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Chamber and committees

Meeting date: Tuesday, October 2, 2018

Economy, Energy and Fair Work Committee 02 October 2018

Agenda: Decision on Taking Business in Private, Pre-budget Scrutiny 2019-20, Publicly Owned Energy Company, European Union (Withdrawal) Act 2018


Contents


Publicly Owned Energy Company

The Convener

Welcome back. We now move on to our discussion of the proposed publicly owned energy company.

Unfortunately, one of our witnesses, Catherine Waddams of the University of East Anglia and the UK Energy Research Centre, cannot be with us today because her travel arrangements have not worked out. However, let me welcome the witnesses who are here: Ragne Low, principal knowledge exchange fellow at the University of Strathclyde centre for energy policy; Neil Barnes, Ofgem deputy director for consumers and markets; and Kate Morrison, energy policy manager for Citizens Advice Scotland. Welcome, all three of you; thank you for coming in today.

I turn to John Mason for our first questions.


John Mason

Let me start by asking about the role of a potential public energy company. I have read some interesting quotes from Professor Waddams’s submission, including that

“there is a danger that conflicting and/or poorly defined objectives result in poor achievement of any of them.”

What should the strategic priorities be for such a company—for example, tackling fuel poverty, supporting renewable generation or supporting community energy schemes? Does there need to be a narrow focus, or can we have a wider focus?


The Convener

Who would like to start?


Ragne Low (University of Strathclyde)

I will give it a crack. Way back when the proposal was initially made, 18 months ago or more, the intention was that the company would support the strategic objectives around energy generation and decarbonisation. As I have set out to the committee before, the focus has changed; it is now much more about consumers and tackling fuel poverty. That is a laudable aim but, as Catherine Waddams has suggested, that goal will need to be quite tightly defined and we may need to take a step back from some of the other things that are still at play, such as local energy, decarbonisation and strategic oversight.

A lot is going on already on fuel poverty, so if the company is going to focus on it exclusively, it will need to be very well aligned with the actions proposed under the Fuel Poverty (Target, Definition and Strategy) (Scotland) Bill, with the requirements for local authorities to develop local heat and energy efficiency strategies, and with the actions already being undertaken on fuel poverty by many Government partners. Alignment with those will need to be at the heart of how the company evolves.

There are other objectives that the company could address, but I agree with Catherine Waddams that it needs a narrower focus now that we have reached the point of putting forward concrete proposals for how it will look.


John Mason

Thank you. Mr Barnes, would you like to comment?


Neil Barnes (Office of Gas and Electricity Markets)

Ofgem is the regulator of the gas and electricity markets in Great Britain. We support many of the aims that the Scottish Government has set out for the publicly owned energy company, many of which match our own duties, such as trying to drive down customer bills and support vulnerable consumers. You will have seen our recent proposals to introduce a price cap, which will particularly help to reduce the bills of consumers who have not engaged, many of whom may well be vulnerable or in fuel poverty. There is a good match with those aims.

Ultimately, we are looking for a well-functioning retail market in which competition can benefit all consumers, innovation and new technologies can come to market and consumers who do not engage, particularly the vulnerable, can also benefit.

A wide range of energy suppliers—60 or so in Scotland alone—is already active in the retail energy market. There seem to be a lot of opportunities for new entry into the market to deliver different objectives, and scope for innovation based on new technology and on new data that is becoming available with the advent of smart metering, for example. There are new markets and new ways of transacting, so we very much welcome new entries, new business models, and products and services that can provide better value to consumers. We share a lot of the Scottish Government’s objectives in that endeavour, but I do not have a specific view on whether those objectives are the right ones for that sort of venture.


John Mason

You said that you want to have a well-functioning market, which I am sure that most of us agree with. Is the market functioning well at the moment? One of the problems seems to be that vulnerable people and poorer people, in particular, are not switching supplier, which is a key factor. If people are not changing supplier at the moment, would the creation of another supplier make them change?


