Off-Grid Energy
An OFT market study
October 2011
OFT1380
© Crown copyright 2011
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CONTENTS
Chapter/Annexe
Page
1 Executive Summary
4
2 Introduction
9
3 Overview of the off-grid market
13
4 Heating Oil
56
5 Liquefied Petroleum Gas (LPG)
127
6 Microgeneration
168
7 Conclusion and recommendations
200
1
EXECUTIVE SUMMARY
1.1
Four million households in the UK are not connected to the mains gas
grid and therefore use other fuel sources for their heating. These 'offgrid' fuels include kerosene heating oil, liquefied petroleum gas (LPG),
coal, wood and electricity, with microgeneration technologies, such as
solar panels, increasingly playing a role.
1.2
In the winter of 2010/11 some heating oil customers experienced high
prices and delays in supply, causing some commentators to question
how well the markets for heating oil and off-grid fuels more generally
were working. In January 2011 the OFT brought forward planned work
into off-grid energy supply and launched a market study to assess
whether and how the competition and consumer protection regimes
could bring about better outcomes for consumers.
Off-grid customers and fuels
1.3
The off-grid community is large, geographically dispersed and diverse: it
covers all social grades, urban and rural communities, households in fuel
poverty as well as households that are not, and embraces a wide range
of fuels.
1.4
The markets in England, Wales and Scotland are broadly similar, with
between 12 and 25 per cent of the population off-grid, and with heating
oil and electricity being the main fuels used. Northern Ireland is very
different. Fully 80 per cent of households are off-grid and around 80 per
cent of these use heating oil. However, a higher proportion of the offgrid population in Northern Ireland has the option to connect to mains
gas. This reflects the relatively recent roll-out of mains gas networks.
1.5
There is limited potential for most consumers to switch between
different fuels – the cost of converting boilers means that such
switching is likely only when central heating systems are upgraded or
replaced. This means that the different fuels provide only a limited
competitive constraint on one another. There are therefore separate
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markets for each fuel and the issues arising in each market are largely
distinct.
1.6
Our report focuses primarily on the markets for heating oil, LPG and
microgeneration; our key findings for each of these are set out below.
Heating Oil
1.7
Most complaints about heating oil concern high prices. Retail margins
only account for around 10 to 15 per cent of the price level, out of
which distributors cover their own costs, and some profit. Of the
variation in prices over time, over 90 per cent is explained by
movements in the price of crude oil.
1.8
Unexpectedly early, heavy snow in December 2010 triggered a sharp
spike in demand (40 per cent up on the previous year) at the same time
as hampering deliveries. Prices also spiked. To some extent this reflected
the increased costs of supply in tough conditions, but firms may also
have taken profit during this peak period. However, retail margins over
the year as a whole do not appear excessive – these margins are
generally high in the winter but low or even negative in the summer.
1.9
Our analysis of the market strongly suggests that competition is
generally working well. Almost all (97 per cent) of off-grid households
live in a postcode district served by at least four known suppliers.
Barriers to entry are low, and the industry is fragmented – the largest
player accounts for less than a fifth of the market and there are many
small players including relatively recent entrants. We found no evidence
of collusion between suppliers, and a variety of evidence that rival
suppliers compete on price.
1.10
We found higher concentration in supply in a small number of remote
areas – less than 0.3 per cent of off-grid households live in a postcode
district with access to only one or two suppliers. High concentration is
an issue for the supply of many products and services in such locations
due to sparse populations and access issues – this is not a finding
unique to heating oil.
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1.11
We have, therefore, found no evidence of a competition problem that
would require either Competition Act enforcement or intervention to
regulate prices in this market.
1.12
We did, however, find grounds for concern about compliance with
consumer law. We found evidence of some heating oil websites making
claims that implied that they were independent or were comparing prices
from different suppliers, when this was not the case. We have already
taken action to address this.
1.13
We also received complaints that some heating oil suppliers were
charging a different price on delivery from that quoted when the order
was taken, particularly during the severe weather last December.
Carmarthenshire County Council took a successful case against this
practice in August of this year.1 The OFT is now examining this and
related practices.
LPG
1.14
Our initial assessment of the Competition Commission's Orders in the
bulk LPG market is that they have resulted in more customers switching
and some new entrants to the market: annual switching rates have risen
from 0.5 per cent at the time of the Competition Commission
investigation to 3.7 per cent in 2010/2011. The Orders have only
recently taken effect and we will continue to keep this under review.
1.15
We received some complaints about contract terms in bulk LPG,
including around limited termination rights in the face of sharp price rises
during the two year maximum lock-in period permitted by the Orders.
This is of particular concern for customers who are offered low but
temporary introductory rates as an incentive to switch. We are pursuing
this matter with the industry.
1
www.tradingstandardswales.org.uk/prosecutions/carmarthengboils.cfm
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1.16
Our review of the supply of cylinder LPG brought to light some concerns
about the contractual arrangements between suppliers and dealers.
However, domestic heating represents only a small part of a wider
market for cylinder LPG (including industrial and commercial customers).
We may revisit this matter in the context of this wider market.
Microgeneration
1.17
Microgeneration is a relatively young industry and currently accounts for
only a very small proportion of off-grid energy supply. Take-up is
expected to grow substantially, encouraged by a combination of financial
incentives, other Government policy, rising costs for conventional fossil
fuels and a growing degree of environmental awareness. The
development of this market over the medium term should provide an
option for off-grid customers to switch away from fossil fuels.
1.18
However, there are several features of the industry that make mis-selling
a particular risk: not all technologies are suitable for all properties; the
technology is complex, so customers are dependent on an expert
assessment to make a decision; salespeople tend to specialise in one
technology and hence may not provide an assessment of the best
technology overall; there is little independent assessment available; and
prices are high so if mis-selling occurs the problems are significant.
1.19
Our evidence suggests that at present problems are not widespread, but
complaints started to increase over the summer. We expect most of
these complaints to be resolved by installers, and are confident that the
arrangements in place through the REAL Assurance Scheme Consumer
code of practice, will support this. It is crucial that such problems do not
undermine consumer confidence and thus the development of this
market. Alongside Local Authority Trading Standards OFT stands ready
to investigate specific allegations with a view to enforcement action as
necessary to stop unfair commercial practices in this market.
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Next steps
1.20
OFT is actively examining a number of practices and engaging with
industry to ensure consumer law compliance, as set out above. We are
also working with trade bodies to ensure that their members are fully
aware of their obligations under consumer law, and that when things go
wrong consumers obtain adequate redress.
1.21
We welcome the recent campaigns by consumer and industry
organisations to advise households about the measures they can take to
buy early and reduce their exposure to risks.
