 Good morning everyone. Welcome to the 15th meeting of the NFC for 2022 We have this morning Apologies from Natalie Dawn MSP Elena Whitman join us today as substitute for Natalie. Good morning, Elena. The first agenda item to ask Elena Whitman if she has any relevant interests to declare. nothing to declare, convener. We have consideration of whether to take agenda item 3 in private, item 3's consideration of the evidence we will hear this morning. Do we agree to take this item in private? Great, that is agreed, thank you very much. Our next item today is an evidence session in relation to our inquiry into increasing energy prices. This inquiry is looking at the significant increase in energy prices that we've all witnessed in recent months. What is driving this, what impact this is having and what can be done to alleviate the worst impact of increasing energy prices? Today, we are going to hear from Ofgen. I'm pleased to welcome our panellists, Neil Kenwood, director of strategy and decarbonisation, and Neil Lawrence, director of retail office of gas and electricity markets. Good morning, both. Thank you very much for joining us this morning. We've allocated around 75 minutes for this panel session and I believe, Neil, you would like to start with making a brief opening statement. Is that right? Yes, thank you. Okay, I'll hand over to you, thank you very much. Thanks very much. Okay, so as the energy regulator, our job is to protect the interests of energy consumers and we know that many consumers in Scotland and across Great Britain are finding the cost of living increases very tough at the moment. I spend a great deal of time with consumer groups, charities and customers and I'm really aware of the pressure that everybody is under. Wholesale gas prices across Europe and Asia have been extraordinarily volatile and have risen to unprecedented levels over the past year and let's put the global energy markets under severe pressure. As a consequence in this, in Great Britain, we've seen a significant rise in consumer bills, with the price cap increasing by almost £700 in April for approximately 22 million customers, with a further price rise expected this October. Many suppliers simply could not cope with such a sustained price shock, with 28 suppliers exiting the market since last August. Throughout the crisis, Ofgem has worked to protect consumer interests. Our safety net has protected more than four million customers, making sure that when their supplier has failed, their kept on supply and their household credit balances are indeed honoured. The price cap has also meant that customers on their suppliers' standard variable or their default tariff have been protected against an instant price rise. We need a retail market that is more robust to this volatility in the future. There are therefore two very important changes that we're making to our regulatory framework. Firstly, companies were not resilient enough and financial regulation needs to be significantly enhanced. We're already implementing tougher and tighter financial regulation with greater oversight in the retail market. Secondly, the price cap, although protecting those consumers from those unfair price rises, needs to be more adaptable to rapidly changing market conditions, and we're therefore reforming the price cap to make it more flexible while still retaining the benefits of protection for consumers. In all of this, our priority has been and remains to act in the best interests of energy consumers. We accept that there are lessons that need to be and have been learned from this crisis. Earlier this year, our board commissioned an independent review into the root causes of the recent supplier failures and, specifically, into how the regulation of the energy industry played a part. We published this last week. We really accept the recommendations in this report, many of which are already being implemented, and we will ensure that all recommendations are carried out to further strengthen our regulatory regime. Finally, I'd like to end on a more optimistic note. I and my colleagues have spent a great deal of time in the past few months with many retail and consumer groups. It is clear that through closer dialogue and closer working relationships, we're addressing the challenges that customers are currently facing. This closer working relationship between the regulator, retailers and customers is key to build what we need in the long term. A resilient, competitive and dynamic energy retail sector fit to support the transition to net zero. We look forward to discussing these important issues with you in the session and answering any questions that your colleagues may have. Thank you very much, Neil, for those opening remarks, which set the scene very well. We'll now move on to Q&A, and I will have a couple of questions before I bring in other colleagues. You mentioned in your opening remarks that Ofgem will introduce new measures to boost financial resilience in the sector, including financial stress testing for all suppliers and increasing the number of times a year that the price cap can be adjusted. A couple of questions on this. What's the timescale for implementing these new measures? Evidence given to this committee by other stakeholders suggests that the price cap will be adjusted to the price cap. It will have to be increased between now and the winter season later this year. I wonder if you can talk us through your expectations for the price cap increases that we may see over the next six to twelve months. Thanks very much. Ofgem absolutely recognises that the price rises that we've seen are having a huge impact on consumers that we really, really care about. We take our job is to make sure that we pass on a fair price for energy and suppliers are able to charge that fair price to consumers. We don't comment or speculate on future price rises, further than saying what I've already said in that we're expecting to rise. It's driven by wholesale markets in the main. Those are very uncertain and we're in the middle of an observation window, so we won't comment on where those price rises are expected to go in October. As you quite rightly pointed out, we are taking a number of steps to ensure that the market is more financially resilient. We did a lot of work in 2019 to bring in measures around financial resilience, operational capability, fit and proper, all aimed at strengthening the market and they had a really, really good effect, but we recognise that we need to go further to make the market more resilient. The measures that we're talking about in financial resilience are around capital advocacy, protecting our own credit balances further and making sure that we protect customers moving forward. We're bringing in those changes at pace. We started on that process last October and we'd expect to complete that work later this year. You mentioned also in your opening remarks that about 30 energy companies that suppliers have failed have had to close shops since early 2021. The supplier of last resort process has added £2.8 billion to consumer bills, which is on top of the increasing wholesale costs. That has affected around 4.3 million domestic customers. Many of the field energy suppliers didn't hedge their exposure to wholesale prices and they were taking massive speculative risks that you don't see in other sectors. Do you recognise that the previous regulatory approach that was taken by Ofchem, which allowed this market risk, this lack of hedging, now looks to have been inadequate? Firstly, what we must recognise is that we've seen absolutely unprecedented rises in wholesale prices. The prices are 500 per cent more than they were last year. That's truly unprecedented and this is a global issue. Ofchem had taken a number of steps to make sure that the market was more resilient. We had a range of monitoring regimes throughout Covid to look at supply finances, to look at the hedging levels that suppliers had. We introduced tougher regimes and tougher measures in early 2021 to try to make sure that we could monitor suppliers and take action where necessary. We've gone further with those proposals with our latest financial resilience measures to make sure that we're fully across suppliers and where they don't have the right level of capital that they need. If they choose not to hedge, we will absolutely take action. I think it's really important that you understand we have very robust monitoring regimes in place. On a weekly level, we receive financial reports from all suppliers in the market and we review those. We also receive data on their