25: Energy Crisis and Beyond
Concern over energy prices has dominated headlines in recent weeks - but what does the energy 'crisis' mean for consumers, communities and the road to net zero? The team are joined by Clem Cowton from Octopus Energy, Dhara Vyas from Citizens Advice, and Dr Jeff Hardy, of Imperial College London.
Episode Transcript:
[Music flourish]
Matt: Welcome to Local Zero. You’re listening to Matt, Becky and Fraser.
Fraser: Hello.
Rebecca: Hi.
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So it’s getting colder and colder, especially here in Glasgow and so in today’s episode, we’re going to be looking forward to winter and thinking about how gas prices are starting to rise and the UK’s mounting energy crisis.
Matt: We’ll be joined today by Dhara Vyas of Citizens Advice to help understand how the current energy situation will impact those most vulnerable and also the crucial role that energy advocacy and support services will need to play in the coming weeks and months.
Dhara: I think there’s often an assumption that people have made a choice about the heating system in their home and actually, they haven’t. They just kind of go with what there is. It’s a distress purchase. ‘My boiler has broken and I’ll get a new one. It’s a complete behavioural mindset change.’
Rebecca: We’ll also be joined by Dr Jeff Hardy from the Grantham Institute at Imperial College London. Jeff is a friend of the pod. He’s been with us before and I’m sure this time he’s actually gunning to beat you, Fraser, in Future or Fiction? But before that, Jeff is going to help us understand some of the issues that we’re seeing more broadly, talking about what this energy crisis means for not only energy supply companies but also consumers and more importantly, how local action can help to provide some of the answers.
Jeff: If this isn’t an opportunity to think longer-term about the future structure of the retail market and its objectives, then I think we’re stuffed.
Matt: And that’s not all. Fraser and I have been chatting with Clem Cowton of Octopus Energy to unpack how energy suppliers are responding to the crisis in real-time.
Clem: Sadly, it’s not possible to say, ‘Well actually, we’re producing lots of cheap wind at the moment, so our customers are going to see the benefit of that.’ The way that the energy system is run and regulated at the moment doesn’t allow us to do that.
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Matt: As always, you can reach out to us on our dedicated Twitter handle. If you haven’t already, go find us and follow us @LocalZeroPod to get involved with discussions over there and also feel free to email us at LocalZeroPod@gmail.com if you want to share some longer thoughts.
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Rebecca: As always, we’ve got Fraser with us, so welcome Fraser.
Matt: Welcome.
Fraser: Thanks very much. How is everybody doing?
Matt: We’re good. As we speak, it’s T-minus five weeks until COP; four weeks when this goes out...
Fraser: Not far away.
Matt: ...which is all a little bit frightening. I looked at my diary the other day and I thought, ‘Okay, I’ve got this, this... oh my goodness, it’s COP.’ [Laughter] I’m guessing you’re both around. It is your city after all that’s hosting [laughter].
Rebecca: Yeah, I’m actually very grateful to be living in Glasgow because it’s almost impossible to get up here otherwise and find accommodation in the city.
Matt: Yeah, we’ve been hearing all sorts of tales of people renting out rooms and what have you because the accommodation situation is so difficult. I’ve heard of one family who are looking to rent out their house to five Inuits from Canada which is amazing. Fraser, you’ve got a similar story, have you?
Fraser: Yeah, our spare room is just about doubled-booked for the full two weeks already. We’ve got a couple of people coming over from Brazil. We’re expecting one or two friends to come up from down South as well. We’re not charging anyone. We’re trying to help people get here as much as possible but it is... it’s mad. If you look at the prices of things just now, it really is just a brass neck the amount that people are asking for.
Matt: Hearing horror stories. Absolutely horror stories but we shouldn’t dwell too much on the bad news just yet and obviously, with our segment that we’ve been trying to bring in at the start of the show, for the last few weeks, we’ve been doing the good, the bad and the ugly. We felt that was a little too pessimistic and so we’ve changed it up this week to go for the good, the bad and the weird [laughter], so I don’t know how that’s going to play out.
Fraser: Actually, that’s our nickname for the three of us on the pod. You have to decide which one...[laughter].
Matt: A Clint Eastwood trilogy I haven’t watched [laughter]. So we’re going to begin with good news articles and so, Becky, you’ve got some for us.
Rebecca: Yeah, I’m in a very positive mood this week and also, given what you’ve just said, I’m glad that I’m talking about the good news stories and let’s hope that this kind of mental connection transpires [laughter] across. I read something this week that made me really smile which was about kids... kind of. In Hertfordshire, the council there has approved the first net-zero carbon school. It doesn’t exist yet but plans are now in place for a school that’s going to have triple-glazed windows, solar panels, EV charging points and it’s going to be heated with heat pumps. It will have a rooftop outdoor classroom, play areas and will also incorporate a forest school.
Matt: Nice.
Rebecca: I believe that the facility was much needed because there’s just so much demand for schools but the fact that so much effort has been put into thinking about how it can be sustainable; so not just to be energy efficient but to engage the kids with these various concepts around sustainability. I just think that’s really heartwarming.
Matt: Really important.
Fraser: I think it’s really, really cool. Speaking from our experience with Glasgow Community Energy, which is all school-based, even little measures can inspire kids to care about it a little bit more and to get involved. So the idea that you’ve got this whole eco-school creating these green warriors of the future I think is awesome. I think it’s really cool.
Matt: Absolutely. Fantastic news.
Rebecca: My kids go to a forest nursery and I think it’s absolutely brilliant the amount that they are interacting with nature. They don’t play with plastic toys. They are out there in the woods and really, really embedded in the natural environment. I love that’s part of the schooling and it’s not just about the new technology but it’s also about a much broader perspective than that.
Matt: Yeah, and this isn’t the only good news story. This is a bumper week for us.
