Source: BBC Radio 4: Today Programme
URL: N/A
Date: 27/03/2014
Event: XXXX
Attribution: BBC Radio 4
People:
John Humphrys: When we worry about the cost of living, the price of gas and electricity is right up there at the top of the list. Prices started going up sharply six years ago - they haven't really come down since - and because we're worried about it, so are the politicians and the regulators. Which is why Ofgem announced, an hour ago, that the whole energy market is fundamentally flawed and the "Big Six" companies, which make up almost all of it, are going to be referred to the Competition Authority, meaning that there will be a very long investigation, which could have a profound impact in all sorts of ways. Well, I'm joined by the Energy Secretary Ed Davey and by the Chief Executive of the biggest of the energy companies, Sam Laidlaw, Chief Executive of Centrica. Mr Laidlaw, good morning to you, first.
Sam Laidlaw: Morning, John.
John Humphrys: Er, it's a demonstration of the fact that a lot of people have thought - have suspected for a very long time, the suspicion - that there's no trust in you, the energy companies. If there were, they wouldn't have to do this, Ofgem wouldn't have had to do this.
Sam Laidlaw: Well I think, given the pressure on household budgets that you described, I think we completely understand why the regulator wants to provide assurance that the market's operating as competitively as possible. And actually, if this inquiry helps to rebuild the trust in the sector, that can only be good.
John Humphrys: So why has the trust gone, then?
Sam Laidlaw: The point I would make is: you know, this is a vibrant, dynamic, competitive market. We've got 19 suppliers - a whole lot of 6 new suppliers actually entered in 2013 - higher rates of switching -
John Humphrys: You - you've got 97% of the market, you Big Six!
Sam Laidlaw: - and I - and I think we're delivering lower prices than the rest of Europe. Now, you know, there is no doubt that, that switching is actually on the increase. The concern about this inquiry is that actually, you know, unfortunately, to do it thoroughly is going to take two years. That happens on - that happens at a time when we've already had five years of uncertainty from an investment point of view, in terms of putting through the electricity market reforms. So the big concern is actually whether we will have a further two-year period where no investment will come forward, at a time when Britain's energy security is a matter of increasing concern, obviously with reserve margins for power generation diminishing, but also when you look at the ability to contract gas and you look at the Ukrainian situation and increased volatility, we'd need large companies, in a stable environment, to be able to enter into those long-term gas prices.
John Humphrys: Yeah, but you see the trouble with that is because, by your own admission, you've lost the trust of the public, they're going to say "Well, they would come up with excuses like this, wouldn't they - they would come up with this sort of argument that says: actually, leave us alone 'cause if you don't, things are going to get even worse than they are now, and that they're pretty bad already".
Sam Laidlaw: Well, you know, what I said was: if we have this inquiry, actually, and it re-establishes trust in the sector, that can only be good.
John Humphrys: Yeah, but it's your fault that the trust has gone, is the point that I was trying to make. Who else is - who else could be to blame for the trust in the sector having gone?
Sam Laidlaw: I think, you know, what's happening here is that we've had huge pressures on the bill of increasing wholesale gas prices driven by international oil markets - if you look at the price of oil, you know, ten years ago, it was 20-25, 30 dollars a barrel compared to 100 dollars a barrel today - the price of wholesale gas has moved up with it. On top of that, we've obviously had an increased component of transportation and distribution costs, to renew the network but also to tie in a lot of onshore windfarms, and we've had the green levies in order to help customers make their homes more energy-efficient, as well, so -
John Humphrys: So -
Sam Laidlaw: - so we've had a lot of drivers of cost on the bill, at a time when if you look at energy company profits - and certainly if you look at my own company's profits - they've actually been coming down, over the last four years.
John Humphrys: So, given all that, why is it that the - Ofgem, the independent - entirely independent - energy industry regulator - I spoke to its chief executive, you might have heard him talking, just an hour ago - believes that the market is fundamentally flawed?
Sam Laidlaw: Uh, I don't think that the conclusion is that it's fundamentally flawed -
John Humphrys: Well, he told me it was, an hour ago.
Sam Laidlaw: I mean, we've read the preliminary - we've read the preliminary market assessment, and I think there are areas that they want to refer for further study, I think it's -
John Humphrys: Not quite the message he delivered on this programme.