Neil Barnes

The market is not functioning as well as it should at the moment, as evidenced by the fact that the Government has decided to introduce price regulation. We made our proposals on that recently, with a view to introducing a price cap, which would stand to benefit consumers to the tune of £1 billion, from 1 January next year.

There is a recognition that the market is not working well, and we are enacting a lot of initiatives in an attempt to improve competition in the market. Even when the price cap has been introduced across the market, significant savings will still be available to consumers who engage in the market and switch. The price cap will at least ensure that consumers who do not engage do not get ripped off but pay a reasonable price for their energy.


John Mason

Ms Morrison, do you have any thoughts about how narrow or wide the focus should be?


Kate Morrison (Citizens Advice Scotland)

Yes. We strongly support the objectives in the most recent version of the energy strategy. More than a quarter of Scots were in fuel poverty in 2016, so we welcome the focus on tackling that issue. Since 2016, we know that there have been significant price rises, particularly in the electricity market. We want a specific emphasis on tackling and alleviating fuel poverty through cheaper energy bills.


John Mason

Should the sort of organisation that we are talking about tackle that issue in a more strategic way by helping people to understand better what is going on, or should it be a player itself?


Kate Morrison

That is a difficult question. There is a huge lack of awareness. We did a recent survey in Scotland that showed that up to 10 per cent of some suppliers’ customers do not even know that they can switch. There needs to be a huge amount of awareness raising to identify and reach the fuel poor and the vulnerable. Our view is that, if such a company contributes to reaching the fuel poor, it will be a good thing, but whether the creation of that company will be the single solution to those issues is another question.


John Mason

Assuming that the company were to sell electricity or gas or both, what kind of level of customers would it need to have in order to break even and be viable? Presumably, if there were too few customers, the company would not work. Can any of you comment on that?


Neil Barnes

I am not sure whether there is a magic number. We know, from the many companies that have entered the market, particularly in recent years, that there is a range of different business models. Some companies are not looking to grow particularly big and are aiming for niche bits of the market, whereas some are looking to achieve economies of scale relatively quickly. If companies have very small customer numbers, it can be quite difficult for them to compete effectively, particularly in terms of accessing the wholesale market on a cost-effective basis. Beyond that, the required level of customers very much depends on the company’s business model, on how cost efficient its operations are and on other such factors.


Ragne Low

To reinforce the point about scale, there are costs associated with tipping over certain thresholds. You would imagine that an energy company supported by the Scottish Government would wish to take on many of those costs, such as the warm homes discount, which is targeted at supporting fuel-poor households. Those costs might well be assumed to be part of a smaller company, irrespective of thresholds.


John Mason

Thank you. My colleagues will explore some of that further.


Colin Beattie

Should the company be involved directly in energy supply? Is that its correct role?


Ragne Low

I can kick off on that. My understanding is that the minister has written to the committee and others to suggest a white-label arrangement. Perhaps we can discuss what that is in more detail, but it is the preferred option in the development of a proper business case. I suppose that it is a hybrid somewhere in between directly supplying and not directly supplying, and it offers a number of advantages for de-risking the venture.

As Kate Morrison suggested, if addressing fuel poverty is the objective, there are multiple ways of providing low-cost energy if the margins in the market allow it. Running a supply company is one of those ways. It can be a part of the solution if it is designed well and designed for success.


Colin Beattie

Am I correct that there is a 5 per cent profit margin on supplying power? I think that I read that in the newspapers.


Neil Barnes

We require the large suppliers to publish annual accounts for their gas and electricity activities. In recent years, the average profit margin on gas and electricity retail has been around 5 per cent; interestingly, that is made up of probably 8 or 9 per cent on the gas side and almost nothing on the electricity side. However, that is for the six large companies; given the rate of new entry and switching in recent years, smaller companies now account for more than a quarter of the market. That is very positive, but their profit margins do not have the same visibility. Anecdotally, they are very thin, as you would expect with companies that have just entered the market and are looking to get up to speed. Whether 5 per cent is an attractive margin is an interesting question.