Rebecca: Yeah, absolutely. Well, I think this is a good news story. I think there are good bits and possibly bits for concern. Everybody is probably experiencing the petrol crisis and nobody can get petrol anywhere. This makes me really glad that I’ve got my EV at the moment actually [laughter] and also that I don’t drive anywhere.
Matt: Is smug the right word, Becky? [Laughter]
Fraser: Is this good smug news? [Laughter]
Rebecca: Smug news [laughter].
Matt: The good, the bad and the smug [laughter].
Rebecca: Let’s face it, I don’t really go anywhere, so it probably wouldn’t have affected me anyway but off the back of this, online searches for electric vehicles have skyrocketed by over 1,000%. In fact, this news article survey was by 1,300%...
Matt: Wow!
Rebecca: ...as the pumps are running dry. This doesn’t necessarily correlate or translate into EVs being bought but certainly sparking much more interest and engagement in electric vehicles which I think can only be positive. I guess the slight concern that have is that, at the moment, there aren’t really the funding or support models to enable people that might not be able to afford to transition to transition. So we could end up in a situation that does see inequalities widening and so we need to hope that doesn’t happen and hope that there are measures put in place to prevent that happening but engaging people with clean transport... that’s exciting.
Matt: Even for those who can afford it, the lead-in time is bananas. I mean it was six months before the current petrol crisis. We’re going to have to tone things down, I’m afraid. We are moving into the bad news category and, Fraser, you’re up.
Fraser: Yeah, unfortunately, I have the burden of that this week and the bad news story is something that I don’t imagine is going to be a huge surprise to most listeners here just now. This came out in the New Statesman just recently. The news is that the UK government is currently paying, and has done consistently, oil and gas companies more money than it takes from them in taxes. What we’ve found is that the UK government is paying oil and gas companies some money around decommissioning old plants and old resources but mostly, they’re realising this money in tax breaks. Exxon received the highest payouts of any of these companies last year of over £117 million from the UK government. Shell received £110 million. BP received £39 million. This is where it looms into view and this might not seem like a huge amount of money in the grand scheme of oil and gas. Why are they taking that money? But by comparison, only £145 million was outlined in the UK government budget this March for environment-specific initiatives. That’s not necessarily wider climate, housing or anything like that but for environmental protection, nearly half the amount of money was set aside than what’s been given to fossil fuel companies...
Matt: Wow, okay.
Fraser: ...in the last year and not over a period of time. In the last year.
Matt: Yeah, so the fossil fuel subsidy is still raging is the headline here.
Fraser: Yeah, and this is only around tax breaks. This isn’t even necessarily new licences for exploration or all this kind of stuff. This is purely in tax breaks that have been received.
Matt: Incredible. That’s in a COP year as well. My oh my!
Rebecca: I wonder if it’s as simple though and maybe this is my positive outlook pervading through even the bad news stories but we know that it’s going to take some time to transition these industries away from oil and gas to something more renewable and there are millions of workers who rely on these jobs. So do we have insight into what this money is actually being used for and whether it is being used in positive ways to support that transition? Because you talk about these companies and yes, there are certainly very ugly elements and detrimental elements of these companies but a number of them are also trying to grow into that clean energy space. Do we have any details about that? Does there need to be more accountability here to look at how it’s being spent?
Fraser: I think accountability is the big one there, Becky. All we know for sure from the article and the research is that some of that money has been around decommissioning. I don’t imagine that that amount of money, say £110 or £120 million, necessarily meets the scale of a transition for workers but also these are incredibly wealthy companies who have made billions upon billions, if not trillions, over years and years receiving more subsidy, as we’re trying to wind these things down, than things on the other side like those green initiatives. Do we trust them to really be going green in their transition anyway? I’m not sympathetic.
Matt: This segues very nicely into the weird article, okay? We’re not on to the weird.
Fraser: Let’s do it.
Matt: Two little ones. The first one is oil and gas majors. I saw something on Twitter from an employee of BloombergNEF (Bloomberg New Energy Finance) called Akshat Rathi who had basically outlined some research from Bloomberg looking at the big oil and gas majors and the level of divestment away from fossil fuel assets and the like and also the levels of clean energy investment. I guess the good news from this is that all of them, to varying degrees, are involved in divestment; some much more than others. Shell was way, way, way ahead versus the likes of BP and Exxon Mobil. In terms of clean energy investment, it really varied... like weirdly varied. You had companies like Total and Shell, to a lesser extent... Equinor did well on this which was investing heavily in clean energy. Some were just not doing it at all. ConocoPhillips, barely anything. Chevron, barely anything. Exxon Mobil, barely anything. It’s a link to your story.
Rebecca: Where’s the money going?
Matt: Yeah! I think the point is that they’re not all moving in the same direction and so there’s a question mark about where some are heading and some are not.
Fraser: Exxon were in the news recently. They’ve got a big lawsuit coming against them just now in the States because they’ve been undermining climate science and this is the allegation, of course; that they’ve participated systemically in dedicated campaigns to undermine climate science and it’s been brought against them, I believe, in a civil suit in the States just now.
Matt: I’m sure.
Fraser: Yeah, one to follow.
Matt: Their investment profile would back that stance up. So we shall end on the fact that the Orca plant in Iceland recently opened. This is a carbon or air-capture carbon and sequestration plant with 4,000 tons of CO2 to be captured every year. To give you a sense of how much carbon that is; that’s roughly equivalent to 870 cars. The plant will cost between $10-15 million to build. It’s weird in the sense that I wanted to compare this against other costs for sequestration, particularly planting trees, forestation and the rest. So any listeners, please chime in and let us know if you’ve run the numbers on this but this is some serious, serious installation out in Iceland which we’ll hopefully hear more about.
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Fraser: So from the good, the bad and the weird news stories of the day to the big story of the day. We’re talking about the energy crisis.
Jeff: Hello, I’m Dr Jeff Hardy. I’m a Senior Research Fellow at the Grantham Institute at Imperial College London and I lead the bit of the Energy Revolution Research Consortium that looks at the governance of future smart local energy systems.
