Examination of Witnesses (Questions 339-359)
Mr David Sigsworth, Mr Alistair Phillips-Davies,
Mr Jon Kimber and Mr Patrick Law
8 DECEMBER 2004
Q339
Chairman:
Could I welcome our visitors from Scottish and Southern
Energy and from British Gas. I repeat that I think you can see
who we are from our labels and information has been circulated
in the pack which has gone both to the guests at the back and
to our witnesses, so we shall not repeat our declarations of interest
when we speak. May I thank you very much for coming to speak to
us this afternoon and I hope you found it interesting to listen
to the previous witnesses giving their evidence. May I ask you
for the record to identify yourselves, in whatever order you choose.
Mr Law:
I am Patrick Law. I am Director of Corporate
Affairs at British Gas. My colleague Jon Kimber is Head of Energy
Efficiency at British Gas.
Mr Sigsworth:
I am David Sigsworth, the Generation Director
from Scottish and Southern Energy. My colleague is Alistair Phillips-Davies,
our Energy Supply Director.
Q340
Chairman:
Thank you very much. Perhaps I could start by asking
you also for your reaction to the announcement today. You in your
various companies have developed initiatives towards energy efficiency.
How do you react to the announcement that the targets which have
provided momentum are now to be suddenly radically revised?
Mr Law:
Well, I think we would like to have a look
at those targets in more detail before commenting specifically.
I think that in the short-term the energy companies do have some
targets going ahead and going forward under the eco obligation
and that certainly provides a sort of ramping up of activity under
energy efficiency which is going to take us forward at least three
years, but clearly if there is going to be a shift in energy efficiency,
particularly amongst consumers across the nation, then we do need
to have some sort of certainty as to what those targets are going
to look like going forward, not just in respect of the eco obligation
but within the wider context as well.
Mr Sigsworth:
I think I reflect a similar view that we have
to look at the detail before commenting fully, but I feel that
Scottish and Southern Energy see that if 50 per cent of all the
White Paper expectations, in terms of climate change, are to be
fulfilled through energy efficiency measures by 2020, then what
we are doing, which is excellent work at the moment in the energy
efficiency field, has to be ramped up into a big business. People
have to get a business edge into this market and create a lot
of new opportunities to get to the expected targets. So we welcome
the increased initiative.
Q341
Chairman:
Perhaps I could ask you a supplementary question,
which refers to your own companies. You are the energy efficiency
manager, I think, within British Gas, Mr Kimber. How are your
energy efficiency directors or managers, whatever their title,
represented within the company? Are they at board level or directorate
level? Perhaps you could just give us a feel for the emphasis
which is given in the company's structure to these issues.
Mr Kimber:
Energy efficiency is placed very highly within
the company in terms of the managerial structure and primarily
through the Energy Efficiency Commitments. It is a huge commitment
on energy supplies. For British Gas alone over the next three
years we will be spending somewhere in excess of £500 million
on energy efficiency. So it is a huge amount of money and obviously
that focuses the minds and attention of people at board level.
In terms of the way the energy efficiency is structured internally
we are represented indirectly on the British Gas board through
our marketing director. Energy efficiency sits within marketing,
which we believe is the right place for it to sit because it we
need to use all of the marketing skills that we have in our organisation
to sell this product. It is a very difficult range of products
to sell and to change people's behaviour about energy efficiency.
Q342
Chairman:
So energy efficiency is part of the marketing division?
Mr Kimber:
Absolutely.
Mr Phillips-Davies:
Within Scottish and Southern I am responsible
for the energy efficiency area. They report through to me basically
and David Sigsworth is responsible for the environment. We are
both main board directors of the company. We frequently have discussions
about energy efficiency, fuel poverty and things like that. I
am an executive and I have a team of people working within my
tariffing and pricing area who actually do a lot of the operational
work, but in terms of the thinking and the direction of the company
then that will clearly come from myself and David, who are both
represented on the board.
