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Ed’s CESP Folly Hits Home – Latest Ofgem Fines

Itofgem logo’s been a busy couple of weeks for Ofgem. With all the fines dished out they could be forgiven for looking forward to the Christmas break after what by any standards has been a tumultuous year for the regulator.

Indeed never has insulation seemed such a commercial barometer but that is what it seems to have become amid Ofgem’s latest crusade.

Whilst millions of businesses and householders are routinely overcharged, left on uncompetitive contracts and receive some of the worst service amongst any sector, it is the failure to insulate homes under a prettified ‘social’ obligation that has got Ofgem’s ire up.

That may seem, as ever with Ofgem, a confusion of priorities, but insulating well can make a big difference to both energy usage and cost as well as save lives.

Yet is this really what we need our regulator to be doing? It is a moot point and a policy that was introduced as a ‘punishment’ for making (too much) money seems to be a typical example of addressing the outcome and not the cause, as so often is Ofgem’s want.

A legacy from Red Ed’s forgettable time as Energy Secretary it is as wonky a policy as one would expect. But like it or not the insulation has come home to roost.

The issue of to insulate or not is focused on the CESP or Community Energy Savings Programme, Ed Miliband’s (original) government initiative to … well to be seen to do something… anything about energy. It was silly then, even sillier now but hey it’s raised a few funds and helped reinforce the evil energy industry perception which appears to be Ed’s want.

Under CESP, electricity generators as well as the energy suppliers were required to deliver “energy saving measures” such as loft and cavity wall insulation free of charge to households in “low-income areas” by the end of December 2012.

Whilst DECC set the targets and policy, Ofgem was responsible for its administration including calculating the individual targets of qualifying energy companies, reporting and initiating enforcement action where appropriate. The time for that enforcement is now upon us.

Despite the individualisation of targets, many companies didn’t achieve them cue Ofgem speeding to the rescue (two years later).

Indeed whilst the overall CESP target was 19.25 million lifetime tonnes of carbon dioxide (Mt CO2). Against this the energy companies achieved 16.31 Mt CO2 (84.7%). Those figures will mean little to anyone but the target setters so suffice to say it was missed, and that, according to Ed and Ofgem was bad.

The energy suppliers met 92.4% of their target – with British Gas, GDF Suez and SSE amongst those who fell short, whilst in contrast the generators lagged well behind delivering just 36.0% of their targets.

Five months after the closure of the scheme, in May 2013, Ofgem launched investigations into six energy companies who had failed to deliver on time their obligations under CESP.

Ofgem has now reported on three of these Intergen, Drax and British Gas with GDF Suez, SSE and Scottish Power to follow.

Intergen: Fined £11m

  • InterGen delivered 6.4% of its total obligation in the time available.
  • After additional measures, InterGen delivered 61.2% of its obligated energy saving measures to around 2,200 households by the end of May 2013.
  • InterGen remains 38.8% below its missed target, equivalent to around a further 1,500 households.
  • Ofgem found that InterGen did not put in place schemes quickly enough to enable on time delivery and installation.
  • And that InterGen’s failure to deliver its obligation, either on time or subsequently, meant it gained financially.

Sarah Harrison, Ofgem’s Senior Partner in Charge of Enforcement, said:

“Ofgem takes compliance with obligations, both of governmental schemes and regulatory rules, seriously. InterGen missed its target by a clear margin, disadvantaging many low-income households. The £11 million payment reflects the seriousness of these failings and means InterGen has not gained through its non-compliance.”

Drax: Fined £28m

  • Drax delivered 37.1% of its total obligation in the time available.
  • Drax failed to meet, by 31 December 2012, its carbon emissions reduction obligation.
  • It delivered 332,312 tCO2 and had a shortfall of 562,826 CO2 against its overall target of 895,138 tCO2.
  • Following that, Drax didn’t take action to address its shortfall.
  • Ofgem found that senior management at Drax were aware of the serious risk of non-compliance with CESP 18 months before the end of the scheme.
  • While Ofgem has taken into account Drax’s inexperience in delivering energy efficiency measures to consumers and its lack of a customer base, Ofgem believe the company could have taken more timely action to reduce the risk of not delivering its obligation.
  • In addition, after the deadline passed, Drax made no attempt to mitigate the carbon saving shortfall.

Announcing the record fine Harrison said:

“Drax missed its target by a clear margin, disadvantaging several thousand households in some of the most deprived areas in Britain. Not only are these consumers missing out on energy efficiency measures that would help keep their homes warm, they also face higher energy bills as a result. Today’s agreement to pay £28 million reflects the seriousness of the consequences of these failings for consumers.”

Drax had made their objections to the obligations under CESP clear from the outset and made a point few would argue with that as independent generators they, Intergen and Eggborough, had no direct relationship with domestic electricity customers and therefore no experience of providing energy efficiency measures and scant reason to take any such responsibility.

Reacting to the fine Dorothy Thompson, Drax’s chief executive, said:

“We take our statutory obligations very seriously and in the case of the Cesp we always sought to maintain a compliant position. We believe the design of the Cesp was flawed and significant problems were encountered with scheme delivery, the Cesp market and the complex arrangements.

“We are deeply disappointed with the magnitude of the fine. However, we believe it is in our shareholders’ interests to settle this matter and, as the nation’s single largest power provider, focus on delivering a reliable supply of electricity this winter.

“We are pleased to be working with National Energy Action to develop a package of measures which would benefit vulnerable energy consumers.”

British Gas: Fined £11m

  • British Gas delivered 62.4% of its obligations in the time available.
  • Ofgem found that British Gas’ senior management did not take appropriate action to ensure it delivered energy efficiency measures on time.
  • In particular, under CESP, British Gas did not do enough to respond to changes in market conditions or effectively manage its delivery when problems arose in 2012.

Harrison, explained:

“British Gas’ failure to deliver two environmental obligations on time is unacceptable. Thousands of households had to wait for energy efficiency measures, like insulation, to be installed during the winter.

“The payment reflects British Gas’ failure to meet its obligations on time but also recognises its commitment to put things right.”

Clare Miles, Managing Director of British Gas New Energy said the company was:

“Sorry that we missed the December 2012 deadline [but remain] hugely committed to the success of our energy efficiency programmes.

“We take our responsibilities to our customers very seriously and do all we can to help them keep their bills as low as possible. Providing free insulation is a big part of that, as well as giving our customers ways to manage and understand their energy use through smart meters and other new technologies,”

Reacting to the fines, specifically that of British Gas given the additional opportunity for political resonance, Energy and Climate Change Secretary Ed Davey said:

“This shows that if energy companies don’t put consumers first, there will be consequences.

“We’re working to make sure consumers are protected right across the energy market, and cutting people’s bills permanently by making 1 million homes warmer and cheaper to heat by March next year.”

Whilst Ofgem is due to announce decisions on Scottish Power, SSE and GDF/Suez shortly the last word goes to Thompson:

Converting three of Drax’s six generators to biomass will save “hundreds of millions of tonnes of carbon”. Drax’s obligations under CESP? “Less than one million.”

Bravo Ed. Bravo Ofgem.