Dhara: Hello, I’m Dhara Vyas. I am Head of Future Energy Services at Citizens Advice. Citizens Advice is the official consumer watchdog for energy consumers and we give both advice and advocate on behalf of consumers.
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Matt: Jeff and Dhara, welcome and thank you for making the time. It’s excellent to have you on and Jeff, of course, welcome back. Today, we’re talking about the issue that is plastered all over the news, and has been for a little while now and shows no threat of disappearing over the coming winter, which is the energy crisis. I think the first question to you both is what is responsible for the surge in energy bills?
Jeff: It feels like a perfect storm is what we have at the moment. Globally, gas prices are four times higher than they were in April. We have had low wind. We have a lot of wind power in our system and it’s been really low in September. I was looking at the stats on National Grid earlier and it looks like it’s about 3% down on average. We’ve also had both planned and unplanned closures of nuclear and fossil fuel plants, so generators, and that means that there’s less generation around to meet demand and one of our interconnectors between us and France went on fire and has closed down and it’s closed down until next year. That’s a gigawatt of power...
Matt: Wow!
Jeff: ...so that’s a sizeable power station offline or not an option anymore. The final thing which is important in all of this is that there’s also a little Brexit issue going on.
Rebecca: Just a little issue [laughter].
Jeff: Yeah, just a little issue. We’re no longer in the internal energy market. The way in which we trade with Europe means that we’re no longer in the auctions that set prices which means we don’t get a say in that. We just take them at the end of it. It’s messy and it’s complex but it means, as a consequence, it’s very expensive for power right now.
Rebecca: Jeff, my brain doesn’t really... I get some of the stuff that you’re saying and when you tell me it’s not so windy, I can picture that and I understand that. Just break down what you were saying about Brexit and the energy markets and that we just take the prices that we’re given. Why don’t we set that ourselves? Is there a challenge from the regulation side of things in the UK? Is it that we don’t have appropriate regulations? Will they be put in place? Can you just break that down a little bit more?
Jeff: Yeah, it’s actually quite a lot simpler I think which is when we came out of Europe, we decided to come out of the internal energy market and that’s where day-ahead prices in Europe for energy commodities, like electricity and gas, are set. We used to bid and be part of that market and now we just take whatever price it’s cleared at. There are other experts in the world who know a lot more about the ins and outs of internal energy markets but it’s a component of all of this because we’re not involved in that auction. We’re just taking results from it and they’re obviously not favourable. If you look at the disparity between UK power prices and European power prices, we’ve been typically higher throughout this really tricky few-week period.
Matt: So a lethal cocktail of a whole range of factors. Dhara, is there anything else to add?
Dhara: Yeah, I think there is because I think Jeff set out the case for what’s happening with energy this winter but the reality is that people’s lives revolve around a lot more than just energy and this winter, it’s proving to have a lot of fairly toxic stuff in store for an awful lot of people. Energy aside, which obviously we’re going to focus on, we’ve also got the impending cut to the Universal Credit £20 increase which is going to affect at least 2.3 million people who are going to struggle with that. I think also it’s not just Universal Credit; it’s high inflation. It’s the cost of food and access to food. We’re getting so many people coming to Citizens Advice asking for help with things like foodbank referrals as well as fuel bank referrals where you can get vouchers for your pre-pay meter. We’re also getting parents in who are needing help to buy things like nappies and milk; the stuff you’d think of as the basics. Nobody feels proud to do that. Nobody wants to do that. I think adding the stress of increasing energy bills is going to be almost a step too far for far too many people. I think it’s a real worry for this winter and that’s why so much of what we’ve been calling for at Citizens Advice on this issue is to do with trying to maintain that £20 increase to Universal Credit because it can make a huge amount of difference.
Matt: So you’re already seeing this demand, as you say, for support not just with energy but outside of energy; in essence, the pressures are already being felt and as we record this, we’re at the end of September.
Dhara: Last week, was the first week that, obviously, all of this started and in the space of seven days, we saw a 9,000% increase to hits on our website for the page about what do I do if my supplier fails.
Matt: My goodness.
Dhara: Those are the ways that we understand the worries of the nation as it were.
Rebecca: Yeah, so this is just coming on top. There’s a perfect storm, as Jeff was describing, in terms of all the stuff that’s happening in the energy space but there’s a perfect storm in terms of the crunch that a lot of people are feeling. What sort of support can they get? For folk that are coming to your website and coming to talk to you in one form or another, what is out there to help them?
Dhara: The first thing, I think, that people really need reassurance about is that they’ll still have gas and electricity coming into their homes. I think people do get really worried about what’s going to happen. So understanding that your supply won’t stop is really important and then until now, there’s been a tried and tested safety net. It’s in place, it’s worked before and it’s there to make sure things will keep running if a company goes bust. The advice we give is for people to take a meter reading, maybe take a picture of their meters if they can, take a note of their account balance and keep hold of any bills or statements they’ve got. We tell people about how gas and electricity regulator Ofgem will be moving them to a new supplier and we also tell people not to switch until their account has been moved to a new supplier because so much can go wrong if they try and switch now. People also ask whether they should be cancelling their direct debits. Our advice is to wait until the new supplier contacts them and they should be hearing from their new supplier within two weeks. It’s a guarantee that your credit balance will be safe but there are no guarantees if you’ve got a debt repayment plan in place or if you get Warm Home Discount and for us, those are the two big gaps this coming winter. With regard to the issues of the Warm Home Discount and people who are in debt, we want government and Ofgem to think quite hard about how best to support these people.
Matt: Obviously, there is support out there and, Dhara, you and your organisation are first and foremost in that queue to support but the energy sector is regulated by Ofgem who we’ve heard a lot about over the last few weeks in terms of the energy crisis. How is regulation dealing with this crisis and to what extent is it making things better or worse?