Sam Laidlaw: - and, yeah, well I've read, you know, I've read his report. I don't think it's suggesting that it's fundamentally flawed.
John Humphrys: Mm, well, he did say that, in terms, those were his words, I... you know, he agreed that that was the case. But anyway... Let - we are where we are.
Sam Laidlaw: We now have a situation where we have a new entity, the Competition Markets Authority, in which we have great confidence, is actually going to spend the next two years and actually establish whether indeed, you know, the market is competitive -
John Humphrys: All right, let's get on to that in just a second, but because we're talking about prices - obviously, that's what it's all about, as far as consumers are concerned -
Sam Laidlaw: It's actually, I think, about bills, and -
John Humphrys: All right, bills, prices, whatever...
Sam Laidlaw: - which aren't quite the same, because actually customers can take control of their energy bills through energy efficiency measures, which we've - you know, been working on -
John Humphrys: Well, hang on, they've got to buy the stuff from you and you charge them, so... That's confusing the issue a bit, isn't it.
Sam Laidlaw: Well, bills this year, John, will be lower than they were last year.
John Humphrys: All right. Let's - but let's talk about bills, prices, whatever you call them. One of your big competitors, SSE, have put a big freeze on their prices for the next couple of years. Are you going to do the same?
Sam Laidlaw: Well, I think, actually this is a competitive market and therefore you would not expect us all to do the same thing. We actually reduced our -
John Humphrys: I'd expect you to compete, if it's a competitive market, therefore you'd have to say "We are - damn right, we're going to make it three years, or we're going to cut our prices" -
Sam Laidlaw: - so we cut our prices, we were the first company to cut our prices on the first of January, and we actually have a competitive offer, out there in the marketplace, that is a lower cost, fixed-price deal that is cheaper than SSE's -
John Humphrys: You're not going to freeze it at that, though.
Sam Laidlaw: We reserve the right to do, you know, in a competitive market, to make changes, to remain continuously providing the best value for customers and to provide the best service for customers, which is very important.
John Humphrys: Now, you are concerned about the next couple of years, 'cause that's how long this whole process is now going to take. You're worried about that, because you say it'll stop investment in the industry. This is potentially very serious, isn't it, because there's already a very low, as it were, safety margin, spare capacity in the generating - generation field. So - what, 2%, we're down to, or may be down to soon, 15% is supposed to be a sort of fairly safe margin. Are you suggesting that, as a result of what's being announced today, what was announced an hour ago, the lights could start going out in a couple of years?
Sam Laidlaw: Well, I think if - you know, one of the things that is being debated in this inquiry is whether actually, energy companies such as ourselves and the other big - the other five major companies - should be in the power generation business, and should be integrated. We have already actually separated our power generation business, and we produce - it's a separate company with separate accounts. Um, but, if the suggestion, which is what we are hearing from various political quarters, is that maybe we shouldn't be in that business at all -
John Humphrys: So you might sell it off completely, you might separate completely generation from sales.
Sam Laidlaw: The point is this, and that is if the - if this competition market review is going to determine whether we should, then obviously our enthusiasm for investing in that space is going to be much less, and the risk of investing -
John Humphrys: Ooh, sounds a bit of a blackmail-ish threat there, doesn't it?
Sam Laidlaw: No, I mean it's an inevitable consequence. The risk of investing in that space, if you might have to divest in a couple of years, has gone up.
John Humphrys: And the effect of you investing any more money in generation would be what? I go back to my question - might the lights go out?
Sam Laidlaw: Well, you know, we're working hard to see if there's a way in which we can, we can actually solve this equation, but it's becoke just more difficult, clearly, because we're now going to have to wait until we see the outcome of this review.
John Humphrys: So the answer to that question is "Yes, they might".
Sam Laidlaw: Well, we hope they won't. Er...
John Humphrys: Yeah, but they might.
Sam Laidlaw: There's always - there's an increasing risk, now, and I think a lot can be done in terms of demand management, um, but actually building new gas-fired power stations does take four years and, you know, that's the - that's the time pressure that, you know, we're now up against, in that we've added another two years to this, so it's potentially going to be six years.
John Humphrys: Right. Well, thank you for that, Sam Laidlaw. Let me turn to Ed Davey. That's a very, very sobering and very serious thought indeed, Mr Davey. We have the Chief Executive of the biggest energy company in the country saying the lights might go out, because there will be no investment in the industry, over the next few years.