Changes to household energy tariffs from 15 November
10 October 2013
· Household electricity and gas tariffs to increase by average of 8.2%
· Changes reflect increasing cost of buying wholesale energy, paying to deliver it to customers' homes and government-imposed levies collected through energy bills
SSE will implement a series of changes to its household energy tariffs on 15 November 2013. This follows increased costs of:
· buying energy in global markets (up 4% for a typical dual fuel customer*);
· paying to use the upgraded electricity and gas networks to deliver energy to customers (up 10%*); and
· government-imposed levies on energy bills (up 13%*).
When SSE last changed its prices in October 2012, it committed not to increase prices until July 2013 at the earliest. Despite external costs continuing to rise in that time, SSE has been able to hold its prices for several months longer than that. On 30 September 2013, however, SSE stated in its Notification of Close Period that it expects to report that its Retail segment was loss-making during the six months to 30 September 2013 and this demonstrates that the rising costs cannot be absorbed beyond 15 November.
SSE therefore regrets that its household energy prices will increase by an average of 8.2% for both gas and electricity from 15 November 2013, equating to approximately £2 per week for a typical dual fuel customer.*
Raising prices is the last thing the company wants to do and SSE remains committed to protecting its customers as much as possible from increasing costs. It is therefore pledging not to raise prices again before Autumn 2014 at the earliest and is urging any customer worried about how the changes will impact them to get in touch to discuss what help is available to them.
Will Morris, Group Managing Director, Retail, said: "We're sorry we have to do this. We've done as much as we could to keep prices down, but the reality is that buying wholesale energy in global markets, delivering it to customers' homes, and government-imposed levies collected through bills - endorsed by all the major parties - all cost more than they did last year.
"Eighty five per cent of a typical energy bill is made up of costs outside our direct control and these costs have increased. So far this year we have made a loss from supplying energy as a result of the higher costs we have been facing and continue to face.
"We understand and regret that this will add to the pressures on household budgets, but there's a lot we can do to help. Rising unit prices do not have to mean rising bills and there remains huge potential for customers to save money by improving further their energy efficiency. There's also real financial and practical support available to those who need it most. I would urge any customer worried about their energy bills to contact our team on 08000 727 222 so that we can find ways to help them."
Rising prices don't have to mean rising bills
Using energy efficiently has a critical role to play in helping to keep bills down. Evidence over the last few years shows that the combined efforts of energy suppliers, governments, Ofgem, consumer organisations and the associated investment have succeeded in helping customers to cut their energy consumption - in the last three years alone, SSE insulated almost 750,000 homes to help customers in England, Scotland and Wales. Correspondingly, Ofgem announced last month its decision to reduce by 18% and 3% respectively its benchmark average domestic customer usage figures for gas and electricity, in line with data published by the Department of Energy and Climate Change showing a sustained fall in consumption in recent years. This follows an earlier reduction in typical annual domestic gas consumption made by Ofgem in 2010.
The underlying energy efficiency improvements make a real difference; SSE estimates that a typical dual fuel energy bill at its new prices would have been around £400 higher had usage remained at 2005 levels.
Act now to make bills cheaper and fairer
Politicians could protect customers by transferring the costs arising from the environmental and social policies pursued by all main parties in government from the energy bill payer to the tax payer. This would immediately take up to £4 billion off UK energy bills and £8 billion a year by 2020 - cutting a typical dual fuel bill by around £110 this year alone and redistributing the costs to those more able to afford it.
Changes to tariff structures and discounts
SSE is also making some changes to its tariff structure that continue the process started last year under SSE's Building Trust agenda to move all customers onto a new, simpler, uniform standing charge plus unit rate structure with clearly defined discounts. This will ensure that live tariffs comply with certain elements of the Retail Market Review (RMR) reforms being introduced by Ofgem from 23 October, designed to make the market simpler and fairer for customers.
In addition, these changes will see the mandatory removal of non-RMR compliant features such as the prompt payment discounts.