1.22
Our study presents an evidence base on the off-grid population and its
experiences that we hope will be useful to relevant policy-makers,
notably DECC, Defra, the Scottish Government, the Welsh Government
and the Northern Ireland Executive. While by no means all off-grid
consumers are vulnerable, there is a proportion of the off-grid
community that is particularly vulnerable to high prices both in the short
term and the longer term, notably the subset of consumers in deep rural
locations with little choice of suppliers, poor housing stock, and low
incomes. Our view is that targeted assistance to the most vulnerable is
more appropriate than measures addressed at the markets more widely,
as in many respects the markets appear to be working reasonably well.
Thank you
1.23
Finally, we would like to extend our thanks to the many stakeholders in
the private, public and third sectors who generously contributed their
time and information to this study.
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2
INTRODUCTION
2.1
On 25 January 2011, the Office of Fair Trading (OFT) announced its
intention to undertake a market study into the off-grid energy sector in
the United Kingdom (UK).2 This study was brought forward from the
OFT's 2011/12 programme of work in light of consumer experiences in
winter 2010/2011 of high and volatile prices and difficulties in receiving
supply, particularly in respect of heating oil, giving rise to concerns that
competition and consumer protection aspects of the market might not be
working well for consumers. Following a short consultation on scope,
the market study was formally launched on 15 March 2011.3
Scope of the study
2.2
The scope of the study relates to the domestic supply of energy to offgrid consumers for their heating needs.4 For the purposes of the study,
we define off-grid consumers as those households that are not
connected to the mains gas grid. This includes both those households
that are not connected to a mains gas supply but may be able to obtain
a connection, as well as those for which the mains gas grid is too
distant for connection to be either practically or economically feasible.
2.3
The following heating sources are commonly used by off-grid
households:
•
Heating oil.
•
Liquefied petroleum gas (LPG) supplied both in bulk and in cylinders.
2
The press release is published at: www.oft.gov.uk/news-and-updates/press/2011/07-11
3
The press release is published at: www.oft.gov.uk/news-and-updates/press/2011/35-11
4
More information on the market study is available on the OFT website:
www.oft.gov.uk/OFTwork/markets-work/current/off-grid/ - including full details of the study
scope at: www.oft.gov.uk/shared_oft/market-studies/oft1302f.pdf
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•
Solid fuels, in particular wood (in the form of chips, pellets or logs)
and mineral forms of solid fuel such as coal and coke.
•
Mains electricity (storage, immersion and portable room heaters).
•
Microgeneration technologies directly providing heat, in particular
ground source and air source heat pumps and solar thermal water
heating as well as biomass boilers or stoves that typically burn
wood.
•
Other microgeneration technologies that can indirectly generate heat
by producing electricity to operate heaters, in particular photovoltaic
panels and wind turbines.
2.4
The study focuses primarily on the supply of heating oil and LPG
because, apart from electricity which is already regulated by the Office
of the Gas and Electricity Markets (Ofgem) in Great Britain (GB) and the
Northern Ireland (NI) Authority for Utility Regulation (the Utility
Regulator) in NI, these are among the main energy sources for domestic
off-grid central heating.
2.5
The study considers whether the markets for these sources of domestic
energy are working well for consumers, taking into account both
competition and consumer issues.
2.6
The study also considers the potential role of alternative heating sources
such as microgeneration technologies, electricity and solid fuel. Our
initial interest in considering this arose because a wider cross-fuel choice
– if available – would create competitive pressures that could act as
important constraints on suppliers across all substitutable markets,
including heating oil and LPG.
2.7
However, our work has identified a limited degree of substitutability
among off-grid heating sources, primarily because of high switching
costs. In light of these costs, heating system replacement tends to be
infrequent and driven by major events such as housing changes or boiler
replacement.
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2.8
Given the limited cross-fuel switching observed, off-grid energy
represents a collection of separate energy markets rather than a
cohesive market in its own right. Therefore, while there are some
themes common across these markets, it is appropriate to consider the
competition and consumer issues in each of these markets separately.
2.9
Accordingly, our report commences by describing the nature of the offgrid population and the common themes it faces. The report then
discusses each of the heating oil and LPG markets, which represent the
focus of our study, in more detail individually. We also include a
discussion of the microgeneration market which, despite not currently
representing a strong constraint on the heating oil and LPG markets due
to its small installed base, is of particular interest given its early stage of
development and hence potential for continued growth. A discussion of
other alternative energy sources is annexed to the study.
2.10
We conclude with a summary of our key findings and our
recommendations. We do not propose to refer the heating oil retail
distribution market to the Competition Commission and we are
consulting on this provisional non-reference decision.
Activities and data sources
2.11
In the course of our study we engaged with a wide range of relevant
parties: consumers; consumer organisations; industry representatives,
including trade associations and companies of diverse sizes; central,
devolved and local government; sector regulators; and interested third
parties including those with relevant sector expertise.5
2.12
Our evidence base was assembled by:
•
5
A call for submissions by the OFT at the time of the study launch,
following which a number of relevant parties provided submissions
and information to the OFT.
A list of key contributors to this market study is provided in Annexe P.
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2.13
•
Data provided by industry following information requests by the OFT
to a sample of suppliers across the relevant industries.
•
Bilateral discussions and correspondence with relevant parties.
•
Eight roundtable sessions held across the UK (two in each nation) in
May and June 2011 bringing together a broad range of stakeholders
to contribute their experiences and views of the off-grid market.
•
Other correspondence with relevant parties.
The OFT also commissioned UK-wide consumer research from the
market research firm SPA Future Thinking (SPA). This comprised:
•
Qualitative research with off-grid consumers (8 focus groups and 46
depth interviews across the UK).
•
A quantitative survey with 400 heating oil consumers in the UK.
•
A mystery shopping exercise obtaining telephone quotes for heating
oil and cylinder LPG in locations across the UK as well as using a
sample of five heating oil websites.
A report by SPA on the consumer research findings is available on the
OFT website (the SPA Report).6
2.14
The OFT supplemented the above information through additional desk
research drawing on public and other third party data.
2.15
The remainder of this report summarises our findings from the above
discussions, research and analysis.
6
The SPA main report is published at: www.oft.gov.uk/shared_oft/market-studies/off-grid/finalreport.pdf. Data tables for the main report are published at: www.oft.gov.uk/shared_oft/marketstudies/off-grid/data-tables.pdf. Screener data for the main report are published at:
www.oft.gov.uk/shared_oft/market-studies/off-grid/screener-questions.pdf.
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3
OVERVIEW OF THE OFF-GRID MARKET
Summary
3.1
This chapter considers the characteristics of the off-grid population
(meaning households not connected to the gas grid) and the common
issues they face. Our key findings are that:
•
15 per cent of UK households are off-grid, with large variation
between the four nations: 80 per cent of homes in NI are off-grid,
compared with only 12 per cent of homes in England. Proportionally
more off-grid households are single occupancy (in GB) and/or house
a person over the age of 60 (in the UK).
