Post on 16-Mar-2019
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ECONOMY, ENERGY AND FAIR WORK COMMITTEE
AGENDA
27th Meeting, 2018 (Session 5)
Tuesday 2 October 2018
The Committee will meet at 9.30 am in the David Livingstone Room (CR6). 1. Decision on taking business in private: The Committee will decide whether to
take items 5, 6, 7 and 8 in private. 2. Pre-Budget Scrutiny: The Committee will take evidence as part of its pre-
budget scrutiny from—
Derek Mackay, Cabinet Secretary for Finance, Economy and Fair Work,Jamie Hepburn, Minister for Business, Fair Work and Skills, Oonagh Gil,Deputy Director, Enterprise and Cities, and Gavin Gray, Deputy Director,Employability, Scottish Government.
3. Publicly Owned Energy Company: The Committee will take evidence from—
Catherine Waddams, University of East Anglia and UK Energy ResearchCentre; Kate Morrison, Energy Policy Manager, Citizens Advice Scotland; Neil Barnes, Deputy Director of Consumers and Markets, Ofgem; Ragne Low, Principal Knowledge Exchange Fellow, Centre for EnergyPolicy, University of Strathclyde.
4. European Union (Withdrawal) Act 2018: The Committee will consider aproposal by the Scottish Government to consent to the UK Governmentlegislating using the powers under the Act in relation to the following UKstatutory instrument proposal: Insolvency (Amendment etc.) (EU Exit)Regulations 2018, and will take evidence from—
Alex Reid, Head of Policy Development, and David Farr, Policy Manager:Corporate Insolvency, Accountant in Bankruptcy;
EEFW/S5/18/27/A
Graham Fisher, Head of Branch, Legal Directorate - Constitutional & CivilLaw, Scottish Government.
5. European Union (Withdrawal) Act 2018: The Committee will consider itsresponse to the proposal by the Scottish Government to consent to the UKGovernment legislating using the powers under the Act in relation to thefollowing UK statutory instrument proposal: Insolvency (Amendment etc.) (EUExit) Regulations 2018.
6. Publicly Owned Energy Company: The Committee will consider evidence
heard at today's meeting. 7. Pre-Budget Scrutiny: The Committee will consider evidence heard at today's
meeting. 8. Work programme: The Committee will consider its work programme.
Alison WalkerClerk to the Economy, Energy and Fair Work Committee
Room T3.40 The Scottish Parliament EdinburghTel: 0131 348 5207
Email: Alison.Walker@parliament.scot
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The papers for this meeting are as follows— Agenda Item 2
PRIVATE PAPER EEFW/S5/18/27/1 (P)
Agenda Item 3
PRIVATE PAPER EEFW/S5/18/27/2 (P)
Written Submissions EEFW/S5/18/27/3
Agenda Item 4
PRIVATE PAPER EEFW/S5/18/27/4 (P)
Insolvency (Amendment etc.) (EU Exit) Regulations 2018 EEFW/S5/18/27/5
Agenda Item 8
PRIVATE PAPER EEFW/S5/18/27/6 (P)
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Scoping Note on a Scottish
Publicly Owned Energy
Company
Ragne Low, Principal KE Fellow
Centre for Energy Policy, University of Strathclyde International Public Policy Institute
Executive Summary
This scoping note provides the Economy, Jobs and Fair Work Committee of the
Scottish Parliament with evidence to consider in its review of proposals for establishing
a Scottish Publicly Owned Energy Company (POEC). Conducted over a short period,
the scoping note is based upon a rapid review of the literature on public and not-for-
profit energy companies, the Scottish Government’s Strategic Outline Case document,
discussion with a number of interested stakeholders and the evidence and views
presented to the EJFW Committee during its inquiry on the draft Scottish Energy
Strategy in 2017.
In its consultation on the draft Scottish Energy Strategy (January-May 2017), the
Scottish Government sought views on the potential role and remit of a publicly owned
energy company to help the growth of local and community projects. In October 2017,
the First Minister made a commitment to establish a not-for-profit, publicly owned
energy company to supply energy to consumers at as close to cost price as possible.
A Strategic Outline Case was published by the Scottish Government in March 2018
setting out a series of operating models for delivering on the core objective of providing
competitively priced energy and helping to alleviate fuel poverty. The options set out
in Strategic Outline Case centre around the establishment of an energy supply
company (a retailer of gas and electricity to customers). This scoping note reviews the
evidence on establishing a Scottish publicly owned energy supply company as well as
wider evidence on what the purpose and model of a POEC could be.
A number of key points emerge. GB electricity (and to a lesser extent gas) supply is a
low margin market, a point recognised in the Strategic Outline Case and reinforced by
many sector stakeholders. The number of smaller suppliers in that market has grown
rapidly in the past five years, and an increasing number of these are offering fixed rate
or very low margin tariffs. The latest data suggest that the pre-tax margin on the
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average dual fuel consumer bill is just under 5%. Importantly, this is almost all
delivered by the gas component of bills. Average electricity pre-tax margins were
below zero for 2016. In the current market, successful suppliers are those that can
procure energy at lowest prices, have the most efficient billing and customer relations
systems, and are best at hedging risk. This is the market into which a Scottish
Government-owned supply company would be entering.
Taking a wider view of the purpose a POEC might ultimately fulfil, the review
conducted here suggests four overarching objectives a Scottish POEC could have:
Creating new energy infrastructure platforms
Accelerating wider energy system transformation
Increasing engagement and participation in the energy system
Reducing costs to consumers
This review concludes that a Scottish publicly owned energy company can deliver on
a number of these objectives. It also suggests that it is possible to integrate these
wider objectives into planning for the POEC, even if the focus for the POEC is initially
as an energy supply company. Further, it suggests that it is essential to consider these
wider objectives in the context of how the POEC will interact with existing energy policy
initiatives.
The EJFW Committee may wish to support further public debate on both the purpose
of the POEC and how it will work alongside existing policy, by considering the following
questions:
How might a Scottish energy supply company work best to support fuel poverty
reduction?
How can the POEC be best designed to maximise alignment with wider Scottish
energy policy objectives, and to remove all potential tensions with other policy
objectives?
Should a new Scottish POEC be more than solely a licensed energy supply company?
How might the POEC be designed to make space for objectives and functions beyond
the retail of gas and electricity? What benefits might this have?
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Table of Contents
Executive Summary ................................................................................................. 1
1. Introduction ....................................................................................................... 4
2. Context ............................................................................................................... 4
3. The GB Energy Markets .................................................................................... 9
4. A publicly owned energy company ............................................................... 12
5. Conclusions..................................................................................................... 25
6. References ....................................................................................................... 28
7. Appendices ...................................................................................................... 31
Acknowledgements
Several people kindly gave of their time to provide insights that have greatly enriched
this report. I gratefully acknowledge the following in particular:
Iain Wright, University of Glasgow; Chris Welby, Bristol Energy; Alice Waltham,
Energy Market and Regulatory Consultants; Nicholas Gubbins, Community Energy
Scotland; Gina Hanrahan, WWF; Alastair Martin, Flexitricity; Keith Bell, University of
Strathclyde; Gail Scholes, Robin Hood Energy; Hannah Smith, Scottish Renewables;
David Sigsworth, former Chair of the Scottish Fuel Poverty Strategic Working Group;
and, Dawn Muspratt, Our Power.
I would also like to thank Mags Tingey, University of Edinburgh and all of those who
attended the International Workshop on Publicly Owned Energy Companies she
organised on 11-12 May 2018. The workshop illuminated some key issues, which I
have tried to reflect in this report. Thanks also go in particular to Karen Turner and
Stuart Galloway, University of Strathclyde, and Alasdair Reid, SPICe.
The views expressed in this report do not represent those of the Scottish Parliament,
SPICe or the Economy, Jobs and Fair Work Committee. Any errors or omissions
remain the author’s own.
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1. Introduction
1.1 The Scottish Parliament Economy, Jobs and Fair Work Committee (EJFW)
commissioned the Centre for Energy Policy at the University of Strathclyde to produce
a scoping note setting out the potential options for a Scottish Publicly Owned Energy
Company (POEC), taking into account the content of the Scottish Government’s own
Strategic Outline Case (a report produced by Ernst & Young LLP (EY) for Scottish
Ministers, dated 29 March), and the EJFW Committee’s response to the draft Scottish
Energy Strategy (letter to Mr. Wheelhouse dated 30 June 2017).
1.2 The purpose of the scoping note is to inform an EJFW Committee call for
evidence on the POEC.
2. Context
Background
2.1 The commitment to explore setting up a Scottish publicly owned energy
company first appeared in the Scottish National Party’s 2016 Election Manifesto, which
contained a commitment to “explore the potential to create a government owned
energy company to help the growth of local and community energy projects. This will
include empowering communities to use the income from energy developments to
support other communities develop their energy potential” (SNP 2016, p.30). In its
consultation on the draft Scottish Energy Strategy (which ran from January – May
2017) the Scottish Government included a question on the potential role and remit of
“a Government Owned Energy Company to help the growth of local and community
projects”.
2.2 Following its inquiry on the draft Scottish Energy Strategy, the EJFW
Committee recommended in relation to the proposal for a POEC that “in the interests
of ensuring continuity of delivery for the strategy a long term framework be put in place;
one which could include the establishment of an independent body” (EJFW Committee
2017, para 70). The Committee took a broad view of the role a new public entity might
have, noting the “complexity of energy policy and the case for a national agency to
oversee it” and referred to the UK Committee on Climate Change, the Danish Energy
Agency, and the model of Transport Scotland for large infrastructure projects.
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2.3 In October 2017, the First Minister made a commitment to set up a publicly-
owned, not-for-profit energy company by the end of the current Parliament (March
2021), stating that “energy would be bought wholesale or generated here in Scotland
– renewable, of course – and sold to customers as close to cost price as possible. It
would give people – particularly those on low incomes – more choice and the option
of a supplier whose only job is to secure the lowest price for consumers” (First Minister
2017).
2.4 Based on Scottish Government statements, the key rationale for establishing
the company is the need to address fuel poverty, with the provision of greater choice
for (Scottish) consumers, contributing to economic development, and helping to deliver
broader Government energy ambitions – including the promotion of renewable
generation and maximising benefits for local communities – also stated as objectives1.
2.5 Based upon this rationale, the Scottish Government commissioned EY to
generate a Strategic Outline Case (SOC) for the POEC. The SOC sets out a series of
delivery options and operating models for delivering on the core objective to “provide
competitively priced energy and help alleviate fuel poverty”, acknowledging that
options and appraisal criteria may need to change if the fundamental objectives of the
POEC are refined or expanded (EY 2018, p.2).
2.6 The Scottish Government is currently considering the SOC and is committed to
public consultation as part of the process of further developing the case for the POEC
(Scottish Government 2018). Following HM Treasury Green Book guidance, the SOC
should be followed by an Outline Business Case that will explore in detail the shortlist
of options generated in the SOC. This scoping note provides the EJFW Committee
with a starting point to engage with the consultation processes around the further
development of the case for a Scottish POEC.
2.7 Given that the Scottish Government’s stated rationale for establishing a POEC
is to supply competitively priced energy to help address fuel poverty, this scoping note
provides a brief outline of the drivers of, and policy context around, fuel poverty in
Scotland.
1 See http://www.gov.scot/Topics/Business-Industry/Energy/POEC and http://www.gov.scot/Resource/0052/00529523.pdf
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Fuel poverty in Scotland
2.8 A household is defined as being in fuel poverty if it needs to spend more than
10% of household income to maintain an adequate heating regime2. Extreme fuel
poverty is defined as needing to spend more than 20%. (England adopted a new
definition in 2013: the ‘low income, high costs’ definition.)