Colin Beattie

You said earlier that there are 60 suppliers in Scotland, which seems an awful lot. Where would the company fit in among the 60 suppliers that are competing at the moment? Presumably some of the smaller suppliers are seeking to establish themselves in various niches in the market, and now there is a proposal to have another company come in and try to establish its own niche.


Neil Barnes

At the moment, part of the energy market is very competitive—consumers are engaged and willing to shop around, and there are a lot of options and relatively low prices available for them—but there is another part of it in which consumers do not engage and are paying considerably higher prices. There is a potential role for a supplier that can reach the parts of the market that are not so well served or targeted by existing players, engage those consumers and make considerable savings to their bills. That is one factor.

Another observation is that the market is going through a rapid change. A lot of the existing players are very focused on what we might think of as traditional supply—selling kilowatt hours of gas and electricity to customers—but we expect significant innovation as a result of the opportunities afforded by new sources of data from smart metering, new technologies such as energy storage or electric vehicles, and new ways of trading such as local energy or peer-to-peer trading. It remains to be seen whether that innovation will come from existing players or from those who are not yet in the market, but we welcome new entry if it brings better or innovative ways of supplying energy.

11:00  


Colin Beattie

Do you think that the Scottish Government’s phased approach with local authorities is the best way to launch this company?


Ragne Low

It makes sense to do it in a phased way for a number of reasons, not least the state of the market. The amount of flux and change in the market means that it would be difficult to do anything else in terms of financial accountability and risk. For me, though, the phased approach still has to have a sense of the end point that we are heading towards. We talked about the range of objectives that may be being served simultaneously, and it is not clear to me yet whether the end point is still trying to address a large number of objectives simultaneously in a way that an energy agency, for example, might be better equipped to do than a supply company.

What happens after the white-label arrangement is an open question that needs to be considered. It may be that the white-label model is the supply-side entity and that other things do not necessarily sit under that arrangement. For example, investment in renewables might be addressed through a different mechanism, but it would be useful to at least start to set out what all that looks like.


Kate Morrison

The two organisations that operate such a model already are Bristol Energy and Robin Hood Energy, and the jury is out as to whether it is really a sustainable model. Bristol City Council said that it would spend £33 million on the venture, and Bristol Energy has already spent £27 million of that and is not yet profitable. I read that Sadiq Khan, through his energy for Londoners programme, commissioned Cornwall Energy to do a scoping study to determine whether it was better to have a white-label arrangement or to set up a complete supply company. The study double-weighted quick delivery, which meant that the white-label option was the one that was chosen, but in fact setting up a supply company would have delivered better on revenue retention, more control over tariffs, tackling fuel poverty, generating economic benefits such as jobs, getting higher customer numbers and supporting renewables in the area. With the white-label model, the devil would be in the detail. How it would be done is the most important thing, but it rang a little alarm bell for me that that option should be chosen when there is evidence to suggest that it may not initially get the best benefits.


Colin Beattie

Do you see a role for the national investment bank?


Kate Morrison

I do not have a specific comment on that.


Ragne Low

In the energy sector generally, there is investment in the generation side and in low-carbon technology projects, as well as in local energy systems that match supply and demand through projects that are not just about putting new bits of kit in, but how that links into the public energy company is a bit of an open question.


Andy Wightman

I want to explore the community and local energy sector, where there has been quite a bit of success but where there also remain huge challenges, mainly in terms of investment—the Scottish national investment bank may have a role to play in that—but also in relation to fuel poverty, which is high in rural areas, especially in off-gas-grid areas. In terms of resilience, we have seen the island of Eigg build its own generation capacity, but only 80 people live there, and repurposing it in 10 years or so will be quite a task for 80 consumers. Is there a role for a public energy company, in alliance with investment vehicles such as the Scottish national investment bank providing grants, loans, equity guarantees and so on, in building resilience in areas where energy supply and generation are most challenging, in terms of both price and resilience?


