Thank you for your letter of 25 September. As you can imagine, I have followed your recent comments about the energy market closely.
Sadly, not all of the responses have been particularly helpful as is often the case with immediate reactions. However, one thing I would like to assure you from the outset is that ScottishPower, and its parent company Iberdrola, is fully committed to a continuous, sensible dialogue on all aspects of the UK energy market. We will always fully engage with all political parties on these matters.
With some 5.5 million electricity and gas services supplied to customers across the UK, we fully recognise the critical importance of the issue of public trust in both successfully delivering for consumers and building support for the vital investment in future clean energy capacity. At the same time, we would question your assertion that the market has “consistently failed to secure the confidence of the public or the investment Britain needs”.
ScottishPower has increased customer numbers by 400,000 in the last year through focusing on winning and retaining customers through competitive pricing and good customer service. At the same time, it has increased its annual investment programme from £600m in 2006 to £1.3bn this year.
To do this, it is crucial that we can rely on the financial support of our parent company, in addition to the revenues we receive from customers. In 2012, for example, ScottishPower invested £957m in its UK asset base, compared to a net profit figure of £646m.
As an international energy company, we carefully analyse all of the major markets in the world. Maintaining principles of sound regulation and avoiding regulatory uncertainty are critical to securing this global investment in the UK. To date, this has worked to help provide jobs and economic opportunities across the country. Thus, whereas dividends of £1.8bn have been paid to the Group since 2007, more than £4bn has come back the other way in investment.
Today, we are committed. The relatively stable and predictable regulatory environment in the UK has meant that we have planned on assigning 42% of total Group investments for 2012-2014 – amounting to £4 billion over the period – to the UK.
This is investment that could be made in many different countries but the UK market has been chosen as it is seen as working relatively well. Moreover, our share of the potential investment in the UK energy market could rise even further from 2015, if it remains an attractive investment destination.
Our Group has investment plans for up to £15bn in the UK. This includes our proposals to Ofgem outlining a £5.2bn investment programme in our distribution network. This will play a major role in connecting renewable energy, as well as delivering significant reliability and service improvements and cost reductions for customers. This is in addition to the £2.6bn investment in the transmission network between now and 2021. Together they will lead to the creation of up to 4,500 new jobs. We also have plans to invest up to £5billion in renewables in the UK. We are building over 200MW of onshore renewables capacity in the UK this year and begin development of the Company's first offshore project – the 389 MW West of Duddon Sands windfarm off the Barrow coast (by the way, this is a cutting edge and exciting project, which like your recent visit to our Whitelee wind farm near Glasgow, I think you would find to be well worth you seeing firsthand).
However, we are at a critical juncture in terms of future investment in the UK as global economic prospects begin to improve and as the Government’s plans for Electricity Market Reform (‘EMR’) are due to be implemented next year. We recognise that the EMR programme was commenced whilst you were Secretary of State for Energy and Climate Change and we have welcomed the political consensus around this framework for reform. This is key to building the confidence so essential to attracting the investment that the country needs. Moreover, maintaining this political consensus is crucial to winning the necessary public backing for this programme. Division in this area will simply make it harder for any government to deliver the necessary investment in the energy system.
Of course, there are entirely understandable and widespread concerns about consumer prices. It is a long way from multi-billion pound projects, decades in the building, to an unwelcome bill for a low income pensioner or a family with a squeezed income in the middle of winter. Affordability is a key issue and one that we are constantly seeking to address.
We take our commitment to consumers very seriously. We inform customers on every bill if there is a cheaper price than the one they are on. We offer direct help through our ‘winter commitments’ including providing free insulation and heating support and we do not disconnect any customer in the winter period.
Key to helping to address the affordability issue is delivering energy efficiency to households. In the last 5 years, we have spent close to £500m making over 1 million homes more energy efficient. In fact, recent data issued by DECC has shown that average energy usage by households in the UK has reduced by 9% for gas and 5% for electricity. Lower consumption means lower bills and this equates to a £100 saving for each household every year.
Balancing the issue of affordability with maintaining energy security and progressing towards decarbonisation is a challenge many European countries are currently struggling with. Reduced household energy usage in the UK is evidence of progress towards lower carbon emissions and lower bills. Likewise, the increasing output of renewable energy and increased investment in our network infrastructure to facilitate further renewable investment, proves we are heading in the right direction.
This is being recognised. The World Energy Council recently gave the UK an AAA rating for energy security, affordable bills and decarbonisation. They ranked us 5th overall in a league of 129 countries - the 3rd consecutive year that the UK has been in the top 10.
But, as you know, energy policy is very difficult. As you made clear as Energy Secretary under the previous Government, consumer bills are likely to rise for the rest of the decade as we meet the challenges of decarbonisation and modernising the energy system. It is decisions about the pace of that decarbonisation and modernisation, and about the scale of social programmes, together with developments in world markets, that will define the future path of energy prices in Britain. Any move to freeze all domestic bills will not alter the fact that the investment Britain needs still has to be paid for. To the extent such a freeze would cause investors to doubt that they will receive an adequate return or to fear future similar interventions, those doubts and fears would be reflected in the appetite to invest.
At the moment, the UK has a framework that attracts our investment on a massive scale. This framework is constantly evolving, but as things stand, we are poised to make further significant investments in the years to come. At the same time, we remain acutely aware of the issue of affordability.
Our view is that this is not a market that can be “reset” by any one player at any one point in time. Rather, it continually moves forward based on the goodwill of all parties acting together in a professional manner to deliver the infrastructure that the country needs while keeping bills under control.
I look forward to discussing this further with you over the months and years ahead so that we might continue to address the issues of affordability, energy security and decarbonisation.
Chief Corporate Officer