2.9 The Scottish Government is about to introduce draft legislation for a new
definition for Scotland. In 2016, the Scottish Fuel Poverty Strategic Working Group
published its report ‘A Scotland Without Fuel Poverty is a Fairer Scotland’ (SFPSWG
2016). That report recommended a review of the definition of fuel poverty in Scotland,
which was taken up by an independent panel of experts that published its own review
of the evidence in November 2017. In that review, the panel states: “A major drawback
of the Boardman-based [10% of income needed to maintain a certain heating regime]
definition is that households which have quite high incomes can be classified as fuel
poor – in Scotland especially, this group represents more than half of all those in fuel
poverty, making this a very substantive problem.” (Scottish Fuel Poverty Definition
Review Panel 2017, p.12)
2.10 The Review Panel’s recommendation was for a definition as follows:
“Households in Scotland are in fuel poverty if:
they need to spend more than 10% of their after housing costs income on heating
and electricity in order to attain a healthy indoor environment that is commensurate
with their vulnerability status;
and if these housing and fuel costs were deducted, they would have less than 90%
of Scotland’s Minimum Income Standard as their residual income from which to pay
2 The complete definition is: if more than 10% of income (including any social welfare payments) is needed to maintain a heating regime of 21C in the living room and 18C in other rooms for a period of 9 h in every 24 (or 16 in 24 over the weekend); with 2 h being in the morning and 7 h in the evening. For elderly and infirm households, this is increased to 23C in the living room and 18C in other rooms, to be achieved for 16 h in every 24. The current method uses modelled dwelling energy performance to calculate the cost of maintaining the standard heating regime, alongside income data based on face-to-face interviews with residents (data are for the income of the highest earner in the household). Due to the small sample sizes, the results are reported as a three-year rolling average. (Mould and Baker 2017).
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for all the other core necessities commensurate with a decent standard of living.”
(Scottish Fuel Poverty Definition Review Panel 2017, p.15)
2.11 Recent research shows low income rural households in Scotland are spending
significantly more on energy than their urban equivalents, and rural households on
lower incomes may be spending more on heating than those on higher incomes
(Mould and Baker 2017). The Scottish Fuel Poverty Strategic Working Group (2016)
reported fuel poverty rates of 50% in rural areas compared to 32% in urban areas, due
to limited access to mains gas, larger detached dwellings and more exposure to wind
and weather, with fuel poverty rates highest in electric-heated properties at up to 60%,
and in energy inefficient properties at 73% in dwellings rated in the two poorest
performing bands.
2.12 As highlighted by the Competition and Markets Authority in its 2016
investigation into the energy markets, energy suppliers have tended to rely upon
customer inertia to bulk out their profits - with large numbers of their customers failing
to switch off their standard variable tariff (which is usually higher than alternative tariffs)
and/or failing to switch to an alternative supplier (CMA 2016). There is likely to be a
strong link between fuel poverty and non-switching although we did not find direct
evidence of this in the time available for this scoping review.
Figure 1 – Fuel poverty rates in Scotland 2003 – 2016 (WHD refers to the Warm Home Discount) Source: http://www.gov.scot/About/Performance/scotPerforms/partnerstories/HARO/ Indicators/High-quality-sustainable
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2.13 As shown in Figure 1, average fuel prices have fallen since 2014, the main
driver for a reduction in fuel poverty levels over the same period (with improved energy
efficiency accounting for about a third of the reduction in fuel poverty).
2.14 Fuel poverty is a complex and multidimensional issue. Energy prices are clearly
one important driver and a range of existing and emerging policies aim to offer
protection to those most vulnerable to fuel poverty.
Existing consumer protection measures
2.15 A new ‘safeguard tariff’ was introduced by Ofgem (the electricity and gas
markets regulator) in April 2017. The safeguard tariff applies to households that pay
for gas or electricity in advance using a prepayment meter (and since February 2018,
also to those households in receipt of the Warm Home Discount, which is a rebate on
electricity bills). The safeguard tariff limits how much a supplier can charge per kWH.
Ofgem sets the safeguard tariff level based upon an estimate of the true costs to
supply energy: wholesale costs, network costs (these vary geographically), policy
costs, operating costs, and costs specifically associated with prepayment meters. The
tariff is due to expire at the end of 2020 in parallel with expected completion of the
smart meter rollout (Ofgem 2017).
2.16 In February 2018, the UK Government introduced a Bill to Parliament for
a temporary tariff cap for customers on Standard Variable (SVT) and default tariffs –
the default tariff cap (UK Government 2018).
2.17 The proposed legislation:
creates a new duty for Ofgem to design and implement the default tariff cap
places a duty on Ofgem to implement the price cap as soon as practical.
2.18 The current safeguard tariff covers around 5 million customers across GB. In
December 2017, Ofgem consulted on extending existing protections to cover an
additional 2 million vulnerable customers in winter 2018/19 if the default tariff cap is
not introduced by then. Ofgem has proposed that eligibility for the extended safeguard
tariff will be assessed based upon factors such as: receipt of income-related
government benefits; receipt of disability benefits; and being on a default tariff. Whilst
fuel poverty and consumer vulnerability are not the same thing, an extended
vulnerable safeguard tariff (or default tariff cap) that is based upon evidence of low
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income and disengagement with the energy market will help to address some aspects
of fuel poverty (Ofgem 2017). Appendix I provides more detail on how the safeguard
tariff is applied in Scotland.
2.19 The Warm Home Discount itself is an obligation on energy suppliers to reduce
electricity bills for those that meet the eligibility criteria by £140 per annum, paid as a
one-off discount on electricity bills between September and March. The Scottish
Government will consult on the new powers under the Scotland Act 2016 for the future
design and implementation of the Energy Company Obligation and Warm Home
Discount in Scotland. Other (non supplier) support is provided through two benefits:
the Winter Fuel Payment scheme, essentially a pension top-up, and the Cold weather
Payment, a payment made to eligible households (mostly poorer pensioners) in
periods of very cold weather.
2.20 There are thus efforts underway to address the energy price element of the
causes of fuel poverty and these must be seen alongside wider policies to tackle
income inequalities, and to improve the energy performance of homes and the
efficiency of their appliances and heating systems. The links between plans for a
POEC and the wider provisions of forthcoming draft legislation on fuel poverty need to
be strong if the aim for the POEC is to help alleviate fuel poverty. And if in seeking to
address fuel poverty the POEC is to be mainly or solely an energy supply company,
its operational effectiveness will be very heavily determined by the context of the
current GB energy markets. This is the topic of the next section of this scoping note.
3. The GB Energy Markets
3.1 In Britain, electricity and gas generated by producers of energy are traded and
sold on to end consumers in liberalised wholesale and retail markets. The Scottish
Government’s stated purpose for the POEC is to “sell energy, whether bought
wholesale or generated in Scotland, to customers at as low a price as possible”
(Scottish Government 2018). This role as a retailer of energy to customers will
necessarily involve the POEC becoming an energy supply company that participates
in the GB energy markets for gas and electricity, which are described here.
Gas
3.2 The GB wholesale gas market is where natural gas is traded after it has arrived
in Britain. Sources include offshore production, liquefied natural gas (LNG) terminals,
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storage sites, pipelines from other countries (e.g. Norway) and interconnectors with
Belgium, the Netherlands and Ireland. There is a single price for gas on the wholesale
market (irrespective of where the gas comes from), called the National Balancing Point
(NBP) price. Shippers bring gas into Britain or transport it within Britain. Suppliers
provide gas to consumers. Availability and demand are matched on a daily basis by
National Grid Gas.
3.3 Energy suppliers purchase gas on the wholesale market and sell it on to their
customers in the retail market. The gas retail market functions in the same way as the
electricity retail market. The retail market is the market for the buying and selling of
gas or electricity between consumers and gas or electricity suppliers (retailers).
Consumers effectively engage a supply company to procure gas and electricity from
shippers and generators on their behalf. Current trading arrangements allow
consumers to choose their supplier and change supplier as often as they wish. Most
suppliers offer both electricity and gas to their customers.
Electricity
3.4 With the ‘functional unbundling’ of the electricity market under liberalisation,
generators, network operators and retail suppliers operate as separate entities,
contracting with one another to provide electricity to end-users. Suppliers and
generators pay network owners for the right to transport energy on their networks. In
the current market, successful suppliers are those that can procure energy at lowest
prices, have most efficient billing and customer relations systems, and are best at
hedging risk.
3.5 Suppliers, generators and Non Physical Traders (for example, banks) trade
electricity in the GB electricity wholesale market. Because electricity is currently not
stored in significant volumes, generation and demand must be kept in balance at all
times across the grid. Most electricity is traded bilaterally between generators and
suppliers in advance to cover the minimum amount needed to match demand - often
referred to as ‘baseload’. National Grid Electricity Transmission (NGET) is responsible
for real-time matching of generation and demand, using a trading system called the
Balancing Mechanism. All Parties in the wholesale market are required to lodge a
deposit, called ‘Credit Cover’, to reduce the risk that the rest of the industry will have
to pay for a defaulting Party’s liabilities.
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3.6 Figure 2 provides a simplified illustration of how the wholesale and retail
electricity markets function, together with generation and distribution of power.
Appendix II provides more detail on the functioning of the electricity market.
Figure 2 – Simplified GB electricity system – power flows (blue) and commercial arrangements
(orange)
Sources: Ofgem website https://www.ofgem.gov.uk/electricity/wholesale-market/gb-electricity-
wholesale-market, and Elexon’s ‘The Electricity Trading Arrangements: A Beginner’s Guide’
November 2017 https://www.elexon.co.uk/wp-content/uploads/2017/11/beginners_guide_v6.0.pdf
The relationship between consumer bills and system costs
3.7 Prices to consumers in the retail market comprise wholesale costs, network
costs, policy costs, operating costs, VAT and pre-tax profits. The latest data from
Ofgem, which are based on submissions from the six larger energy suppliers, suggest
that the pre-tax margin on the average dual fuel consumer bill is just under 5%.
Importantly, this is almost all delivered by the gas component of bills. Electricity pre-
tax margins were below zero in 2016 (i.e. electricity supply was loss making for the
2016 period in which data were submitted), whereas for gas were almost 11% (Ofgem
2018). The point that margins are tight is reinforced by evidence from a series of expert
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workshops held in response to the Welsh Assembly’s Environment and Sustainability
Committee recommendation for the establishment of a Welsh energy company
(Darnton 2017).
3.8 Network costs vary regionally, reflecting actual costs of maintaining networks
and of transporting energy across them from generators to consumers. This cost-
reflective charging is intended by Ofgem as a stimulus to overall system efficiency,
incentivising generation near centres of demand. Broadly speaking, the idea is that
the price a consumer pays should reflect how much it costs to transport energy to the
region they live in.
3.9 This is more an issue for electricity than for gas. In 2017, electricity consumers
in the North of Scotland paid 7 - 9% more than the GB average (Scottish Government
2018b). Overall, Ofgem analysis shows that regional variations in household bills are
largely (but not exclusively) driven by regional variations in national and local network
charges. This is more pronounced for electricity than for gas3. Regional differences in
energy bills that are not driven by network charges are likely to have a range of causes,
including variations in cost faced by suppliers in different regions. Market share and
customer behaviour (for example, willingness to switch supplier) may also contribute
to regional differences in supplier bills (Ofgem 2015).