hedging levels and we keep a really, really close eye on that. It's important in the context to understand that it's not our job as a regulator to choose the risk management position that a business will take. That's up to them to choose. What we need to do as a regulator is to make sure that if they are taking a position, taking some risk, they have the capital adequacy to withstand the shocks and that's what a lot of the financial regulation changes that we're making will do. That will protect customers in the long run. Rest assured, we don't ever want to see the number of suppliers exiting in a year that we've seen over the past 12 months. We recognise that that has had an impact on consumers. If you look at other sectors, the banking sector, if you look at the role of the FCA, they do impose market risk limitations, capital adequacy limitations. I know hindsight is a wonderful thing, but do you think that those capital adequacy and capital risk buffers should have been in place 24 months ago for new suppliers coming into the market? I think that if you look at the number of suppliers that are coming into the market, the numbers dropped dramatically. We only had two new entrants in 2021 and one of those was a pre-accreditated supplier. The measures that we had in place already were making sure that suppliers that entered the market did, in fact, have a robust and fit business models that succeed in this market. We have very robust checks across fit and proper, across the financial projections, across the customer service plans for any new entry in the market to ensure that we feel that they are able to operate, they can deliver value to customers and they can avoid the cost of exit. Where suppliers do not meet those thresholds, we do not let them in and we have refused licence applications over the course of the last 12 months. If you look at the cost of the supplier of last resort process, that is adding £2.8 billion to consumer bills. How is that spread over to the average consumer bill? Do you have a number in terms of what each domestic consumer will have to contribute in their bills towards the cost of that process? The cost of consumer from the solars to date is £68 per consumer. We recognise that that is the cost of the solars. What we must realise is that this is absolutely unprecedented. The wholesale price rises that we saw last August, September and October. They were really truly unprecedented and that was a real, real struggle for many suppliers. We were not expecting to see that. Those costs are passed through through the solar mechanism, that is the safety net. We must remember that we protect consumer balances and we managed to transfer over 4 million customers to a new supplier so that they did not lose supply and that they continued to receive a service for the essential service that they needed. In terms of future costs, you will see that solar cost rise. It does not include all the costs that suppliers will claim through our process. You will see additional costs later this year. There are, of course, costs for the Bulb Administration, but those are a matter for Government where we are not in control of that. I am sure that other members will want to come back to some of those issues, but let me bring in Fiona Hyslop for further questioning. Good morning and thank you for joining us. We have a cost of living crisis. We are worse by an energy crisis, but we also have a climate crisis. My questions will be directed to Neil Kenwood, because we want to address the tensions between potential tensions between addressing the immediate issues and the transition to net zero if there are any. What reforms need to be done in the longer term to ensure that we have an energy supply sector that can protect consumer interests but ensures that we can transition to net zero and what would success look like? I think that this is absolutely your finger on the really important long-term picture, which is to get this transition to net zero and make sure that it happens smoothly and in the interests of consumers and keep the costs down for that transition. We were seeing, even before this big surge in gas prices, that some forms of renewable power, for example, were cheaper than gas generated electricity. We were already seeing that structural move to a point where decarbonisation can actually reduce costs for consumers. Of course, with gas prices the way they are now, the low carbon transition is not in conflict with a lower cost system. Actually going faster on that transition will help bring down costs for consumers faster. That is something that Ofgem stands ready to support. Through our regulatory regimes, we help to ensure that the infrastructure gets built to help that low carbon transition occur and that it gets built at a low cost to consumers through things like our regulated asset base regime and net work regulations. I would observe that the cost of, if you put all the environmental schemes and subsidies together, the total cost of that it is not insignificant but it is just over £130 in the current price cap period per consumer on an analysed basis. That is actually less than it was in the previous price cap period and that is because a number of renewable, increasingly the renewable generation is on fixed price contracts. When the price in the market is high, driven by the gas price, those contracts pay back to consumers. We are getting a situation now where the costs of decarbonisation are helping to bring down the cost of bills for consumers. In Scotland, you know that we have an extensive range of renewable assets and generation, but we export much of our renewable electricity, but your regime is tailored to the United Kingdom market as a whole. Clearly, there are inhibitors in Scotland for that expansion to net zero energy production, not least the exorbitant transmission costs. There is a danger that, even under the new regimes that might be coming, the subsidy goes to where the consumer base is rather than the generation of energy. What can be done to ensure that Scotland can contribute to net zero by powering ahead with renewables and what might have to happen in a UK market regime to enable that to happen and what changes would you see, not least on transition charges? The commitment that we make is to try to get this net zero transition happening at least cost to consumers. We try to establish the rules and incentives to ensure that there is a low cost system overall. The transmission charges are set up in that way, so they are meant to incentivise new generation in the locations closest to the main centres of demand. That is why those transmission charges vary in different parts of the country. Of course, there are ways in which we are helping to facilitate new infrastructure investment to enable the growing level of renewable energy. Obviously, the potential for more renewable power in Scotland is vast. The system operator, the grid, is developing new network plans. Those strategic plans will help to facilitate more transmission capacity to get that low carbon power from Scotland down to England when there is a surplus north of the border. That long-term structure is important to make sure that increased capacity is built and that we get an efficient system across GB. Do you acknowledge that those grid plans still penalise Scotland and that we have people living in fuel poverty in the part of the United Kingdom that generates the most renewable energy, but also in terms of oil and gas? Is that not something that is wrong? Fuel poverty is a problem across GB. As my colleague has said, we try to establish a least cost system, but we do not have the ability to introduce new subsidies. For us, it is about the fair prices across the whole of GB. Any subsidy issues would be addressed by the UK Government in an energy market to deliver what it wanted. Bear in mind the recent price energy spikes. Is there a case for whole-scale energy market reform? You have already referred to gas being the marginal generation technology setting the price. What options are there? What major changes, wholesale major changes are needed? Obviously, you would need the UK to give you instructions as regulators as to what that would be. What would you like it to be and what do you anticipate it to be and bear in mind the immediate issues that we are facing? Do you see any steps being taken and the Queen's speech today to enable that to happen? We fully accept that we and the Governments need to look at the current energy market and ensure that it is reformed in order to be fit for the net zero future. It will be a