Mr Law:
Perhaps I could just add to that. I sit on
the British Gas executive team and we do debate these things very
regularly and about three weeks ago we sat through an hour and
a half discussion amongst my colleagues about the Energy Efficiency
Commitment going forward and what the company strategy would be
in terms of that and also fuel poverty issues would feature in
that as well. The managing director of British Gas takes a very
strong personal interest in these issues as well. He is a member
of the Energy Saving Trust board and he is also a member of the
Fuel Poverty Action Group.
Chairman: Thank you.
Q343
Lord Paul:
Could I just ask, what will be the incentive to a
company which is marketing energy to try and promote energy efficiency?
What goes into the minds of those people?
Mr Law: I think there are two
things. First of all, there is an obligation on energy suppliers
to fulfil their energy commitment and that is a very large commitment
which energy companies have to comply with. That is a licence
obligation and there would be consequences for that company if
it did not comply with it. That is really just looking at it,
I think, from the regulatory compliance programme. But if you
look at, for example, British Gas's Energy Efficiency Commitment
for next year it is around £130 million. Now, you can either
sit there and say, "That's an obligation that we're simply
going to have to discharge," or you can say, "Let's
get creative about this. How are we going to discharge this obligation
but do so in the most creative and compelling way for our customers
so that it provides a commercial edge in terms of how we compete
in the gas and electricity market?" But also moving on from
that, British Gas has a prosperous home services division. We
have about 8,000 engineers and we sell boilers and we service
those boilers and we believe the home services market is a very
large market for British Gas, very large indeed, and we believe
that working with our customers deepens those relationships and
will enable us to branch out into other areas. For example, condensing
boilers is, I think, probably a very good example where I think
about 40 per cent of the boilers that we install are high efficiency
condensing boilers. That is a new product area for us and a new
product area that we will want to continue to exploit.
Baroness Platt of Writtle: I thought
that when I got my gas bill last week.
Chairman: I am going to bring Lord Lewis
of Newnham in now to ask a question because he has to leave.
Q344
Lord Lewis of Newnham:
Well, really I think it is a continuation of your
present discussion. How far do you see the present Government's
emphasis on energy efficiency and reduction as posing a threat
to the supply companies and the possibility of opening up new
business opportunities?
Mr Phillips-Davies:
I do not think there is any real threat there
to supply companies from what the Government is doing. I think
there are in actual fact opportunities in that sense. As a company,
the only thing I would have added to what Patrick said on the
previous question is that we are very, very committed as a company
to environmental targets and to sustainability generally because
we believe we have a genuine place within society in order to
act responsibly. The sort of measures proposed by the Government
we see as an opportunity to continue something that we firmly
believe in ourselves. As Patrick said, it gives us an opportunity
to differentiate ourselves in the eyes of the consumer as well
as actively engaging with the public and consumers on some of
these issues.
Q345
Lord Broers:
But do you see this as in essence a tax on your operations
or do you have a financial model that comes up with actually making
new money?
Mr Phillips-Davies:
Well, I think both those points are valid.
If you look at it cynically you can clearly say that, "Okay,
we've got an obligation to discharge," as Patrick says, "and
therefore we must just try and find a way of doing that,"
and that pushes that out of the way and we can get on with making
money elsewhere. That would be a cynical view. I think the fact
that you place a general obligation on a number of different companies
encourages competition amongst us to try and do those in an effective
way. When some of us find effective ways of doing it, it probably
gets around the market and you actually get some competition in
there, which is probably what you would want at the end of the
day. Finally, I go back to my other point that despite the fact
that we are not a charity and we clearly have to make money for
our shareholders and pay dividends at the end of the day, we do
feel a very, very strong commitment internally to driving things
forward on an environmental front and having a sort of wider responsibility
to society. Often if we do things like cutting the amount of paper
we use and doing a lot of recycling, we actually find it makes
very good business sense in terms of making money as well. There
are a number of examples I am sure David could cite as well, he
has got responsibility for environmental issues, but we do find
that our commitment there has made us money and has actually improved
the returns to our shareholders.
