Energy policy report

12 December 2008

In response to the current economic downturn, the Business and Enterprise Committee today calls for urgent action from the Government to ensure investment in gas storage and new electricity generating capacity takes place. This is necessary if the UK is to avoid an 'energy crunch'.

In its final report on energy matters, the Committee also raises concerns on a number of energy policy issues, including the inadequate nature of wholesale gas and electricity markets in the UK, which it believes the new Department of Energy and Climate Change, and its corresponding select committee, will need to address.

Gas storage and electricity generating capacity

The Committee is concerned that the current economic downturn means there is a high risk that energy companies will not be able to raise the finance necessary to close the energy gap resulting from the decommissioning of old nuclear and coal-fired power stations in the coming years. The Report states that “Just as the Government has been quick to respond to the crisis in the banking sector, it must now take action to ensure investment in new capacity takes place as planned”. Further, that “The situation is now very serious and we believe that a simple trust in the market’s ability to deliver without any intervention will see us facing an ‘energy crunch’ in the medium term”.

On gas storage the Report states that: "If the UK is to avoid falling victim to even higher levels of wholesale gas price volatility in the coming years, it requires a level of growth in gas storage that is an order of magnitude greater than that which the market has achieved on its own to date”. Given the current economic climate, the Government “must now re-consider the likelihood that investment will take place without some form of regulatory intervention”.

Energy prices

On retail prices, the Committee acknowledges that profits are essential if the energy companies are to be in a position to invest in new capacity, but it adds its voice to that of the Government and consumer groups in “calling on the Big 6 energy companies to cut prices for their retail customers as soon as possible in 2009”, in response to lower wholesale gas and electricity prices.

Fuel Poverty

The Committee estimates that as many as 5.5 million households may now be living in fuel poverty. The Report welcomes the Government’s recently announced £1 billion package to tackle fuel poverty and its focus on energy efficiency measures. However, it expresses concern that “Provided the regulatory framework is sufficient to ensure fairness to all consumers, in the long term the Government will need to consider whether it can continue to expect energy companies and the regulator to be responsible for the delivery of its social policy objectives”. The report also reiterates the Committee’s long-held recommendation that “much more attention must be paid to groups in fuel poverty other than pensioners, particularly disabled people under 60”.

Treating domestic and small business customers fairly

The Report highlights the need for more work to ensure domestic and small business consumers get a fair deal. It supports the proposed introduction of new licence conditions to ensure energy suppliers’ charges for different payment types (pre-payment meter, standard credit and direct debit terms) are cost-reflective, and to prohibit undue price discrimination.

The Committee also urges its successor to maintain pressure on Ofgem “to look into whether the energy suppliers are using higher than necessary direct debit charges to boost their cash flow”. This is an area where the high level of public concern has only recently come to its attention.

On the use of direct selling, the Committee’s report on energy prices in July, warned that “the industry must consider itself on notice” on the continued use of direct sales as a means of encouraging customers to switch suppliers. This Report reiterates its concern following new evidence from Ofgem that “nearly half of consumers who switch as a result of a direct sales approach fail to achieve a price reduction”. The Committee calls on the regulator to “ensure new rules are in place within the first quarter of 2009. If they do not significantly improve the level of service to customers by this time next year, then the regulator should not hesitate to ban the practice outright”.

Conduct and powers of Ofgem

The report criticises Ofgem for being “slow to respond to rising concern over the functioning of the energy markets” in 2008, and expresses its “hope that in 2009 and onwards the new Energy and Climate Change Committee will not have to take the lead in setting the regulator’s agenda” as the Business and Enterprise Committee has done on too many occasions in the past.

However, the Committee acknowledges that the Government must ensure the regulator has the teeth it needs. The Report recommends “the Government now investigates whether Ofgem should have additional powers to guard against market abuses, particularly in the wholesale electricity markets”.

Further issues

The Committee’s report highlights other areas that require urgent attention in the near future:

  • Interventions to improve liquidity in the wholesale gas and electricity markets;
  • The need for timely investment in new network infrastructure;
  • The development of new initiatives to promote small and large-scale renewables; and
  • The Government’s framework for managing its current nuclear liabilities and those arising from new nuclear build.

Peter Luff, Chairman of the Committee said:

“The UK now faces the very real risk of an ‘energy crunch’ in the coming years as vital investments are delayed as a result of the recession. We have concluded that the Government’s faith in the market to deliver new gas storage, generating capacity and other infrastructure is misplaced. A radical re-think is now required if the lights are to stay on in the medium term.”

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