very different energy system. As you will be fully aware, the growing dominance of renewables on the system changes the nature of the electricity market considerably. There will be surpluses of low carbon power when the wind is blowing and the sun is shining, but then we will have to use other sources when that is not the case. It is absolutely right that the Westminster Government looks at how that market operates and considers whether reforms are necessary to ensure an efficient system going forward. I think that they announced as part of the energy security strategy a few weeks ago that they were undertaking a review of the energy markets and would publish some documents on that in the coming months. Obviously, in off-gem, we are really keen to work with the Westminster Government on that and make sure that the interests of consumers are being fully protected in that consideration. How long will that take? We know that we are facing an energy price crisis now for people. Some of the changes will need wholesale energy market reform. What would be the desirable time frame to get that wholesale energy market reform to start to make an impact? The reality is, as I am sure that I appreciate, that making changes, major changes—if that is what the Westminster Government chooses to do to wholesale markets—is a process that it is likely to take years. It is important that off-gem and the sector and the Government's and Westminster's Holyrood and elsewhere are taking what steps they can to support consumers in the short run. The high prices that we see this year and, as Mr Aron says, probably higher still in the autumn cannot be addressed by long-term reforms such as wholesale market reform. I am sorry to say that there does not seem to be a sense of urgency. During the Covid pandemic, we saw the whole system changes because of a world emergency. I do not get a sense that if this is a wait and see, it might take some years. What are you, as a regulator, trying to do to increase the pace, the scale and the impact of those changes and reforms? We are taking steps to make sure that the system works effectively. We are moving ahead with supporting the creation of the new system operator to make sure that it can do this strategic planning and that we can make the changes that are needed. We are looking at how markets function to make sure that they are as efficient as they can be. We are absolutely moving at pace, but some of those major changes, inevitably, I am afraid, take time, particularly if they require legislation. I believe that Liam Kerr has a supplemental in this area. Liam, over to you. On the point about transmission charges, the deputy convener talks about the transmission charges being higher to generators in Scotland. Is it not the case—or can you help the committee to understand—that that simply reflects the reality that demand is concentrated elsewhere, further away from where it is generated? Therefore, demand customers are paying the overwhelming majority of to new us, and therefore consumers in Scotland are paying a cheaper rate for their electricity than they otherwise would be. Were there the market reforms that the deputy convener outlines? I am also going to speculate about different potential reforms, but the transmission network charges are set up to try and incentivise the most efficient location of generation. As you rightly say, the greater demand is where the greater population is, which is in the south. There are obviously enormous low-carbon assets in Scotland, and getting more infrastructure built to get that low-carbon power down to England when it is demanded is absolutely fundamental to the network plans that are being developed by the system operator. From our perspective, we will be trying to make sure that the regulatory process is able to accelerate those investments and that those investments can come forward at least cost. Next up is Jackie Dunbar to be followed by Monica Lennon. Jackie, over to you, please. Thank you, convener. Good morning, gentlemen. If I can start following on from what the deputy convener was speaking about about the cost of living crisis, I would be interested in your thoughts on how that should be tackled in the short to medium term without compromising the strategic emissions reduction goals. Mr Kenwood, I will start with you, maybe, or I'm a better with Mr Law. We can probably chip in on this one. It's useful to point out some of the statistics, as I mentioned, that the total of the environmental schemes and programmes, the total cost of those has fallen from about £145 per household on their life basis down to just over £130. The cost of the wholesale market component has doubled in the same period of time from £500 to now over £1,000, so it's really clear where the key cost drivers are coming from in this market. What we're doing is what we require. In terms of affordability, as Mr Lawrence says, it's not something that we as a regulator can tackle the affordability challenge, that has to be tackled by Governments, but we are requiring suppliers to take the actions that they can take to make sure that consumers who are struggling to pay their bills get financial advice and that perhaps get emergency credit, and individual suppliers have their own support schemes available to consumers in need, but none of that will be sufficient to deal with the price rises that are coming. Maybe if I can just add a couple of words to that. We support the UK Government's £200 rebate scheme for households that will make a difference this year. We work hard to make sure that that's implemented alongside the limited role that we've got. From a compliance perspective, we announced a series of market-wide compliance reviews to make sure that suppliers are absolutely looking after customers in the right way so that they have the right customer service standards. They have the right processes in place around vulnerability and affordability, and we'll take that role very, very seriously. Where we find that suppliers don't come up to scratch, aren't setting the standards that we expect in the industry we will take, we will absolutely take action. Suppliers do have a range of schemes available. Our advice to all consumers if they are struggling with the high bills is to contact the energy supplier in the first instance. There are things like fuel direct, winter fuel payments available, warm home discount, cold weather payments, and as Neil said, there are a range of other things that suppliers will try to do to help. What we have to recognise is that this is absolutely unprecedented times, and there are a lot of people asking for that support right now, and the numbers will increase as we go through to next winter. Our role as regulators is to make sure that the suppliers are set up and are resilient enough to cope with that increased demand and can service customers, because this is an essential service. This really is serious stuff. Do you think that that will be enough not to make a huge impact on the reduction goals that have been put in place, the measures that you've outlined, or do you think that to try and balance it out, one may have to suffer rather than the other? Can I clarify? Are you talking about the potential tension between the decarbonisation goals and the… We've got the strategic emissions reduction goals, and so are they going to be met with what is being put in place? We have got in the UK and in Scotland extremely ambitious decarbonisation goals, and it's off-gem's job to facilitate those and to help deliver those at least costs to consumers, and we do that in a number of ways. In a sense, as I was saying earlier, I don't think there is a tension between that short-term and the long-run. There is a short-term problem for all energy consumers in the UK and indeed across Europe, but that shouldn't stop us from moving ahead at pace with the decarbonisation agenda, because we think that that is ultimately the best way to bring down costs for everyone and to get a low carbon, low cost and a secure energy system. Also, the convener was mentioning earlier about the added £2.8 billion to consumer bills on top of the increase in the wholesale costs. Do you think that this is the best way to recover the costs? Was any other options being considered, or do you think that they should have been? So, the cost of the solar impact is £68 per customer, £1.8 million, and there are costs on top for Bulb. We have a set process in place for our solar process to protect consumers. That enables us to move the consumers across to a new supplier and enables the cost of that transition