TIDMCNA
RNS Number : 9090W
Centrica PLC
20 November 2017
20 November 2017
Centrica plc
("Centrica" or 'the Company')
Centrica sets out proposals to deliver a fairer and sustainable
energy deal for customers
Centrica plc today announces a package of actions and proposed
measures to reform the UK energy market and benefit customers. This
will increase engagement and choice, result in better deals and
reduce average bills, deliver a fairer allocation of energy policy
costs, and further protect vulnerable customers. As market leader,
we are announcing seven unilateral steps we will take, and
proposing a further seven recommended actions for Ofgem and the
Government, designed to improve the market further.
We believe our proposals will deliver a fairer, more competitive
and sustainable energy market for customers and will be
significantly more effective than further Government intervention
through temporary price controls.
Iain Conn, Group Chief Executive, Centrica plc said:
"We fully recognise that the energy market can and should be
improved, but further price controls will only set this back. We
believe more action is needed and are ready to play a leading role.
Today we have set out the unilateral actions we will take to
improve the UK energy market for our customers. This starts with
the withdrawal of the Standard Variable Tariff which contributes to
lower levels of customer engagement.
We also believe that further measures by Ofgem and the
Government are required so that together we can create a market
that works for everyone, where there is improved transparency and a
fairer allocation of costs currently included in the energy
bill.
We have long advocated that the end of the Standard Variable
Tariff is the best way to encourage customers to shop around for
the best energy deal. But we also need a fairer way to pay for the
changing energy system by removing Government policy costs from
energy bills. This will be fairer for everyone and especially those
who struggle most with their bills.
Politicians, regulators and energy companies acting together can
do better than simply imposing a temporary cap or freezing
household energy bills. Working in partnership, we can create a
fairer, more competitive energy market for the long-term. We ask
that the Government and Ofgem engage with us and other members of
the industry to evaluate these proposals in the period up to March
2018."
Our own actions and other proposals build on the findings of the
Competition & Markets Authority (CMA), which noted in its final
report into the energy market that the key issue was one of
customer engagement and that a cap on all default tariffs would
"run excessive risks of undermining the competitive process, likely
resulting in worse outcomes for customers in the long run". We
believe the competitive market established to date can be harnessed
and further improved for the good of all market participants,
instead of Government price controls which will only perpetuate the
problems of the current market.
Centrica has already taken a number of measures over the last 12
months, including investments to improve customer service,
proactively engaging 5 million customers on the standard variable
tariff to make them aware of their energy choices, reducing our own
costs to enable cheaper offers, and introducing British Gas
Rewards, a new scheme to reward loyalty. We continue to invest
significantly in technologies and propositions for the energy
system of tomorrow which save customers time, money and hassle -
such as the Hive product range - and which provide insight,
optimisation and distributed energy solutions for business
customers.
The energy sector delivers a significant contribution to the UK
economy, adding GBP27 billion to GDP every year. The sector
invested GBP11.9 billion in 2016 alone and the Government has
identified a pipeline of future projects worth over GBP200 billion
in the years ahead. Energy is a key input to all economic activity,
is an important driver of the UK's productivity and therefore
getting energy right is fundamental to the Government's Industrial
Strategy. We welcome the Government's recognition of the sector's
contribution to the economy and look forward to the publication of
the forthcoming Industrial Strategy White Paper.
Today Centrica sets out the seven actions we will take
unilaterally to further improve the UK energy market and deliver
more customer engagement, increased choice and better deals for our
customers. These actions will all be implemented no later than 31
March 2018.
We will:
-- Unilaterally withdraw the Standard Variable Tariff (SVT) for
new customers, aimed at increasing customer engagement: We believe
that one of the main problems with the market is the ongoing nature
("evergreen", without an end date) of the SVT; so, British Gas will
unilaterally withdraw the SVT and instead offer customers a choice
of fixed term competitive tariffs. This follows Ofgem's recent
changes permitting fixed term default tariffs. Encouraging
customers regularly to select a new energy deal when their fixed
contract ends will drive greater choice and competition. This will
result in a broader range of better deals with fewer people on
default tariffs. And if SVTs could be ended completely then the
effects would be market-wide.
-- Provide new offers to respond to customers' changing needs:
We are introducing a number of new offers to meet our customers'
requirements for value, convenience and choice. We have recently
introduced an on-line only tariff, as well as bundled offers for
energy and boiler servicing and energy and HIVE connected home
products. This will give our customers more choice to choose a
tariff which works for them. We will also reward loyalty through
British Gas Rewards which now has over 500,000 members.