3.10 GB electricity (and to a lesser extent gas) supply is a low margin market, a point
recognised in the Strategic Outline Case (EY 2018) and reinforced by many sector
stakeholders. The number of smaller suppliers has grown rapidly in the past five years,
and there are now 69 domestic suppliers (Ofgem 2018), an increasing number of
which are offering fixed rate or very low margin tariffs (Cornwall Insight 2018). This is
the market into which a Scottish Government-owned supply company would be
entering.
4. A publicly owned energy company
4.1 As the EJFW Committee heard in its inquiry on the draft Scottish Energy
Strategy, there is a range of strategic and delivery functions that a new public energy
3 For gas transmission, Ofgem analysis suggests that differences are so small that they are unlikely to be picked up in bills. Gas distribution cost differences are reflected in bills. Scottish consumers generally pay lower gas network costs than the average across GB regions (Ofgem 2015).
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body could fulfil, each with value in terms of meeting the objectives of the Scottish
Government’s long term energy strategy (EJFW Committee 2017). This section of the
scoping note takes a step back from the specific potential objective of supplying
competitively priced energy, to explore what wider potential objectives a POEC might
have.
Potential Purposes for a POEC
4.2 Based upon a review of the evidence gathered by the EJFW Committee, the
wider evidence presented in previous sections of this scoping note and engagement
with stakeholders across the sector, at least four potential purposes emerge for a new
public energy company:
Creating new infrastructure platforms
4.3 A public body would be well placed to support investment in new infrastructure
which others, including private companies, could then ‘plug in to’ to innovate and
provide new energy services to consumers4. Examples of the type of infrastructure
that could be supported are heat networks, energy storage infrastructure and electric
vehicle charging infrastructure. The Scottish and UK Governments are already
providing this type of support but a new body could act to better coordinate existing
schemes and provide additional capacity and specialist expertise, as well as to
increase levels of investment, accelerate the rate of roll-out and broaden the
geographical spread of these new infrastructures. A new body could promote
complementarity between energy system infrastructure investment and investment in
energy efficiency under the National Infrastructure Priority announced by the Scottish
Government (Scottish Government 2017).
Accelerating wider energy system transformation
4.4 A public body could provide more strategic and direct support for energy system
innovation. It could provide advice and guidance on programme and project
management for other public bodies and social enterprises, as well as coordinating
4 The term ‘public good’ has crept in to the public discourse on how government can support such ‘plug and play’ energy infrastructure. Strictly speaking, a genuine public good resource is something that is cost-free to access and for which the benefits of access are not exclusive. For energy infrastructure, there are costs associated with connecting-in any new user and a new user can only benefit from the resource by actively investing in accessing it.
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access to funding and/or finance for those projects. It could provide a data service for
the benefit of a range of energy system innovators, by collecting, holding and curating
data and leveraging value from it for a range of potential users. Working with Ofgem,
it could provide a platform for new business models to be trialled by others (e.g. local
supply models) including commercial actors.
Increasing engagement and participation in the energy system
4.5 A new public entity could take a stronger position in promoting and supporting
customers to switch supplier. As the SOC notes, the Scottish Government has already
part-funded Citrus Energy to provide an impartial switching service (EY 2018). This
could be developed and expanded. The public entity could work to improve
consumers’ understanding of their bills, and support the use of smart meter and other
data to empower consumers, increasing the potential for digital innovation to benefit
consumers across society.
4.6 The public body could also work to increase consumers’ engagement with
energy efficiency and low carbon energy technologies and energy services, enhancing
their potential role in demand side management. A further function could be to provide
information and advice (and perhaps also financial support) to boost local (co-)
ownership of energy assets and participation in decision making about energy
developments and technologies.
Reducing costs to consumers
4.7 Aligned with the rather more focused aim set out in the SOC, the fourth potential
purpose of a new publicly-owned body could be to recycle energy market profits back
to consumers, lowering bills and helping to tackle the fuel bills element of the causes
of fuel poverty. As well as involvement in the commercially competitive retail market,
such an objective might also entail supporting generation cost reductions in order to
lower the wholesale costs of power, or provision of alternative infrastructures and
technologies to deliver heat at lower cost to consumers than they are currently paying.
It might also involve supporting local supply models where local generation resources
are linked more directly to local consumers, potentially avoiding them paying the full
market costs of energy whilst being able to retain more value locally.
4.8 These four purposes are related and mutually reinforcing and if sufficient
resource were available, several might be addressed at once. They are all being
addressed to varying degrees through current Scottish Government policy, as well as
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at UK level. The creation of a POEC provides the opportunity to better coordinate
those existing policy initiatives and provide strategic oversight as well as various types
of support for on-the-ground delivery.
4.9 These various potential purposes are already reflected to different degrees in
existing not-for-profit and publicly owned energy initiatives. The next two sections
review some of these, as instructive for how a POEC might develop in Scotland.
UK Experience of Publicly-owned and Not-for-profit Energy Companies
4.10 In a review of local authority engagement in UK energy systems, Webb et al.
found a wide diversity of activities and business structures, with a mix of in-house,
commercial and not-for-profit entities including municipal energy service companies
(ESCos), private sector-led ESCos and community benefit societies. Motivations
include decarbonising local energy, improving energy security and saving on energy
costs. However energy provision and demand management are increasingly also
being seen as a source of revenue (Webb et al. 2017). Three examples are reviewed
here.
Robin Hood Energy
4.11 Robin Hood Energy is a licensed energy supply company wholly owned by
Nottingham City Council, established in 2015. Robin Hood Energy’s aim is to provide
affordable energy, and was launched with pre-payment meter customers particularly
in mind. Robin Hood succeeded in turning a profit this year, one of only very few small
suppliers to reach break-even point in such a short period. It now offers eight white
label5 products to other entities including several local authorities.
4.12 Robin Hood voluntarily participates in the Warm Home Discount scheme and
offers smart meters (in spite of being below the compliance threshold in terms of
customer numbers). The use of smart meter data in particular has allowed Robin Hood
to provide evidence of customers’ prompt payment and therefore enabled customers
to move onto cheaper tariffs faster than otherwise. Robin Hood also works to ensure
5 White label products are provided by a licensed supplier (in this case Robin Hood Energy) to another entity that sells that product on, separately branded in line with the buying entity’s objectives. Examples of white label contracts are Robin Hood’s white labels with Islington Council (Angelic Energy) and with Liverpool Council (LECCY), and SSE’s with Marks and Spencer (M&S Energy).
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that as few customers as possible are on their standard variable tariff and is in
discussion with Ofgem about ways of avoiding the standard variable tariff being the
default. Robin Hood’s Board is made up of City Councillors and staff have moved from
being local council employees to being employed by Robin Hood.
4.13 Robin Hood’s operating costs are around £2.8m per year6, with staff costs
representing about £1.9m of this. Set up costs were just under £2m, which is low
compared to comparable companies. Part of the reason for this is that Robin Hood
spent relatively little on marketing, and less than most comparable companies on
consultancy fees.
Bristol Energy
4.14 Bristol Energy began trading in 2015 as a licensed gas and electricity supply
company owned by Bristol City Council. The company operates independently of the
City Council. Staff are employed by Bristol Energy and the Board has a Bristol City
Council representative as well as other Non-Executive Directors. The process of taking
the company from initial proposal to fully licensed supplier took around five years.
Objectives include generating revenue for the Council, addressing fuel poverty and
providing a high standard of customer service. Bristol Energy is not yet profitable –
something that is far from unusual for the smaller companies in the supply market, and
in particular for socially motivated companies that emphasise compliance and
affordability for their customers. The company expects to be profitable (and begin
repaying Council loans) by 2021. It has around 60,000 customers across GB, including
13,000 in Bristol (7% of city households), to whom it offers the cheapest tariff in the
city.
4.15 Bristol Energy runs the Fuel Good Fund, which supports Bristol charities
working to tackle fuel poverty as part of a wider Council-led initiative. The Fund is
financed from donations made each time a new customer signs up to Bristol Energy
(£15 per fuel, £30 for a dual fuel customer). Bristol Energy trialled an at-cost social
tariff, which was offered directly to fuel poor households via referrals from charities,
6 Borrowing, which includes commodity costs (to cover the purchase of gas and electricity), is around £5m per year.
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but sign-up rates fell very far below projections – demonstrating the challenge of
engaging with some of the most vulnerable and disengaged consumers.
Our Power
4.16 Our Power is not strictly speaking a publicly owned company, but it has many
of the attributes of a publicly owned company. Established in 2015, Our Power is a
Community Benefit Society with subsidiaries operating as a licensed energy supply
company (Our Power Energy Supply Ltd) and engaging in renewable generation and
district heating. It is owned by its 66 members and is asset-locked and non-profit
distributing. Membership is open to Social Landlords, Local Authorities and
Community Controlled Organisations who collectively own over 200,000 homes. Our
Power offers a void management service to its members which includes a switch to
Our Power during the void period (though residents can then choose whether to stay
with Our Power or switch).
4.17 Our Power now has over 27,000 customers, with tariffs available to the wider
market to help to gain scale, with the objective of becoming profitable by 2021. Tariffs
do not vary by payment method and Our Power has one of the lowest prepayment
tariffs in GB. Our Power introduced the first alternative tariff for customers with
restricted meters (i.e. households on Total Heat Total Control or ComfortPlus tariffs)
offering significant savings for the majority of these customers. It also has a number
of partnerships with local authorities and community-controlled organisations
(including Hebrides Energy to offer a range of local tariffs in the Hebrides) and is
engaged in renewables development and exploring ways to use renewable generation
to benefit fuel poor customers. 90% of its electricity is from renewable sources.
4.18 Our Power has benefited from Scottish Government support, including an initial
grant for feasibility work and repayable loans of £2.75m and £3.25m million from the
Scottish Government and loans of £1m and £.6m from Social Investment Scotland.
Investment support has also come from the Joseph Rowntree and Esmee Fairbairn
Foundations, and Tudor, Barrow Cadbury and Robertson Trusts. Further working
capital was raised in 2017 via a social purpose bond which raised £4.5m.
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Overseas Experience of Publicly-owned Entities
German municipal energy companies
4.19 German municipal energy companies are often cited as examples of successful
publicly owned companies. In fact the motivations and structures of these companies
vary widely and some are more commercially successful than others. In Germany
there is a legacy of small, local grids and legal structures available for municipal
services. Unlike in Britain, although privatised, the sector is subject to concessions
which are issued by local municipalities7 and re-municipalisation has been relatively
more straightforward to achieve where concessions were up for renewal. Even then,
there have been cases of the incumbent operator taking legal action against the
municipality that is trying to take on the energy assets. Depending on local
circumstances, the result is a mix across municipalities of private-public partnerships
and wholly public entities. Public backing (e.g. via a referendum in Hamburg) has been
key.
The Swedish Energy Agency
4.20 The Swedish Energy Agency works largely as an energy policy delivery agency,
and innovation and R&D funder covering renewables, smart grids and low carbon
vehicles and transport fuels. It was formed in 1998 to support uptake of new energy
technologies and its research funding is targeted in particular at industry and
supporting commercialisation. The agency produces evaluations, national statistics
and consultation responses. It manages instruments such as the Electricity Certificate
System and the EU Emission Trading System. The Swedish District Heating Board is
an independent unit within the agency and acts as a mediator between district heating
companies and their customers regarding district heating contracts and network
access and management, to support compliance with Sweden’s District Heating Act.
The Danish Energy Agency
4.21 The Danish Energy Agency is similar in many respects to the Swedish Energy
Agency, but acts more as a regulator, for example administering subsidies and
supplier obligations, designing and enforcing energy labelling schemes for buildings
7 The networks themselves are publicly owned by regional/local government and municipalities tender
concessions competitively to operators for fixed periods (much like the rail sector in Britain).