Making a fair and reasonable profit
SSE expects that its annual profit margin in its Energy Supply business should average around 5% over the medium term (ie three to five years). In 2012/13, it was 4.2% and SSE expects to fail to meet this 5% target profit margin again in 2013/14. SSE believes that 5% is a fair amount and similar to organisations that provide other everyday essentials such as the major food retailers. It will publish the financial results for its Energy Supply business for the six months to 30 September 2013 on 13 November 2013.
As SSE is a UK-listed supplier, this profit stays in Great Britain and Ireland, providing thousands of jobs and contributing hundreds of millions in tax revenue every year.
Will Morris, Group Managing Director, Retail, added: "We don't take these decisions lightly. We know we will come in for a great deal of criticism for this decision and politicians will no doubt be lining up to condemn us. But over many years policymakers themselves have failed to highlight adequately the cost to consumers of the policies they have pursued in government. They can't expect to have power stations replaced with new technologies, the network to be upgraded and nationwide energy efficiency schemes all to be funded for free. And as an energy provider we are in the unenviable position of having to pass this cost on to customers through energy bills.
"We will work with any political party on initiatives to keep bills as low as possible for customers and, in turn, we urge them to work together to achieve consensus in energy policy. And if politicians want to do something to make bills cheaper and fairer, they should take the cost of government policies out of bills and fund them through general taxation instead. Why wait until 2015? This would be far more progressive as those who can afford it would pay more while those most at risk of fuel poverty would be protected - taking around £110 out of their bills immediately."
*Based on a standard dual fuel customer (averaged across Great Britain) using the typical annual household energy consumption levels adopted by Ofgem in January 2011 - 16,500kWh of gas and 3,300kWh of electricity.
- Ends -
When did SSE last change household energy prices in Great Britain?
SSE: SSE last increased gas prices in October 2012, having lowered gas prices in March 2012. Before that, the last gas price rise was in September 2011.
For electricity, SSE last increased prices in October 2012 and before that in September 2011. However, the 2011 rise was the first since August 2008.
How many customers will be affected?
SSE: Around 4.4 million household electricity customers and around 2.9 million household gas customers in Great Britain. This excludes customers on fixed-price tariffs.
When will SSE customers find out more about how the changes will affect them?
SSE: In line with its regulatory obligations, SSE will give every domestic customer at least 30 calendar days' notice of any price increase. This means customers who are affected should receive a letter by 15 October 2013. In the meantime, information is now available on SSE's supply brand websites:
What will happen to customers' bills?
SSE: From 15 November 2013, SSE's average annual standard dual fuel energy bill, for a customer who pays by monthly Direct Debit and receives a paper bill, will be £1,380. This is up from £1,274 and represents an increase of around £2 per week.
This is based on the industry average annual household energy consumption adopted by Ofgem in January 2011 (16,500kWh of gas and 3,300kWh of electricity). Ofgem recently announced that from January 2014 it will be reducing its benchmark typical domestic consumption values (TCDVs) for gas and electricity by 18% and 3% respectively to 13,500kWh of gas and 3,200kWh of electricity. This was because data published by the Department of Energy and Climate Change has shown a sustained fall in consumption in recent years. This follows the earlier reduction in typical annual domestic gas consumption made by Ofgem in 2011.
Based on the new figures, on 15 November 2013 SSE's average annual standard dual fuel energy bill will rise from £1,131 to £1,224.
SSE believes strongly that rising prices do not necessarily have to mean higher bills. Falling consumption in recent years means that customers are spending less on their energy than they would otherwise have done. SSE estimates that if usage for an average SSE customer had remained at 2005 levels, a typical dual fuel energy bill following the changes announced today would be around £400 higher. At a time when external costs are rising fast, this illustrates the critical importance of energy efficiency and demand reduction as a method of minimising bills.
Simple measures can make a huge difference. For example, according the the Energy Savings Trust, replacing an old, inefficient boiler could save more than £300 a year. Cavity wall insulation can save up to £140 a year for a cost of around £450, while draught proofing can save up to £55 a year.
Does the commitment not to increase energy prices again until at least Autumn 2014 mean that prices will be fixed at the 15 November 2013 level?
SSE: Not necessarily. If costs were to fall for a sustained period of time, SSE would be able to reduce household energy prices - as it did for gas in March 2012.