-- Proactively offer customers a choice of fixed term tariffs at
the end of their contract: We will offer a range of fixed term
tariffs with a duration of up to three years. We aim to minimise
the number of customers who go onto "default tariffs" by offering
customers at least two alternative tariffs when their current deal
ends.
-- Introduce a new fixed term default tariff: For any customer
who does not make an active decision when their tariff ends, we
will introduce a 12-month emergency or default tariff with no exit
fees.
-- Engage customers on legacy Standard Variable Tariffs and
offer them better deals: We are keen to move all our customers off
the SVT. We will contact all of our customers at least twice a year
to encourage them to move away from the SVT. We have already made
good progress having contacted all British Gas SVT customers in the
first half of 2017, with 10% switching away from the SVT. For as
long as customers remain on legacy SVTs we will ensure they
continue to be priced competitively. We will publish the number of
SVT and default customers we supply twice a year alongside our
financial results.
-- Introduce simple no nonsense bills for all our customers: We
will work with Ofgem to secure the permissions necessary to
introduce much simpler bills as fast as possible for all our
customers which will help them to make the right choice about their
energy tariff.
-- Drive further improvements in customer service and in our own
efficiency: We are committed to significant improvements in
customer service and to drive competitiveness through reducing our
overall cost base. Our goal is to deliver great customer outcomes,
remain highly competitive and deliver sustainable returns. Relative
to 2015, in 2017 our complaints in UK Home are on track to be
around 40% lower and we will have delivered over GBP600m of annual
cost efficiencies across the Group. We will continue to drive
material further improvements in our own cost efficiency.
However, to reinforce competition and choice, and deliver a
sustainable and fairer energy market for customers our own actions
need to be supported by action from Ofgem and the Government. We
ask them to take the following seven further actions to address
some obvious failures and distortions in the market.
-- Phase out the SVT altogether and prohibit all tariffs without
an end-date: Through changes to the licence conditions, Ofgem
should prohibit tariffs without an end-date and force a market-wide
phase-out of the SVT over a defined period. The "evergreen" nature
of the standard variable tariff acts as a disincentive to customer
engagement. Eliminating tariffs without an end-date will encourage
all customers to make a regular choice about which energy supplier
and product is best for them.
-- To be fair to all customers, level the playing field on
Government social and environmental policy costs: The market is now
mature and highly competitive with over 60 suppliers. If social and
environmental policy costs are to remain on the bill, the playing
field should be levelled so that all domestic energy suppliers are
obliged to contribute to the social and environmental policy costs
including the "Warm Home Discount" and the "Energy Company
Obligation". Currently this is not the case, and as a result some
customers are being made to pay more for these costs, whilst others
are exempt. This is driving price distortions in the energy market
and also creating advantages for some suppliers to undercut
others.
-- Move funding of all energy policy costs from bills to a less
regressive mechanism such as general taxation: The energy system
must change, and it is not cheap. These costs should be paid for
more fairly with a greater burden carried by those who can most
afford it. Recent investigations and reviews have identified the
extent of significant and rising government energy policy costs
which are currently paid for through energy bills. While we
recognise it would not be easy, we believe the Government should
consider a less regressive mechanism to recoup policy costs, to
protect those on the lowest incomes for whom energy is a higher
proportion of their outgoings. The current system of collecting
energy policy costs via energy bills is not means-tested and is
regressive. We estimate that over GBP5 billion annually could be
removed from energy bills, equivalent to around GBP200 on the
average bill. Clearly society would still have to pay for these
costs another way such as through taxation, but it would be much
fairer and protect the vulnerable and those who can least afford
it.
-- Make the smart meter rollout more efficient and avoid price
controls derailing it: British Gas is leading the way in the smart
meter rollout and has installed over 4.5 million smart meters in UK
homes to date, equivalent to all other suppliers combined.
Differing rates of installation leads to costs of the programme
being borne by customers unevenly and unfairly. We support the
digitisation of energy through smart meters, which help our
customers save energy and bring the benefits from eliminating
estimated bills. However it is expensive during the roll-out
period. Our smart meter costs are rising to approximately GBP300
million a year, equivalent to around GBP40 on the bill for each of
our customers. The Government should address inefficiencies in the
programme, for example taking a more flexible approach to
rapidly-changing technology, reviewing the "opt-in" nature of the
programme design and the 2020 deadline which incentivises companies
to hold back, hoping to acquire customers with meters at the end of
the period rather than install their own. Additionally, any
Government imposed price control needs to be thoughtfully
constructed to allow energy suppliers to make the investment
required, and not to disadvantage companies who are paying for the
investment. There is a real danger that a price control will derail
the smart meter rollout and lead to companies implementing the
programme more slowly.