Q346
Lord Wade of Chorlton:
Could I just follow up on that. I agree entirely
you are a commercial company and you have, both of you, got to
give profits to your shareholders, but from what we have heard
(not just earlier this afternoon but previously) a lot of people
see tremendous opportunities with the development of new technologies,
new ways of producing energy, new ways of creating energy in the
home small-scale, all these sorts of activities, which clearly
are going to be the future of the energy industry. So are both
your organisations investing now into these new possibilities
or are you hoping that somebody else will invest in them and then
maybe you can move into them when the time comes? What is the
view of your end of the trade as to what you are going to be doing
in ten or fifteen years' time in the light of these changes?
Mr Law:
Well, I think clearly there is a lot of truth
in what you say. We do not pretend to be a technology and research
company; we are essentially a marketing organisation. So what
we would look to do is to spot new technologies and make agreements
with the manufacturer of those agreements to market those, and
indeed that is exactly what we are doing in the area of something
like micro-CHP, for example, and we are also looking at a number
of other technologies for the future. Trying to spot the technological
winners is tough. I mean, it is not something that we can sit
here and say, "In ten years' time we know exactly which the
technological winners are going to be." So what we will try
and do is develop a portfolio where we have various things under
tests, we will look at various propositions with consumers and
see which the consumer will go with, and once we find which the
consumer will go with we will go with it big time.
Mr Sigsworth:
I have probably a different model to the one
Patrick has just described because whilst I accept the model of
developing today's technologies and looking for tomorrow, I actually
am firmly of the belief that there are some new technologies which
can be applied today in the energy efficiency field; for instance,
some of the small renewable technologies. If we look at wind,
there are several small devices now coming on to the market. We
have made an investment in a small start-up wind company and are
finding there is huge interest in both the small and medium enterprise
area as well as for the domestic sector. If you also look at biomass,
there is a lot of talk about does biomass work in the domestic
sector. People are arguing about it, but we have only to go to
Austria and see that there are many, many devices available. What
we have to do is create the supply stream to get the renewable
fuels, like coppice willow, grown in this country and processed
into a pelletised form that can work with those devices. Our model
for applying that in SSE is not necessarily the traditional relationship
with the customer. We intend going beyond the meter and as well
as supplying energy we would like to supply some of these technologies
along with the right insulation envelope, so as to improve the
energy efficiency of the built environment. We also want to offer
energy efficient appliances and have a customer contract package
where (over a longer duration than we have traditionally expected
in the utility market) we see a pay-back, whilst actually getting
lower electricity and gas bills for the customer along with more
comfort, and helping address the environment. But at the same
time, and I made the point earlier, we must see the UK adopt this
approach and build a big business because we are going to have
to have very successful businesses doing this to achieve the Government's
target.
Lord Wade of Chorlton: Thank you.
Q347
Baroness Sharp of Guildford:
Can I bring you back to the Energy Efficiency Commitment.
I think it would help us if you could give us some idea of how
these targets are set by the Government and how their achievement
is measured. Also, could you perhaps pick up this question of
how far they do pose a potential conflict in imposing a duty on
the one hand to increase energy efficiency on the supply companies
but your interest is also here in selling more energy. It picks
up the same point that we have been looking at, that you are being
pressed on the one hand to limit the amount you sell and at the
same time your main interest is in selling more energy.
Mr Kimber:
In terms of how the target is set we, along
with other represented industries, obviously consult with Government
on the size and scale of the targets. The target is set, let us
say the energy saving target, a terawatt hour target, and it is
also expressed in terms of carbon savings as well. The target
is actually apportioned between suppliers based on customer numbers,
so as British Gas is the largest supplier we have the largest
share of the target. There is a cut-off threshold for smaller
companies supplying around fifty thousand customers. Obviously
the obligation is not applied to them. It might be seen by them
as a barrier for new entrants into the marketplace. In terms of
the target itself, it is split between environmental and there
is a social angle as well in terms of the target; 50 per cent
of the target is focused on what we class as the priority group
and it is based on people on benefits. In terms of the actual
cost of the programme, that is estimated by Defra or the Government.
That is currently estimated at £8.97 per customer per bill.