Neil Barnes

We see a lot of interest in local energy schemes, and not just in Scotland but more widely. A lot of thinking and investment are going into such schemes. Eigg is a slightly different model from what we see generally. There are ways in which the current market arrangements do not facilitate some innovative new business models and ideas. Ofgem is looking actively at how we could adapt the rules to enable a greater range of business models, whether local energy or other types of trading. That certainly seems like the direction of travel for bits of the market, but it remains to be seen whether that will make sense everywhere.

It will be interesting to see how some of the current experiments work out and how well they engage the consumers in an area. There are some positive signs. More broadly, we need to consider how well such schemes can deliver cost savings for areas by drawing on local generation and so on.


Andy Wightman

The market does not work at all in that respect. Thirty years ago, we had a state-owned energy enterprise, but it was privatised and is now owned by big multinationals, with the focus being on generation, distribution and supply.

As you said, we have new innovative models—for example, we have been looking at district heating. Some of the models are in their early stages, but we have had demonstrations of how they could apply not just in this country but in other countries. Reform of the energy market along conventional lines, with price controls and so on, will not make much impact on the need for resilience, which exists not just in rural areas but in parts of urban Scotland, so innovation needs to be supported. Perhaps that suggests that there should be an energy agency rather than an energy company.


Ragne Low

Yes, it does—or it suggests that there should be a range of policy levers, some of which are not within the purview of the Scottish Parliament.

We need to think beyond the white-label arrangement that has been proposed. Under the current arrangement, and in devising the white-label model, one way in which support—as Andy Wightman is suggesting—might be possible is through power purchase agreements. Those agreements look the way that they look because of the drivers in the current market. There might be a role for a publicly owned energy company in pursuing longer-term power purchase agreements that have a more social objective. However, I am not an expert in that area and do not know what such an arrangement would look like in practice, given the current rules of the game.


Kate Morrison

There are groups of consumers—for example, people who rely on electric heat—who pay, on average, three times as much to heat their homes as they would if they had gas. It is questionable whether a supply company could offer enough of a saving to make it worth while for those groups of consumers to switch. However, if such people could be put on to different systems, such as district heating, that might provide a better solution. The outcomes for consumers might be better if we think beyond cheaper tariffs to the other options that might be better in a home.


The Convener

How will adding yet another energy company or another aspect to the market affect the Scottish Government’s policy approaches? Is that likely to assist in delivery of the Scottish Government’s policy objectives, or is it likely to overcomplicate matters?


Ragne Low

The proposal, as I understand it, is that local authorities will be invited into an umbrella white-label arrangement, and that the Scottish Government would, in effect, procure a supply package on behalf of local authorities that they could then choose to take up. If that proposal aligns with what local authorities want, and with the Government’s wider energy policies and its current activities with energy services companies, that is all to the good.

I suspect that we will end up with a patchwork, in which some local authorities will engage in that and others will not, because they do not feel that it aligns well with their objectives and current activities. It would be good if the proposal could be designed in a way that would support as many local authorities as possible in their endeavours to reduce fuel poverty and increase energy resilience locally.

However, as it is framed at the moment, the area in which the proposal can help is in engaging with the idea of local energy systems. To me, that does not seem to cut across anything else that the Scottish Government is trying to do. However, although it seems to be a sensible approach, it addresses only one part of the objectives that we have been talking about.


Kate Morrison

I add that the risk with the policy is that its application might be patchy, so that not everyone benefits. If the objective is to reach fuel-poor customers, I point out that we have recently done research in which we spoke to people about fuel poverty, and they said—unsurprisingly—that they want and need instant financial support with their bills. In Ireland, there is a model in which people get a winter fuel allowance if they are on specific long-term benefits.