•
There are large urban off-grid populations in addition to rural off-grid
populations. In GB, electricity is the most common fuel for off-grid
households in urban locations; heating oil is most common in rural
locations. In NI, heating oil is the most common fuel regardless of
location.
•
The UK average cost of heating a typical three bedroom house is
around 50 per cent higher with heating oil and 100 per cent higher
with LPG than with mains gas. UK average heating costs for both
heating oil and LPG have risen over the last four years. Over this
period LPG has been consistently the most expensive and heating oil
has been the most volatile.
•
Switching between fuel sources is expensive and may make sense
only when boilers or central heating systems are replaced. Where
available, connection to the mains gas grid may be the best option.
In particular we note that 30 per cent of off-grid households in NI
may be within 50 metres of a gas connection. Microgeneration
technologies also represent an increasingly viable alternative. For
many households, however, improvements to home energy
efficiency may be the best way to improve affordability in the short
term.
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3.2
This chapter sets out in more detail the characteristics of households off
the gas grid, and discusses the possibility of gas connections and the
wider context and issues for off-grid consumers.
Who is off-grid?
3.3
Around four million UK households are not connected to the mains gas
grid.7 This varies substantially across the UK, as shown in Table 3.1
below. Among the nations, NI has a unique majority reliance on non-gas
fuels since natural gas was only relatively recently introduced there in
1996. For more details of the derivation of Table 3.1, refer to Annexe A.
Table 3.1: Off-grid populations by nation
Mains gas
availability
England
Scotland
Wales
NI
UK
Off-grid
2,631
488
253
594
3,966
12%
21%
19%
80%
15%
('000
households)
Off-grid as a
percentage of
total
households
Sources: OFT analysis of Consumer Focus Report data; Welsh Government data; NI Utility
Regulator data and NI House Condition Survey 2009 data. Refer to Annexe A for more details.
3.4
Unless otherwise indicated, all off-grid statistics cited in the remainder of
this chapter8 are:
7
This is a conservative estimate, preferred as it is based on detailed breakdown figures
referenced elsewhere in the report. Other estimates range up to 4.7 million. Refer to Annexe A
for details.
8
Please note that the OFT has not undertaken any significance testing when referring to
statistical data from the Consumer Focus Report or the NI House Condition Survey. Differences
between groups are presented for information only and may not be statistically significant.
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•
For GB – based on a report on off-gas issues to be published by
Consumer Focus9 (Consumer Focus Report) which draws on GB
survey data.10 A more detailed breakdown of differences by nation
within the GB data can be found in the Consumer Focus Report.
•
For NI – based on the closest comparable data, where available,
from the NI House Condition Survey 2009 published by the NI
Housing Executive.11
We caveat that neither of the above reports provides statistics that are
an exact match to our study definition of the off-grid population as set
out in paragraph 3.1. Hence, the off-grid statistics cited in this chapter
refer to the closest available proxy from the above and should be
understood as estimates. The relevant proxy is, for GB, the statistics for
homes that do not use gas as their main heating fuel12 and, for NI, the
9
Off-gas consumers: Information on households without mains gas heating, to be published by
Consumer Focus.
10
The Consumer Focus Report is based on analysis of data from the 2008 English Housing
Survey (EHS), the 2007/09 Scottish House Condition Survey (SHCS) and the 2008 Living in
Wales Survey (LIWS). The sample base for each survey is 15,523, 9,394 and 2,741 households
respectively. For more details, please refer to the Consumer Focus Report and Annexe A of this
report.
11
This survey is based on a sample base of 3,000 dwellings. Refer to
www.nihe.gov.uk/northern_ireland_house_conditions_survey_2009_-_main_report.pdf
Please note that some of the NI House Condition Survey 2009 statistics refer to dwellings and
some refer to households. In this report, where we refer to statistics from the NI House
Condition Survey, we have used both terms interchangeably, as where figures relating to
households are not available, figures relating to dwellings are the closest available proxy. For
example, the off-grid percentage of NI households presented in Table 3.1 is more precisely the
off-grid percentage of NI dwellings.
12
Not identical to our study definition, as some of these homes are, despite not using gas for
their main heating, connected to a gas supply.
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statistics for households with non-gas central heating or no central
heating.13
3.5
The OFT definition of off-grid households, for the purposes of this study,
covers both homes that do not use gas but lie within a gas postcode14
('potentially connectable' homes with respect to gas supply) and homes
that do not use gas and do not lie within a gas postcode ('likely nonconnectable' homes). The possible circumstances and solutions for
households in each of these categories clearly differ and we will highlight
some of these differences in this chapter for interest.
3.6
The following figures show postcode areas that are not on the mains gas
grid – in each map these areas are outlined in black. We refer to these as
off-gas areas, which are likely to capture mainly the likely nonconnectable proportion of the off-grid population. We show these off-gas
areas overlaid against fuel poverty,15 rural and urban classification and
general deprivation indicators,16 in that order. This gives some idea of
where the off-grid population lives, how spread out it is and some
13
Not identical to our study definition for the following reasons. Categorisation is by use of gas
rather than connection to gas; and 'gas' includes LPG. Also, the data specify a particular off-grid
fuel usage only where this occurs with central heating systems; off-grid use of standalone
stoves or heaters is not broken down by fuel. Finally, a separate category of dual central heating
is identified which covers both gas fired and off-grid fuels. Where we do not have a breakdown
of dual central heating by type of fuel, we have excluded these households from the calculation
and state so in accompanying footnotes.
14
Defined as a postcode where at least some households within that postcode have been
recorded as having a gas supply.
15
For more details of the definitions of fuel poverty applied, which vary across the UK, please
refer to Annexe B. We note that for England, the fuel poverty definition and its associated
targets are currently being considered by an independent Review led by Professor John Hills.
Refer to: www.decc.gov.uk/en/content/cms/funding/fuel_poverty/hills_review/hills_review.aspx.
16
Because fuel poverty and deprivation are measured differently and at different points in time in
each nation of the UK, these maps are not directly comparable across nations. For example, the
most deprived area in England cannot be compared to the most deprived area in Wales.
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indication of its likely vulnerabilities. Details of the sources for and
methodology underlying these maps are in Annexe B.
