On 24 April, Ofgem hosted the 2023 Vulnerability Summit. Our CEO, Emma Pinchbeck, was invited to speak and give an industry perspective on the challenges facing the energy sector and provide insight into how best to support vulnerable consumers. Below is a full transcript of her speech.
I’ve been asked to talk about the wider context of industry, and so I’m going to stick to what Energy UK says about regulation, which is that it should be about principles rather than prescription in most cases, and I’ll give a high-level view of what the sector’s facing.
As you’ve heard, and as you all know, we’re operating in a crisis.
That’s the first thing to really bear in mind.
And energy is an essential service and it’s delivered by a private market. That means that the industry has to treat people fairly and provide reliable services at homes or businesses across the country.
Global energy systems are also at a point of massive transition as we need to decarbonize the economy. And that means that the industry has to be able to invest in new infrastructure, skilled workers, and the energy services that society will need in that new energy world. Net zero is a £50 billion a year challenge by 2050, and we know that businesses will provide most of that money.
So these were the two existing missions for Energy UK and for the wider industry, but over the last several years since the start of the pandemic, and then followed by the global gas price crisis, both helping homes and the economy to move away from expensive fossil fuels and the need to find support and services for people who are struggling with the rising cost of living are now absolutely mission critical.
Times are still stark tough, as Clare [Moriarty] just said, bills are around double what they were 18 months ago and as a result, some of the discussions we have today are going to be really challenging for the industry to hear, and for all of us to take part in. I personally think it’s really important for government, industry and consumer groups to work together to make the energy sector as good as it can be.
And it’s in that spirit that I’m speaking today.
Now there is unprecedented pressure on energy suppliers. Energy UK represents the majority of domestic energy suppliers, around 90% of the market, covering about 28 million households in the UK. And as you know we’ve already lost 30 suppliers from the UK’s energy market with the majority collapsing as gas prices started to spike in the autumn of 2021.
Today though, the UK and energy sector is also facing investment challenges right across the system from a global supply change shortage and competition from the US, the EU, India and other markets, for that money that I talked about. Most retail companies, for most of the time I’ve been in this job, have been loss-making.
In a market in which businesses are already loss-making, any support for vulnerable customers, whether providing assistance or writing off debt, is currently either funded by the taxpayer or spread across other people’s bills, and we need to bear that in mind.
Ofgem’s own figures say that retail sector debt at stands at around £2.5 billion in 2022, but we think that figure has significantly risen and our estimates are that the debt in sector is now between £3.5 billion and £3.6 billion or around £129 pounds per house, on average. This is why it’s important for the regulator and for government to ensure that cost distributional impacts, which is wonk speak for “the cost impacts of right across the system with our consumers and bills” when we’re making interventions in the market for households and for industry are properly evaluated, we need impact assessments, we need to know what things will really do, and that they are transparently considered in conferences and rooms like this one.
As Clare was talking about the other really big thing is that their affordability crisis is unprecedented. This isn’t just an energy crisis, it’s a cost-of-living crisis. Every company chief executive I speak to, some of them looking at me now, are really, really, really worried about rising affordability, they can see customers struggling who have never previously been thought of as fuel-poor, and vulnerable.
Fuel poverty is growing and at the end of September 2022, more than two million households were behind on their energy bills. That’s a rise of about 2/3 since the end of 2020. Retailers are reporting that some call centre volumes are up as much as 300% compared to previous years and the length of time on calls has also increased.
This shows you that customer needs are more complex than taking longer to resolve. One of our small-medium retailers told me that they’re providing over £500,000 per week in credit to their customers. As Clare said, the trend line is actually going up and not yet coming down.
It’s important to recognise the sheer scale of this and to talk explicitly about the overlaps between fuel poverty, vulnerability and people struggling to pay bills. These are not actually the same thing and the measures that we need to tackle them are sometimes the same but they are sometimes very different and sometimes require trade-offs.
It’s critical that in tackling one, we also don’t make the others worse. All the way through this crisis there has been additional support put in place by the suppliers for customers. I’m personally horrified when I read negative stories about customer service. I would imagine that many of you in this room, myself included, will have loved ones who are struggling with the cost of living, including loved ones who use prepayment to help them manage their finances.
Energy UK has been very, very clear throughout the energy crisis that we expect the highest standards from our industry and that the regulator needs to be clear about the rules, and then to enforce them effectively. But as Jonathan said there is best practice out there that we should learn from. We should acknowledge the amount of time, resources and expertise that suppliers commit to supporting their vulnerable customers, and the industry has committed hundreds of millions of pounds for financial support, payment plans, emergency credit and training additional advisors, on top of the billions in Government support schemes.
For me, getting the Energy Price Guarantee up and running (I say that like I was there, I was on maternity leave) but all of you in the room that got the Energy Price Guarantee up and running in about three weeks, it’s a real model for how quickly we can work when everyone in this room, the regulator and the government gets together and focuses on a problem, and everyone does their bit.