The question is whether there are other ways of consistently reaching the fuel poor and lowering their bills that would mean that everybody could be accessed, instead of just those who sign on. My concern is that although the approach might be useful in advancing the policy objectives, there is a question about whether it will reach everybody who needs to benefit from the objectives.


Neil Barnes

We talk to a lot of innovators who are potential entrants to the market and who have different ideas and business models that they want to bring to it. In an awful lot of cases, they do not start out with the intention of becoming licensed energy suppliers: they are not really interested in that because it comes with a lot of obligations attached. However, they find that, given the current structure of the market, they end up by needing either to seek supply licences themselves—in particular, to gain access to industry systems and data—or to partner with existing players in the market in order to do so. That suggests that, in the current market model, there can be benefits to being licensed suppliers that enable them to do certain things, such as accessing the wholesale market and its customers.

As I mentioned previously, we are looking at ways in which we can update market arrangements to recognise how the market is likely to evolve, and to make it either less burdensome to become a licensed supplier or easier to provide the individual services without having to go through the hoop of being such a supplier.


Gordon MacDonald

Earlier, we touched on the fact that the retail energy margins are very tight, at about 5 per cent. Also, most electricity and gas is sold through the wholesale market, which depends predominantly on supply and demand and does not necessarily reflect the cost of production. Do we know what the margins for generators are?


Neil Barnes

We get the six largest supply companies to publish their generation outturns. Of course, some of them are less involved in generation than they used to be. Previously, they were virtually all involved in that. The margins differ significantly. One player that is very involved in the nuclear side makes the vast majority of the profits in that area. The six largest suppliers no longer represent the entire generation market, so it is less clear what—


Gordon MacDonald

Would it be fair to say that the margin is substantially higher than 5 per cent?


Neil Barnes

As far as return on investment is concerned, yes—but one would expect that in a capital-intensive sector such as generation, compared with the retail sector. Again, whether a 5 per cent margin on retail activities is tight is an interesting question. I suspect that some retail markets would consider it a very healthy return. It all depends on perspective.


Gordon MacDonald

If the proposed publicly owned energy company wants to make a difference, should it get involved in generation, where the margins are larger and therefore there is more scope to support people who are struggling to pay fuel bills?


Neil Barnes

I do not have a view on whether it is worth its while to get into that bit of the market.


Gordon MacDonald

Anybody else? Is it a good idea for the publicly owned company to get involved in generation?


Kate Morrison

It seems to be logical that that would have greater benefits, but obviously it would mean higher investment risk, so it is a question of how that would play out.


Gordon MacDonald

What do you think the potential risks are?


Kate Morrison

The risks would depend on the technology that the company decided to invest in. I will not pretend to be any kind of economist, but I know that a lot of suppliers have been failing in the market of late. It is not necessarily an easy market to be in; there are a lot of high risks.

11:15  


Gordon MacDonald

There are a lot of small-scale electricity suppliers, as Andy Wightman said. Harlaw Hydro Ltd in my constituency has been on the go for a couple of years, for example. Is there a need for a publicly owned energy company to engage with the small-scale producers and generators through power purchase agreements, and to give them a market in order to focus on people who are fuel poor?


Ragne Low

Yes—potentially there is such a need. That may not be deliverable through the white-label model, at least initially, but there is definitely scope for that kind of support and, as we have discussed, for investment from the national investment bank, for example.


Gordon MacDonald

We touched on Bristol Energy earlier, and I believe that Robin Hood Energy has just turned a profit for the first time since it was established. Can we learn lessons from either supplier that would help us to set up the new publicly owned energy company?


Kate Morrison

The only thing that I would add is that we rank suppliers in a quarterly league table based not on costs but on factors including complaints numbers and how easy the suppliers are to get through to on the phone. I think that Bristol Energy did pretty well: it was sixth out of 32 according to our parameters. Robin Hood Energy may be a wee bit cheaper, but it was 29th. I hope that the publicly owned energy company will focus on good customer service and everything that goes with it, particularly if it is trying to attract vulnerable consumers and people who are in fuel poverty. We do not want people to move and see their standard of service drop.