to be charged through what is into the solar levy mechanism. That's the process that we used. It's tested to stress with 28 suppliers going out of the market, and we're really pleased that we've managed to move those £4 million customers, protect them, ensure that we're kept on supply and ensure that credit balances were protected. In a sense, we don't have options to change the way that was recovered. That's the way the solar system is set up, and so it does require being recovered from consumers over a period of time. I'm afraid that it's only the government, rather than ourselves, that would be able to change the way that's recovered. Next up, Monica Lennon. Monica, over to you, please. Good morning to you both. Thank you for joining us. Listening this morning, I've heard both of you mention fair prices a couple of times, particularly Neil Lawrence. Many people across the country will be wondering what is a fair price, what's happening right now doesn't feel fair. Maybe you can tell me from an often perspective what fair pricing means and looks like to you. You recognise that consumers up and down the country are struggling with the price of bills and the wider affordability crisis that we're seeing in the country. This is unprecedented and is driven by the energy increases that are driven by those high wholesale prices that we've talked about. If we just take a step back and look at our role as regulator, it is to ensure that the suppliers charge a fair price for the energy to consumers, and that means that they have to pass on those costs of supply. If the wholesale price increases, then they have to be able to pass it on. Energy in the UK is not subsidised at the retail level, so there's no subsidisation for those consumers. Therefore, we have to allow the suppliers to pass on those fair costs, otherwise those business models wouldn't be sustainable. Those suppliers would go out of business, and ultimately that would lead to a bigger cost for consumers in terms of supplier exit, so maybe further sars or maybe further solars. That's what the mechanism does under the price cap. Those costs are absolutely challenged, so in the price cap methodology we look through its suppliers costs. We robustly challenge and look for evidence, so we set it at a fair level. But any decision around cost subsidy to the consumer, so price subsidy to consumer, sorry, that is a matter for government and not something that is within our gift. The price cap has had its desired effect, which was to prevent the price exploitation of consumers who weren't active in the market, and they were sometimes being charged considerably more than the cost of delivering their energy. The price cap has been set at a very tight level, so tight in fact that suppliers collectively were making losses because we were trying to drive efficiency through the system. That has been a successful in terms of preventing exploitation of inactive consumers. It's also smoothed, yes of course we're seeing a record rise in prices, but it's actually smoothed the impact of the rises in gas prices that we've seen in the last few months. Over the last two to three years suppliers have not made any money in this market from a retail perspective, so it's been a very, very tough time for suppliers, so we have removed that loyalty penalty, but we recognise the costs and the pain that suppliers are feeling at the moment, and that's coming through in our data. What we need to do is we need to create a market that is investable, we need to create a market that is fair and that will enable that transition to net zero. Some of our colleagues in a previous session did touch on some of the very healthy profits made by the big six, albeit perhaps not from the current retail market, but they're not exactly in fuel poverty themselves. Neil Lawrence, you also talked about the importance of regulator retailers and consumers working together, to perhaps try and foster some trust there. I'm looking at a news article yesterday reporting on some comments by Martin Lewis, known through his work as a money-saving expert, and I think it's fair to say that Martin Lewis is trusted by the public more so than people trust politicians or energy companies, but he says yesterday that an energy bill surge smells wrong as direct debits increase by 100 per cent, so people have always been encouraged to pay for energy by direct debit. So they're saying here that after energy prices took a 54 per cent price hike in April, some users of his website complained their bills went up by 100 per cent. Does that seem right and fair to you? What's the explanation behind that? I absolutely recognise that in the current context, the current affordability crisis that we've seen. This is troubling times for consumers and people are struggling to pay their bills. We absolutely understand that and we empathise with it. We were aware of a number of reports of direct debit increases and earlier this year we announced a series of market compliance reviews, the first of which was direct debit, to review how suppliers are set up and how they increase direct debits. Are they fair? That is a very, very invasive review, so we're collecting a range of data, but we're also looking at the management control frameworks that are in place at suppliers to assess that they really, really do take this seriously. Martin has conducted some independent analysis and we absolutely welcome that. That's very, very helpful and he has agreed to share the information and data with us. Direct debits can increase for a range of reasons, so we've seen a drift to SVT from contracts which may have increased direct debits. We have to recognise some of some of that data, but rest assured where I find and where my colleagues find that suppliers have not treated customers fairly, we will take robust enforcement action over that because customers need to receive a fair price for their energy charged for by their supplier, so we will take this very seriously. We are on it and I'm looking forward to getting the results back from our compliance work. Thank you. We also heard from Citizens Advice Scotland and others that they are really struggling to keep up with demand for advice. I just wanted to draw to your attention one of the comments that we heard. It was from Energy Action Scotland, it was from Fraser Scott when he came to the committee and he warned that the energy price rises could lead to the catastrophic loss of life this winter if the UK Government and Scottish Government don't take further action. Again, from an off-gem point of view, in the short term and perhaps in the medium to long term, what further action do you think needs to be taken both by yourselves as regulator, by the companies and by Governments? Is there anything that local authorities could be doing as they pull together their administrations after election time to try and help people at a community level? I absolutely recognise the comments that have been made and are aware of them. Our job is to protect consumers but ultimately the matters of affordability and cost of living are for the Government. We have a very limited set of tools in play within off-gem that we have at our disposal. We do take the redress fund finds that we have and we have redistributed as fuel vouchers for a number of consumer and charity groups in the past and will continue to do that this winter to help those most in need. There are a number of schemes that I have outlined already today in terms of warm home, discount etc. that are available. Our advice is if you are struggling with your bill to go and contact your energy supplier in the first instance who will provide you with the help and support that you need but absolutely do recognise those comments. Longer term Neil Kilmerd, anything you want to add? From our perspective, there are a number of measures that we will be taking. For example, as we move to that more renewables dominated system, there will be a premium on flexibility. If we can put the frameworks, the markets and the incentives in place for people to flex their demand for electricity so that it more closely matches when it's windy and when it isn't, then that level of flexibility could reduce costs on the system by up to £10 billion a year. That's a long run figure but that's the sort of savings we think we can help to deliver through our regulation of the sector. Thank you back to you, Kilmerd. Okay, Monica. Thank you very much. Let me bring in Liam Kerr to be followed by Mark Ruskell. Liam, over to you please. Thank you, convener. Good morning, panel. Neil Kenwood. In opening