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and products, managing the EU Emissions Trading System in Denmark, and
regulating the biogas industry. It has a regulatory role in relation to energy generation,
supply and consumption, including in buildings. It was established in 1976 and has
360 staff. It runs a range of low carbon partnership programmes overseas, and is
responsible for managing energy systems models and providing analysis. The
Swedish and Danish agencies are examples of the value of an independent body that
can take a longer-term, strategic view (beyond political cycles) of energy policy
delivery.
General Issues, Opportunities and Challenges
Targeting fuel poverty
4.22 As noted above, one fifth of Scottish homes are off the gas grid and off-grid
areas tend to have higher rates of fuel poverty than on-grid areas. The Scottish Fuel
Poverty Strategic Working Group’s 2016 report recommended that the Scottish
Government identify specific measures to support customers in rural and off-gas grid
areas who suffer from higher energy prices on average than the rest of Scotland. The
role of a POEC in relation to tackling off-gas grid fuel poverty merits further
consideration, in particular in relation to consumers with electric heating, given the low
margins in the electricity supply market and the likelihood of a publicly owned supply
company being able to offer significant tariff reductions for electricity compared to
other suppliers. For these consumers, providing support for switching may be as
significant as offering a new tariff in the market8.
4.23 The Scottish Fuel Poverty Strategic Working Group’s report also recommended
that a new fuel poverty strategy should include direct support for the fuel poor on
managing their energy use, switching to better tariffs, ensuring correct billing and debt
relief. If its purpose is considered in broader terms than simply as a not-for-profit
retailer of gas and electricity, the publicly owned energy company presents an
8 The 400,000 customers with restricted meters in Scotland – such as those on Economy 10 tariffs – have traditionally been subject to additional constraints on their ability to switch. At present, few mid-tier or small suppliers are able to supply these customers. In practice, some are more expensive to supply than others, and as a group, they are difficult for suppliers to price. The CMA has imposed new conditions on suppliers, requiring them to make all their single-rate electricity tariffs available to all domestic electricity customers on restricted meters (CMA 2016b).
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opportunity to provide exactly this sort of support. Such a role for the POEC could be
articulated under the provisions of forthcoming fuel poverty legislation.
Interaction with local initiatives
4.24 The business or operational objectives of a new national energy body could
support local initiatives explicitly or equally might be in tension with them if it set up in
a way that effectively competes for resources and customers. As local authorities
across Scotland become increasingly active in establishing ESCos, investing in energy
projects and delivering on energy efficiency objectives, there is likely to be an
increasing diversity of approaches taken across Scotland. A national entity has the
potential to provide a central resource to support these various initiatives, but there is
a risk it could stifle local innovation if it were too centralising and directive. If the POEC
were solely a supply company, it might support local initiatives through white label
arrangements – alternatively it could, potentially at least, end up in competition with
other emerging not-for-profit supply company initiatives.
4.25 One potential impact of the establishment of a POEC could be increased local
employment in the area in which the POEC is headquartered, and through local supply
chains if the POEC had a role in investing in energy generation or infrastructure (for
example heat networks or through supplier obligations on energy efficiency).
Increased local employment would be expected in turn to have a positive effect on
incomes and thus potentially on local fuel poverty levels.
Interaction with other policy initiatives
4.26 As highlighted above (paragraph 4.23) there are clear linkages with the
forthcoming Fuel Poverty Strategy.
4.27 The objectives of the Energy Efficient Scotland programme9 also clearly align
with those of a POEC: as energy efficiency improves under the Energy Efficient
Scotland programme, this will reinforce the positive effects of efforts to make energy
more affordable spearheaded by the POEC (Scottish Government 2018c). However,
thought will need to be given to the POEC’s role (if any) in delivering the Energy
9 The Energy Efficient Scotland programme is the suite of policies and projects aimed at delivering the
National Infrastructure Priority on energy efficiency. The ambition is for a step change in the energy
efficiency of Scotland’s domestic and non-domestic buildings over the next 20 years.
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Company Obligation, given that the ECO is also a major source of funding under
Energy Efficient Scotland.
4.28 Further policy developments in relation to the objectives set out in the Energy
Strategy that are expected soon are expected to include, at least, a strategic statement
on local energy as well as statements on electricity and gas policy and market
development. Again, these Scottish Government policy statements could have a direct
bearing how the POEC develops and the effectiveness of its operational design.
Period of rapid change in the energy system and market regulation
4.29 There are many new small suppliers in the market and some are experimenting
with extremely low margin tariffs and fixed bills. The effect on the supply market of this
is yet to play out. Over the past two years, Ofgem has been moving to introduce a
series of regulatory changes that aim to strengthen competition and increase
consumer protection in the supply market. This includes reforming the ‘supplier hub’
model (in which suppliers are the primary interface between consumers and the
energy system, acting as the ‘hub’ of the market), and moving to half-hourly settlement
(use of half-hourly smart consumption data to settle consumers’ bills), as well as
considering how time-of-use tariffs may be rolled out (where the prices consumers pay
per unit of energy change across the day, and are cheaper when the system needs
more demand to balance and more expensive when demand is high and the system
would benefit from demand being ‘dialled down’). There are also very recent moves
by Ofgem to review supplier licensing in relation to the safeguards for customers of
failed suppliers and the conditions for market entry for new suppliers.
4.30 Further change is occurring in the market in relation to finding innovative ways
to link local generation and demand. The Scottish Energy Strategy sets out a vision
for local energy, the full delivery of which implies some change in the relationships
between, and responsibilities of, generators and suppliers to enable greater matching
of local generation (and other energy assets such as storage) with local demand.
Ofgem’s Innovation Link10 was set up to test new business models in the market,
including peer-to-peer electricity trading.
10 See https://www.ofgem.gov.uk/about-us/how-we-engage/innovation-link
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4.31 The importance of data in the energy system is increasing. A new POEC will
face a rapidly growing set of opportunities and challenges around the collection and
use of data. There is an opportunity from the smart meter rollout to better target
support to vulnerable and fuel poor consumers, and to supplement this with
increasingly sophisticated data collection, monitoring and analysis techniques. New
intermediaries are emerging in the market, offering novel data services. The protection
and proper use of data will become even more salient.
4.32 There is a wider move in the electricity system towards a Distribution System
Operator (DSO) model, where the distribution network operators would have a greater
role in managing the system at the distribution network level. There are different
potential ways in which this will work and the benefits and costs will fall differently
depending on which model (or models) are eventually adopted. This shifting landscape
in the electricity system may have implications for a Scottish public energy company.
Similarly, the new energy service models that are emerging, including around
providing low carbon heat, may prove to be significant market disruptors. Again, the
implications for customers (and different groups of customers) and the wider market
are still uncertain.
4.33 Taken together, these changes – and the uncertainties they bring – suggest a
need for the POEC to have a very clearly defined purpose, against which its business
model can be designed in a way that enables adaptation to changing circumstances
whilst maintaining delivery of its core aims.
Governance and democratic accountability
4.34 Governance and accountability are concerns for any new public body. There
are a number of approaches that might be taken, some of which are described in the
SOC (EY 2018). Municipal energy companies on the continent may provide good
examples of how local democratic structures can be integrated with energy company
governance to ensure accountability. Statoil (now Equinor) is a further instructive
example – for its first decade of operation, the company was obliged to take strategic
decisions to Parliament for democratic scrutiny, which was critical to a more social and
environmental remit for Statoil (Cumbers et al. 2013). The Scottish Fuel Poverty
Strategic Working Group recommended that the Scottish Government should involve
people who are experiencing fuel poverty in the development of the new fuel poverty
strategy and its delivery and evaluation (SFPSWG 2016). The same principle should
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apply to the publicly owned energy company, where those whom the company is being
established to benefit should be consulted on its mission and operation. A public
company that has a direct role in supplying customers with services and charging for
those will need particularly robust governance arrangements, transparently managed.
Particular issues and challenges related to setting up an Energy Supply
Company
Customer acquisition
4.35 Prudent targets are sensible given the relatively low switching rates in the
market. Robin Hood Energy set a target of 30,000 customers per year initially, for
example. As the Scottish Fuel Poverty Strategic Working Group put it: “Advice on
switching will require a concerted and sustained effort to achieve better engagement
with the fuel poor to overcome the propensity not to switch – especially in rural
Scotland” (SFPSWG 2016, p.28). Given state aid rules, which would suggest that the
Scottish Government would have to be cautious in its promotion of a government-
owned supply company, the company itself might have to invest in a concerted
customer acquisition campaign. As noted in the SOC, the social enterprise Citrus-
Energy offers an existing impartial switching service, and is working in partnership with
the Scottish Government programme Home Energy Scotland (EY 2018).
Customer retention
4.36 Customer retention is perhaps even more important than initial acquisition,
because by definition these acquired customers are customers who have switched at
least once before to a new supplier (and are therefore more ‘mobile’ and less easy to
retain than customers who have never switched).
Consultancy costs
4.37 These are inevitable and may be substantial irrespective of whether a White
Label or full Licence model is chosen. Due diligence is therefore vital, but takes time
(which in turn may be a challenge given the timescales implied by the commitment to
have the POEC operational by 2021).
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Hedging strategy
4.38 Complex and essential, hedging refers to the ability to buy power over different
timescales at set prices to manage risk of exposure to changes in price. It is critical to
profitability, and a key source of risk.
Credit cover requirement
4.39 Some early non-Big 6 suppliers were caught out by high credit cover costs
when wholesale prices suddenly escalated in the late 2000s. For any supply company,
estimation and provision of credit cover must be well managed to reduce risk.
Customer relationship management
4.40 This is key to the ability of a supplier to provide good customer service, which
in turn directly affects reputation. Reputation is an important factor in customer
acquisition and retention. Customer service is arguably particularly important for a
publicly owned company where expectations may be higher.
Settlement and billing
4.41 It is essential to get the right IT in place to deal with customer billing and the off
the shelf options are not necessarily the most cost effective in the medium-term,
implying complex procurement processes (specifying precisely the system
requirements and then performing due diligence on suppliers).
Compliance costs
4.42 Various supplier obligations become relevant as a supply company grows. For
example, above 250,000 meter supply points (which with dual fuel customers could
mean 125,000 customers), the Renewables Obligation will apply to a supplier. The
Energy Company Obligation, smart meter roll out and other schemes will also apply
over certain thresholds. These schemes can add significant costs to a supply business
and tipping just over thresholds is a risk that needs managing. Thresholds are
changing for some of these schemes, implying a degree of uncertainty in the medium
term about which compliance costs will be applicable (see for example BEIS 2018).
Transparency
4.43 A publicly owned energy supply company will inevitably be subject to greater
scrutiny than private supply companies, including through Freedom of Information
requests and media attention. This has been the experience of local authority owned
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supply companies in the UK to date. As well as reacting to externally-driven
requirements for transparency, a publicly owned company would be very likely to wish
proactively to make information available to the public about the operation and
performance of the company. Managing the flow of information for transparency
purposes will cost more for a publicly owned supply company than for its private
competitors.
State Aid restrictions and potential conflicts of interest
4.44 Because the supply market is a fully competitive one, a Scottish Government-
owned supply company would need to be sufficiently independent from the Scottish
Government to avoid any potential breach of rules aimed at preventing anti-
competitive behaviour. This means, for example, that public resources could not be
used to promote a government-owned supply company in the market, and the
company would have to compete on equal terms with others if it were tendering for
public sector contracts. (The recent example of Bristol Council procuring energy from
a supplier other than its own Bristol Energy is instructive.) Potential conflicts of interest
would need attention too – for example with respect to the powers over the
implementation of supplier obligations (the Energy Company Obligation and Warm
Home Discount) that are now devolved to Scotland.
