New Year is a time for change and resolutions – and at Npower we’ve made our own commitment to make things better for our customers and put right the system issues we’ve had in recent months. We’ve launched a new, clearer bill, cut the number of tariffs we offer, and promised to make energy fairer, simpler and easier to understand for all our customers through our new Standards of Conduct.
There’s a lot we’re doing to improve the customer experience – and a lot more we can do. But to me, the most important reason for making these changes is to help improve confidence in the energy industry as a whole. That industry is made up of not just the so-called big six, but more than 140 companies involved in the production, generation, trading, delivery and supply of energy in the UK, all of whom influence the price of the energy we all use. Around 80 of these companies are engaged in trading in the UK energy market, and around 20 companies generate the electricity we all sell.
Confidence in what we do for our customers is crucial – but one of the biggest barriers to restoring that confidence is the confusion surrounding the industry, fuelled by the myriad of opinions that sometimes cloud the facts about energy in the UK. So while suppliers such as Npower are making bills and tariffs simpler, misconceptions around trading, generation and pricing still exist.
It’s not enough to claim that energy is complex. It’s no more complex than many other industries. We have to make it simple – to explain it, and get inside the cost of energy to make it clearer to everyone involved.
This week, I launched the second of Npower’s Energy Explained reports – a series of six-monthly reports that sets out the facts behind different aspects of the energy industry. The first report shared the main drivers behind energy bills now and in the future, and how this cost of energy is changing. The second builds on this, explaining how and why energy is traded, power stations are financed, and how energy is priced.
At times in recent months, the facts have been in short supply – particularly amid rumours of broken competition, profiteering and rigged wholesale markets. As the cost of living debate continues, it is easy for politicians from all parties to make headline-grabbing statements that don’t always stand the test of closer scrutiny.
So the aim of Energy Explained is to present the facts, not opinions. It’s time for facts and perspective. For example, popular opinion would lead you to believe that Britain’s energy wholesale markets have just six participants, yet nothing could be further from the truth. In fact, many of the 80+ organisations that actively trade energy in Britain are larger than the so-called big six. The idea that international banks or major multinational oil companies would choose to operate in a market where six energy supply companies could self-supply or manipulate the market is unlikely at best.
Energy Explained also shows how the make-up of a domestic bill is changing as the impact of government policy to deliver cleaner energy and keep the lights on is passed on to consumers through the bill. I’ve said before that an energy supplier controls less than 20 per cent of costs in customers’ bills, but we are blamed for 100 per cent of those costs and 100 per cent of any price rise.
Our analysis of the data shows an increase in policy costs on the bill of 272 per cent between 2007 and 2020, even if energy demand falls in line with government expectations. This is just one example of how responsibility for energy costs sits outside of my company’s control.
The report also shines a light on power station profits. I want to address the idea that if suppliers are only making a reasonable profit margin in their retail business then they must be hiding it somewhere else (we aim to make 5 per cent in our supply business for the financial risks we must manage – and it’s often less than that). There are 20-plus power generators operating in this country, and Npower is just one. Depending on the technology involved, we look to make around 7-12 per cent return on our investment. That level reflects the billions of pounds required upfront, as well as the risk that policy and markets could well affect the financial success of the plant over its 20-plus years of operation. It’s a significant risk – and as tweaking of energy policy is becoming the norm, power station profits become more unpredictable over time. In the first nine months of 2013, our generation plant in the UK made a loss of £59 million.
The simple fact is this: there are no hidden profits, and pretending otherwise only serves to undermine confidence in a market that is delivering jobs, investment and energy 24/7 to homes and businesses across the UK.
Another fact often omitted from the energy debate is that the actual unit price of energy in the UK is cheaper than in most other European countries. In fact, we’ve got the cheapest gas in Europe behind Luxembourg and Belgium, and electricity that’s 10 per cent cheaper than the EU average, according to think-tank VaasaETT. A Moody’s report on energy affordability last November showed that even though energy consumption in the UK is higher than in Germany, the average UK household still pays less than in Germany, because of our cheaper unit prices. A further myth is that people don’t switch, yet in 2013 more than 3.5 million customers switched suppliers.
2013 was a particularly difficult year for our industry. I hope that 2014 is a year in which all suppliers work harder to be more transparent and are even more determined to make energy easier to understand. But those efforts will be thwarted if the energy debate continues in its current vein. To restore confidence in the industry – to encourage take-up of energy-efficiency measures and get consumers switched on to treating energy waste the same way as wasting money in other areas of life – we’ve got to concentrate on the facts.