14 of the suppliers covering about 90% of the domestic market are also signed up to our independent Vulnerability Commitment which outlines best practice in terms of how vulnerable customers can be identified and supported and that’s on top of government programs, there’s good learning there. Those signed up have delivered additional millions of pounds of support on top of the additional support already in their businesses.
The second thing though, I want to say and it hasn’t been said explicitly today, is that the energy transition is actually a moment of opportunity and a moment where we could really start to tackle some of these inequalities.
To make a real dent in vulnerability, and to allow vulnerable households access to fair, and reliable energy services, the big thing we actually need to do is tackle the cost of heating buildings. And that means looking at what we call thermal efficiency or the quality of the building, and also the heat source.
Households living in the least efficient homes will pay around £916 more per year on their energy bills. This is where energy crisis management and the long-term Net Zero transition overlap for me, because our exposure to the volatile global gas market and the wide economic impacts were significantly to do with the amount of gas that we import for heating UK homes.
So insulating homes in Britain and installing heat pumps could benefit the economy by £7 billion per year and create 140,000 new jobs by 2030, but also really help people stay warm through the winter. Obviously, I’m going to make this case to you, I think suppliers have a really critical role in delivering that role; in fact, it’s one of the main reasons I’m in the job.
Suppliers have a connection with all almost every building in the country and are already the delivery agents for some of the government energy efficiency and fuel poverty schemes. Several major suppliers are training heat pump installers and they’re investing to bring down the cost of heat pumps below 3000 pounds with a government grant. Ideas for an enhanced ECO scheme from the suppliers could also save £700 a year on bills.
What makes me really excited however, in all this is the services and support that suppliers can provide to help people access, warm, modern and green homes.
Smart products, flexible tariffs… these things allow people to use energy when it’s cheapest and most plentiful. The load-shifting tariff run by National Grid over the winter saved a power station’s worth of energy, and they did it reliably and predictably, so we think that tool is going to be something we can use going forward.
That’s often real scepticism, and you may hear it in this room today, that this smart-enabled world isn’t for vulnerable people or poorer households. And yes, we should acknowledge that there are some risks to a smarter, more digitalised system for a significant minority. In 2020, 6.5% of adults in the UK had never used the internet and many vulnerable households lack basic resources, including bank accounts and computers to really take advantage of this new world, and we know that.
However, the flip side of that, is that vulnerable households and those struggling with high energy costs are some of the customers most likely to benefit from new services, new products and cheap, flexible deals. I don’t know about any of you but my mum ran our entire house on Economy 7 when I was a kid and this is the smart way of doing what was then a very blunt price signal. Smart meters and controls, including smart prepayment metres, are one of the most effective tools that we have for managing demand, and that is why we want to see government, the regulator and industry working together to solve some of the challenges on smart meter rollout.
Better data can also help us identify vulnerability, and this is critical, to understanding its transient nature, particularly in crisis years, like the ones we are experiencing now. Any of us can be vulnerable at any point in our lives, and then move out of vulnerability again. The industry should be able to understand how to best serve people at any particular time, and any sort of targeted additional support should be able to respond to people’s changing circumstances.
An energy system dominated by modern flexible technologies is also cheaper for all bill payers. So we need to roll out clean power, grid infrastructure, storage, EV chargers and consumer technologies from EVs to smart metres.
It is possible to do this faster, by the way; countries across the EU have spectacularly reduced their Russian gas demand this winter by doing exactly that. So lastly, the thing to say is that this current crisis just adds urgency, security and Net Zero are two sides of the same coin and therefore the response to this has to be something like that film that just came out “Everything, Everywhere, All at once”. Retail for me is interconnected with all the rest of the puzzle pieces, and in essence at the heart of this is people. People are key enablers as well as beneficiaries of the future system. Different households will still have different needs that we need to meet.
And therefore, the retail market has to start being considered as an essential part of this essential service. Suppliers need to be able to invest their resources, knowledge, and innovation to support customers, all kinds of them. The industry’s view is that we should not assume this energy crisis is over. I completely agree with Claire and the comments that others have made in that regard. For many households and businesses, when the government support tapers off, there will be a real pain to come this year. The government deserves credit for stepping into the support bills, but universal support is not sustainable.
And therefore, it’s critical that we start working on what comes next. We need to work strategically with a big vision about what retail is for, and on enduring policies where reforms are principled and forward facing, and not knee-jerk or backwards-looking – understanding though that is a crisis. We need to work really fast, faster than we think, to protect the country from geopolitics of fossil fuels, and also to speed up the deployment of these exciting, new technologies. And lastly, and the point of us being here, we need to work together. We need to make sure we protect the most vulnerable in society as we go through this, and change through this current crisis into a new energy world.