5. Conclusions
5.1 This scoping review highlights many of the same issues raised by stakeholders
in relation to a POEC at the EJFW’s inquiry on the draft Energy Strategy. Those
stakeholders wanted to see a POEC that could take a strategic oversight role in the
energy sector, driving innovation and supporting investment in and deployment of low
carbon energy technologies, coordinating energy efficiency activities to achieve a step
change improvement in Scotland’s housing stock, and supporting local energy
systems and helping to drive down the cost of energy11.
5.2 The focus on consumer bills and fuel poverty in the SOC takes the POEC in a
particular direction, away from having this more strategic role, and narrows down its
purpose to that of an energy supplier. As the SOC shows, there is scope for a Scottish
11 These stakeholder responses are set out in detail in Appendix IV.
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publicly owned energy supply company to save customers money by returning the
profit that private companies make back to consumers. Profit margins in the supply
industry are low, and there is already a wide range of tariffs and small suppliers
available to consumers. These two factors mean that customer switching to the POEC
is likely to make as large a difference to consumers’ bills as the fact that POEC may
be able to offer new competitive tariffs. This puts emphasis on the POEC’s potential
for customer acquisition, and for driving up switching rates. The existing not-for-profit
supply companies reviewed here exhibit a range of rates of success in the market,
although they do demonstrate that a socially-minded supply company can make a
difference to fuel poor and vulnerable consumers.
5.3 The other models of public energy company reviewed here, for example state
energy agencies and municipal energy companies, provide additional examples of
what a POEC could achieve in terms of supporting strategic action in the energy sector
and public development and ownership of energy assets. However, this review has
focused more on the potential purpose of a POEC in the Scottish context, setting out
four overarching objectives a POEC might have:
Creating new infrastructure platforms
Accelerating wider energy system transformation
Increasing engagement and participation in the energy system
Reducing costs to consumers
5.4 The review of evidence and stakeholder views presented here suggests that a
Scottish publicly owned energy company can deliver on a number of these objectives.
It would also suggest that it is possible to integrate these objectives into planning for
the POEC, and that it is essential to consider these in the context of how the POEC
will interact with existing energy policy initiatives.
5.5 The EJFW Committee may wish to support further public debate on both the
purpose of the POEC and how it will work alongside existing policy, through its work
on the POEC. Based on this scoping review, the EJFW Committee may wish to
consider the following questions in any call for evidence or further inquiry it may make
in relation to the POEC:
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How might a Scottish energy supply company work best to support fuel poverty
reduction?
How can the POEC be best designed to maximise alignment with wider Scottish
energy policy objectives, and to remove all potential tensions with other policy
objectives, (for example around creating integrated local energy systems that link
local supply and demand and retain value locally, or around decarbonising heat
through a differentiated and locally appropriate suite of policy interventions)?
Should a new Scottish POEC be more than solely a licensed energy supply
company? How might the POEC be designed to make space for objectives and
functions beyond the retail of gas and electricity? What benefits might this have?
The POEC could be purposefully designed to accommodate objectives and
functions beyond energy retailing. This could be achieved for example by
the supply company becoming a subsidiary of a wider group of companies
with complementary roles. Or the mission and activities of the supply
company could be purposively aligned with those of a strategic oversight
body established in parallel with the supply company (and which might have
a governance relationship with the supply company e.g. through
representation on the supply company’s Board). Or the supply company
could be designed with flexibility and growth built in at the outset, as
suggested in the Strategic Outline Case.
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6. References
BEIS 2018, ‘Press release - Households with smaller energy suppliers to benefit
from £140 Warm Home Discount on their energy bills’. 15 June 2018. Available at:
https://www.gov.uk/government/news/households-with-smaller-energy-suppliers-to-
benefit-from-140-warm-home-discount-on-their-energy-bills
CMA 2015, ‘Energy Market Investigation: Gas wholesale Market’. Available at:
https://assets.publishing.service.gov.uk/media/54ff238040f0b6140700000c/Gas_who
lesale_market.pdf
CMA 2016, ‘Energy Market Investigation’ Available at;
https://assets.publishing.service.gov.uk/media/5773de34e5274a0da3000113/final-
report-energy-market-investigation.pdf
CMA 2016b, ‘Energy Market Investigation: Explanatory Note - Energy Market
Investigation (Restricted Meters) Order 2016’. Available at:
https://assets.publishing.service.gov.uk/media/58513f75ed915d0aeb00009e/energy-
market-restricted-meters-order-explanatory-note.pdf
Cornwall Insight 2018, ‘Tariff limbo: how low can domestic supplier margins go?’
Available from Cornwall-Insight.com
Cumbers, A., Danson, M., Whittam, G., Morgan, G., and Callaghan, G. 2013
‘Repossessing the Future: A Common Weal Strategy for Community and Democratic
Ownership of Scotland’s Energy Resources’, Jimmy Reid Foundation. Available at:
http://www.allofusfirst.org/commonweal/assets/File/Repossessing-1.pdf
Darnton, A. 2017, ‘An Energy Company for Wales? Stakeholder Engagement Events
– Summary Report’ Welsh Government. Available at:
https://gov.wales/topics/environmentcountryside/energy/publications/an-energy-
company-for-wales/?lang=en
EJFW 2017, ‘Draft Energy Strategy – EJFW Committee Response’, Letter to Mr
Wheelhouse from the Convener of the Economy, Jobs and Fair work Committee, 30
June 2017. Available at:
http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/20170630Convener
_to_Minister-EnergyStrategy-Web.pdf
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Elexon 2017, ‘The Electricity Trading Arrangements: A Beginner’s Guide’
https://www.elexon.co.uk/wp-content/uploads/2017/11/beginners_guide_v6.0.pdf
Environment Journal 2016, Interview with Gail Scholes, CEO of Robin Hood Energy
https://environmentjournal.online/articles/robin-hood-energy-one-year/ 13 October
2016
EY 2018, ‘Publicly Owned Energy Company: Strategic Outline Case (SOC)’ 29
March 2018. Available at: http://www.gov.scot/Resource/0053/00533962.pdf
First Minister Right Honourable Nicola Sturgeon MSP, Speech to the October 2017
SNP Conference, Available at:
https://www.snp.org/nicola_sturgeons_speech_to_the_snp_conference_2017
Mould R. and Baker K. 2017, Uncovering hidden geographies and socio-economic
influences on fuel poverty using household fuel spend data: A meso-scale study in
Scotland, Indoor and Built Environment, Vol. 26(7) 914–936
Ofgem 2015, ‘Regional Differences in Network Charges’, Available at:
https://www.ofgem.gov.uk/sites/default/files/docs/2015/10/reg_charges_final_master
_version_23_october_2015.pdf
Ofgem 2017, ‘Providing financial protection to more vulnerable consumers’ Available
at:
https://www.ofgem.gov.uk/system/files/docs/2017/12/providing_financial_protection_t
o_more_vulnerable_consumers_0.pdf
Ofgem 2018, Infographic; Bills, Prices and Profits webpage, Available at:
https://www.ofgem.gov.uk/publications-and-updates/infographic-bills-prices-and-
profits
Scottish Fuel Poverty Definition Review Panel 2017, ‘A new definition of fuel poverty
in Scotland: A review of recent evidence’, Available at:
http://www.gov.scot/Resource/0052/00527017.pdf
Scottish Government 2017, ‘National Infrastructure Priority for Energy Efficiency -
Scotland's Energy Efficiency Programme’. Available at:
http://www.gov.scot/Publications/2017/01/2195
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Scottish Government 2018, Publicly Owned Energy Company webpage, Accessed 6
June 2018. Available at: http://www.gov.scot/Topics/Business-
Industry/Energy/POEC
Scottish Government 2018b, ‘Energy in Scotland 2018: Key Facts’, Available at:
http://www.gov.scot/Resource/0053/00531699.pdf
Scottish Government 2018c, Energy Efficient Scotland: Route Map webpage,
Accessed 11 June 2018. Available at:
http://www.gov.scot/Publications/2018/05/1462
SFPSWG 2016, ‘A Scotland without Fuel Poverty is a Fairer Scotland: Four Steps to
Achieving Sustainable, Affordable and Attainable warmth and Energy Use for All’,
Available at: http://www.gov.scot/Publications/2016/10/2273
SNP 2016, Election Manifesto, Accessed 28 May 2018. Available at:
https://d3n8a8pro7vhmx.cloudfront.net/thesnp/pages/5540/attachments/original/1461
753756/SNP_Manifesto2016-accesible.pdf?1461753756
UK Government 2018, https://www.gov.uk/government/collections/domestic-gas-
and-electricity-tariff-cap-bill
Webb, J., Tingey, M. and Hawkey, D. 2017 ‘What We Know about Local Authority
Engagement in UK Energy Systems: Ambitions, Activities, Business Structures &
Ways Forward’, UKERC and ETI. Available at
http://www.ukerc.ac.uk/publications/what-we-know-about-local-authority-
engagement-in-uk-energy-systems.html
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7. Appendices
Appendix I: The Safeguard Tariff
Data on the current levels for Ofgem’s vulnerable safeguard tariff are provided below.
For the North of Scotland region, based on a simple prepayment meter:
Gas – standing charges are 26.96 pence/day; unit price is 3.31 pence/kWh
Electricity – standing charges are 28.97 pence/day; unit price is 14.61 pence/kWh
For the South of Scotland region, based on a simple prepayment meter:
Gas – standing charges are 26.96 pence/day; unit price is 3.31 pence/kWh
Electricity – standing charges are 28.97 pence/day; unit price is 13.65 pence/kWh
For comparison, the average (arithmetic mean) for the safeguard tariff across all GB
regions is 3.36 pence/kWh for gas and 14.19 pence/kWh for electricity.
Source: Ofgem’s Prepayment Price Cap FAQ document, April 2018, available at:
https://www.ofgem.gov.uk/publications-and-updates/safeguard-tariff-prepayment-
reporting-template-and-faq
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Appendix II: The Electricity Market in More Detail
Suppliers, generators and Non Physical Traders (for example, banks) trade electricity
in the GB electricity wholesale market – they are called Parties in the Balancing and
Settlement Code that governs the market. Elexon is the company that administers the
Code on behalf of Parties, providing and procuring services to implement the Code
and ensure the wholesale market runs efficiently and accurately.
Electricity is currently not stored in significant volumes and generation and demand
must be kept in balance at all times across the grid. Electricity is traded in half-hour
blocks called Settlement Periods, for which suppliers assess demand (from their
customers) and strike contracts with generators or on power exchanges12. Contracts
for electricity can be struck well ahead of delivery, sometimes several years, right
down to the time of delivery (the Submission Deadline).
Electricity is usually traded far in advance to cover the minimum amount needed to
match demand - often referred to as ‘baseload’. This tends to be contracted for
bilaterally between generators and suppliers for example directly through Power
Purchase Agreements. Power exchanges tend to be used to adjust baseload to meet
the expected demand on a specific day, usually closer to the delivery time and based
on things like the weather forecast for that day.
Within each Settlement Period, National Grid Electricity Transmission (NGET)
manages the real-time matching of generation and demand. One of the main tools it
uses to do this is the Balancing Mechanism, where generators and suppliers that are
flexible enough can make ‘Offers’ to increase generation or reduce demand for a given
price, and ‘Bids’ to reduce generation or increase demand for a given price, at very
short notice. NGET uses the Balancing Mechanism to match supply and demand in
each half hour, in real-time, by accepting Bids or Offers depending on whether the
system needs more or less generation (or demand) to stay in balance.