Jeff: On price, there is a price cap in place across all of the energy retailers; not for all of their customers but for a substantial proportion of their customers. That sets the maximum price they can charge for electricity and gas. That’s a calculation between the industry and the regulator but the regulator sets that. Now, as it happens at the moment, anyone with a customer on a price cap, as a supplier, is losing money because the prices are so high, particularly if they’re not hedged; so they haven’t bought their energy in advance at a price they can accept and that fits within the cap. A lot of suppliers are basically living hand-to-mouth at the moment; so buying from spot markets or even from the balancing markets which are very expensive right now. The price cap protects customers to some extent but it is going up. In fact, it’s going up now and what you can guarantee right now is that the price that the companies are facing now is going to reflect in the next price cap in the New Year. Prices are going to go up again. So that as well is storing up quite a reasonable amount of trouble for those who are struggling to pay bills right now. There are lots of other things that are going on. Most of your listeners will be reading about suppliers failing, some quite big ones. I think there are 1.5 million customers whose supplier has failed recently. As Dhara says, if your supplier fails, stay put. It will get sorted out. It goes through a process called Supplier of Last Resort. The Ofgem managers and someone else will take on those customers. The issue at the moment, which people might be reading about in the press, is if you get a lot more suppliers failing, which is quite likely, then what companies are taking on is a lot of customers but with a lot of price risk. We know the prices are really high at the moment, so they’re basically asking the question, ‘Can I afford to take on billions of pounds’ worth of new customers and all of the risks that that entails?’ There’s quite an interesting bun fight going on between the companies, the regulator and the government at the moment to say that for the companies that are left, when all of this goes through, ‘How are we going to survive ourselves if we don’t have some sort of guarantee from government that’s going to stop us from toppling, that’s going to allow us to raise the finance and so forth?’ There’s a lot of that going on. You’ll hear about loan guarantees and all sorts of things. It’s all really saying, ‘I’m going to take on billions of pounds’ worth of new risk and I can’t manage it very well at the moment.’
Matt: Dhara, what is Citizens Advice asking Ofgem to do next?
Dhara: We’ve called on Ofgem, for some time now, to consider what’s been happening in the market. As an advocate for energy consumers, we have quite a lot of evidence and insight into what’s happening in people’s lives and when they’re contacting us. We have known for some time that when there is a supplier who, perhaps, has what you could describe as a risky business model and is offering tariffs that are incredibly low, so low that you could argue that they’re unsustainable, or they have particularly bad customer service and we know that because we’re seeing increases in the calls to us, that’s when the warning lights go off for us. The thing that’s happening now that’s different is that even well-run companies are struggling and are going to struggle, just as Jeff was saying. That, I think, changes things slightly and we’re going to have to reshape the retail energy market. When it comes to trying to meet net-zero targets, we’re going to have to really think about what a well-functioning retail market does to contribute to meeting net-zero targets because customer service is absolutely paramount. Decent pricing is absolutely important too but we need to be thinking about what we’re expecting from this market. We want this market to lead on innovation. We want this market to be considering how smart innovative tariffs, products and appliances can be put in people’s homes, how people can interact with different things to do with their energy and to use energy when it’s cheapest and to be using things smartly in the most sustainable way. That means it’s only going to get more confusing. It’s only going to get harder for people [laughter] to navigate. We’re going to have more bundled products. We’re beginning to see it, I think, a little bit with the EVs, particularly with the smart chargers and X number of miles per however much you charge and things like that. Those things are already incredibly hard to pick apart and for people to understand and there are huge gaps in consumer protections when it comes to that new aspect of the market. That said, we’re talking about today’s market and why it’s experiencing the problems it is and I genuinely think Ofgem and the government are really going to have to think about how to keep protecting the people who need protection the most.
Matt: So as the technologies, softwares and business models innovate and change, so has the regulation and the policy because otherwise, it’s ahead of the game and households and the vulnerable could fall through the gaps.
Dhara: You know, it’s slightly philosophical as well. We measure people’s engagement with the market based on how much they switch; whereas, in the future market, you’re going to want people to be taking on more long-term commitment to a supplier because they’re probably, highly likely, going to be buying something them from as well. They might be repaying for a heat pump. So whilst there are all these questions about interoperability, if you’ve got different things in your home that need to talk to one another, there’s also this relationship with a company. Are we best measuring people’s engagement with the market on switching or should it be about something else? Should it be about the experience they get? The loyalty penalty and the arguments that led to the price cap are really good examples here of why we need to think quite creatively about a few things. One is how to protect the people who need protection the most and the other is how we have a system that really actually just promotes and supports improving energy efficiency in homes. How do we do that? Because we can’t seem to get that right, can we?
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Fraser: Obviously, energy suppliers themselves are a key component here and so we wanted to get a supplier’s perspective in the midst of everything that’s happening. To dig into that, Matt and I grabbed a chat with one of the bosses of Octopus Energy. We’ll be back with Dhara and Jeff after this.
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Clem: Hello, I’m Clem Cowton and I’m Director of External Affairs at Octopus Energy.
Fraser: So obviously, there’s a whole situation going on just now around energy supply and Octopus have been at the forefront of a lot of the headlines and coverage recently. Can you talk us through a little bit about how you’ve been affected, as Octopus, and how the company are dealing with the current energy situation?
Clem: Well, I suppose most directly we’ve been affected because we have taken on the customers of Avro through Ofgem’s Supplier of Last Resort process. Basically, we are the emergency supplier that all those customers will switch to in the background. More generally, I think Octopus is extremely well-financed and actually, on Monday, we announced that Al Gore’s fund, Generation Investment Management, had invested $600 million into Octopus bringing us to a valuation of $4.6 billion which is relevant simply because I think what I’d say is Octopus isn’t worried about our own position in what’s going on in the supplier market. I think what we’re seeing is some less well-back and/or less well-run suppliers going out of business in what would normally be a natural course of a competitive market but because we’re seeing very, very spiky gas prices and very high and unprecedented gas prices, we are seeing all of those happening all at once; whereas, normally, they would be spread out probably over the course of a year or certainly over the course of this season. That has meant that there were some nerves over the past couple of weeks as to whether the existing industry, Octopus and others, might be able to absorb the potential failures coming their way. As it turns out, that’s gone without a hitch and there is plenty of funding in the system from the larger suppliers to be able to absorb that. This is a time of year when companies had just paid their Renewables Obligation bill which is the bill that we have to pay to subsidise old renewable power plants. This is why things tend to happen around this time of year like this because there’s generally a shortfall of cash. So if something hits, suppliers have a little bit less in the bank to be able to weather the storm and that’s what is going on at the moment.