What are the main costs that make up a typical 'dual fuel' bill?
SSE: Three costs make up around 85% of a typical dual fuel bill:[i]
· Buying energy: around 50%
· Network charges for delivering energy to a customer's home (including metering): around 25%
· Government schemes (mandatory environmental and social costs): around 10%
VAT also accounts for a further 5% of the bill.
SSE publishes separate breakdowns of costs for electricity and gas on its supply brand websites.
Why do prices need to go up?
SSE: Since SSE last put prices up, three things have been putting upward pressure on domestic energy prices. To help explain this, SSE has broken down how these external costs have changed for a typical dual fuel energy customer:[ii]
1. The average price in the wholesale markets over the last 24 months to secure energy is around 4% higher than it was for last year.[iii]
2. The costs of using the energy networks to distribute electricity and gas to customers' homes are 10% higher than they were a year ago.[iv] The owners of these pipes and cables charge energy suppliers to use them, but the amount of money they are allowed to recover for this plus a reasonable return is agreed with the regulator, Ofgem. It helps fund much-needed investments in upgrading Great Britain's energy networks to ensure they can meet the changing demands of the energy system, accommodating more local renewable energy sources and supporting growth by connecting new homes and businesses to the grid.
3. The cost of government taxes paid for through energy bills - supported by the major political parties - is 13% higher than a year ago.[v] These are initiatives like the Energy Company Obligation (ECO) energy efficiency programme, and support for producing low-carbon energy which together represent towards 10% of a typical bill. This cost has more than doubled in the last four years.
So far SSE has absorbed these costs, as demonstrated by the fact that its Retail business is expected to report a loss for the first half of the 2013/14 financial year. However, supplying energy at a loss is not a sustainable position and, in the longer term, is therefore not in the interests of the company, its customers and shareholders, or society as a whole.
As well as providing energy to its millions of customers, SSE makes a huge contribution to the economic wellbeing of Great Britain and Ireland, employing thousands of people and paying hundreds of millions in tax every year. It can do none of these things if it does not make a sustainable level of profit. SSE therefore needs to equalise its position over the remainder of the financial year, in line with its target of a medium-term average profit margin of 5% in its Energy Supply business and to support its commitment to cap prices at their new level until at least Autumn 2014.
For a long time other people have been saying that wholesale prices are going down. What's really happening to wholesale costs?
SSE: As outlined above, the cost of energy itself now accounts for around half of an average bill.
Even so, the average price in the wholesale markets over the last 24 months to secure energy for the coming winter is around 4% higher than it was for last winter.
Like all suppliers, SSE has to secure, in increasingly competitive global markets, the energy its customers need in advance of them needing it. To insulate itself and customers from day-to-day market volatility, SSE procures energy, at varying prices, sometimes years in advance of it being delivered to customers. Short-term rises or falls in the wholesale price are therefore not immediately reflected in the prices customers pay. However, long-term trends are impossible to avoid.
In the context of setting energy prices, the rolling two-year average price gives a better indication of the cost of securing energy for a given year. The average price of securing energy for 2013/14 over the last 24 months has been around 4% higher than it was for last year, putting upward pressure on prices. If energy and non-energy costs were to fall for a sustained period, SSE would of course look to pass savings on to customers as soon as possible, as it did in March 2012.
UK wholesale gas prices continue to rise as the UK's capacity for its own production decreases and the country is forced to import a greater proportion of its gas. Demand for liquefied natural gas (LNG) from the Far East continues to be strong with growing demand in China and continued nuclear shut-downs in Japan. Benchmark prices for LNG are up nearly 20% year on year and the UK has imported 40% fewer LNG ships than last year, resulting in a reduction in LNG supply to the UK of 3.5bcm year on year (first three quarters). Europe and the UK are relying more and more on Russia to supply the gas to balance the system and this gas will only flow at contracted price levels.
Prices for the current summer and upcoming winter are also suffering from an overhang after the exceptionally cold Q1 this year, requiring greater injections into storage to replenish the depleted levels. Prices for the upcoming winter and following summer year are also expected to be higher due to significant long-term maintenance that is required at major Norwegian gas fields.