I think it is fair to say the suppliers actually disagree with
that. We believe that contribution is actually understated by
about 25 per cent. So going back to the potential threat to our
business, we actually believe the cost of delivering the Energy
Efficiency Commitment is probably going to be significantly greater
than estimated by Government. In terms of the mechanics of how
the programme actually works, for every energy product that we
supply (either we sell to a customer or we supply free of charge)
we receive an energy saving credit and that credit will differ
for a particular product, for instance cavity wall insulation
will be a different value attached to a two bedroom property as
opposed to a four bedroom property, and end of terrace property
as opposed to a four bedroom detached house, depending on the
size and scale of the energy saving. Once we have actually installed
or supplied the product we can then claim that against our target
and every energy saving that we deliver has to be accredited by
Ofgem, our regulator. At the end of the year obviously we will
make a submission to Ofgem and they will then audit the work that
we have completed and accredit us accordingly.
Q348
Lord Broers:
Could I ask, in that context, that is clearly one
way you can do this but it is a theoretical measurement, however,
of energy efficiency. Do you work with the EST and other people
to actually, as it were, go out and poll and check that these
savings have been made?
Mr Kimber:
We do actually work with the Energy Saving
Trust and we have provided customer data to them to help them
in terms of their validation.
Q349
Lord Broers:
So how do you do that? Do you allocate a certain
street and then say, "We have put in so many energy-saving
boilers," etc, and see what has happened?
Mr Kimber:
We would do that by providing meter readings
for them so that they could actually check the energy consumption
before and after the product was introduced.
Q350
Lord Broers:
Because there is clearly the possibility that if
you provide lower energy consumption people may actually take
advantage of it and use more hot water or keep their house warmer,
etc, etc. So it is rather important to have a real-time measure,
is it not, that we are actually accomplishing this?
Mr Kimber:
It is, and there is a factor built into the
energy saving, which everybody in the industry refers to as the
"comfort factor", which assumes that basically if you
put these measures into people's properties then they actually
will use more in terms of their energy consumption. So there is
a factor that is built into that, but obviously that is an estimate
which we apply across every single energy product that is installed.
Q351
Lord Broers:
I think some of your television advertising actually
is suggesting that if insulation and so on is supplied by you
people can be warmer; not better off and fitter, but warmer?
Mr Kimber:
Yes. The actual advert you are referring to
is our "Here to Help" programme, which has been phenomenally
successful and in that particular programme we offer free insulation
to vulnerable customers, people in the priority group, people
on benefits. So we are actually hoping to make them warmer, that
is the purpose there, and hopefully at the same time to save them
money on their energy bills as well.
Q352
Chairman:
Our concern and the point of Lord Broers's question
is that you have these theoretical models, and I understand that
a lot of the time you have to work on that—the kind of house,
the number of occupants and the energy efficiency appliance that
you put in—but how do you measure the actual result of the
different appliances? It may well be, for example, if somebody's
use of gas goes down it is because at the same time as they had
a more energy efficiency boiler put in they also switched from
a gas stove to an electric stove. So they are using just as much
energy except they are not using it in gas. How do you get figures
for the actual output of energy, or your input of energy use for
a household?
Mr Kimber:
We do not actually calculate the energy savings.
That is something that people like the Energy Saving Trust are
responsible for, but certainly we work alongside the Energy Saving
Trust, providing data where we can to actually help them validate
the energy saving attributable to each of the products that we
install.
Q353
Chairman:
You do that by telling them when you have introduced
a more efficient boiler into a house and also by the energy consumption,
at least as far as your energy is concerned, as far as gas is
concerned, against that?
Mr Kimber:
No, specifically we would work on individual
projects with the Energy Saving Trust and provide them with consumer
data to allow them to validate their figures on the energy saving
potential of the product.
Q354
Chairman:
You see why we are concerned about this?
Mr Kimber:
Absolutely, yes.
Q355
Chairman:
A lot of it is done on a theoretical basis, but it
is very, very difficult to measure the actual total savings.
Mr Kimber:
It is, but if you look across the entire Energy
Efficiency Commitment programme we will deliver in the next three
years to suppliers 1.7 million cavity wall insulations, 1.1 million
loft insulations. Each of those will go into different homes and
there will be a different scenario in each of those homes. So
the theoretical model is important to give us an average view
but you are right, it will vary depending on the usage in the
home.