Matt: Of course, with the bill prices escalating and likely to do so, I think Ofgem has already committed to an additional £139 increase in October as the price cap rises. Those that are going to get hardest hit are those who are already struggling to afford the bills. What is Octopus doing or the sector more broadly and what does Ofgem, the regulator, expect you to do to look after those that are maybe struggling to heat their homes?
Clem: That’s a good question. Octopus has always started from the position of the customer coming first and that doesn’t sound particularly revolutionary [laughter] and it may not surprise you to discover that in the energy supply business, that has been a pretty revolutionary position. Our focus has always been to do what’s right by the customer first and then look at the licence second rather than attempt to build a business around what Ofgem is telling us we have to do. Our philosophy is that if it’s right for the customer, it will probably be right in the licence and if it’s right for the customer but contradicts the licence, we’ll go and talk to Ofgem about that which is a sort of roundabout way of saying what Ofgem is telling us to do at the moment is sort of what we’re doing already or going even further. Our longstanding existing customers are already on a tariff that is capped to £51 below the price cap, so we’re effectively subsidising our customers through the winter. In addition to that, we always take a very individualised approach to customers. So rather than identifying some characteristics of a customer that might traditionally be considered vulnerable and then doing a bunch of box-ticking stuff to, in theory, support those according to what Ofgem wants us to do, what we tend to do is listen to customers rather than what often happens is that it’s quite badly managed and then some people suddenly get hit a year later with a very high bill.
Matt: Are you expecting, come October as these bills rise, the phone to be ringing off the hook with those who are struggling to pay? Are you putting the groundwork in place for a difficult winter for you and your billpayers?
Clem: It will be a difficult winter and actually, a difficult spring as these high prices continue to be reflected in the energy market. In terms of what we’re expecting from our customers, I think there will be some people getting in touch with us but we are very well equipped to handle that and to hold their hands through it. I wouldn’t say we’re worried from a business perspective but I think it is going to be very tough on households who, of course, will already be dealing with other challenges in terms of their budgets, not least the reduction in Universal Credit.
Fraser: So I guess there are things immediately happening, Clem, and obviously it’s something that we’re going to have to buckle up for for a little while but I guess the million-dollar question is, as you see it, how do you think we can get around or fix this issue both in the shorter and the longer term? What things need to change in terms of energy supply for that more sustainable model that makes sure that customers are protected as well?
Clem: Actually, there’s quite an appealing fix that’s available to the government right now. About 23% of a customer’s electricity bill is actually paying for green and social levies, as it’s often called, but things like the Renewables Obligation and some of the social schemes. They are areas of policy that you might otherwise expect to sit within general taxation but for historical reasons, actually sit on the electricity portion of the bill. So it’s very significant and I think depending on where prices go, it could end up being about £200-300 sitting on top of customer bills. Because all suppliers, pretty much, are pricing at the level of the price cap at the moment, if the government were to remove those levies from bills and move them back into general taxation or, arguably, where they should have been to begin with, you could have a very direct impact on customer bills. You would be helping people out very directly this winter and, just as importantly, helping to reduce our overexposure to gas. Now that’s because, at the moment, gas heating is effectively subsidised. Because there are so many taxes placed on the electricity portion of the bill and because there are almost no taxes placed on the gas portion of the bill, people have been very slow, and actually, it just hasn’t really happened at all, to move to electric heating, i.e. via heat pumps, in spite of the fact that heat pumps are more efficient and better technologies, both in terms of comfort and in terms of the safety and then, of course, carbon. Actually, because electricity bills have been so high historically, people have not wanted to move away from their gas boilers to heat pumps. That has meant that we’re in the situation we find ourselves now as a nation where we are incredibly exposed to spikes in gas prices because we are burning too much of it, both in electricity but most importantly, most people have, almost exclusively, gas heating and a bit of oil in this country. By removing those levies from electricity bills, the government could have a kind of double whammy or a win/win of both addressing bills and addressing the long-term structural issues that have led us to this position and then, of course, improving our climate leadership ahead of COP. So there’s a potential very big win for the government here.
Matt: I think the point about shifting levies from electricity and gas is an interesting one. I sat through a very fascinating presentation from Jenny Hill of the Climate Change Committee and she pointed out that doing so would disproportionately burden the fuel poor because they have a higher ratio of gas to electricity but I think that’s maybe a discussion for another day. It’s an interesting one.
Clem: I suspect that what Jenny is talking about is moving those levies from electricity to gas rather than moving them from electricity into general taxation, i.e. paying it from Treasury coffers rather than paying it via a subsidy on the gas bill.
Matt: Understood. I thought you were suggesting, after the general taxation point, that gas was essentially being under-levied versus electricity.
Clem: I mean it is but at the same time, when you’re facing extremely high gas prices, it’s probably not very responsible to be putting them up. While gas prices are so high, we should certainly not be looking to add any extra burden there. Although it’s worth noting, by the way, that everybody who pays a gas bill also pays an electricity bill and so if you get a reduction on one side in addition to the other, then it does sort of balance out.
Matt: Is Octopus seeing increasing levels of interest in the types of tariffs you’re offering that are very much aligned to EVs and heat pumps in the midst of this energy crisis? Is the appetite for electrification growing or not?