-- More consistency for vulnerable customers: We agree that
customers who are vulnerable, disadvantaged and unable to
participate fully in what is already a highly competitive market
should be protected. Many other suppliers do not provide the sort
of help that we do for those who need it. We believe that
supporting truly vulnerable customers is not an optional extra. It
is a moral, social and commercial obligation. Energy suppliers
should not be able to opt out. All suppliers must demonstrate that
they can serve those who are most in need, with no exemptions. In
fact, this is part of every supplier's operating licence conditions
and it should be consistently enforced. In addition, there are
unclear and often contradictory definitions of who the vulnerable
customers are. The majority of customers do not fall into this
category and if we are going to expand the numbers protected, we
ask Ofgem to agree a more sophisticated way of identifying
vulnerable customers so that help is focused on those who need
it.
-- Simpler customer communication: Everyone agrees that energy
bills are too complicated. They need to be less prescriptive and be
crystal clear in explaining to customers what they are paying for.
We would like Ofgem to accelerate their plans to remove the
prescriptive nature of communication to customers.
-- Review pre-payment cap methodology: Ofgem should review the
methodology used to determine the level of the price protection for
customers on pre-payment meters. If this is to be a permanent
feature of the market, a more reliable and representative
methodology is required. As it stands, the current cap risks making
the supply of those on pre-payment meters uneconomic, therefore
stifling competition and impacting the very customers it is
designed to protect.
The CMA investigation into the functioning of the market
concluded that the fundamental issue is one of customer engagement.
These proposals, beginning with ending the "evergreen" SVT, would
address these concerns head-on. They will address the issues of
unequal terms for market participants and level the playing field
to remove market distortions. Taken together they will deliver a
fairer and more sustainable improvement to what is already a highly
competitive market.
The Government's proposal to introduce a temporary price cap on
the SVT and other default tariffs is based on the claim by the CMA
that customers are losing out to the sum of GBP1.4 billion a year.
This calculation in our view is flawed and constructed on highly
theoretical competition analysis. In simple terms, GBP1.4 billion
is more than the total annual profits generated by all suppliers.
In that case all suppliers would be lossmaking, which is clearly
unsustainable for any industry. Centrica laid out our objections to
this analysis at the time of the CMA investigation.
Government price controls in competitive energy markets are not
good for customers. Where they have been introduced in other
markets, they lead to reduced competition, choice, and prices which
tend to cluster around the cap.
We are determined to pursue fairer, more sustainable
improvements which we believe would benefit customers both in the
near-term and in the long-run. We are also very focused on reducing
our own costs to make Centrica more efficient and contribute to a
more competitive market. We remain concerned, however, that a
poorly designed price control could drive an efficiency response
which could damage competition, impact customer service and
threaten jobs.
Following the Government's announcement to introduce draft
legislation to give Ofgem powers to introduce a temporary price
cap, there has been significant uncertainty about the future
functioning of the UK market and as the largest supplier this has
in turn created uncertainty for Centrica and our shareholders. We
believe the proposals we have announced today would improve the
market for customers in the long term and are a much more
sustainable solution than a temporary price cap, which will also
have unintended consequences. Whichever final path is chosen to try
to improve the market for customers, we believe we can deliver a
sustainable and attractive business in UK energy supply. We will
update on progress with our own actions along with our 2017
Preliminary Results in February 2018.
Centrica is committed to achieving a customer-focused
competitive market which innovates, delivers great service and
choice, is efficient, keeps bills as low as possible and provides
protection for the vulnerable. This is what our proposals are
designed to achieve. We hope other suppliers, the Government and
the regulator will join us in making it a reality.
Ends
Our paper with further details to help inform the debate in the
UK energy market and an interview with Iain Conn (Group Chief
Executive) is available on http://www.centrica.com/energymarket
Enquiries
Investors and Analysts: tel: +44 (0)1753 494900 email:
ir@centrica.com
Media: tel: +44 (0)1784 843000 email: media@centrica.com
Centrica plc is listed on the London Stock Exchange (CNA)
Registered Office: Millstream, Maidenhead Road, Windsor,
Berkshire SL4 5GD
Registered in England & Wales number: 3033654
Legal Entity Identifier number: E26EDV109X6EEPBKVH76
ISIN number: GB00B033F229
This information is provided by RNS
The company news service from the London Stock Exchange
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