remarks, Neil Lawrence said that wholesale gas prices are volatile and then went on to say, as a consequence, there's been a rise in consumer bills. Now, the UK Government's energy security strategy will launch a further oil and gas offshore licensing round with a view that that would improve energy security and affordability. The question I asked you is, what could be the impact on prices for domestic and commercial customers if the gas that we need is being sourced locally rather than imported? First thing to say is that Ofgem doesn't really have a remit for oil and gas production, the upstream industry, and we're not really experts in this sector. The only thing I would say is that the prices in these markets, particularly gas markets, are set at a European or global level. You can read from that how much contribution increased production at a UK continental shelf level might have. For us, this is all part of a broader transition to net zero, which for us is I think the best way to bring down costs in the long run. Sticking on that point about net zero, because I think that the deputy convener and Jackie Dunbar asked person in questions earlier, which I'd just like to explore, some people are understandably very worried that an energy price crisis could undermine our drive to net zero. Whilst others suggest that by increasing the use of domestic gas, which an earlier panel heard, has about half to a third of the carbon footprint of imported gas, perhaps more reliance on nuclear generation and the current focus by both Scotland's Governments on things like heat and buildings, the transition could be accelerated. The question for you, Neil Kenwood, is what is your view and how do we, as a committee, as a Parliament, ensure that this transition continues whilst balancing the cost to consumers? The critical thing here is to keep an eye on that long-term transition. Yes, we need to focus on the short term and make sure, as my colleague is doing with his teams, that the market is stable and that we're protecting consumers in the short run, but not lose sight of that transition to deliver a lower cost low-carbon system in the long run. There's a number of ways in which Ofgem can help to do that. We are, for example, likely to be asked to set up a new system of economic regulation for new nuclear power and for carbon capture and storage, and we can use our regulatory tools to facilitate the billions of pounds of investment that will be needed in these low carbon technologies and to make sure that investment happens at the lowest possible cost to consumers. We're also supporting the development of other new technologies like hydrogen and clean hydrogen, which may have quite an important role in the future, yet to be determined what that role is, but we're helping through our innovation funds, for example, to test how hydrogen might work in, say, a domestic heating environment and to see whether that is a viable and low cost form of energy for the future. So, I think that that's the sort of step that we, as a regulator, can take. I'm not able to comment on the sort of the oil and gas exploration market and the impacts of that on the oil and gas prices, because that's outside of our remit, but, for us, it is that transition and Ofgem's ability to help the transition and keep it at the lowest cost for consumers that is what we're focused on. Neil Lawrence, do you have anything to add to that? Back to you, convener. Thank you very much. Liam, next up is Mark Ruskell. I'll hand over to you, Mark Ruskell, please. It's really interesting evidence that you presented this morning. I wanted to go back to the theme that Monica Lennon was exploring around just how this is impacting on individual households. It's quite clear that for some people, for some households, this is devastating and it will continue to be devastating. You're saying that you can't re-predict where the prices for energy are going to be in October 2023, so I'm really concerned about those people that may end up in spiralling levels of debt. I wanted to ask you about the specific proposal that Scottish Power Keith Anderson has made around setting up a deficit fund that could really help people who are in those very deep forms of debt when it comes to their energy bills, £1,000 that can be effectively given to people to get them out of fuel poverty or at least to stop them slipping even deeper into fuel poverty payback by presumably all consumers over 10 years. What's your analysis of that as a specific proposal? How does that compare to what the UK Government has already announced? We absolutely recognise that. I've said it time and time again, and I'll keep repeating, but this is an incredibly tough time for consumers and I truly appreciate that those in most need in our society are finding today's conditions incredibly tough. We have openly supported the UK's announcement for a £200 rebate on my household energy bills this winter, and we're working actively to support that. That is a government policy, but all these decisions around affordability, so other measures such as the one that Keith has talked about and discussed widely yesterday, they are a matter and a decision for government, they're not within our gift, so it's a decision and question for them. As regulators, you've got a duty to protect the short-term and the long-term interest of energy consumers, so you're saying that you have no role in terms of modelling or working out what the impact of a policy like that would be in terms of advising government? Absolutely. We collect a range of data from charity groups, from our own and independent analysis to look at the impact of those things. I don't have that information with me today, so I can't comment on the impact of Keith's proposal from yesterday. But as I said, our role is not to decide on these things, so we can analyse the impact of them, we can see what it could do for a consumer, but it's not our role to make those decisions that's not within our gift. I'm not really asking you to make a decision, that is the role of politicians, obviously, but I'm asking, in your role as regulator, surely you're able to look at everything that's in the toolbox. Scottish Parliament made this suggestion several weeks ago, Keith Anderson was in this committee several weeks ago, I think he made the suggestion of this deficit fund at Westminster, I think, a month ago now, so why is it that you're not looking at that right now? Why is it that you've come to this committee today without a clear view on what the impact would be on consumers of that idea? What else is in the toolbox? What other options might there be that you're actively looking at, not with a sort of, we think you should do this minister but very much a look, this would be the impact if you went down this route or that route, as advice to government or at least data to government and parliamentary committees? Yeah, so we work absolutely very closely with government on a range of issues in the market and we're able to provide our information and data on affordability issues and on how tough it is for consumers. I speak to consumers all the time personally, I speak to a range of charity and consumer groups to try and get the data and get the information that we need as regulators so we can provide views but the decisions and the drive around any affordability measures, any social policy is not for often, it's for government so I don't have the information that you're asking for, I can look and take that away but these decisions and the drive of social policy is a government decision, it's not ours. Well I think if you had some form of independent analysis of that specific proposal and how it measures up against what the government is currently proposing, pros and cons I think that would be very useful for this committee. I'm going to ask you another question and I hope this doesn't again fall into another area where it's like well it's not nothing to do with us but fuel oil, LPG, massive issue, particularly in Scotland, particularly for off gas communities, you're seeing an enormous volatility in price bikes, I mean to be honest they have been for years but particularly at the moment in the cost of fuel oil and it really is driving again rural fuel poverty often in homes which are very hard to heat, very hard to retrofit. What's your thinking if I can tempt you to say something on this about regulation of oil and LPG going forward, where that needs to be brought into the regulatory framework, what the options might be there? I'm afraid it's not an area that we have regulatory responsibility for, we