Clem: I wouldn’t say as a result of this crisis and that’s because, again, as we are so overexposed to gas in our electricity system, electricity prices are still pegged to wholesale gas prices. Sadly, it’s not possible to say, ‘Actually, we’re producing lots of cheap wind at the moment and so our Agile customers, for example, are going to see the benefit of that.’ Sadly, the way that the energy system is run and regulated at the moment doesn’t allow us to do that. We would like that to change and we’ve been talking to government and Ofgem about that for years now. What I would say is that we have never marketed our Agile tariff and the related smart Time-of-Use tariffs that help to underpin things like EVs and heat pumps but we have seen an absolute explosion and interest in them since we launched them. They have massively outperformed our expectations. It’s a slightly artificial product in that while we pass on the benefits of cheap wind to customers, we don’t receive the benefits ourselves. We effectively subsidise those tariffs and we now have tens of thousands of people on them and that is becoming quite expensive.
Fraser: The final question, Clem, that I have to ask actually speaks to the tweet you put out about this yesterday and you brought it up there around things like curtailment and cheap wind where you’ve mentioned that you’re working with Ofgem and government about potentially trying to get this system changed. How would you like to see that change run more optimally, both for yourselves and consumers? Also, speaking to what we do at the podcast, which is often focused around a local role in all of this, do you see local playing a part in those changes going forward? Do you think this can help, whether that’s insulating against these external gas price shocks or anything else? Do you think local has a role to play in that change?
Clem: I certainly do and we do. Where I would disagree with maybe some other contributors is how that’s expressed. What I don’t believe, and we don’t particularly believe, is there should be any significant role, for example, for local authorities or creating Local Area Energy Plans. That, we believe, is an unnecessarily bureaucratic approach to reforming our energy market and we think it would act to slow down innovation rather than increase it and actually, would end up being more expensive. Where we do believe the system needs to be reformed in order to create more local energy markets to better reflect the benefits of renewables and to make the system as a whole more efficient... we have an organising principle which is a very blunt tool but this idea that the cheapest electron should be the greenest electron that’s travelled the shortest distance down the emptiest wires, i.e. we should be organising our system so that you are using your green electrons when they are produced to the greatest possible extent by renewable energy and where they are produced to the greatest possible extent in order to eliminate or reduce losses that occur when you transport electricity over distance and to avoid having to, for example, curtail wind because there is not enough demand in the local area. That way, we believe that you could create a real opportunity for local communities to see the discounting that could happen if, for example, there are high wind speeds in their local areas which, by the way, is another tariff that we have. It’s called our Fan Club [laughter].
Fraser: Excellent name for a tariff. I’m a big fan of puns wherever we can squeeze them in [laughter] but, Clem, thank you so much for joining us and for the conversation.
Matt: Thank you, Clem.
Clem: Thanks very much for having me.
[Music flourish]
Rebecca: What a great chat with Clem Cowton from Octopus Energy. Just picking up on some of the conversations we were having earlier and, Dhara, you started chatting about new ways of thinking of what an energy supplier could be doing and not just selling us those kilowatts of energy but actually buying products from them or paying them back over periods of time for services. I always get a bit dismayed actually about how we seem to split supply and demand; how we seem to think, on the one hand, about energy bills and all of the things we’re using energy for and then it’s like a completely different headspace and conversation around energy efficiency, insulation and warmth. Of course, if we had better-insulated homes, we would be using a lot less of everything [laughter] to achieve what we want and we’d be addressing fuel poverty as well. I really like this focus and these ideas around new sorts of business models. Do we need a very different type of energy business model, supplier or marketplace? What could that actually look like on the ground? Jeff, how would that interplay do you think with the regulations that are out there? Is this sort of future even possible? Is there interest in the industry for going down this route or is this just a real pipe dream?
Jeff: Firstly, I think we’re stuffed if it’s not possible. I really hope it is. Secondly, just coming back to something Dhara said a minute ago, why is energy efficiency so hard? It is. I think it’s exactly what you’re saying, Becky. It’s because we separate supply and demand but if you think about it, the impact of these prices would be so much less if all homes were energy efficient. It is as simple as that. It doesn’t make it go away but it makes it less painful because it brings down the proportion of the bill and it brings down a lot of other things. So we do need this sort of innovation. Now I could talk for hours about business model innovation because I’ve spent far too much of my time at both Ofgem and as a researcher thinking about this but let’s just think about a couple of examples. Dhara also made another excellent point which is that in the future, it looks like having a long-term relationship with your customer is a good thing and there are lots of good reasons for that but one is that you can learn more about each other. Obviously, you can learn about behaviours, habits and what really works for each side but more importantly, it means that it does allow you to install stuff in homes and then get it paid back slowly as you do with an expensive mobile phone and a service contract. The capital cost of the phone and the service contract are two separate things but you’re paying them both back which means you can fire the service provider if you want but you still have to pay back the capital to someone. An example of a business model that really suits that is something called Energy-as-a-Service; whereby, instead of selling a commodity like kilowatt hours of electricity or kilowatt hours of gas, you’re selling warmth, mobility, illumination or whatever it might be the services that you demand. The reason why it’s really interesting is that it disconnects the service from the commodity. So if I’m a service provider, it might well be within my interest to give you the service to make you comfortable in your home or to make you mobile with the least amount of commodity or the commodity at the lowest possible price because that way, I don’t have to buy much of it in the energy markets which might be quite turbulent or might be quite like this month. Say, if I’m selling you heat as a service or comfort as a service, it incentivises me, maybe, to insulate your home and then to install the most efficient energy heating technology and then learn about your behaviours so that I can really de-risk when I buy the commodity to make you warm because I know when you’re going to be home from work. I know when you’re going to need to be warm. I know what temperature you’re comfortable with and I even know what room you’re in, potentially. That sounds a bit invasive, by the way.
Rebecca: That terrifies me.
Matt: A little, Jeff. Yeah, a little bit.
Jeff: A little bit.