Chairman: Thank you very much. I think
we will continue to pursue this with several of our witnesses.
Q356
Lord Paul:
First of all, just before I ask my question, you
might create energy efficiency in the properties, etc., but you
still want to sell the same amount of energy or more. How does
it totally help as far as the Government's desire to consume less
energy is concerned, because it goes directly against your own
marketing? Then if I can come back to my question, it has been
argued that low prices are a disincentive for energy efficiency.
What is your view on this? Perhaps it is the wrong question to
you people, but I would be delighted to know. That is the first
thing, and do you think we are at the start of sustained high
prices for energy?
Mr Law:
Let me have another crack at this. People do
have difficulty with the idea that energy suppliers should be
interested also in energy efficiency. I think there is a couple
of things I can perhaps say which might help your understanding
of this and how we look at it commercially. The biggest drivers,
I think, to energy suppliers' success as businesses now are how
well you compete in a highly competitive market. So things like
your market share, your costs, are going to be very, very important
factors. The other important factor for British Gas, as I mentioned
before, is the depth and the variety of the relationships that
we have with consumers in terms of the additional product that
we would sell them. So yes, selling them electricity and gas is
important to them, but selling them condensing boilers is very
important to them, servicing those condensing boilers, and there
are other opportunities that we see arising. We believe that the
potential sort of dampening down, if you like, of energy demand
is, yes, of course, a factor we will always look at, but the key
component to our success as a commercial entity is to do with
how successful we are in the competitive market and how we control
our own costs as well. So I think there is a sort of complex set
of reasons and it is not simply about the overall demand for energy.
I think there is perhaps one other point I would just add to that,
which is that in relation to electricity demand in particular
people are fantastically inventive about finding more and more
uses and more and more things that they want to power by electricity.
Three or four years ago we did not all have mobile phones that
we recharged every night. That is just one example, but there
are many others, whether they are PCs or whatever. So I think
electricity demand in particular will probably continue to grow,
albeit perhaps slightly more slowly. Shall I now move on to your
other question?
Mr Sigsworth:
If I could just add to what Patrick has said
there, maybe a different approach, because all of the discussion
that we have had so far has been about basically the domestic
sector and energy efficiency applies equally in the industrial
sector. In fact, the hardening prices that we have seen recently
in the energy markets bring back into prospect some of the technologies
that I believe personally, and I know my company does, are vitally
important to achievement of the overall objective. I refer to
CHP, which really has been in the background for several years.
Since the new electricity trading arrangements emerged there has
not been an economic case for large CHP and yet, if we talk about
how we are to achieve the energy efficiency target, some of the
biggest opportunities in terms of the size of the improvement
would come from CHP. So we have to find a way of incentivising
business use and business efficiency, and again the concept I
outlined earlier, where you look for investment in, and a long-term
relationship with, those customers works equally in that sector
to my ideas for the domestic sector.
Q357
Lord Young of Graffham:
Could I just ask, what is the smallest effective
size of a commercial or industrial CHP, because they are not effective
yet at the house level?
Mr Sigsworth:
No.
Q358
Lord Young of Graffham:
Presumably they get more effective the larger you
go, or more economic?
Mr Sigsworth:
Well, in our own fleet we have almost £150
to £200 million worth of CHP assets on our balance sheet
and some of those vary from a few hundred kilowatts (we have a
hotel at Heathrow Airport which is a few hundred kilowatts) right
up to an installation that is 250MW. So there is a range. But
when you ask what is economic; at the moment very little is economic
without grant aid, and we have to find a way forward. I know Defra
now are looking at schemes to actually drive into that with new
initiatives, but we need them soon.
Q359
Lord Broers:
Could you elaborate on that? What is the cost problem?
Is this a capital depreciation cost or is it just a fuel cost?
What is the difficulty?
Mr Sigsworth:
The difficulty has been that if you are particularly
a sole trader or even a single company which used CHP the opportunity
to benefit from the export has been very limited.
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