don't have the ability to to regulate that. We do absolutely recognise and understand that there are millions of homes off the gas grid who use other forms of fuel for their heating and sometimes those can be expensive and subject to considerable volatility so we see that happening in the market but we don't have the remit to regulate it. If Governments asked us to do that and gave us those powers we of course could do that and for example in heat networks that's an area where historically we haven't had a regulatory role but it looks like we will be given a remit to oversee heat networks, I believe the Scottish Government and Westminster Government want us to take that role on. That's something that an example of where off-gem can take on additional responsibilities if we're asked to by Governments. In terms of those rural off-gas homestead, do you think that part of the issue here is that in 10 years time we'll have completely transitioned away from oil and LPG heating in rural areas and we'll have other options be it biomass, high-temperature heat pumps or whatever or is this going to be sticky? Are we still going to have homes 10 years time that are being heated by heating oil and therefore we're still going to have to regulate? My understanding is that the intent is to prioritise the off-gas grid homes for decalbinising heating certainly that's what the Westminster Government talks about. Partly because the costs are often higher for those homes and they may not all be suitable for heat pumps because you need certain levels of insulation for example but I think it is important that where heat pumps are viable that that's a sector that is supported to move away from the higher costs and the high carbon forms of heating that some of them currently use. Next up is Eleanor Whitton. Eleanor over to you please. Thank you convener and good morning to both of you. I'm also the convener of the social justice and social security committee and we've been taking a huge amount of evidence recently with regards to debt and poverty and as you can imagine this is an area that we're acutely focused on several times this morning you've mentioned Mr Lawrence that this is unprecedented to people at the sharp end that we're taking evidence from this feels like a return to the days of where you couldn't afford a bag of coal you had no heating and no means to cook some food so I want to look at some data following on from my colleague Mark Ruskell as well if we think about the winter that we've just come through winter 2021-22 for consumers in Scotland you know how difficult was this an increase to cope with have we seen more self-disconnections we knew that there was self-disconnections already you know in my own local authority area a couple years ago we had uncovered about 300 people self-disconnected and do we think that that's something that's going to only increase as we go forward? Thanks for that question so look I absolutely recognise the issues you've talked about as I said I spend a lot of time and we've consumer groups understanding those issues first hand and I truly empathise with them this is is an absolutely extraordinary time it's very very difficult we know we are absolutely aware there's probably 613,000 households that are in fuel poverty in Scotland and the numbers that we have are 311,000 households in extreme fuel poverty so we absolutely recognise the size and the scale of the challenge that those individuals are facing and we're aware of self-disconnection it occurs in the market so customers will choose not to eat their home to switch off all of their appliances disconnect their prepayment meter as a way of reducing cost we do require that suppliers absolutely do look out for that and they do monitor it as part of our regulation earlier this year we announced a series of reviews and the market compliance reviews to get under the skin of what it is that suppliers do to protect consumers that includes vulnerability and affordability so looking at how they treat those consumers the steps that they take to make sure that they protect those consumers particularly those that are most most vulnerable in our society again that's a very very stringent it's a very very invasive measure so we'll be looking at a range of data but more importantly looking at the overall control framework that people have in place to make sure that they protect those consumers and get into areas such as self-disconnection it's a tough time out there and we absolutely do recognise that our role is to try and support consumers if we find that suppliers are not up to scratch so they're not scaling their operations they're not ready for what will be increased core volumes later this year as a result of vulnerability and affordability concerns we will take action we have a number of things that we can do such as ban them taken on new customers or taking action under the operational responsibility principle so we will do that to try and protect consumers in the best way but we recognise that this is unprecedented times this is not what we would have expected from the UK energy market given those high wholesale prices and that is a global issue okay so in terms of those measures are you are you saying that the measures are going to be increased the sanctions that are going to apply to companies who don't actually actively look out for these individuals and start to offer some type of supports because in the past people have been self-disconnected for years without any support being offered and so are you assuring this committee today and myself as the convener of another committee that that action is going to be forthcoming so through the market compliance reviews in this area we'll have that information we'll have that data we'll understand which suppliers are treating customers fairly fairly and which ones aren't and where we find that they are not adhering to the rules we will take action to protect consumers and we absolutely understand that this is a key moment this year this is a key set of work that we're doing and we have to ensure that the consumers are protected this is an absolutely vital service and we've heard from other colleagues around the table today about the impact that that could have and comments in the press so take that role really really seriously we will we are and we will work at pace with with regard to those reviews and you know where we see the suppliers are not acting in the best interest of consumers we will take action to protect them it would be I mean one of the other things just to just to add if I if I if I may this is an area where you know potentially extra legislation could help us you know I don't have the step in powers that I would like if I saw a supplier you know not acting in the best interest of consumers I saw severe detriment I don't have the ability to step in to that organisation and take over and do the right thing and that's one of the areas that we would we would like um like to see changed in legislation that would make us more effective as a regulator okay thank you for that I have one further question um as is usually the case um there's not enough disaggregated gendered data um but there's strong circumstantial evidence that women are at higher risk of experience and circumstances known to make households more vulnerable to fuel poverty I'm thinking about lower incomes I'm thinking about heading single parent families and having a care status therefore it's important that policy makers understand what role gender made play so that they can respond accordingly so can ask you what gendered analysis often as a regulator employed prior to lifting the price cap and how do you intend to monitor its impact on women going forward so I'm sorry to I don't have that data with me today I'd have to go back to back to base and write to you afterwards I don't have the information and statistics of that nature what would say is we're here to protect all consumers and I absolutely recognise the challenges across households particularly those of single single parent families um and the impact that that can have um there are stringent rules in place for protection of of customers and you know you can't you know we've seen a very very low number of disconnections um and there are a range of measures in place to protect um those consumers but I regret to say I don't have that information that you're asking for and I can't answer that accept question today okay I think that highlights the fact that we don't always have that information and you know it's information that we need um everybody to to start