Rebecca: [Laughter] That absolutely terrifies me. I want to probe into this a bit more. This is really exciting and also a bit scary but is this something that’s only going to work in the owner-occupied sector? What about people that rent? How could this work for them? They don’t own their home and they may not be in them for that length of time. Are we running the risk here of widening inequality?
Jeff: I think it runs that risk. However the market develops, it has to work for all of its participants and at the moment, we know we have a really important split incentive between a landlord and their tenant where the landlord would pay for the measures and the tenant pays the bills. The landlord doesn’t see the benefit unless they get more rent out of it. Those sorts of things are material and so business models are going to have to work across that typical split incentive but also it might just be the case that some of these things need to be mandated and standards placed on landlords to make homes much more comfortable without telling them how. That allows the business models to come in and help with that process. The split incentive is really important but it might require intervention to make it work for all concerned.
Matt: And Dhara?
Dhara: I don’t disagree with anything Jeff said but it’s really hard to not view that as quite utopian. It’s really hard to not see that as futuristic and not really relevant for most people today because it’s not, right? We have the most diverse housing stock and it’s really hard to make some really basic changes. People have things like thermostatic radiator control valves and don’t know how to use them. It’s really basic stuff. You can put things in people’s homes but they need to know how to use them. It’s great, it could work and it could make a really big difference but how do we get there? That’s that really tricky exam question. How do we get there? I think if you consider what we know right now, we know that people want a warm, comfortable home. We know that people want a heating system that’s affordable to run. We know that people want a heating system that’s responsive and can give them heating and hot water when they want it and we know that people want it to be reliable. Those are the things we know about how people feel about their homes. We also know that making these changes is going to be disruptive and it’s going to be hard. I think there’s often an assumption that people who own their homes or have a mortgage have made a choice about the heating system in their home and actually, they haven’t. There’s also this assumption that people want to make a choice. Often, they don’t. They just kind of go with what there is. It’s a distress purchase. ‘My boiler has broken and I’ll get a new one.’ It’s not desirable. It’s seen as part and parcel of what’s in your home and you just have to do it. It’s a complete behavioural mindset change at the same time that we’re asking people to make a whole host of other changes to their lives because of this net-zero target. We’re expecting a net-zero strategy from government. We’re expecting part of that to be about net-zero behaviour change and at Citizens Advice, one of the things we’re most conscious of in this space is this massive lack of consumer protections when it comes to this path to net zero. When people come to us for help and support, they really don’t know where to go because the insulation has gone wrong and their house is now mouldy or the installer that fitted something has gone out of business, the technology isn’t working and they don’t know how to get their guarantee or warranty sorted. They don’t know where to go and they don’t know where their rights are. It doesn’t help that there are multiple codes and consumer protection schemes in this space. It is very, very hard because it’s outside of the regulated market. In the regulated market, that’s when we’re talking about upfront costs and we’re talking about changes people need to make to their homes that are going to cost them money but we’re also entering this winter and this world in which the ongoing costs are already so mindblowing and the changes are so significant... people who have been with a supplier that’s gone bust, their bills have gone up, on average, about £30 a week.
Matt: Wow!
Dhara: That’s an awful lot for people to cope with.
Matt: So what needs to happen next? Of course, this is the Local Zero pod and so we’re constantly asking questions about what can be done locally. I appreciate some solutions will need to come from national and regional but what needs to happen next, who needs to do what and locally, are there solutions that maybe listeners and communities or we could be doing a little bit more?
Jeff: Yeah, let me throw a few ideas out there and see where we get to. A lot of these issues that we’re talking about, the slightly more future issues about customers’ net-zero journeys or homes’ net-zero journeys or even small businesses, are all very local in nature. It’s stuff going in your house where you live, it’s your car or your mobility, it’s your home that might be retrofitted with insulation and all of that kind of thing. Some of the things that we’ve been talking about in EnergyREV is whether or not thinking about the net-zero journeys of places is really a discussion best had and, in some ways, concluded locally because your local government knows about the local people, their values, their preferences and all of that kind of thing. They’re slightly more trusted, you might argue, than national government as well and there are also local supply chains. There are all sorts of other things that could come together because the transition a place goes through might be quite specific. It might very much suit a heat network or it might very much suit an electrification pathway. It might suit, if it’s next to an industrial site, a hydrogen pathway. Those are very local things and, therefore, the transition they’re going through is local which might mean that the businesses delivering on that are also local in some ways. It doesn’t have to be but it could be. There’s that side of things. The other thing I want to definitely leave with is there is going to be a lot of consolidation in the energy supplier market. I don’t think we’re finished by a long shot. There will be a lot of companies having a lot of frantic conversations with the regulator, government and so forth. What we’re going to see are less players in the energy supply market and if this isn’t an opportunity to think longer-term about the future structure of the retail market and its objectives, then I think we’re stuff once again if we don’t have that conversation. For example, if there are fewer players in the market, is there a reasonable opportunity to discuss the role of a supplier in taking customers on a net-zero journey and perhaps even think about how you would mandate suppliers to do something about that, whether that’s you have an average customer carbon allowance and it goes down over time and, therefore, it doesn’t tell you how you’re going to do that but it tells you you’ve got to do it? There are ideas like that as well in there but energy efficiency, for goodness sake...
Matt: Yeah, why not? Why aren’t we doing it? Many reasons. Dhara, you have the final word on this, so next steps and how local do they need to be?
Dhara: I feel like there has to be a national overview that supports different local areas to build on their own diversity but maintains some equity across the country. For me, I think that’s incredibly important because there is such a disparity in the way that different areas are experiencing deprivation and poverty, even things like the efficiency of homes. It varies so much from area to area. I think that what we know is it is already really hard for so many people and energy isn’t necessarily top of their list. Perhaps it is in terms of how much they pay for their bills but certainly, not efficiency. What I think is really exciting though and that there’s a lot of optimism about is some areas having a brilliant take on this. There is the West Midlands Combined Authority and their net-zero neighbourhoods work. There is Greater Manchester Regional Authority and their housing retrofit which Andy Burnham chairs and is just really progressive and really thinking about whole-house retrofitting an area. I think there is some real optimism about it but, for me, it’s how we make sure it’s fair across the country because there are areas where local government is basically bankrupt and all they’re doing is Social Care and the bins if they can. How do they do this stuff and how is that fair to those people?
