Views from the energy supply industry

Views from the energy supply industry
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For nearly twenty years there was an energy policy consensus among the main political parties, the regulator, the ecologists, and the industry. All agreed to decarbonise – that is, to shut down the high-CO2-producing coal-fi red power-plants and to replace them with cleaner alternatives. The alternatives are more expensive and require new plants to be built, and the costs would be passed onto consumers.

But it wasn’t a true consensus: consumers were not put in the picture; their bills showed rises but did not explain why. With energy becoming a bigger slice of household budgets at the very time that people’s ability to pay was shrinking, it is no surprise that there would be anger. That created a political opportunity, which Ed Miliband exploited with great success, announcing there would be a price freeze if he was elected PM. The consensus, if it ever really existed, was blown to pieces.

The partnership between YouGov and Cambridge University exists to explore these interfaces between business, government policy and citizen-consumers, and hence this report. We know the views of politicians because it is their job to tell us. And the rest of this report looks at the opinions of consumers. But what about the practitioners? I have interviewed many of the leading players in the industry to understand their point of view so that our research into public opinion and consumer sentiment could be properly informed.

Mr Miliband’s intervention did, of course, create widespread shock in an industry that depends on stability. How could such a debate be launched with so little grasp of the real-world choices that face us? How can responsible politicians plunge the industry into such an upheaval? Energy strategy involves long-term planning and long-term investment. Because it is so capital-intensive, everyone needs to know what is up ahead. Introduce new risks, such as uncertain variations in public policy, and the cost of capital goes up. Everyone pays for that: the improvements-pipeline is disrupted; energy security is weakened; share prices go down; and in the end, it will be the consumer who pays.

As one would expect, there is moaning at politicians: practitioners believe that behind closed doors, the politicians understand and even admit that a price freeze would be disruptive and unrealistic, and it’s been mere opportunism to invent an ogre that they can then pretend to slay. But the industry also accepts that it has itself ‘prepared the ground’ for what happened: billing was often confusing, never transparent, and complaints were handled badly. Customers were taken for granted, service was poor, and no-one bothered to explain the situation to them, nor even to question whether they wanted the things they were being made to pay for. The industry broadly accepts it helped to create the political opportunity that Mr Miliband seized.

Now, everyone wants a real debate. What are the energy problems the country faces? What are the trade-offs between security of supply, ecological improvement and the price to the customer?

The industry bristles at any accusations of gouging. They point out that per-unit energy prices are below the average for Europe. Critics answer that, with increasing vertical integration of energy production and distribution, company accounts are too opaque to allow one to tell if they are efficient or inefficient, or even if they might be making excessive profits. One knowledgeable insider suggested that because the giant brands of the household industry are actually mere subsections of even bigger international conglomerations, they have come to be viewed as ‘cash cows’ for their non-British parents.

The industry does not believe it is a ‘broken market’. With six big suppliers and many new players joining in, there is more competition than, for example, among the supermarkets. But it’s much easier to switch supermarkets; one critic even accused the big companies of employing industry game-theorists to create clever algorithms that work out which clients will accept higher rates, so that they can offer lower prices to those identified as most likely to switch, with the result that the most passive or loyal customers are actually punished.

This applied especially to older people, many of whom found it hard to shop around. According to one interviewee within the industry, companies may have overestimated the scope of liberalisation that had taken place, even paying large sums to clever traders to speculate on futures, rather than focusing enough on their societal role. All participants in my interviews showed real pride in their industry and contrasted its problems with those of the banking sector, where real and deliberate wrong-doing took place; but they also accepted that the industry needs to change. One of them called for their trade body, Energy UK, to set the standard for reporting, for communicating with the customer, for setting the standards of transparency to which they should all be accountable.

There was broad and significant criticism of the role of the regulator – for being too burdened and weakened with huge and complex administrative tasks (it is one of the biggest regulators in Europe), and too focused on the ‘big kit’ of energy production and distribution and not enough on the retail side. Many called for the remit to be reviewed, with one suggestion being that instead of three regulators overseeing telecoms, water and energy, we should have just one, focused on the consumer’s interest in fair and reliable distribution, and leaving other tasks to more appropriate authorities, for example the CMA to ensure proper competition, or National Grid/DECC to ensure security of supply. Another industry leader suggested that we should try to regulate less by rules (which tend to focus on negative regulation rather than encouraging best behaviour) than by principles.

The row over the price freeze and the subsequent political risks and opportunities almost seem too great to allow genuine public debate right now. My experience of these discussions made me disheartened that our political system puts us in such a quandary over a matter of such vital national interest and indeed consumer interest. But there will be positive outcomes that we can be fairly confident of. Greater transparency of bills and tariffs, and simplified systems for switching suppliers will surely lead to greater market efficiency and responsiveness, as well as a more informed debate about national energy policy. And I was particularly impressed by the CEO who told me that the industry has become too used to talking to Whitehall rather than to consumers, and that the way for the industry to regain trust and influence was through the entirely virtuous and practical route of better all-round customer service.

Methodology

From January to March, 2014, Stephan Shakespeare conducted a series of one-to-one depth interviews, either by telephone or face-to-face, with a range of senior figures related to the energy generation and supply industry. An initial shortlist of potential interviewees was drawn up, which included executives at both larger and smaller energy companies, consumer organisations, and other bodies. This shortlist was designed to achieve a balance of different perspectives, which is reflected in the final list of those who took part in the interviews. A discussion guide was drawn-up before the interviews, which were conducted in a ‘semi-structured’ manner – with some questions common to all interviews, but with room to explore particular topics of interest according to the individual.

Interviewees included:

-Alistair Phillips-Davies, Chief Executive Officer, SSE

-Tony Cocker, Chief Executive Officer, E.ON UK

-Paul Massara, Chief Executive Officer of RWE npower

-Paul Spence, Director of Strategy and Corporate Affairs, EDF Energy

-Keith Anderson, Chief Corporate Officer, Scottish Power

-Ian McCaig, Chief Executive Officer, First Utility

-Stephen Fitzpatrick, Managing Director, Ovo Energy

-Steve Holliday, Chief Executive Officer, National Grid plc

-Angela Knight, Chief Executive Officer, Energy UK

-Ann Robinson, Director, Consumer Policy, uSwitch

-Tom Wright, Group Chief Executive, Age UK

-Audrey Gallacher, Head of Energy Policy, Consumer Focus

-Professor Nick Pidgeon, University of Cardiff

-Gillian Guy, Chief Executive Office, Citizens Advice Bureau

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