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Figure 3.2: Map of UK off-gas areas by fuel poverty
Source: OFT mapping analysis based on Xoserve and other source data; refer to Annexe B
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Figure 3.3: Map of UK off-gas areas by rural/urban classification
Source: OFT mapping analysis; based on Xoserve and other source data; refer to Annexe B
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Figure 3.4: Map of UK off-gas areas by multiple deprivation indices
Source: OFT mapping analysis; based on Xoserve and other source data; refer to Annexe B
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Off-grid rural/urban split and associated fuel use
3.7
In GB, there are clear differences in the off-grid population in urban
compared to rural locations. However, in NI, where the natural gas
market (introduced in 1996) is much less established, there remains a
prevalence of off-grid households across both urban and rural areas and
the differences between the two areas are less marked.
3.8
We therefore consider GB and NI separately below, making a distinction
between rural and urban locations only for the former.
GB
3.9
In GB, 51 per cent of off-grid households are in rural17 areas compared to
15 per cent of on-grid households. The higher than average rurality of
off-grid households reflects the higher costs of installing mains gas
infrastructure in such locations (due to, for example, the greater distance
to reach households, topological complexities and there being fewer
households over which to spread costs).
3.10
However, almost half of off-grid GB households are in urban areas.
•
This may in part be due to health and safety regulations prohibiting
mains gas from being installed in certain types of buildings.
Following the partial collapse of the high-rise Ronan Point apartment
building in London in 1968 due to a gas explosion, building
regulations were changed to ensure that new buildings over five
storeys tall were constructed to resist an explosive force such as a
gas explosion.18 Gas supply was banned from existing buildings that
17
Rural and urban definitions vary for each housing survey. For England and Wales, we have
estimated 'rural' data by combining the 'town and fringe', 'village' and 'hamlet and isolated
dwellings' categories.
18
www.pwri.go.jp/eng/ujnr/joint/35/paper/72lew.pdf
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did not meet these criteria, resulting in a number of high rise blocks
switching to electricity.
•
3.11
Some landlords may also be unwilling to take on onerous gas
installation and maintenance regulations.19
Because of the different circumstances affecting the urban and rural offgrid populations as described above, the two populations are also quite
distinct in nature, with substantial differences in particular with respect
to the types of fuels used. This is illustrated by Figure 3.5 which show
the use of different off-grid fuels in urban and in rural areas:
•
Urban off-grid households rely largely on electricity (90 per cent use
this as their main heating fuel in GB). The reasons set out above are
likely to factor into this. Other possible reasons include:
-
Flammable and contaminable fuels with relatively high levels of
emissions are less favoured (or may not be allowed by regulation20) in
densely built up areas and are also less easy to deliver door-to-door
given the size of the delivery vehicles.
-
Urban homes are also less likely to have the outdoors space available
to accommodate storage tanks or solid fuel stockpiles.21
19
Based on discussions with some stakeholders. For details of applicable regulations, refer for
example to: www.letlink.co.uk/letting-factsheets/factsheets/factsheet-7-the-gas-safetyinstallation-and-use-regulations-1998.html
20
Under the Clean Air Act 1993 and the Clean Air (NI) Order 1981, smoke control areas have
been introduced in many large towns and cities in the UK and in large parts of the Midlands,
North West, South Yorkshire, North East of England, Central and Southern Scotland. In these
areas, it is an offence to emit smoke from a chimney of a building, from a furnace or from any
fixed boiler. (Source: smokecontrol.defra.gov.uk/background.php#smoke)
21
This seems a reasonable general assumption but, for illustration, the English Housing Survey
Housing Stock Summary Statistics Tables, 2009, show that the average floor area for a dwelling
in a city centre is 71 square metres compared to 153 square metres in a rural area. Refer to
Table SST1.1 in www.communities.gov.uk/documents/statistics/xls/1937429.xls
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•
Rural off-grid households have fewer such constraints and rely much
more on delivered fuels, in particular heating oil which is the main
heating fuel for 53 per cent of GB rural off-grid households.
Figure 3.5: Main heating fuel by location and nation for GB off-grid
households
Rural
100%
100%
90%
90%
80%
80%
70%
70%
% off-grid households
% off-grid households
Urban
60%
50%
40%
30%
60%
50%
40%
30%
20%
20%
10%
10%
0%
0%
England
Scotland
Wales
LPG & Bottled Gas
Solid Fuel
England
Scotland
Wales
Heating Oil
Electric heating
Source: Consumer Focus Report22
3.12
As shown in Figure 3.5, there are also considerable variations by nation.
Notably, the proportion of off-grid households using electricity is lower in
Wales than elsewhere in GB, in both urban and rural areas. Conversely
the proportion of off-grid households using heating oil or solid fuel is
higher in Wales than elsewhere in GB, in both urban and rural areas
(although the difference is less marked in the latter).
22
For urban areas, the number of households is 1606 (England), 288 (Scotland) and 40 (Wales
– note the small size). For rural areas, the number of households is 1509 (England), 253
(Scotland) and 229 (Wales).
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3.13
A clear majority of GB off-grid households rely on a mix of fuels to heat
their home (80 per cent use secondary fuels, with the figure higher
among households using heating oil and LPG as their main fuels and
lower among households using electricity as their main fuels). The SPA
research corroborated that a high level of secondary use exists, with 75
per cent of GB heating oil consumers surveyed using a secondary
heating fuel. Mains electricity (which we assume means portable
heaters) and/or23 wood were each used by around 40 per cent of GB
heating oil consumers, followed by coal/coke (25 per cent) and cylinder
LPG (seven per cent).
NI
3.14
In NI, a clear majority (around 80 per cent) of the population is off-grid.24
78 per cent of urban households are off-grid and 99 per cent of rural
households are off-grid.
3.15
About two-thirds of all NI households (68 per cent) use heating oil as
their primary heating fuel,25 rising to 81 per cent of off-grid households.
Electricity heating – used by five per cent of off-grid NI households – is
much less common in NI than in GB and is associated mainly with urban
areas and apartment buildings.26
23
Respondents could select multiple responses in this question.
24
Please note that the percentage of off-grid households derived from NI House Condition
Survey 2009 data (84 per cent) differs slightly from the percentage of off-grid households in
Table 3.1 (80 per cent). We assume this may be because some households with a gas supply do
not use it for central heating.
25
NI House Condition Survey 2009, data provided by the NI Housing Executive. Please note that
fuel use is recorded according to central heating (CH) type and there may be additional oil, solid
fuel or electricity use within the categories CH Dual/Other and Non CH.
26
According to the NI House Condition Survey 2009 Report: ' … over two-thirds (67%) of all
dwellings with electric central heating were flats/apartments … The majority of dwellings with
electric (92%) central heating were located in urban areas, partly reflecting concentrations of
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Table 3.6: NI off-grid fuel use by location
% of off-grid households
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
All
CH Oil
CH Solid Fuel
Urban
CH Electricity
Rural
CH Dual/Other
Non CH
Source: NI House Condition Survey 2009. Note that 'CH' refers to central heating.