um pulling together yeah we have uh tried to improve the sophistication of our distributional analysis um and introduced a more sophisticated way in which we are understanding different consumer groups including low income groups uh so so we do have a stronger framework now to look at those impacts thank you very much Eleanor just a couple of questions I think there are a couple of supplementals to follow up in this line of questioning going back to the 29 energy companies that have failed over the last 18 months in some cases because of financial mismanagement a lack of hedging which was designed to maximise the profits um has off-gem taken any action against those companies or the directors involved do you have the powers to do so or have you referred those companies to other regulators who may have the powers to take further action so absolutely recognise the issue as I said before we um we have robust monitoring regimes in place those monitoring regimes have been through in continuous improvements since um since the Covid crisis to monitor the financial resilience of suppliers I get under the skin of the business models understand what hedging levels they they take on a weekly basis I get reports on the hedging levels across the market and on the financial viability of suppliers and we have the ability to step in and do audits we've done a number of audits in the past um the past uh the past year to to really really understand the financial health of of suppliers that's all about um acting in the best interest of consumers and protecting consumers um moving forward we're going further with our financial responsibility measures so it's more robust steps steps in place and we will absolutely um take take take action with regard to the um the the action against directors um I can't comment on the pacific cases in a public forum but we have worked very very extensively with the insolvency service on a number of cases and have made reports but I can't comment on those today or be grateful if you don't push me any further on that no I don't understand that I appreciate the response um Jackie Baillie wanted to follow up uh on a question sorry Jackie Dunbar sorry wanted to follow up on a question as well apologies thank you thank you um you said earlier that consumers choose to self-disconnect I'm afraid I'd have to disagree with you there is no choice when they get get to that stage um and if I can touch maybe on the the prepayment meter households there are most vulnerable normally and yet they are paying more than the direct debit households um and they're paying a premium for the energy I think we've touched touched on it before in other committee in other committee panels you know where there's there's I think there's little to protect um our most vulnerable in regards to the the prepayment households um can you tell me if there is protect protection methods in there and what more should be done um to protect what quite frankly is our most vulnerable because they're the ones that are paying the highest tariff yeah so first of all to be clear we absolutely recognise the difference in um in tariff prices between prepayment and credit credit credit customers I'm absolutely right there is there there is a difference and prepayment customers do pay more if I go back to the context and the wider context of that we have to allow suppliers to charge a fair price for their energy and the costs of supplying prepayment meters are indeed higher than credit meters and there are higher operational costs and if we didn't let the suppliers pass through that cost to to those consumers then ultimately um they wouldn't have a sustainable business model we expect there's a difference um the transition to smart prepay will will reduce that reduce the cost um and would be absolutely focused on making sure that we can see that happen across the prepayment um the prepayment community and that will will make them cheaper in the long run um absolutely understand um that it's a difficult time and some of the most vulnerable customers are indeed on prepayment we have a range of measures in place to try to protect those vulnerable customers um and as I said earlier we are actively um assessing suppliers ability to to meet those um those those obligations through the market compliance reviews that we're doing and um and those market compliance reviews do um to cut across credit and prepay it to all customers and as I said earlier you know we absolutely will take action if we find that suppliers are not supporting those customers that are vulnerable um that they aren't doing what they need to and aren't meeting their obligations and we will take very very firm action we absolutely recognise that if we that if um if suppliers don't provide that support this this winter that could be have a very very catastrophic impact for the for those customers last week it was we find one energy network company for insufficient support for some of the vulnerable customers on their network and we find them £15 million which is a obviously a significant sum. Just come back Camila I mean we hear as well that um these prepayment metres are left in houses when people move out so that when the new tenants go in they are automatically put on to the higher tariff um and it's up to it's we've heard that it's up to them um and not maybe the landlords or the suppliers themselves to to get to the the meter taken out which maybe I would say we've put some folk they can't afford to take out the meter so that that so that they're left with paying the higher payments is there anything that that can be done and round about that regards I'm not sure if you if you'd be able to answer that but it'd be interesting to hear. So certainly our advice for customers is if they move into a property of the prepayment meter and they want to move on to credit is to um is to contact the energy supplier and have that discussion and the energy supplier is obligated to to work with them. If if customers are in a debt situation and we are aware that at times prepayment um prepayment meters can be a a source of moving that customer out of debt and customers do often choose to be on prepayment meters it's not a case of suppliers absolutely enforce the installation of a prepayment meters a lot of customers do choose that option for budgeting purposes and we have to just be aware of those of those facts but my advice is you know contact your energy supplier if you in that case if you have a constituent that's um that's spoke to you about that you know do pass on that advice talk to your energy supplier see what they can do. Thank you very much. Thanks very much Jackie with a few further further supplementals in this area Monica Lennon to be followed by Mark Ruskell Monica please. Thank you convener it's just to follow on from Elena Wattam's important question on gender desegregated data and your offer to write to the committee just from my own understanding does that mean that you're confirming to this committee that Ofgem does hold that data how recent is it and has analysis been done of that data so you don't have to write doesn't say we don't have the data so just to get some clarification. Yes sorry if I wasn't clear apologies for that so I have to check what data we've got available on it as I said I don't have that information in front of me now I have to go back to base and that's why we said we would write you afterwards and so I can't ask the question right now and apologies for that. Okay that's fine that's what I thought it seems like you were a bit uncertain but thank you for that. Mark please. You made a comment earlier on about smart meters I think and about the ability of consumers to move on to variable tariffs but you know where are we with smart meter rollout I mean is this something that could be significantly ramped up between now and October between October and when the next price cap potential comes up and how significant could that be are we talking about large numbers that could be on smart meters and have that ability to move on to variable tariff are we still looking at relatively low numbers of consumers who've found out this is even a possibility let alone had an installation. Yes so we've recently agreed a set of targets with the industry with regard to smart meter rollout so all suppliers have a obligated target that they need to meet for this year we monitor that on a regular basis so we look at the number of installations that are completed the numbers that are forecasted and how they progress on those targets those are hard-baked targets where against suppliers