After each Settlement Period, imbalance charges are payable by Parties (suppliers,
generators and Non Physical Traders) that have failed to use, generate or sell exactly
the amount of electricity they contracted for, taking into account any Bids and Offers
12 A note on power exchanges: buyers and sellers of electricity buy and sell anonymously – i.e. buyers do not know which seller they are buying from and vice versa.
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accepted. The differences between what they contracted for and what actually
occurred are called imbalances.
Where any Party does not meet its imbalance charges (i.e. defaults on payment), all
the Parties pick up the cost proportionally. However, all Parties have to lodge a
deposit, called ‘Credit Cover’, to reduce the risk that the rest of the industry will be
required to pay for a defaulting Party’s settlement liabilities. Credit Cover levels are
set by Elexon based on a calculation of imbalance exposure.
The following diagrams show in more detail how the physical infrastructure of the
electricity system (in blue) interacts with the commercial arrangements of the electricity
market (in orange), as well as how electricity flows are physically controlled (green).
Figure 3 shows this in simple terms:
Figure 3 – Simple model of the energy system and market
Figure 4 below shows the current – or incumbent – model of the GB electricity system
in more detail than provided in the body of this report.
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Figure 4 – Detail of the incumbent electricity system model
Source: Ongoing research by Damien Frame, Electronic and Electrical Engineering,
University of Strathclyde
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Appendix III: Relevant Scottish Energy Facts and Figures
Total energy consumption in Scotland breaks down roughly to 50% for heat, and 25%
each for electricity and transport. Gas consumption in Scotland’s domestic properties
has gone down 30% since 2006. 20% of Scottish households are off the gas grid. The
energy efficiency of Scotland’s housing stock has been increasing, with at least 100
mm of loft insulation is installed in an estimated 94% of lofts (up 12% on 2010 levels)
and a high standard of insulation (300 mm or more) now in 30% of homes (up from
only 5% in 2010). Levels of insulation (both loft and wall) are higher in the social sector
than in the private sector. 53% of walls (all types) are insulated in the private sector
compared to 71% in the social sector. 62% of lofts are insulated to 200 mm or more in
the private sector compared to 78% in the social sector.
Overall, domestic energy consumption (heat and electricity) has fallen 20% since the
2005-2007 baseline period. The change in average direct debit bills in Scotland since
2004 has followed wider GB trends, increasing 84% for gas and 52% for electricity.
Sources:
Energy in Scotland 2018 Key Facts
http://www.gov.scot/Resource/0053/00531699.pdf
and
Scottish House Condition Survey Key Findings 2016
http://www.gov.scot/Publications/2017/12/5401/348227
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Appendix IV: POEC Evidence from the EJFW Committee’s Inquiry on the
draft Scottish Energy Strategy
In responding to the EJFW’s inquiry, WWF stated: “Internationally, government
agencies and energy companies have had an important role in overcoming market
failure, capacity building, and driving forward the transition to clean energy and energy
efficiency. There is a role for a similar body with a broad suite of responsibilities in
Scotland.”
Ofgem’s response to the Scottish Government’s consultation on the draft Energy
Strategy included the statement: “The vast amounts of data that the smart transition
will generate should also permit greater diversity in tariff offerings. However, as the
retail environment becomes more diverse and complex, providing an appropriate level
of service for those not able to navigate the market could become more challenging.
Whilst many of the changes we are witnessing with regards to new business models
and products are potentially positive, it is important that the less engaged and those
in vulnerable situations are also able to benefit.” And: “We are reforming the rulebook
to future proof our regulation and put responsibility on suppliers to understand what is
right and fair for their customers. This will ensure that customers can benefit from
technological change and innovation in the market, while protecting them from new
risks. We will ensure that energy suppliers who fail to put the needs of consumers at
the heart of their business will continue to face tough action. We welcome the Scottish
Government’s commitment to engage with the UK Government, Ofgem and consumer
groups to secure effective regulation of the retail energy market.”
And specifically:
“A Government-owned energy company: There are already various public sector
models emerging in the energy supply market. For example, Nottingham City Council
have set up Robin Hood Energy and Bristol City Council created Bristol Energy. In
Scotland, we see “Our Power” which is rooted in the social housing and local
government sectors. As such, public sector ownership per se is consistent with and
enabled by current regulation. If the Scottish Government wanted to act as a supplier,
a Government-owned energy company would, of course, have to comply with
regulatory arrangements like any other. State aid matters would also be a
consideration for the Scottish Government as they would be in any other publicly
supported intervention that could affect competitive markets. Strategic support for
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innovation can be crucial in overcoming the market failures in developing new
technologies and approaches. We have set up the Innovation Link to provide a space
where innovators can come to us and seek advice on the regulatory implications of
their ideas and would be very happy to talk to the Scottish Government about the
models they are looking at and expertise we can provide.”
COSLA’s response noted “Elected members may wish to consider, based on local
policy of councils, an increased role for local authorities in a new Scottish energy
supply system. Examples of municipal energy companies such as in Sweden,
Denmark and parts of the UK could be of relevance here.” And: “Committed to the
principles of local democracy and community action, members may also wish to
explore a more formal and strategic role for local authorities in facilitating
community/local ownership of renewable energy sources, to ensure that greater
financial benefit is retained in communities. Local authorities can potentially provide
important skills and resources, such as technical expertise, project development,
finance and political support. This topic requires further exploration, not least to
determine which types of renewable schemes would lend themselves to such an
approach.”
Community Energy Scotland’s Nicholas Gubbins observed: “We feel — certainly from
a community perspective — that if there are going to be more and more extensive
community-owned or community-engaged energy developments, we are going to
need much better economies of scale. We also think that a number of collective and
facilitative roles could be undertaken by some form of co-ordinating organisation. It
does not necessarily have to be a Government one, but if there were to be such an
organisation, it could assist in a number of quite useful ways—both in developing new
projects and in helping to underwrite or guarantee or in assisting with the various things
that are necessary to generate such economies of scale.”
Lindsay Roberts, Scottish Renewables said: “We agree that, if it is created, it must
add value and should not duplicate things that are out there already. We are coming
round to the view that it could be a very useful mechanism as a front door. There are
a huge number of projects and organisations out there to help communities, but
because there is so much support, it is sometimes very difficult for them to know who
to go to first and which door to knock on. A one-stop shop begins to open up options
for communities and to help them to travel through the project development process
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or whatever it is that they are looking towards to get them involved with renewable
energy.”
Joan McNaughton, Climate Group said: “We cannot have oversight through a piece of
policy machinery at the political level. We need something that is closer to the practical
side. If my memory serves me correctly, some of the examples that were cited in the
chapter are designed to do that. In particular, the Swedish energy agency is there to
help oversee execution and to make sure that it is delivered in an integrated way
across all the different sectors. For me, there is a question mark over that area; there
might be a gap that needs to be filled. There is a case for a bit of machinery that is
distinct from the economic regulator and from Government, but which has the
accountability to report on what is actually delivered and to spot problems before they
become a matter of post hoc accountability because they have not been solved.” And:
“I had in mind the Committee on Climate Change when I was talking about post hoc
accountability. It is not there to spot problems early on and to help people to devise
solutions. Although it is doing great work, it is not quite the kind of body that you need
for the kind of role that I would like to see, which is around implementation and
separating that from the policy development process.”
The EJFW Committee’s letter of 30 June 2017 to Mr. Wheelhouse stated interest in
better understanding: “the balance of policy between local and national (plus the
suggestion of a gap between national policy and local reality), and complexity of
energy policy and the case for a national agency to oversee it.” And stated: “Given the
scale and complexity of the many policy strands covered by the strategy, it will be
important to ensure good governance, policy expertise, cross-party buy-in (as there
has been for climate change) and long-term ownership. Sitting on the edge of a few
civil servants’ desks, we were told, will not be enough. This is a strategy the lifespan
of which extends beyond the usual electoral and budgetary cycles. The Committee on
Climate Change was mentioned, as was the Danish Energy Agency, and the model of
Transport Scotland for large infrastructure projects. Another witness underlined the
importance of a body to spot problems before they became “a matter of post hoc
accountability”. In the interests of ensuring continuity of delivery for the strategy, the
Committee recommends a long term framework be put in place; one which could
include the establishment of an independent body.” (para 70).
In responding to the committee, Mr. Wheelhouse did not address POEC explicitly, but
said “We remain resolute in the task to eradicate fuel poverty from Scotland’s
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communities and ensure that we reach the most vulnerable in society and those least
able to afford to adequately heat their home. That’s why we plan to introduce a Warm
Homes Bill to set a new statutory target for fuel poverty. We will consult on the new
powers for the Scottish Parliament for the future delivery of the Energy Company
Obligation and Warm Homes Discount, to ensure they are used most effectively to
deliver on our dual objectives on fuel poverty and climate change.”
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ECONOMY, ENERGY AND FAIR WORK COMMITTEE
PUBLICLY OWNED ENERGY COMPANY INQUIRY
SUBMISSION FROM [Citizens Advice Scotland]
Scottish Publicly Owned Energy Company (POEC)
Citizens Advice Scotland (CAS) seeks to improve outcomes for consumers. We use research and
other evidence to put consumers at the heart of policy and regulation in the energy, post and water
sectors in Scotland. We work with government, regulators and business to put consumers first,
designing policy and practice around their needs and aspirations.
Scottish consumers recently told us that they find the cost of their energy bills the second most
concerning issue they face (after Brexit). The CMA‟s Energy Market Investigation found in 2016 that
70% of domestic customers of the 6 largest energy firms were still on an expensive „default‟
Standard Variable Tariff and that consumers have been paying £1.4 billion a year more than they
would in a fully competitive market.1
The number of energy „issues‟ which the Citizens Advice Network advises on in Scotland has more
than doubled since 2012/13 and in 2017/18 we advised on over 38,000 energy issues.2 Our case
evidence clearly demonstrates that many consumers find the current energy market complex and
difficult to engage with. As the consumer advocate for the energy market in Scotland we have a
detailed understanding of the complexities and difficulties consumers experience within this market
and take a keen interest in proposals to deliver improved consumer outcomes such as through a
POEC. The energy market continues to undergo rapid transformation with new market entrants,
new business models, new technologies and new services. A POEC should therefore be adaptable
enough to meet these challenges and be mindful of supporting future, as well as current,
consumers.
What are your general views on the idea of a Scottish publicly owned energy company (POEC)?
Given that rates of fuel poverty remain stubbornly high in Scotland with 26.5% of households being
fuel poor in 2016, CAS strongly supports the objectives for a POEC stated in the final Scottish
Government Energy Strategy – to “support economic development and contribute to tackling fuel
poverty.”3 Finding the best route to deliver on these objectives is complex, as shown by the diverse
responses to the POEC proposal in the Scottish Government‟s Energy Strategy, along with evolving
thinking from the Scottish Government about the role of a POEC.4
The potential for public ownership to deliver cheaper energy for consumers by acting on a not-for-
profit model was identified by the EY report and also the First Minister.5 As the scoping note
1https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/531204/o
verview-modernising-the-energy-market.pdf 2 https://www.cas.org.uk/system/files/publications/energy_advice_summary.pdf 3 An ‘energy issue’ is defined as a piece of advice given by the Citizens Advice Network https://www.gov.scot/Resource/0052/00529523.pdf 4 https://consult.gov.scot/energy-and-climate-change-directorate/draft-energy-
strategy/consultation/published_select_respondent?_b_index=0 5 https://www.gov.scot/Resource/0053/00533962.pdf
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highlights, the retail supply of electricity and, to a lesser extent, gas is a low margin market, so to
deliver cheap energy a POEC will have to acquire a sufficiently large customer base.