3.16
The SPA research showed that a high level of off-grid secondary use
exists, with 65 per cent of NI heating oil consumers surveyed using a
secondary heating fuel. Mains electricity (which we assume means
portable heaters) and/or27 coal/coke were each used by around 30 per
cent of NI heating oil consumers, followed by wood (20 per cent) and
cylinder LPG (14 per cent). This suggests that, among heating oil
consumers, coal/coke is preferred to wood as a secondary solid fuel in NI
whereas this is reversed in GB; and secondary cylinder LPG use is also
higher in NI than in GB.
Off-grid housing stock
3.17
Off-grid households face some particular challenges in respect of housing
stock, which may make off-grid housing on average harder to treat.
Housing Executive dwellings.'
www.nihe.gov.uk/northern_ireland_house_conditions_survey_2009_-_main_report.pdf
27
Respondents could select multiple responses in this question.
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3.18
3.19
3.20
Off-grid households generally seem to be less energy efficient:
•
In GB, 59 per cent of off-grid households (mainly electricity users)
do not have central heating as their main heating system. However,
this is not similarly a factor in NI where less electric heating is used.
•
A higher proportion of GB off-grid households have the lowest F and
G Energy Performance Certificate (EPC)28 ratings (49 per cent
compared to 10 per cent on-grid). Similar data were not readily
available for NI.
Among those who are off-grid in Scotland and Wales, and within
segments of this population in England, there is on average a higher
proportion of households with solid wall construction – which indicates
that these households will less readily be able to reduce their energy
needs through cavity wall insulation. Similar figures are not available for
NI.
•
In Scotland and Wales respectively, 28 per cent and 34 per cent of
off-grid properties have solid walls compared to 20 per cent and 26
per cent of on-grid properties.
•
In England, data from the English Housing Survey suggest that the
incidence of solid walled properties is greater in more remote areas
(hamlets and isolated dwellings).
Households living in rental accommodation are at a further disadvantage
in terms of energy use, as they have less control over improvements to
their housing stock. On average, a slightly higher proportion of GB offgrid households are in rental accommodation compared to GB on-grid
households (38 per cent compared to 31 per cent). However, this differs
28
'Every home which has been on the market should have an Energy Performance Certificate
(EPC) which rates the home for energy efficiency. Energy Performance Certificate Ratings run
from A (very efficient) to G (very inefficient). The average rating in the UK at the moment is D.'
Source: www.energysavingtrust.org.uk/Home-improvements-and-products/Moving-home-agreen-guide
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by nation: notably, in Scotland the difference is more marked (46 per
cent to 34 per cent). In Wales the position is reversed (21 per cent to 28
per cent). Similarly, in NI, a higher proportion of off-grid households own
their homes (66 per cent) than on-grid households (45 per cent).29
Off-grid demographics
3.21
When comparing the income distribution for off-grid households
compared to on-grid households, the picture across the different nations
is mixed. Each nation presents income distributions in a slightly different
way and so they cannot be directly compared with each other. Broadly,
however, there appears to be variation in the income profiles for
households using different off-grid fuels.30
3.22
Notwithstanding this, a higher proportion of GB off-grid households are
in fuel poverty31 (32 per cent, compared to 15 per cent of on-grid
households; while NI experiences the highest levels of fuel poverty in the
UK32 at 44 per cent overall33). This implies that features of the housing
29
These NI figures are calculated excluding dual fuel use.
30
In GB, a higher than average proportion of solid fuel and electricity consumers are in the
lowest three income bands surveyed and a higher than average proportion of heating oil
consumers are in the highest three income bands surveyed. Refer to the Consumer Focus Report
for more details of the GB statistics. In NI, 25 per cent of off-grid households in the top income
bracket recorded earn more than £30,000, compared to 17 per cent for on-grid households.
31
The definition of fuel poverty varies slightly across the nations. Please refer to Annexe B for
more details; however for example in England: 'A household is said to be in fuel poverty if it
needs to spend more than 10% of its income on fuel to maintain a satisfactory heating regime
(usually 21 degrees for the main living area, and 18 degrees for other occupied rooms)'.
(www.decc.gov.uk/en/content/cms/statistics/fuelpov_stats/fuelpov_stats.aspx)
32
As cited on page 5 of DETINI's 2010 Strategic Energy Framework.
33
No corresponding data for the off-grid and on-grid segments are readily available from the NI
House Condition Survey. However, 46 per cent of rural NI households are in fuel poverty
compared to 43 per cent of urban NI households and 99 per cent of rural households are offgrid. Furthermore, according to the 2009 NI House Condition Survey Report (page 63), NI
households using off-grid central heating fuels such as electricity or solid fuel have higher levels
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stock and the relatively higher costs of off-grid fuels as shown later in
Figure 3.7, together clearly affect the average energy spend of an offgrid household.
3.23
Among off-grid households (comparable NI statistics are only shown
where of interest):
•
A higher proportion of GB off-grid households are single occupancy
(41 per cent compared to 27 per cent on-grid) although in Wales
there is no substantial difference (26 per cent compared to 25 per
cent on-grid).
•
A higher proportion of GB off-grid households house a person over
the age of 60 (22 per cent compared to 15 per cent on-grid). The
same applies in NI, where 31 per cent of off-grid households house a
person aged 60 years or older, compared to 21 per cent of on-grid
households.34
•
A lower proportion of GB off-grid households house a couple with
dependent child(ren) (15 per cent compared to 23 per cent on-grid).
The first two cases may be more vulnerable to fuel-related concerns, for
example because those in older age groups are more likely to be in
retirement with fixed incomes.
Switching across off-grid fuels
3.24
This section considers the potential benefits to households from
switching between off-grid energy alternatives and the extent to which
barriers to switching may exist. Our analysis of potential benefits
focuses on costs, because the SPA research and the correspondence we
have received both indicate that costs are a major concern for off-grid
of fuel poverty (69 per cent and 63 per cent respectively) than households using heating oil and
mains gas central heating (41 per cent and 43 per cent of whom are fuel poor respectively).
34
These NI figures are calculated excluding dual fuel use.
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consumers and a main driver of their purchasing behaviour. But we
recognise that myriad other factors such as environmental
considerations, ease of handling and ease of buying also affect
household fuel choices.
3.25
Off-grid fuels are generally a more expensive option than gas. This is
illustrated by Figure 3.7, which uses data from Sutherland Tables35 to
illustrate the comparable costs for heating an average-size threebedroom house with different types of fuel.36
•
For example, in July 2011, the latest period for which comparable
data is available from Sutherland Tables, the UK average cost37 of
heating an average-size three-bedroom house was 47 per cent higher
for oil and 107 per cent higher for LPG, in each case compared to
gas.