Power prices are generally higher due to the higher gas prices and the impact of the carbon support mechanism.
What is behind the increasing cost of government-imposed levies collected through energy bills?
SSE: As an energy supplier, SSE is required to recover from its customers the cost of government-mandated social and environmental schemes, endorsed by all major political parties. While SSE supports the aims of these initiatives, they do come at a price - which is increasing. Government schemes paid for by customers through their bills include:
· The Energy Company Obligation (ECO) - the Government's new energy efficiency scheme, through which all major energy suppliers are required to identify particular vulnerable groups of customers and deliver specific energy-saving building improvement measures. ECO not only replaced the Carbon Emission Reduction Target (CERT) and the Community Energy Saving Programme (CESP) from 1 January 2013 but also replaced the Government's Warm Front scheme. SSE estimates that this year's ECO costs per customer will be over 5% higher* than those of the similar government-imposed schemes last year.
· The Renewables Obligation (RO) - a support mechanism designed to incentivise investment in renewable technologies by awarding generators a set number of Renewable Obligation Certificates (ROCs) for every MWh of renewable electricity they generate. This effectively translates into a subsidy which must ultimately be paid by consumers through energy bills. The RO costs are 35% higher* this year as the UK builds more renewables to help meet its legally binding targets.
· Feed-in Tariffs (FiTs) - a subsidy designed to incentivise householders and small businesses to install their own small-scale electricity generation, such as solar panels, by paying them a fixed amount for each unit of electricity they generate. Energy suppliers have to collect this from their customers and distribute it to the recipients. The cost for FiTs is expected to be 15% higher* this year.
· Warm Home Discount - a £135 rebate for certain customers, including the elderly and vulnerable. The cost of delivering this social programme is expected to remain flat* this year.
*The increases outlined above are based on a typical customer at Ofgem's industry standard consumption.
Rather than funding these schemes, which are endorsed by all main political parties, through energy bills, SSE believes that a far more progressive approach would be to fund them through general taxation, which would see those who can afford it pay more and protect those most at risk of fuel poverty. SSE estimates that this would take around £110 a year off a typical dual fuel bill. A recent survey carried out for SSE by Populus found that less than a quarter of people agreed that government schemes should be funded through levies on energy bills.[vi]
Research by Consumer Futures for its 2012 'Who Pays?' report found that as many as nine in ten consumers do not know that they pay for environmental and social schemes through their energy bills. It is therefore very important that awareness of both the cost and benefits associated with them is improved.
Does SSE expect any of these costs to increase beyond this year?
SSE: Due to the high number of variables and the volatile nature of global commodity markets, it is impossible to predict with any certainty what will happen to energy prices. However, unfortunately there are several cost components within a typical energy bill which are expected to continue to rise into 2014/15:
· The network operators have outlined increases in their charges equating to 5% from April 2014.
· Ofgem has set the Renewable Obligation at a level for 2014/15 which would see RO costs to a typical customer rise by 20%.
· The cost of delivering ECO is expected to continue to increase as the scheme goes on, as highlighted by PA Consulting in its report for SSE.
That said, SSE is committed to protecting its customers for as long as possible from increasing cost pressures and has therefore pledged not to increase prices again before Autumn 2014.
Will the price increase be uniform across all customers? Will some see bigger increases than others?
SSE: The percentage increase announced today is an average across Great Britain and across our standard variable tariffs.There are a number of factors affecting how the changes will impact on individual customers.
The most significant of these are:
· which region they are in;
· their usage;
· the structure of the tariff they are currently on; and
· the way in which they currently receive any discounts.
The cost of supplying energy to a household customer can vary considerably depending on their location due to network charges. Simply put, it costs more to transport energy to some customers than others, for instance those in sparsely populated or remote areas, and these variances are reflected in the charges set by the distribution network operators (DNOs) and thus factored into the amount customers pay. Because these charges are being changed, there will be changes to prices at a regional level.