don't meet those there are penalties that we can apply and what we will do as we take that matter really really really seriously and and we have an ongoing set of people that are responsible for looking at that within off-gem. The capacity in the system is the capacity in the system so suppliers aren't planning to roll out 100% of smart meters this summer they have obligated targets to progress and that's what's been agreed. I mean is there an argument to say that that should be revisited and if there are supply chain issues then you know scaling up that more rapidly in the next 12 months would and perhaps even targeting it at those consumers that are most affected by the price increases might be a way forward. So I absolutely recognise I think that we would like to see smart meters rolled out across the country and see the benefits that they can have for reducing energy consumption that's what we're focused on at the moment there are no plans to delve deeper into the smart meter roll out that's happening within each supplier and target and target where they are with specific vulnerable cases. Thanks very much Mark. A final set of questions from Fiona Hyslop. Thank you. If I'm understanding you correctly you're saying that support for individuals and subsidy is a responsibility of government that you have limited interventions in the immediate area but you can find people or direct companies and you can intervene if you think they're not providing sufficient support for individuals but you would welcome legislation to give you more powers in that area can you be a bit more specific about what would be useful legislation and reflecting the discussion that we've just had about prepayment meters is there a law or should there be legislation to require energy suppliers to replace prepayment meters if there is a request from individual to do so and that's to Neil Lawrence I think. So what I was referring to earlier was if I see a supplier that's not acting in the best interest of consumers I'm seeing severe consumer detriment I don't currently have an option to step in to that supplier, take over that supplier and mend those issues and those stepping powers additional powers that may protect customers and that's what we would like to see that's what we would be would be really really helpful. For our monitoring activity you know we absolutely can see the performance of suppliers around a range of consumer customer service metrics range of affordability issues you know we talked about the additional work we're doing in in the market compliance reviews and we can use our existing powers yes but those stepping rights would really be an ultimate sanction and would enable us to move quicker and it's that pace of change that's the important thing so when you see things going awry or you're aware that a supplier is in trouble having that ability to step in other powers that we've talked about are being able to intervene during the process when a company goes bust so we have seen some challenges from working with administrators and how the legislation around administrators and the supply license regime works you know it can cause some some issues within the industry so again some additional powers there and additional powers as well to strengthen our licensing revocation ability so you know rather than a long process making it easier for us to take a supply license of the way where we feel that there's an unsustainable business model where we feel a company is getting into difficulty or they're just not acting in the best interest of consumers if we have those powers which are you know pretty significant changes I think that that would really really help us perform perform our role as regulator and the pre-payment legislation and legal obligation to replace pre-payment it's an interesting question I'd have to take that away do some analysis on it and think about the benefits benefits for that what I said earlier rings true that some consumers really like the prepayment method they use and choose that prepayment method so we have to be very very careful in assuming but what we're assuming that taking that away or changing it in some some some way would have a benefit for consumers requested by the consumer a legal obligation to replace it would hardly be revolutionary but would be very practical yes it would but also we also need to bear in mind and be balanced that if there's a debt on a meter often a prepayment is the best solution to enable that debt to be recovered and if that is enabling the industry to work as a whole then maybe that's the right way forward we're getting into debate of policy here and maybe in an energy price crisis the balance needs to shift from the companies to the consumers in this instance but I'll leave that one there but you can come back to me if you've said you would and I just wanted to to finally ask Neil Kenwood as brexit proceeds and the GB and the EU energy markets remain closely aligned I don't feel how present Macron's speech but he's obviously looking at a potential of a wider alignment of non-EU countries but European countries particularly for defence and energy issues but we heard from Scottish Power from Supplier that they thought there was sufficient domestic energy market reform could take place to deliver what you've been talking about without wider EU reform but I suspect there will be both EU and GB wider reform of energy markets so what do you see as the challenges and opportunities in the short term but also strategically going forward? Yeah so I think obviously we have to prioritize getting the GB market working as effectively as possible for that new net and zero world the critical link for us as you would appreciate with the European markets is through the interconnectors and as we move to this more renewable dominated electricity system the importance of interconnectors will become ever greater so that we can export so we're talking about exporting Scottish surplus renewables to England but actually the whole of GB will have surplus renewables in the future on windy and sunny days and actually that the interconnectors will enable us the GB system to export those surplices and maintain a more stable low cost system and then when we need power in when we haven't got as much of that wind and solar power generating we can bring those bring that power in from from those interconnected zones of course now that includes Norway which is a great addition to the to the network because they have a separate system they have a very hydro domain system it's very low cost system and so the sort of things we might be able to see in future is when there's a when there's a surplus of power in GB in Scotland that can be exported along the pipes to Norway they use it to to use pumped hydro so they put water up in their dams and then when we need the power back in GB they let it go and send the hydropower back to us so it's a really effective way to integrate the markets and I think in Ofgem we're really keen to make sure that there is this pipeline of further interconnector projects that they continue to be developed because we think that's really strongly in the interests of GB consumers as we move to this new net zero world and that's infrastructure as an obviously we've got our own crook and dam here in terms of pump storage which does a similar function but in terms of market reform you know that is could you confirm that we don't necessarily need to see reforms in the EU market where we're aligned still to possibly a bit 2020 so we can do a sufficient within our own domestic market to meet the needs of of what the UK you know that's in any market so the primary determinant for the effective operating of GB market must obviously be those GB reforms and then we will respond and through interconnectors and other mechanisms try and make sure that we have the most efficient connections with with the other the other bits of the market which of course includes Ireland as well as continental europe thank you thanks very much Fiona that brings us to the end of our allocated time thank you both for being with us this morning and giving evidence to the committee very much appreciated the committee will continue scrutiny tomorrow when we hear from Greg Hans MP minister of state at the department for business energy and industrial strategy and next week our final evidence session for this inquiry will be with the cabinet secretary for net zero energy and transport thank you to members and thank you to our guests this morning that brings us to the end of the public part of the meeting thank you