35
Information about Sutherland Tables can be found on their website:
www.sutherlandtables.co.uk
36
This is based on data from Sutherland Tables that are 'intended to be used to compare
different domestic fuels and the costs of using them under similar conditions. Their primary
purpose is not the prediction of actual operating costs in any particular dwelling, although they
will of course give an indication of this' (Sutherland Tables, Introduction to the July 2011
Tables).
37
For consistency with Figure 3.7, where calculating UK averages based on Sutherland Tables
data in this report, we have followed Sutherland Tables's methodology of a simple average
across the six UK regions (South East, South West and Wales, Midlands, Northern England,
Scotland and NI) for which they provide cost data.
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Figure 3.7: Comparative Domestic Heating Costs – United Kingdom
National Averages, July 2011
Source: Sutherland Tables, July 2011
3.26
Data from Sutherland Tables show that, among the fuel types shown,
the costs of all fuels, but in particular of LPG and of heating oil, have
risen over the past four years. In this period, LPG has been consistently
the most expensive off-grid option followed by, on average, heating oil
which has been the most volatile in terms of costs. However, we note
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that the comparable heating cost based on a standard electricity tariff38
exceeds the costs of both LPG and heating oil.39
3.27
There is also variation in heating costs by region, as would be expected
in light of temperature differences. Scotland is the most expensive
region while the South-West of England and Wales40 appears to be the
least expensive region, for most fuels. However, '… sometimes these
variations are not systematic in terms of climate. For example, heating
and hot water costs with wood pellets are much cheaper in NI than in
Scotland or the North of England, while figures for solid fuels are
cheaper in South West England and Wales than in the South East of
England. In these cases, local economics appear to prevail over climate
conditions.'41 In our view, the differences may also reflect geographic
features leading to higher establishment and transportation costs for
supplying the relatively higher number of outlying areas in Scotland
compared to other UK nations. For NI, the Sutherland Tables data42 also
show that:
•
Standard gas heating costs appear higher in NI than in GB, so that
the cost disadvantage of being off-grid is reduced for the former –
particularly as the NI heating costs for heating oil, which is used by
the majority of off-grid households, are also lower than in GB.
38
According to the SPA research, a standard electricity tariff, rather than more economical
special tariffs like Economy 7, is used by a minority of the off-grid households sampled who use
electricity for heating. These sampled households should be seen as representative of electricity
use only in the areas surveyed. Further details are provided in the screeners to the SPA Report.
39
Heating costs using standard electricity to run radiators (rather than storage heaters) were one
per cent higher than the heating costs using LPG based on a UK average from Sutherland Tables
data for July 2011.
40
Costs for the South West of England and Wales are not reported separately and are
represented only as a combined cost in Sutherland Tables's standard cost tables.
41
Sutherland Tables: Commentary on April 2011 Tables.
42
Sutherland Tables, July 2011 data.
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•
NI heating costs for some solid fuels and for electricity have risen
less relative to the four-year average than in other regions (and
indeed, for wood pellets, have reduced).
3.28
The wide range and variability of off-grid fuel costs observed shows that
the mix of fuels used can have a significant impact on heating costs for
the average off-grid household. This suggests that some off-grid
households could benefit from switching to another off-grid fuel.
3.29
To illustrate this, Table 3.8 summarises, for each off-grid heating source:
•
The relative estimated upfront costs of installation.
•
The annual savings relative to heating oil.
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Table 3.8: Relative upfront and heating costs of off-grid fuels
LPG43
Microgeneration
Solid fuels
Electricity
Upfront costs £3.5k (installation
£8k44
and
equipment)
£2.5k £6k45
Wide range depending
on technology but
typically between £2k
- £23k
c. £0.5k£7k46
c. £2k47
Average
annual
heating costs
relative to
heating oil
+41%
-100% to -54%
-22% (wood
pellets)
-22%
(economy)
-23% (coal)48
+42%
(standard)
Heating
oil
-40%
(anthracite)49
Source: OFT research and supplier estimates. Information on the relative costs of
microgeneration technologies can be found on the EST website.50 Other average relative heating
costs are calculated by the OFT from Sutherland Tables data for July 2011, for an average size
three-bedroom house in the UK, and assuming the use of conventional boilers for oil and LPG.
43
The annual savings figures provided relate to bulk LPG, which suppliers have informed us
tends to be more economical than cylinder LPG.
44
www.homeheatingguide.co.uk/central-heating-cost.html
45
www.homeheatingguide.co.uk/central-heating-cost.html
46
OFT desk research and information provided by the Solid Fuel Association.
47
See www.energysavingtrust.org.uk/business/Business/Housing-professionals/Interactivetools/Hard-to-treat-homes/Matrix/Electric-storage-heating and
www.energysavingtrust.org.uk/business/Business/Housing-professionals/Interactive-tools/Hardto-treat-homes/Matrix/Explanation-of-terms-used
48
Housecoal gp A(1).
49
In the form of peas / grains.
50
www.energysavingtrust.org.uk
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3.30
We note, however, that Figure 3.7 and Table 3.8 provide a historic view
of annual heating costs that may change over time depending on the
relative development of the different sectors. For example, while heating
costs using oil are currently more expensive than heating costs using
electricity, when averaged over a four-year period these costs have, at
least in some nations (Scotland and NI) been on a par;51 and going
forward, gas and electricity suppliers have recently announced
substantial increases in their standard rates. 52 Furthermore, a
comparison of whole-life costs taking into account potential differences
in upfront costs, average replacement life cycles and average
maintenance costs among different heating systems may yield different
outcomes for different households depending on their individual
circumstances than a comparison of relative annual running costs.
3.31
We also note that cost is only one factor in a household's determination
of the best off-grid heating source for its circumstances – ease of use,
quality of heat, emissions, efficiency and security of supply are examples
of other factors that may be relevant. Different fuel types offer quite
diverse purchasing and usage experiences, so that consumers would
need to research the features of different options, the availability of local
suppliers and other relevant factors carefully to determine which type is
most suitable for their individual circumstances before taking any
decision to switch.
3.32
In any case, the possible cost or other benefits that may derive from
switching between different heating sources, including as a result of
51
Sutherland Tables data, July 2011.
52
For more information refer to:
www.decc.gov.uk/en/content/cms/meeting_energy/markets/making_energy_/making_energy_.as
px
www.uregni.gov.uk/news/utility_regulator_comments_on_power_ni_tariff_announcement
www.uregni.gov.uk/news/increases_in_international_fuel_costs_directly_responsible_for_the_gas
_price_rise_announced_by_phoen
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increasing competition and choice across the market for off-grid fuels as
a whole, are only available where switching is readily feasible.
3.33
This is not the case for off-grid consumers, as our study has identified
considerable barriers to switching between different fuel types.