In order to ensure that it remains fit for purpose and able to cope with the changing demands of the future UK energy system, the energy network requires significant investment now and in the future, which ultimately must be paid for by consumers through their energy bills. The owners of the pipes and cables used to transport energy charge energy suppliers to use them, but the amount of money they are allowed to recover for this plus a reasonable return is agreed with the regulator, Ofgem. As an energy supplier, SSE is required to factor the higher charges it has to pay to use the network into its prices.
The electricity network, for example, is divided up into 14 different regions, each with its own costs and with its own charges overseen by the regulator. This is something not many customers are aware of. SSE understands that it can be confusing and does what it can to simplify this by rationalising the 14 regions down to just five when setting prices. SSE believes it would be beneficial to customers if this approach were to be adopted by all suppliers.
The following table breaks down the regional increases based on an industry standard dual fuel customer paying by monthly direct debit.
Manweb (North Wales)
Norweb (North East)
Seeboard (South East)
Swalec (South Wales)
Sweb (South West)
Yorkshire (North East)
Scottish Power (South of Scotland)
Scottish Hydro (North of Scotland)
The increases announced today are being applied to the unit rate only. The standing charge is being frozen (see below). The headline increase of 8.2% adding £2 per week is based on standard industry average consumption figures for a typical dual fuel customer, averaged across Great Britain. Low users will see a lower percentage and pounds/pence increase, whereas higher users will see a larger percentage and pounds/pence increase.
In line with the market reforms being introduced by Ofgem through RMR, SSE is completing some structural changes which may affect customers' bills differently. For instance, those customers currently on a no standing charge (NSC) tariff will see a standing charge introduced which could have a positive or negative impact on them depending on their usage (more details below).
Additionally, those customers on time of use tariffs may be affected differently depending on their usage habits. While the increase to the off-peak rate has been set at a level which would lead to a net increase consistent with customers on other tariffs for a typical customer, in some cases customers who use a particularly high proportion of their energy at off-peak times may experience a higher percentage increase in their costs. SSE has capped the rate increase, however, to ensure that the Economy 7 tariff remains cheaper than the general domestic tariff wherever off-peak usage accounts for more than 30% of the total.
As part of Ofgem's retail market reforms to simplify the market, SSE and all other suppliers will no longer be able to offer certain types of discounts, including prompt payment discounts, loyalty-based discounts and percentage-based discounts. These changes could mean that customers currently benefitting from these discounts could see a bigger increase in their energy bills than others, however SSE will be alerting those customers to see whether they can qualify for the biggest discounts. More details are set out below.
Changes to tariff structure
What is SSE's standing charge?
SSE: All SSE customers will now pay a standing charge of £100 per year, per fuel (including VAT) before any applicable Direct Debit or paperless discounts are applied. The standing charge is shown on a customer's bill as a 27.41p (including VAT) per day charge covering the period of the bill, so customers will be able to see exactly how it has been calculated.
What is covered by the standing charge?
SSE: Less than half of a typical dual fuel bill relates to the cost of the energy used.
A large part of the remaining bill is made up of costs that are not linked to the level of energy used, but are incurred at a fixed rate per customer.
These fixed costs include a proportion of the costs of using the gas and electricity networks to distribute energy to customers' homes, metering and customer service costs, and the costs of some mandatory government-imposed initiatives that energy companies are obliged to pass onto customers. It is these fixed costs that are covered by the standing charge.
From 15 November, SSE's standing charge of £100 per year, per fuel will remain unchanged. This reflects SSE's ongoing efforts to control its own fixed costs as well as its desire to offer simple, straightforward prices and products.
Why has SSE introduced a standing charge for all customers?
SSE: Customers, consumer groups and Ofgem have made it clear that they want greater simplicity in the products all energy suppliers offer. SSE has already responded to this by significantly reducing the number of products and tariff choices offered to customers and last year began the process of moving customers towards the new, simpler standing charge and unit rate tariff structure.
In the past, tariffs have recovered the fixed cost elements of a customer's bill either through a fixed standing charge or through a two-tier unit rate 'No Standing Charge' (NSC) tariff. With this type of tariff, the first block of units used incurred a higher cost than subsequent units, and the difference between the two unit rates recovered the fixed costs.