Neil Barnes

I am not saying that there are lessons to be learned, but it is interesting to note the different approaches that those suppliers have taken—for example, in engaging consumers. Bristol Energy has physical shops that people can go into. There is quite a lot of consumer research that suggests that consumers need that kind of hand-holding to give them the confidence to engage effectively in the market and to make decisions. Bristol Energy has clearly used that, whereas most suppliers offer no physical presence, but communicate over the telephone or online.

I think that Robin Hood Energy initially focused on prepayment customers as part of its social objective. I guess that that shows that such suppliers run by city councils can target different segments of the market in different ways and have tried different things.


Ragne Low

Another example is Our Power here in Scotland, which has an explicit policy of addressing people in social housing who are being moved from one contract to another, and of intervening at that point to give them a better deal.


The Convener

Thank you. We will have a supplementary question from Jamie Halcro Johnston, and then move on to Dean Lockhart.


Jamie Halcro Johnston

You mentioned that there are 60 suppliers. How many are not-for-profit organisations?


Neil Barnes

I thought that you might ask that. We do not formally log whether suppliers are not for profit. There are different interpretations of what that might include—we have heard examples. However, I would say that not-for-profit suppliers are almost certainly a significant minority.

“Not for profit” does not necessarily mean cheaper. Not-for-profit suppliers are not aiming for a profit margin, but that is a different matter from whether they are cost effective. Of the not-for-profit suppliers, some might be at the cheaper end and some might be at the higher end.


Jamie Halcro Johnston

Yes, I appreciate that they may be trying to provide an additional customer service.

What is the difference between the average fuel costs, whether electricity or gas, and the lowest available costs? Is there a fairly consistent gap between the two?


Neil Barnes

Over recent years, the difference between the most expensive and the cheapest on the market for an average consumer—the one who consumes an average level of gas and electricity—has remained around £300 a year. In circumstances where people consume more, obviously that figure could be higher. Ofgem is planning to introduce a price cap from 1 January, which will provide savings for consumers on the poorest-value tariffs of around £75 a year on average, resulting in total savings of around £1 billion, but that will still leave scope for those consumers who want to shop around and engage in a competitive market to save significant amounts.


Jamie Halcro Johnston

Would that not suggest that perhaps the focus should be on encouraging those who are not engaged to shop around for prices and helping them to get on to the lowest tariffs? The price cap will play a role, but is the effort not best spent on ensuring that everybody who needs to be is on the lowest tariff available?


Neil Barnes

Absolutely, and in recent years we have been putting a lot of effort into better understanding what is stopping consumers from engaging effectively in the market. We have done a lot of research and a lot of trials of different ways of engaging consumers, some of which have been positive.

One that we published recently was a hassle-free collective switch. We asked one of the big suppliers if we could use about 50,000 of its customers who had not switched for around three years—a reasonable proxy for the people who may not be making a conscious decision to be on a poor-value tariff—and we used a price comparison service to run an auction and get suppliers to bid a low price for those customers. A quarter of those customers ended up switching, against an average baseline of around 3 or 4 per cent who would have switched otherwise.

That is just one example of where there is significant potential to engage more consumers, and an important lesson from that was about the extent to which consumers valued being able to use the telephone and actually talk to someone, rather than being expected to deal with a company online when making those sorts of decisions. We recognise that it is necessary, but perhaps not sufficient, to continue providing engagement, because there are always likely to be some consumers who, for whatever reason, do not or cannot engage in the market. The price cap is a temporary solution for improving their outcomes. In the longer term, we are committed to exploring ways of changing the arrangements in the market to try and improve competition, enable better innovation and, we hope, deliver better outcomes without some of the downsides that could come with setting prices.