3.34
These barriers largely arise because such a switch typically requires the
replacement of the boiler and central heating system. The upfront cost
of installing a new central heating system throughout the home is
generally the main barrier to switching. However, the disruption that this
would entail, given that the system is often embedded in the
infrastructure of the building to some extent, is also a strong deterrent.
•
Other barriers relate to lack of information and awareness about
different fuels and their relative costs.
•
In some cases (for example in rental accommodation), consumers
are constrained by having little choice over the form of heating used.
•
In some cases, bulk LPG consumers can face additional fuel
switching costs related to charges for the removal of their LPG
storage tank where this is owned by their supplier.
3.35
Accordingly, off-grid opportunities to switch fuel type tend to be eventdriven: for example, by changes in housing circumstances (moving
home, or refurbishment), or aligned with the life cycle of a boiler (around
12 years).53
3.36
Replacement in the latter case tends to arise only when the heating
system breaks down, which by nature represents a distressed situation
in which a household may make a replacement decision more for reasons
of expediency (in which case a like-for-like replacement is most
straightforward and therefore probable) than long-term efficiency.
Households may also be guided in their decision-making at such times by
53
www.energysavingtrust.org.uk/Home-improvements-and-products/Heating-and-hot-water
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the person servicing their existing boiler, who may not have experience
of or access to alternative solutions.
3.37
The odds are therefore stacked against fuel switching in that
opportunities to do so are generally rare, and constrained even when
they arise.
3.38
The existence of significant barriers to switching in practice is borne out
by the fact that many of those households who use heating oil appear to
have done so for a very long time. The SPA survey of heating oil
consumers, for example, showed that 63 per cent of UK heating oil
consumers surveyed have used heating oil for over 10 years (rising to 78
per cent for NI consumers alone) and for the majority54 of all UK heating
oil consumers surveyed this had been ever since moving into their home.
3.39
In light of the difficulties in switching between different types of off-grid
heating sources, we conclude that off-grid energy is not in fact a market
in its own right but, rather, represents a community who share the
common feature of not being connected to the mains gas grid, albeit
that they are consumers in largely separate markets.
3.40
Given that switching costs limit substitutability between heating
sources, we have considered the different off-grid fuels separately.
Therefore the next chapters of our report consider each of the heating oil
and LPG markets in turn and separately from any other. The report also
considers the microgeneration market which, despite not currently
representing a strong constraint on the heating oil and LPG markets due
to its limited off-grid installed base, is of interest given its relative
immaturity compared to the other off-grid fuel markets and hence
potential for rapid growth.
54
73 per cent of GB consumers and 61 per cent of NI consumers.
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3.41
Our findings in respect of the electricity55 and solid fuel markets for
heating use, which the study has also considered in the limited context
of their role as possible alternatives to heating oil and LPG, are attached
in Annexes M and N respectively.
Gas connection as an off-grid option
3.42
Connection to the mains gas grid may be an attractive option where
available. Natural gas is a relatively low carbon56 energy source that is
easy to use and offers greater security of supply than fuels requiring
road transportation to the home. A choice of suppliers is available and its
status as a regulated sector affords the consumer additional protections.
It also has the advantage of being – at least in recent times57 – a
relatively inexpensive source of space and water heating.58
3.43
The potential for expansion of the grid differs between GB and NI. In GB:
•
The option for large scale expansion of the mains gas grid was
previously considered in 2001 by a working group chaired by the
then Department of Trade and Industry (DTI). The report of the
working group (the DTI Report)59 found that, even were a full-scale
extension of the gas network possible, it would not be justified on
cost/benefit grounds.60 Furthermore, at an individual level, while
55
Although electricity is used for heating by a large proportion of off-grid households, we have
not focused on the supply of electricity within this market study as this is separately regulated.
56
Natural gas is the lowest polluting fossil fuel (source: NI Strategic Energy Framework 2010).
57
As noted, there is no certainty about how the relative costs of different off-grid fuels may
develop in future.
58
Refer to Figure 3.7.
59
Report of the Working Group on Extending the Gas Network, 2001.
60
Report of the Working Group on Extending the Gas Network, 2001. The report refers to an
estimated cost of £80m to connect 100 communities.
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connection to the gas grid may be the most appropriate solution for
a given household, it is not necessarily so in every case and a wide
range of other (sometimes quicker) options should be taken into
account.
•
Small-scale extension of the GB gas grid is still occurring on an adhoc basis, funded either by the individual household or community
requesting the connection, or through the Fuel Poverty Scheme
administered by Ofgem (as described in more detail in Annexe D).
New gas connection levels have been falling over the past few
years, with around 78,000 gas connections to GDN owned
networks in 2009/10, down from 114,000 in 2007/08.61 78,000
represents approximately two per cent of the estimated size of the
GB off-grid population.
3.44
In NI, the Department of Enterprise, Trade and Investment (DETINI) has
consulted on the potential for extending the natural gas network.62 The
consultation closed only recently, on 30 September 2011, so no decision
has yet been made. Even without expansion, the relatively recent
introduction of natural gas in NI means that many off-grid households
could be, but have not yet been, connected – as detailed below.
3.45
Without further large scale expansion, our work has estimated that
(depending on the criteria used) between five and 45 per cent of off-grid
households by nation are currently potentially connectable63 to the mains
61
Refer to Table 2.5 of Ofgem's Gas and Electricity Connections Industry Review 2009-10, 28
March 2011. The Review is published at:
www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/CIR%2009-10.pdf
Paragraph 2.22 explains that GDN networks account for a much higher proportion of
new/modified connections to existing domestic premises.
62
The consultation may be viewed at: www.detini.gov.uk/deti-energy-index.htm
63
A further (approximately) 500,000 GB households are connected to a mains gas supply but do
not use it as their main heating source. As these households fall outside our off-grid definition,
we will not consider them further in the context of this study. However, as a potentially readily
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gas grid. Our definition of connectable relates to location relative to the
mains gas grid. It is, as such, a technical measure rather than one based
on affordability; furthermore it does not take into account feasibility
(such as geographical, geological or engineering factors). Our analysis is
set out in Table 3.9 – more details are provided in Annexe A.
Table 3.9: Estimates of the percentage of off-grid households that
are potentially connectable based on proximity to the mains gas grid
England
Wales
Scotland
NI
Potentially
connectable
(within 50 m)
N/A
6%
N/A
30%
Potentially
connectable
(within 1 or 2
km)
20% (Southern
Gas Network
only, 2 km)
31% (1 km)
40% (2 km)
N/A
Potentially
connectable (in
gas postcode)
42%
22%
35%
N/A
Source: OFT analysis of Consumer Focus Report, Scotia Gas Networks data and NI Utility
Regulator data; Welsh Government analysis
3.46
A lower distance from the grid implies a greater likelihood of
connectability.64 Table 3.9 shows that the largest opportunity for gas
connections is in NI, where a material proportion of off-grid households
addressable subset of those households who may struggle with non-gas heating costs, this
segment may be of particular policy interest. We refer interested parties to section 2.6 of the
Consumer Focus Report which analyses this segment (in England) in more detail.