Feedback from customers, consumer groups and Ofgem showed clearly that many people found the two-tier unit rate approach confusing. Ofgem is banning two-tier pricing structures through the implementation of its Retail Market Review (RMR) reforms. SSE supports this move as being in the best interests of customers. From 15 November 2013 SSE will complete the process it started last year of moving all customers onto a simple, fixed pence per day standing charge plus a unit rate for the energy they use. Approximately 225,000 customer accounts on credit meters yet to be moved off NSC tariffs will be affected by the change (see separate section on prepayment customers). While this has a big impact on the total cost for some customers, SSE believes that this structure is fairer and simpler when the needs of all customers are taken into account.
Not all suppliers offer a simple, uniform standing charge across all their tariffs and customers, however. SSE believes this approach strikes the right balance between simplicity and the fair distribution of fixed costs.
Will customers lose out because of the change to standing charges?
SSE: Most SSE customers are already on a standing charge and unit rate tariff structure and the vast majority will have benefited or have seen very little difference in their bill as a result. For some very low usage customers still currently on a NSC tariff structure, this change could leave them worse off.[vii]
Additionally, some customers may lose out as a result of changes SSE is required to make in order to ensure compliance with RMR, including the withdrawal of prompt payment discounts and loyalty-based discounts. More details are provided below.
In the short term, the impact of the regulatory change will affect customers differently. Some will be better off and, unfortunately, others will be worse off. SSE is committed to getting customers the cheapest deal to suit their energy usage and circumstances and, in the long term, customers should benefit from having a simpler, more accessible market as a result of the new regulations. SSE fully supports the principles of simplicity and fairness which underpin the changes being made by Ofgem through RMR.
How will the changes affect prepayment meter (PPM) customers?
SSE: SSE will continue to insulate PPM customers from the full cost of using this more expensive technology, allowing them the benefits of standard rates despite the higher cost of serving them. SSE estimates that the additional cost of supplying a typical dual fuel PPM customer amounts to almost £50.
However, as part of the changes announced today, SSE is aligning its PPM customers with its pay quarterly customers. Any PPM customers still on NSC tariffs will be among those to be migrated to the new standing charge and unit rate structure. In practical terms, the introduction of a daily standing charge for PPM customers will require those customers to maintain sufficient credit on their meters to cover these daily fixed costs even during periods when they are not using energy. SSE understands that this may lead to unexpected difficulties for some customers and will be highlighting the practical implications of this in its written communications to customers over the coming weeks.
To protect PPM customers, SSE is applying the same £100 per fuel standing charge across all customers despite the fixed costs associated with PPM customers being higher.
SSE believes that having a simple, consistent tariff structure across all customers will help make it easier for customers to compare products and engage with the market, and believes that offering a £100 per fuel per customer standing charge across all tariffs strikes the right balance between simplicity and fairness
Can other customers choose to remain on a NSC tariff?
SSE: No. While SSE has tried to protect its low-usage customers for as long as possible by shielding them from changes implemented last year, for the reasons outlined above SSE is choosing to complete the implementation of the new, RMR-compliant structure of standing charge and unit rates across its entire customer base now.
Over the coming weeks, SSE will be writing to NSC customers with especially low usage who will see a much larger than average increase as a result of this change in the structure of their tariff.
Changes to discounts
What changes is SSE making?
SSE: In line with RMR, from 15 November 2013, SSE will complete the introduction of a single range of fixed discounts for all of our currently available tariffs that will be deducted from a customer's bill when they choose lower-cost service options. These will replace the range of percentage discounts that some customers still have. The main discounts are:
· customers who choose to pay by Direct Debit will receive a pence per day discount equivalent to £40 per fuel, per year. This will be deducted from the standing charge on each bill; and
· customers who choose to receive paperless bills will receive a pence per day discount equivalent to £6 per fuel per year. This will be also deducted from the standing charge on each bill.
A gas and electricity customer choosing both these options would benefit from up to a £92 annual discount off their standing charges.
What options will give customers the biggest discount?
SSE: As is the case now, customers who choose to pay by Direct Debit and receive paperless bills can make the biggest savings. This reflects the lower costs SSE faces in servicing these customer accounts. These discounts can reduce the standing charge SSE customers pay by almost 50%.