Kate Morrison

Quite a lot is going on at a local, grass-roots level. We have 60 citizens advice bureaux in Scotland and we run a project called energy best deal, which gives people one-to-one sessions to make sure that they are on the right tariffs and have accessed all the correct support. Last year, we had 38,000 energy issues come through the network in Scotland, and we managed to save clients £1.6 million through financial gains, which just shows you how many people could be saving money. It is a real shame that people are not on the cheapest tariff available to them.


Jamie Halcro Johnston

Should the Scottish Government’s focus, in the first instance, be on looking at the reductions that are available already and trying to get people on to those cheaper tariffs?


Kate Morrison

I do not think that there is a single answer. The Government is focusing on that. It supports the energy best deal project, the big energy saving network and various other projects that attempt to do that, and those projects have success, but you can never reach everybody with a single thing.

There is a role for the supply company, and perhaps that could be tied into local awareness initiatives. If there is a local tariff that is really good for people in an area who are on pre-payment meters, the energy best deal project can ensure that that is clearly advertised to people in that area, and that can tie in with other things that are going on.


Dean Lockhart

In order to achieve a meaningful impact on the market and make a difference to consumers, presumably the energy company will require scale in terms of being able to influence the market and influence price, which in turn will require significant investment, both in set-up costs and in annual running costs, and I assume that we are looking at tens of millions of pounds. From a policy perspective, is that the best use of money to address fuel poverty? The company might not reach all those in need. Is there a better way to use public sector money to address fuel poverty?


Ragne Low

The white-label arrangement that is currently on the table avoids the large set-up costs that you have described. That is a sensible first step. There is the question whether, ultimately, there will be something that looks more like a standard supply company. We need to understand what will happen in phases 2 and 3. If a white-label arrangement can be designed to match what local communities need it would seem to be a sensible approach.


Kate Morrison

It is a difficult question. There is a lot going on in the area. The powers over the warm homes discount and the energy company obligation are potentially moving to Scotland, so there are pots of money that could be used to target support for the fuel poor. There is also a lot going on with the fuel poverty strategy.

I do not want to make a new policy position for my organisation on the hoof, but I like the Irish model of having a winter fuel allowance that ensures that people who are in fuel poverty or on certain benefits definitely get a certain amount of money over the winter to ensure that they can heat their home.


Dean Lockhart

I have a question on a slightly different topic. We have heard mention of other companies in the rest of the UK addressing fuel poverty and hoping to reduce pricing for consumers. Can you point to other examples in the rest of the world where state-owned companies have been successful and from which we could potentially learn some lessons?


Ragne Low

The UK or Great Britain energy market is quite different from most other energy sectors. There are no directly comparable examples.

Much play is made of the ways in which Danish and German municipally owned companies have succeeded in delivering local investment, local jobs and good prices for consumers. However, those companies exist in a different market. Many of them, despite being publicly owned, compete in a more or less liberalised market, and many of them are involved not just in the supply of electricity to households, but in generating and supplying heat and in district heating.

We have not touched on heat in that way. Heating the home, rather than the need to have the lights on, is the chief reason that someone would be in fuel poverty. There are lessons to be learned around how not just the state, but not-for-profit companies might be involved in provision of heat.


Neil Barnes

It is fair to say that energy markets tend to be set up quite differently in different jurisdictions. We do not necessarily have a view on which ones deliver best against some of the aims, but there are clear differences. For example, in some of the Scandinavian markets, objectives around vulnerability and fuel poverty are dealt with outside the market, through the social security system.

One of the defining features of the British market is the volume of obligations that we put on energy suppliers to be delivered through the market, such as loft insulation, the warm homes discount and so on. That is one route and those companies have existing relationships with their customers. However, it has the potential to make it a harder market to enter, because a company coming in needs to be able to perform a wide range of activities. That could put off a company that is looking to do something quite specific and clever.