An economic analysis is required to find how many customers are required to achieve desired cost
savings. CAS intends to undertake research on the affordability of energy which may include such
an analysis. Given the Scottish Government‟s interest in a local authority based approach, it should
undertake a thorough economic assessment of the impact of existing local authority supply
schemes on tariff cost.
As the scoping note recognises, customers acquired by a POEC are by definition likely to be more
engaged in the energy market, having switched at least once before to a new supplier.6 Certain
groups of consumers likely to be in fuel poverty are also less likely to switch. As our Consumer
Tracker Survey showed the overall switching rate to be 25%, while for those in social housing it was
19%, and for unemployed people, 10%. Our Power‟s void management service, switching social
housing tenants to the supplier during a void period, could be a useful model.7 The POEC will need
to consider innovative ways of attracting typically disengaged, fuel poor customers to ensure that
they can benefit from lower-cost tariffs and thus fulfil its aim.
As Ofgem‟s State of the Market Report found, consumer trust in energy suppliers is still low and
while some consumers may feel greater trust in a POEC which is not operating for profit, a POEC
would arguably be more vulnerable to a loss of trust if it faces difficulties (e.g. inability to maintain
competitive tariffs, poor customer service) than other energy companies given its high profile and
the likelihood of greater scrutiny.8 Good customer service is important to retaining customers and
we have seen first-hand through our CAS network the financial detriment that can be caused when
customer service goes wrong – such as incorrect billing and metering leading to fuel debt.9
Therefore a POEC would have to ensure the highest levels of customer service and this will need
significant resource and planning.
What role should it fulfil and how?
Delivering cheaper energy and alleviating fuel poverty are the key roles that a POEC should look to
fulfil, although given current market conditions doing so on a significant scale may be challenging.
CAS‟ consumer tracker survey showed that by far the most common reason for switching is for
lower prices, with 78% of all respondents giving this reason for switching, with the figure growing to
85% amongst those who switched to a non „big 6‟ supplier.
In terms of attempting to reach fuel poor households, a POEC could deliver tariffs targeted at these
consumers. However as referenced in the scoping report Bristol Energy trialled an at-cost social
tariff, but struggled with lower than hoped for sign up rates, which demonstrates how hard-to-reach
these customers can be.10 This mirrors one of the findings from our recent fuel poverty research
Speaking Up: Understanding Fuel Poverty Support Needs that households with the greatest need
https://www.bbc.co.uk/news/uk-scotland-scotland-politics-41560397 6 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf 7 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf 8 https://www.ofgem.gov.uk/system/files/docs/2017/10/state_of_the_market_report_2017_web_1.pdf
9 https://www.cas.org.uk/system/files/publications/advice_in_detail_energy_2016_17.pdf
10 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf
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for support are often those who are not accessing it, mainly due to a lack of awareness of available
support.11
What are the key challenges that the POEC should address?
There are a huge number of challenges that a POEC could seek to address. The specific consumer
issues include providing more affordable energy, alleviating fuel poverty, supporting vulnerable
consumers, improving trust in the energy market, increasing engagement in the market, providing
consistently high levels of customer service, targeting specific groups of consumers such as those
with electric heating (who pay the most for their energy). There are also a huge range of energy
system challenges which a POEC could seek to address which would consequently benefit
consumers such as buying up community-generated electricity, diversification of energy generation
sources, increasing the number of district heating schemes, and offering flexibility services to
balance local grid demands with local supply in order to connect consumers to cheaper periods of
electricity.
However the POEC will not be able to do all of these things and the government will have to decide
where to focus its efforts to have the greatest impact. The opportunities are significant, but more
analysis to identify the best route to take to reduce fuel costs is required.
How might a Scottish energy supply company work best to support the growth of
local and community projects, and fuel poverty reduction?
The cost of fuel is one of the four drivers of fuel poverty – the others being household income, home
energy efficiency, and how energy is used in the home.12 As set out in the response to the first
question, detailed economic analysis is required to see how and if a POEC could sufficiently
decrease unit costs. If a POEC is to be a retail supply company, then its impact on the other drivers
of fuel poverty is likely to be limited. However, if the POEC took on a different form then there may
be increased scope to support local and community energy projects. Piloting new project types for
example through Power Purchase Agreements, providing expertise to communities, and supporting
community ownership were all identified as possibilities in the responses to the Energy Strategy
consultation.
In terms of the type of support required for fuel poor households, our recent research on fuel
poverty called for an adjusted minimum income standard for rural areas, increased financial support
for those in fuel poverty, awareness raising of support services, and bespoke support for those in
need, including those on electric heating, in rural areas, in rented accommodation, and for
vulnerable consumers.13
How can the POEC be best designed to align with wider Scottish energy policy objectives, and to avoid potential policy conflicts?
Care must be taken to ensure that the unintended dilution or duplication of existing policies does not
occur with the creation of a POEC. At both Scottish and UK levels there are a vast range of policies
11 https://www.cas.org.uk/system/files/publications/2018-06-
18_fuel_poverty_in_scotland_cfu_cas_briefing_sheet.pdf 12 https://www.gov.scot/Publications/2018/06/2306 13 https://www.cas.org.uk/publications/speaking-understanding-fuel-poverty-support-needs
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attempting to address problems in the energy market. Although not fully exhaustive, a count by CAS
identified 36 main policies, funds and initiatives enacted by suppliers, the Scottish Government,
Ofgem and consumer bodies. To take the example of energy efficiency, recent policies include the
new Energy Efficient Scotland (EES) scheme, the Green Deal, Home Energy Scotland Loan
Scheme, Home Energy Efficiency Programmes (HEEPS) Area Based Scheme, Warmer Homes
Scotland, and the Climate Challenge Fund. Recent research by Cambium Advocacy on behalf of
the Existing Homes Alliance concluded that „the complexity and scale of EES means some form of
national oversight arrangement will be critical for ensuring its effective and efficient delivery.‟
Certainty is also required around new powers devolved under the Scotland Act over the Warm
Homes Discount (WHD) and Energy Company Obligation (ECO). A function of a POEC could
therefore be to oversee and coordinate policy, particularly if the local authority based approach to a
POEC proposed by the Scottish Government is pursued.
Should a new Scottish POEC be more than solely a licensed energy supply company? Should it have a direct role in energy generation?
The Minister for Energy, Connectivity and the Islands‟ letter to the committee indicated the Scottish
Government‟s intention for a Local Authority based approach and that this would initially focus on
the retail supply of electricity and gas with the potential for future involvement in renewable
generation. Suggestions on the nature of a POEC have varied significantly beyond the retail supply
of energy, with responses to the Energy Strategy consultation including, but not limited to,
suggestions of a community model, a third party licensed supplier (TPLS), a district heating
facilitator, an advice provider, a distribution company, an energy agency, a supporter of local
planning processes, a driver of innovation, an investor in infrastructure, and an aide for off-gas
areas.14 There is thus a range of other functions a POEC could have beyond the retail supply of
energy, and there is a need to analyse which option, or options, would provide the best value and
consumer outcomes.
Dr David Toke has proposed a role for long term power purchase agreements to new renewable
energy schemes by a POEC to improve its competitive advantage over other suppliers and deliver
cheaper energy.15 CAS would welcome further consideration of the benefits and practicalities of this
proposal, particularly if a POEC is ultimately to be involved in the generation as well as the retail
supply of electricity.
How might the POEC be designed to promote objectives and functions beyond the retail of gas and electricity (e.g. supporting investment and innovation in new technologies and infrastructure)? What benefits are there to having wider objectives?
If there is a sole focus on the retail supply of energy, a POEC is unlikely to be able to take a whole
system or coordinating role to support investment and innovation. It is also likely to face the same
challenges that current suppliers contend with and will need to adapt to the many changes predicted
in the energy market in coming years. Citizens Advice‟s „Disrupted Decade‟ research suggested that
of these, those which would have the greatest impact on consumers are: new pricing models – most
significantly time of use (ToU) tariffs, that vary energy costs by time of day; energy retail
14 https://consult.gov.scot/energy-and-climate-change-directorate/draft-energy-
strategy/consultation/published_select_respondent?_b_index=0 15 http://www.nuclearpolicy.info/wp/wp-content/uploads/2018/07/A290_NB177_The_potential_of_a_SEC.pdf
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intermediaries - making it easier for consumers to find and switch tariffs by handling part or all of the
switching process; widespread adoption of storage - reducing demand and possibly cost on the
electricity network at peak times; distributed generation and costs with for example rooftop solar
panels resulting in a re-allocation of network costs.16 A POEC should therefore be designed to adapt
to a rapidly evolving energy market, meeting the needs of future energy consumers. This could
include managing „flexibility services‟ to match lowest cost energy generation with local supply,
whilst also offering robust consumer protection in an area that is currently lacking mandatory
consumer protection.
What governance arrangements should a Scottish POEC have? Who should it be accountable to e.g. Parliament?
A POEC, should it take the form of a retail supply company, will have to comply with the same
regulatory arrangements under Ofgem as any other energy company. However, the company‟s
public ownership would imply the need for greater public accountability than a private energy
company. Scottish Water provides an example of a publicly owned company responsible to the
Scottish Government with its Chair and Non-Executive members appointed by Scottish Ministers
and such an approach could also be taken for a POEC. Similarly, under section 251 of the
Companies Act 2006, Scottish Ministers act as Shadow Directors of Caledonian MacBrayne.17 A
POEC should lay an annual report before the Scottish Parliament and MSPs should be able to table
Parliamentary Questions about its performance and operation. Finally, as the scoping note
indicated, a publicly owned energy company would inevitably be subject to greater scrutiny than
private supply companies, by both media and the public‟s use of Freedom of Information requests.18
• Should legislation be required to underpin the creation of a POEC? CAS does not take a firm view on the need for legislation. While writing a POEC into statute may increase its permanence, the functions of a POEC must be kept under review to allow it to adapt to the needs of consumers in a rapidly changing energy market.
16 https://www.citizensadvice.org.uk/Global/CitizensAdvice/Energy/DisruptedDecade.pdf 17 https://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf 18 http://www.parliament.scot/S5_EconomyJobsFairWork/Inquiries/Scoping_note-Publicly_Owned_Energy_Company-Centre_for_Energy_Policy.pdf
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ECONOMY, ENERGY AND FAIR WORK COMMITTEE
PUBLICLY OWNED ENERGY COMPANY INQUIRY
SUBMISSION FROM Catherine Waddams, Centre for Competition Policy, University of East Anglia
Scottish Publicly Owned Energy Company (POEC)
What are your general views on the idea of a Scottish publicly owned energy company (POEC)? A Scottish POEC could achieve a number of interesting objectives, but there may be better instruments for achieving each of these different objectives in the energy sector. In particular, as other questions indicate, there is a danger that conflicting and/or poorly defined objectives result in poor achievement of any of them. A Scottish POEC clearly could pursue a number of different objectives, but this makes it doubly important, as the Institute of Public Policy Institute (IPPI) Scoping Note emphasises, that the objectives are clearly defined, both in terms of principles and expected outcomes.