Will customers who pay quarterly still receive a discount for paying promptly?
SSE: No. As a result of RMR, which affects all energy companies, SSE will be unable to offer a discount for prompt payment. This means that from 15 November quarterly customers who pay their bill within 10 days of receiving it will no longer be offered the discount of £5 per quarter, per fuel. To access additional savings, customers could consider Direct Debit and paperless billing. As shown above, choosing this combination could save up to £92 a year.
What changes will off-peak heating/dynamic teleswitch (DTS) customers experience?
SSE: The increase in the overall cost to typical customers on off-peak heating/DTS customers is broadly in line with those experienced by other customers. However since the bulk of government scheme costs are levied on electricity usage (per unit consumed), SSE regrets that in a number of cases a larger percentage increase must go on the off-peak rates (although SSE has held off passing through as much of this cost as it could). SSE has capped the rate increase, however, to ensure that the Economy 7 tariff remains cheaper than the general domestic tariff wherever off-peak usage accounts for more than 30% of the total.
SSE has continued to campaign against the unfair penalisation of electricity-only customers due to the disproportionate way in which the cost of government schemes are levied on electricity usage. This often means that customers who can least afford it end up paying the most towards government schemes.
What does all this mean for Atlantic customers?
SSE: SSE has decided to remove the loyalty based discount which applies to Atlantic online customers. This change is consistent with the simpler discounts which SSE first introduced in October 2012 and which are now being extended to more customers. This change will be detrimental for some customers, but the impact is neutral or beneficial for customers whose monthly payment is less than £40 (or £46 for customers who choose paperless billing).
Whilst SSE is choosing to implement these fairer discounts now, this change would have become necessary as the changes required by Ofgem's RMR are introduced over the coming months.
How much money does SSE make from supplying gas and electricity?
SSE: In the last financial year, 2012/13 SSE made an operating profit of £364.2m in its Energy Supply business, compared with £271.7m in 2011/12 and £347.7m in 2010/11. As has been its consistently stated intention, over the medium term SSE expects its profit margin (ie operating profit as a percentage of revenue) in its Energy Supply business to average around 5%. Indeed, over the last four years, the period for which SSE has published annual Consolidated Segmental Statements, SSE's profit margin in its Energy Supply business has averaged less than 5%. This is in line with the profits of the major supermarkets, for instance.
A recent poll carried out for SSE by Populus found that 86% of people asked felt that 5% was an acceptable level of profit to make for a company that buys electricity and gas and sells it on to customers. Just 13% of people thought that a 5% profit margin was an excessive level of profit.[viii]
If SSE is making a profit from generation as well as energy supply, why can't it delay price increases for longer?
SSE: SSE believes in the importance of maintaining a competitive energy supply market. There are now well over 20 players in the market, as well as the very active switching sites, which can only be a good thing for customers. However, the smaller suppliers who help increase competition and give customers alternatives would not be able to compete if vertically integrated companies like SSE used their generation businesses to cross-subsidise their supply businesses. Even if this led to reduced prices in the short term, it would be damaging for competition and, ultimately, customers in the longer term. Generation and Supply businesses therefore need to stand on their own two feet.
SSE's Wholesale business (covering electricity generation, energy portfolio management, gas production and gas storage) achieved an operating profit of £509.5m in the last financial year, down 16.2% on the previous year. From the operating profit of all its businesses, including things like telecoms and water, SSE has to pay tax to the UK Government and pay interest on the money borrowed to finance an investment programme which sees the Group invest more than it makes in profit each year, the equivalent of £4m a day. Investment like this is needed if the UK is to meet its legally binding energy policy objectives as well as to protect the security of UK energy supplies for consumers.
Is the UK energy market competitive?