[Music flourish]
Matt: Dhara and Jeff, thank you very much. I am hoping you might be able to stick around for a few minutes whilst I hand the reins over to our one-and-only Fraser Stewart for Future or Fiction?
Fraser: Thanks very much, Matt, and can I just say as well that that was a really, really good conversation and, Dhara, I was so glad you left it on that note about equity, about different experiences and about how we need to think about these things as we try and address the problem now and in the longer term as well. Really, really good conversation and important.
[Music flourish]
Anyway, now to close off on a slightly lighter note, our seasoned listeners will know that we end every episode with a game called Future or Fiction? Future or Fiction? is a game whereby I present our esteemed panellists with a new technology idea and they have to decide if it’s real, i.e. if they think it’s the future, or if they think I have just completely made it up, in which case, it is fiction. So this episode’s technology is called... Pencil It In [laughter]. That is Pencil It In. We all know that producing paper takes cutting down a lot of trees; trees which themselves are crucial in removing carbon from the atmosphere but how about this? A small stationery company have designed a line of products that have seeds built into them. Once the stationery has fulfilled its purpose, whether that’s a notebook or a pencil, the seeds can then be planted to grow flowers, trees and herbs. Do we think it’s the future or do we think it’s fiction?
[Music flourish]
Matt: My oh my, Fraser. This is a tough one [laughter]. I’ve got a little anecdote about this in a minute but I won’t bore you with it immediately [laughter], so let’s hand over to our guests. Jeff, you’ve done this once before. I think it’s fair to say you didn’t get it right last time, so you’ve joined me with the dunce hat on and so this is your chance to shine. What do you think?
Jeff: Well, I love the idea of it even if it doesn’t exist, so I want it to and so I’m going with future [laughter].
Rebecca: Come on, Jeff. Give us some more snippets. I was going to say something related to seeds and then realised I’d better not but [laughter] you’ve got the chemistry background, right? Is this feasible? Is this possible?
Jeff: Yeah, yeah. For example, you can make pens out of something called polylactic acid which is a biodegradable polymer. There are lots of other biodegradable plastics that are long-lived enough to be useful in life and then you can just put them in the earth and they will biodegrade. So if you put a seed in there, and I suppose if it was kept dry, then there’s no reason why not. In fact, I’ve seen something like this but I can’t remember what it was.
Matt: I have seen paper with them in. We got an invitation to a wedding through the other day which was on very nicey, nicey and lovely stationery paper and it said at the bottom, ‘Wildflowers are within this invitation.’ My wife immediately rips it up and throws it onto the flowerbed to make flowers. I said, ‘Did you get the details for the wedding?’ No, no [laughter] and so we still don’t know when the wedding will take place. It may have already happened. It may be in the future. So I do know this exists.
Fraser: Dhara, what’s your feeling on this?
Dhara: I think it’s future and the reason I think it’s future is because there are restaurants, that I’m sure you’ve eaten at and are well-known chains, where they give you those little folding books of paper matches that you can get and they’re actually seed sticks, aren’t they? So if you can do that, you can easily do something chemically, that Jeff said, that would make the lead in the pencil as well and use that sort of thing. I’m firmly on the future here.
Rebecca: I’m sold. I’m sold. The three of you have made such compelling arguments. I went into this thinking I’d got absolutely no idea and I am completely bought into the future. I have no idea what restaurant or restaurant chain you’re talking about, Dhara, so you’ve got to share that with me after because I want to go there [laughter]
Matt: Okay, so you’re in. Jeff is in and Dhara is in. I’ll play devil’s advocate. I think stationery is on the way out obviously [laughter]. None of us are writing letters to each other as we speak.
Fraser: The most sustainable stationery is the stationery you don’t use [laughter].
Matt: We know what I’m going to say next... Silicone Valley, who’s going to invest in this stuff? I say this every time and I get it wrong but it wouldn’t be fun if somebody didn’t come down on the other side. So I think whilst probably paper bits and pieces... not pens and pencils and so I’m out.
Fraser: Okay.
Jeff: Is this just because you don’t know where the wedding is? [Laughter]
Matt: Yeah, it could be happening now, Jeff. It could be happening now.
Fraser: He’s got a lovely mint plant in the back garden now [laughter].
Matt: Lovely poppies but no wedding.
Fraser: Okay, so unanimous apart from Matt which, of course, means that the majority is right. It is the future. Every year, a staggering 80,000 trees are cut down to meet the global demand for 14 billion pencils. Left Hand Design founder wanted to create an alternative line of pencils and notebooks that can live a second life as a plant and so they put little seeds through the pencil and once you’ve used it down to the nib, plant that in your garden or wherever and you can get herbs and flowers from it. We also thought about integrating that into our wedding invitations, Matt, but I think we might have to second-guess it [laughter].
Matt: It doesn’t work, Fraser [laughter].
Jeff: Send him a text as well [laughter].
Matt: Do you mean he’s going?
Rebecca: Brilliant. Well, I guess all that’s left to say then is thank you to our guests, so thank you Dhara and thank you Jeff. Thanks, Fraser, for another fantastic Future or Fiction? I’m so glad to have it back after missing it last time. You’ve been listening to Local Zero. If you haven’t already, go and find us and follow us @LocalZeroPod on Twitter and get involved with all the discussions going on there. Remember you can email us at LocalZeroPod@gmail.com but for now, thanks for listening and bye.
Matt: Bye-bye.
Dhara: Bye.
Jeff: Bye-bye.
Fraser: Bye, bye, bye, bye.
[Music flourish]
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