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Extending the Gas Network

Malcolm Wicks MP,  Minister of State for Energy
SBGI-BERR Seminar, BERR Conference Centre,  01 July 2008

Today’s event marks a key stage in what has been a lengthy journey.

Households outside the gas network have long been known to be especially vulnerable to fuel poverty, primarily because they lack access to what has, for some years, been the most cost-effective conventional fuel. The challenge has been how to give those households access to gas at an affordable price.

You’ll hear in detail how we’ve reached the point where we can offer households hope of obtaining a connection. But let me pick out some key points.

The model for connecting off-gas communities

The main innovation of recent years has been the creation of a funding model for providing gas connections to deprived communities. That model was developed by Richard Grant, Head of the Design and Demonstration Unit in BERR, supported by his colleagues in National Grid's Affordable Warmth Programme. The model involved changing the focus from the connection to the home and the community that were being connected.

The connection simply became one of a wider set of activities, carried out across a community, and including provision of a heating system, installation of energy efficiency measures and benefits checks to maximise household income. These activities in turn offered scope to attract a range of funds that defray the cost of connections to the extent that fuel poor households receive free connections and measures, whilst the able-to-pay get a connection at a once-in-a-lifetime special price. The method of delivering the connection, and the economics of making the connection were fundamentally changed. And the connections were made by packaging existing funding.

Ofgem’s Price Control incentivisation

The success of that model, first tested in North Wales, and replicated in communities elsewhere, was instrumental in persuading Ofgem that, if it offered some incentivisation to gas distribution networks as part of their new Price Control, there was scope for generating meaningful activity. And, because it provides a new funding source, it opens up a wider range of communities to the application of the model.

Ofgem will shortly issue guidance on this activity. I hope that guidance will be liberal, because it's vital that we get distribution networks engaged, and engaged early. If we do, the numbers we discussed with Ofgem - 400-500 communities, 20,000 homes - can be delivered. And these are measures that can change the lives of vulnerable households, in terms of comfort, income and health.

Regional delivery of community gas connections

Since it tested and proved its connections model, the Design and Demonstration Unit has also developed a template for delivering measures to communities on a regional basis. Its approach is to operate regionally in partnership with key regional players. This involves initial screening of non-gas communities and identifies the energy solution best suited to their needs, whether it be based on gas or renewables. The communities are then tackled intensively. BERR was pleased to pilot this approach in the North-East and Yorkshire and Humberside, in partnership with the local Regional Development Agencies. To deliver it, we've used purpose-built community interest companies - companies that act as commercially as any business here today, but retain their profits to aid fuel poor households.

I very much hope the individual network companies will respond enthusiastically to the incentivisation from Ofgem, and I also commend the community interest company approach as one that maximises value for both sponsors and for customers.

Opportunities

Now I appreciate that today's audience is a mixture of those from the fuel poverty network and those whose concern is to make money for their businesses. And that’s good. Because this activity doesn’t just offer opportunities for low-income customers, it also helps companies, whether in the infrastructure, installation or systems business. In terms of main energy efficiency programmes, it offers suppliers ready access to CERT credits, whilst it reduces Warm Front delivery costs by providing block referrals.

In helping business, it also contributes to the local economy - and community activity means regeneration - improvements to the local housing stock, local jobs, money spent in local communities. For distribution networks, the activity may be said to bring together their straightforward business interest in growing their networks, and the less tangible interest in strengthening their brands by demonstrating corporate social responsibility in a most thoroughgoing way.

Gas price rises and extending the network

It would, I think, be remiss of me to talk to this audience and not address some concerns about the future. We're meeting at a time of significant change in energy markets and in energy policy. We all know that gas prices have risen. That begs the question of whether activity to expand the network is appropriate. The fact is that, whilst wholesale, and thus retail, prices have risen sharply, gas remains more than competitive with rival fuels such as oil, LPG and mains electricity, which those outside the network would otherwise have to use. And gas offers heating in a convenient form that solid fuels can’t match - and the extent of pensioner fuel poverty means that ease of use is a serious consideration.

The Renewables Strategy and extending the network

The second question we have to face is whether there is a tension between providing gas connections over the 2008-13 period and our move away from fossil fuels. We issued the UK Renewable Energy Strategy consultation last week. The Strategy puts forward a package of measures aimed at decarbonising our energy mix, increasing deployment of renewables and meeting our EU 2020 targets.

We know from Stern that the cost of tackling climate change will have an impact on prices, but we also know that the impact is likely to be least if we take action now. Everyone - Government, business, and the individual - has a role to play if we are to be successful at meeting our ambitious proposed goal of 15% of all our energy coming from renewable sources by 2020. So as part of this, it is true that we expect to see gas and electricity bills rise.

At the same time, the challenges of climate change and security of supply present many opportunities. Not least the potential for £100 billion of investment or up to 160,000 jobs in the UK and beyond. So we think that it’s right we pay for these changes, either through our utility bills or through changes in our economy.

No-one will deny that, as the years go on, energy supply will look very different. But the impact of potential measures in the Renewable Energy Strategy consultation will have almost no impact in the short term. We don’t expect a significant impact until 2015 to 2020 at the earliest.

So, as we’re in 2008 - not 2015 or 2020 - and people need help in 2008, we believe that using the 2008-13 Price Control to connect households in deprived communities to the gas network can continue to make a significant contribution to addressing fuel poverty. Looking beyond that, we can continue to help our most vulnerable customers to counter adverse price impacts in the years after 2015, just as we do now.

Additionally, in our fuel poverty activity, we’re looking at microgeneration for non-gas areas. I've mentioned our pilot work in the North-East and Yorkshire, and earlier this month I was pleased to announce the establishment of a new fuel poverty workstream within the Low Carbon Buildings Programme that will test the efficacy of our funding and delivery models within that programme.

Let me return to the main attraction that is today's event. I hope I've been able to communicate my commitment to this activity, and to underline the hard work that has got us to this position. And I hope I've been able to draw out the many benefits that the activity can offer - not just to some of the most vulnerable members of our society, but also to all those connected with the gas industry. I thank you all for coming, and I hope that, together, we will be able to look back on today’s event as an important step on the road to eradicating fuel poverty.