As Ragne Low said, in many European countries there is greater public ownership, based around municipalities and other bodies. That can raise other issues around competition, which has perhaps developed less well in some of those countries. There are pros and cons. Not all of the things that energy suppliers are currently expected to do have to be done by them; there are potentially different ways to do that.


Dean Lockhart

That is very helpful.

11:30  


Angela Constance

I want to explore the governance arrangements for a publicly owned energy company. Does the panel have views about where the principal accountability should lie? Should such a company principally be accountable to Parliament, Government or both? Is the committee structure of this Parliament adequate and suitable for scrutinising and holding to account such a complex organisation, and is there any basis for the accountability arrangements to be set out in legislation? What do you see as the arguments for and against that?


Kate Morrison

We do not have a specific view on whether legislation is required. We work closely with Scottish Water, which uses a model that we think works. It is publicly owned and effectively accountable to ministers in that its high-level objectives are set every six years through the principles of charging and the ministerial objectives. There is a whole governance structure that goes around that, with the different organisations such as the Water Industry Commission for Scotland and the Scottish Environment Protection Agency, which ensures that certain elements of those priorities are delivered on. That seems to us to be an exemplary model for a publicly owned company.


Neil Barnes

I do not have a view on what suitable governance arrangements would be. If a publicly owned energy company sought a licence as a supplier, as the regulator we would be the body that considered that and granted it. We would want to be clear about the entity that we were granting a licence to, so that we could hold it accountable and regulate it. We would treat a publicly owned energy company in the same way as any other company that we regulate, and we would monitor and enforce compliance in the same way, in order to protect consumers.

In terms of governance, such a company might well be instructed to look at some of the existing local authority or city council-owned models. Those are on a smaller scale than a Scottish Government-run company would be, but that would show how those companies have addressed issues and potential concerns around state aid and the way in which such companies are funded.


Ragne Low

I agree with both of those points. Learning the lessons of existing models of governance—those of Robin Hood Energy and Bristol Energy, for example, which took a slightly different approach—would be good. I do not have a well-enough informed view on legislation. Another example that we might point to is Statoil, the Norwegian energy company; when it was established it was required to report to Parliament. Without assuming that Parliament would be the ultimate body to which the company would be accountable, the company should perhaps be required to report to Parliament on its business objectives and how they are being met, in order to provide transparency and accountability.


Angela Constance

We have heard about some local examples, such as the Robin Hood Energy company south of the border, and the arrangements for some of the larger national companies on the continent, and we have heard that there might be some learnings from Scottish Water. I am thinking about not only accountability but service user involvement, promoting and protecting the rights of consumers and ensuring that the voices of those most affected by fuel poverty are heard and that their lived experience is integral to the working of a publicly owned energy company. Are there any other examples that we could learn from in terms of proper, meaningful and participative user engagement?


Ragne Low

There are models of citizens panels and deliberative participatory processes being used to support the design of services in, for example, health and social services—although that is not my area of expertise—and those could be drawn on. There are multiple ways in which service users and/or citizens, depending on how we want to characterise them, are involved in supporting decision making. Participatory budgeting is an example of a process that directly involves the recipients of public services in the design of those services. There are multiple models that we could draw on.


Kate Morrison

As a consumer representative, we would hope that, as the company is being formed, our expertise and research would be drawn on to understand what consumers want and need from such a company. Our work plan for this year includes a plan to speak to consumers about that.


Angela Constance

My next question is perhaps more for Ms Morrison, because I suspect that, in her role in Citizens Advice Scotland and from research, she will be more familiar than other members of the panel are with Social Security Scotland and how it has been set up. Rather innovatively, it taps into the service user experience. I am keen to canvass opinion on a range of bodies in Scotland and across the UK and the continent that we could learn from.


Kate Morrison

That is a question for my colleagues, but I could provide their feedback on what they think the learnings could be from Social Security Scotland.


The Convener

I thank our witnesses for coming.

I suspend the meeting briefly to allow a changeover to our next panel.

11:36 Meeting suspended.  11:38 On resuming—