What role should it fulfil and how? The role to be fulfilled by a Scottish POEC should be determined by elected representatives. The Scoping Note makes clear the possibilities. There is no reason why a POEC would have significantly lower costs than a privately owned company, and the low profit margins, particularly in electricity, indicate that there is little scope for much lower prices without breaching state aid rules. One obvious role for a POEC might be a policy of charging similar prices to ‘new’ and ‘loyal’ consumers, i.e. removing the price discrimination which is currently observed in the sector, though initially all its consumers would be new. However if other companies are offering lower prices to attract new customers, this will affect the ability of the POEC to attract consumers without similarly low prices. Given the small, or even negative, margins on these consumers, it may be necessary to raise prices to those who show some loyalty to achieve break even in the longer term. The ability to do so will be somewhat constrained by Ofgem’s price cap on default tariffs. More exploration of alternative business models within the sector, for example with the companies mentioned in the scoping project, but also with longer established companies which have attempted such undifferentiated pricing policies, like Ebico, could help to explore the possibilities. The tension for any new start up in this market is that while research shows that price savings are the strongest driver in consumers’ intentions1 to switch and in their
1 Empirical Evidence of Consumer Response in Regulated Markets (C. Waddams Price and M. Zhu), Journal of Competition Law and Economics, 12, 1, pp 113-149, 2016.
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actions2, there is still a high degree of inertia: savings are necessary but not sufficient to persuade most consumers to switch. While some consumers may have a preference for a Publicly Owned company, there would probably be insufficient active switchers to generate a large consumer base for the POEC. Moreover experience and evidence suggests that private commercial firs are more effective at communicating with their consumers than their public counterparts (for example in knowledge of privately run price comparison websites rather than official public equivalents). While the private sector may be trusted less, it has a better track record of communicating with consumers.
What are the key challenges that the POEC should address? The key high level challenge will be for the POEC to have clear objectives and success measures. Attracting consumers will also be a challenge if the POEC is to meet multiple objectives while still breaking even, see comment above.
How might a Scottish energy supply company work best to support the growth of local and community projects, and fuel poverty reduction? My main comment is on reducing fuel poverty. Our own research confirms historically higher levels of fuel poverty in Scotland than the average in the rest of the UK. Since there is likely to be little profit to redistribute, one way in which the POEC could reduce fuel poverty is to give special assistance to consumers at risk of fuel poverty to switch to cheaper deals, but this will be limited in the market by restrictions imposed by State Aid rules. The POEC, like other companies, can help consumers with reducing the quantity of energy they use through energy conservation measures, and, like Robin Hood Energy, could voluntary participate in the Warm Home discount and other schemes. But this will have financial costs for the company. There is some evidence that those at risk of fuel poverty are more likely to be on more expensive tariffs, so a significant reduction in fuel poverty might be available if such consumers moved to tariffs with lower prices. But there will be limits on how far the POEC itself can stimulate such change, and there might be other more effective instruments which the Scottish government could use to achieve lower prices for groups at risk. One of these is collective auctions, where a group of consumers are offered a better deal. Experience of these is mixed3, and under current legislation consumers are required to opt in, which poses many of the same challenges of inertia for certain consumers as direct switching. The Scottish government might
2 (D.Deller, M. Giulietti, G. Loomes, C. Waddams Price, A. Moniche and J.Y.Jeon), CCP working paper 17-5,
http://competitionpolicy.ac.uk/documents/8158338/17199160/CCP+WP+17-5+complete.pdf/fdaaed88-56e5-44f9-98db-6cf161bfb0d4; Consumer behaviours in the British retail electricity market (M.Flores and C. Waddams Price), The Energy Journal, 39, 4, 153-179, 2018 3 Helping customers switch: collective switching and beyond, published by DECC 2013
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/253862/Helping_Customers_Switch_Collective_Switching_and_Beyond_final__2_.pdf
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want to explore the potential of opt out collective switching as an instrument to offer lower prices to consumers who are not currently active in the market4. One problem for designing and monitoring such initiatives is that those inactive consumers who may be most at need are often hard to reach because of their circumstances. This often makes it difficult to identify their needs and appropriate remedies, and raises the cost of policy development and research which has the potential to benefit this group.
How can the POEC be best designed to align with wider Scottish energy policy objectives, and to avoid potential policy conflicts?
As suggested above, it may be clearer if different objectives are delivered by
different bodies and instruments, rather than expecting the POEC to meet several
objectives which may be in conflict.
How might the POEC be designed to promote objectives and functions beyond the retail of gas and electricity (e.g. supporting investment and innovation in new technologies and infrastructure)? What benefits are there to having wider objectives? There are dangers as well as benefits in expecting the POEC to meet wider objectives. One is that it may carry so many potentially conflicting expectations that it will inevitably disappoint at least some of its supporters, who then lobby for changes which are incompatible with its other objectives. Given the importance of the issues, particularly to low income households and those in vulnerable situations, it is important not to ‘set it up for failure’.
What governance arrangements should a Scottish POEC have? Who should it be accountable to e.g. Parliament? The POEC should be accountable to Parliament (rather than government) if it is meeting Parliamentary objectives.
Should legislation be required to underpin the creation of a POEC? A statutory basis might be the best wat of making its objectives and priorities clear, though this is not always easy for politicians to clarify.
4 for information on experience of an opt-in auction see and possibilities of opt-out auctions see Switching
Energy Suppliers: It’s Not All About the Money; and Collective Switching and Possible Uses of a Disengaged Consumer Database (D. Deller, P. Bernal, M. Hviid and C. Waddams Price), Report for Ofgem, 2017
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NOTIFICATION TO THE SCOTTISH PARLIAMENT The Insolvency (Amendment etc.) (EU Exit) Regulations 2018 (“the Regulations”) Brief explanation of law that the proposals amend The Regulations would amend EU Regulation 2015/848 (“the EU Regulation”) as it applies in domestic law after Exit Day. The EU Regulation deals with cross-border cooperation and coordination of insolvency proceedings for businesses and individuals with operations/assets in more than one member state, and provides a framework for determining where applications for insolvency proceedings can be made; the applicable law; and the interaction between insolvency proceedings in different member states. The Regulations would also correct various deficiencies across UK insolvency legislation where such legislation reflects the provisions of the EU Regulation which are repealed or amended by the Regulations. Summary of the proposals and how these correct deficiencies Once the UK is no longer a member state of the EU, insolvency proceedings commenced in the UK will no longer have automatic recognition in EU member states under the EU Regulation, and it will not be possible for the UK to continue the current cross-border system on its own. The EU Regulation, as it is retained in UK law after Exit Day, will therefore not operate effectively and requires to be amended to reflect the fact that the UK will no longer be a member state of the EU. The proposal is for the major part of the EU Regulation to be removed from UK law. The UK would maintain a modified version of the EU Regulation’s rules for opening insolvency proceedings, that would sit alongside the UK’s own domestic rules. The proposed amendments would allow UK courts to continue to open insolvency proceedings where an EU individual or company has an establishment in the UK. The other provisions in the EU Regulation would be repealed. The provisions of the EU Regulation are reflected in various other pieces of insolvency legislation and which will result in deficiencies . The Regulations would also amend these deficiencies. AiB and The Insolvency Service (UK Government) have carried out an extensive review of the various pieces of insolvency legislation to identify the deficiencies and the actions required to cure or mitigate the deficiencies.
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An explanation of why the change is considered necessary On exiting the European Union without a deal being agreed the cross-border insolvency procedures would no longer be available. Therefore there would be no formal cooperation mechanisms between UK insolvency practitioners and their counterparts in other EU countries. This could impact on securing and the recovery of overseas assets for the benefit of the creditors. AiB considers that this would not be desirable, particularly for existing and ongoing insolvency cases. AiB and the Insolvency Service share a common view that there are significant benefits in retaining cross-border insolvency recognition and cooperation where possible. Scottish Government categorisation of significance of proposals AiB consider that the proposals should be classified as Category A – the lowest level of scrutiny as they are minor and technical in nature. This rationale for this assessment is based upon the well-precedented approach to dealing with the area of mixed competence as highlighted below. The deficiencies created are clear in this instance. The key consideration is the most effective manner to deal with the contingency arrangements for a No deal Brexit and experience has shown that the proposed approach has minimised the complexity involved. Impact on devolved areas The EU Regulation spans a mix of reserved and devolved matters. While personal insolvency is fully devolved (with 3 narrow exceptions), the arrangements for corporate insolvency are very complex (in devolution terms) - with certain areas devolved, some fully reserved and other measures spanning devolved and reserved competence. In particular, winding up in Scotland spans mixed competency with (broadly) general legal effect being reserved and the process being devolved. Summary of stakeholder engagement/consultation The main stakeholders are Insolvency Practitioners and in particular their Recognised Professional Bodies. ICAS and R3, the trade association for the insolvency, restructuring, advisory and turnaround professionals have previously indicated support for amending legislation covering corporate insolvency matters to be covered, insofar as possible, in a single instrument laid in the UK Parliament. There has been no formal consultation on the EU Exit proposals and the deficiencies created. However, a working group on corporate insolvency has met frequently over the past two years on the project to modernise the corporate insolvency rules in Scotland and these discussions have touched on the EU Regulation and the most effective approach to deal with these complex areas of cross-competence. Summary of reasons for Scottish Ministers’ proposing to consent to UK Ministers legislation When the EU rules on cross-border corporate insolvency were first implemented in 2003 it was done entirely on a cross-UK basis, including personal insolvency, in
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recognition of the difficulties in proceeding otherwise. Similar provision for cross-border insolvency cases was made on that basis in 2006 under the Insolvency Act 2000 with a Legislative Consent Motion in the Scottish Parliament and also in the implementation of legislative changes in June 2017 related to the commencement of aspects of the EU Regulation (utilising section 57(1) of the Scotland Act 1998). Ministers consider that this approach makes sense for the mixed area of corporate insolvency. There is currently a separate and significant ongoing exercise being carried out to modernise the rules covering corporate insolvency for Scotland. This is being carried out by the AiB in conjunction with the UK Insolvency Service. Due to cross-competency in the area of winding-up, a Scotland Act Order (2018/174) was sought and passed through both the Scottish and UK Parliaments. This secured the mutual transfer of competence for the purposes of drafting the modernised insolvency rules and enabled the cross-competency area of winding up to be included in an SSI, to be laid in the Scottish Parliament. Future amendments would be possible through instruments laid in either the Scottish Parliament or UK Parliament, subject to the agreement of each administration. There has been good co-operation with the UK Insolvency Service on this work and the approach taken has been welcomed by the main stakeholders. A Scottish SSI would cover the amendments required for fully devolved aspects in receivership and personal insolvency. AiB consider that including devolved aspects of corporate insolvency in Scottish Regulations would add greatly to the complexity of the provisions. AiB therefore consider the most effective route in respect of elements that span both devolved and reserved competence is to deal with them in the UK-wide regulations taken forward in parallel by UK Ministers (which will extend to Scotland anyway for wholly reserved aspects such as company administration). Such an approach would mean that the UK SI would cover the necessary aspects of corporate insolvency in relation to the processes of administration, company voluntary arrangement and winding up. AiB considers that this is an area in which it would be beneficial to take a consistent approach with the rest of the UK to remove doubts in areas which span reserved and devolved competence Intended laying date of SI 24 October 2018 If the Scottish Parliament will not have 28 days to scrutinise Scottish Minister’s proposal to consent, why not? Please note that the date on which the UK Government proposes to lay these regulations is 24 October 2018. I realise that with the October recess starting on 6 October I am asking for approval within a shorter timescale than the 28 days outlined in our protocol.
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Information about any time dependency associated with the proposal Time dependency is set out above. The timeline for the SI is being driven by the UK Government who have an agreed laying date. Any significant financial implications? AiB does not consider that there will be any significant financial implications for the Scottish Government. However, AiB considers that if the deficiencies are not addressed in this manner then cross border insolvency process will be more complex. This will result in more expensive and lengthier insolvency processes, increased court actions in multiple jurisdictions and ultimately far lower returns to the creditors involved.
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