SSE: Yes. There are now more than 20 players in the UK domestic energy supply market, giving consumers a great deal of choice when it comes to selecting their energy supplier. Suppliers must therefore do all they can to keep prices as low and attractive as possible in order to maintain a competitive position in the market. While UK domestic energy prices have risen in recent years, this has been from a relatively low base and the UK still benefits from some of the cheapest prices in Europe. The latest statistics from the Department of Energy & Climate Change (DECC), showed that the UK has the cheapest and fourth cheapest prices in the EU 15 for domestic gas and electricity respectively.[ix]
SSE believes that more can be done to promote consumer engagement in the market. It knows that the time it takes to switch electricity and gas providers, for example, can deter consumers from switching. It is therefore something that consumers would rightly expect the industry to improve, where possible, and SSE will continue to work constructively with all parties to deliver improvements for customers.
Won't this increase result in more people being in fuel poverty?
SSE: In all likelihood, and unfortunately, yes. SSE understands the impact that rising energy costs, along with the rising costs of other essentials and slow wage inflation, are having on many households. As currently defined, fuel poverty arises from people having insufficient income, living in poorly-insulated homes and spending a significant proportion of their income on energy. Clearly the price of energy is a major contributing factor and SSE regrets that more of the underlying costs are not within its direct control. That said, anyone struggling with their energy bills should get in touch as there are a number of ways in which SSE can help.
SSE believes that continuing to invest in cost-effective energy efficiency measures is crucial, as is giving practical help for vulnerable customers. During 2013/14, SSE expects to spend more than £50m providing assistance to over 300,000 vulnerable customers through the Warm Home Discount scheme. It also expects to fund and manage more than 125,000 energy efficiency installations in homes throughout Great Britain in 2013/14 under the ECO scheme.
SSE will continue to work with the UK Government to help ensure that policies to tackle this important issue are as effective as possible and targeted at those in greatest need. It is SSE's view that the creation of a government-led fuel poverty agency responsible for delivering social energy programmes would be a more progressive way to address the problem.
Additionally, SSE believes that the issue of fuel poverty could be addressed more effectively if the cost of government policies currently levied on bills were removed and instead paid for through general taxation. As taxation is means tested, those who can afford it would pay more, with those most at risk of fuel poverty paying less. If any political party is serious about cutting bills and tackling fuel poverty, SSE would urge them to implement this change.
In the meantime, SSE is here to help and would encourage any customer worried about their bills to get in contact on 08000 727 222.
If costs are going up, why was First Utility able to announce a price freeze until March 2014 in recent weeks?
SSE: SSE would not have to raise prices now if it had increased prices by almost 20% in June, as First Utility did for many of its customers.[x] SSE is instead pledging not to increase prices again until Autumn 2014 at the earliest. These two differing approaches to pricing are an example of how competition is at work in the market.
What is SSE doing to help customers who may have difficulty in paying their energy bills?
SSE: Anyone who is struggling to pay their energy bills should get in touch so that SSE can find ways to help them. During 2012/13, SSE helped lots of customers who were either having difficulty paying their bills or wanted to reduce their bill by taking action to be more efficient in their energy use.
There are five main ways that SSE will continue to help customers manage the impact of rising energy prices:
1. During 2013/14, SSE expects to spend more than £50m providing assistance to over 300,000 vulnerable customers through the Warm Home Discount scheme.
2. SSE provides tailored and flexible payment arrangements to help customers pay for the electricity and gas they use in a way that suits their circumstances.
3. SSE expects to fund and manage more than 125,000 energy efficiency installations in homes throughout Great Britain in 2013/14 under the ECO scheme. It will also provide free energy efficiency advice to its customers in order to help them reduce costs by wasting less energy.
4. Between the start of October and the end of March (or longer if the weather is unseasonably cold outside this time), SSE will again commit to a no disconnection policy covering all customers.
5. SSE will build on its work with partners, including consumer bodies such as Citizens Advice Bureau and National Energy Action and voluntary organisations, to help customers in an environment of rising prices.
SSE is here to help and would encourage any customer worried about their bills to get in contact on 08000 727 222.
SSE plc is one of the UK's leading energy companies, involved in the generation, distribution and supply of electricity and in the extraction, storage, distribution and supply of gas. Its core purpose is to provide the energy people need in a reliable and sustainable way. It has over 9.5 million energy and home services customer accounts throughout Great Britain and Ireland and has been ranked number one for customer service by uSwitch for each of the last seven years.