64
The exact distance beyond which connection costs are not practical will vary according to
dwelling density and technical factors among others, but two km is one proxy that has been
used in some analyses (Scottish House Condition Survey, Scotia Gas Networks) as an indicative
threshold.
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live within 50 m where connection is currently generally free,65 more
cost-effective (hence affordable) and more likely to be feasible.
3.47
Although, from Table 3.9, the potentially connectable proportion of the
off-grid population appears at face value substantial, it must be
emphasised that engineering feasibility has not been taken into account
in this analysis. Furthermore, analysis of this segment reveals inherent
characteristics that may reduce their actual connection opportunities:
•
For example, many of the GB households who are theoretically
connectable are, in practice, unable to connect to the gas grid due to
location, 66 tenure67 or housing stock68 restrictions that are also likely
to explain their higher reliance on electric heating.
•
In NI, we expect the potentially connectable population to be
concentrated in the urban areas where the current gas network
areas are located; more detailed data on this segment are
unavailable. Nevertheless, constraints on connection are likely to be
fewer than in GB as a higher proportion (66 per cent) of the NI off-
65
firmus energy will connect households within 30 metres and Phoenix Gas Networks will
connect households within 50 metres. Refer to Annexe D for more details.
66
In GB, a higher proportion of the potentially connectable segment are located in urban areas
(75 per cent) compared to the likely non-connectable segment (26 per cent) with there being
less of a difference in Wales. Refer to Annexe C for more details.
67
In GB, more households that are potentially connectable are renting (44 per cent) compared to
those that are likely non-connectable (34 per cent). The proportion of potentially connectable
households in rental is notably higher than average in Scotland (58 per cent) and lower than
average in Wales (26 per cent). Refer to Annexe C for more details.
68
The proportion of those in flats among potentially connectable households was higher for
England and Wales (44 per cent and 13 per cent respectively) than for likely non-connectable
households (23 per cent for England and five per cent for Wales). In Scotland there was no
difference between the two groups. Refer to Annexe C for more details.
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grid population owns their home and a lower proportion lives in flats
or apartments (six per cent).69
3.48
69
Besides feasibility considerations as covered above, there are also, in
practice, other more general yet equally substantial barriers to
connection. Consistent with the overall barriers to fuel switching
described in paragraphs 3.34, these are primarily concerned with costs,
disruption and awareness. The disruptive effects are self-evident; the
other points are discussed below:
•
The average cost of connection for an individual household
sufficiently close to the mains gas grid to benefit from regulated
connection charges and acting independently of others, where the
engineering requirements are straightforward, is in the region of
£660 per GB household70 and, in NI, is free where a dwelling is
within 30 or 50 metres of the grid.71 However, the large majority of
households will incur bespoke costs that can vary widely upwards of
this depending on factors including distance from the closest
suitable gas mains access point and complexity of installation.
•
Connection costs are in addition to the costs of installing a gas boiler
and associated pipework (up to around £2,000 depending on the
complexity of the installation)72 and the cost of the boiler itself (in
the region of £1,000).73
These NI figures are calculated excluding dual fuel use.
70
Please refer to Annexe D for details of gas connection costs. Average is calculated as a
straight average of connection charges that include the cost of backfill by the GDN.
71
Depending on the relevant NI gas network area.
72
See for example: www.which.co.uk/home-and-garden/heating-water-andelectricity/guides/installing-a-boiler/
73
www.energychoices.co.uk/partner-lp_do-you-need-a-new-boiler/do-you-need-a-newboiler.html#5
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•
3.49
3.50
Consumers may not be sufficiently aware of their proximity to the
gas grid, the cost and process of connection, or available financial
support (as described in Annexe D), to properly assess their options
for connection. The SPA research found that such awareness within
the sample of off-grid consumers providing qualitative feedback
appears low. Government, regulators and/or industry may therefore
wish to consider means of raising awareness, particularly of
available connection funding, within qualifying off-grid households.
In summary, our analysis of potential connectability among the off-grid
population concludes that:
•
There are many factors that will in practice significantly limit the
achievable conversion rate among those households who have an
opportunity to do so. However, there should still be numerous
households for whom connection is a genuine option for
consideration.
•
Nevertheless, it should also be recognised that this option is
primarily one available to urban off-grid households and therefore
offers little if any relief for the many off-grid consumers who live in
rural areas. This is both because the majority of potentially
connectable households are located in urban areas and because of
scale efficiencies in incurring connection costs that favour urban
areas.74
For NI, there are further differences that should be noted. Here, more so
than in other nations of the UK given the relative immaturity of the NI
natural gas market, there is a significant opportunity to decrease the size
of the off-grid population either by expansion or by increased conversion
to natural gas within existing grid areas. Both are consistent with
74
All else equal, mains gas extension is most economic where there is a greater density of
connectable households within a certain distance from a grid, to share the predominantly fixed
costs of laying an extension. Therefore, any gas extension programme that seeks to maximise
cost-effectiveness is likely to focus on urban rather than rural areas.
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DETINI's stated objectives to promote opportunities for switching to
lower carbon fuels such as natural gas and biomass, where it is cost
effective to do so,75 which will also assist in alleviating the high fuel
poverty levels in NI.
3.51
Nevertheless it is clear that there are strong barriers to the adoption of
gas by NI consumers, even where already available, including high levels
of satisfaction with existing home heating and the need to reassure a
nervous public with limited experience of gas of its safety and to
effectively communicate its benefits.76
3.52
We therefore support the plans set out in the 2010 Strategic Energy
Framework published by DETINI77 to '(a)gree a strategy to incentivise
gas connections and increase gas uptake in existing and future licensed
areas'. As illustrated, there seems to be potential for such a programme
to have a strong impact in NI, which represents 15 per cent of all UK
off-grid households.
The wider off-grid landscape
3.53
75
This section provides some further general context, as background for
the consideration of off-grid issues in this report, on the wider policy and
regulatory support and energy measures that may be relevant to off-grid
consumers.
www.detini.gov.uk/strategic_energy_framework__sef_2010_-3.pdf
76
A study undertaken by Action Renewables and Element Energy on behalf of the Energy Saving
Trust (Into the West: Low carbon heat options off NI's gas network, July 2010) found that
among those uninterested in the potential of connecting to gas, almost two thirds (64 per cent)
felt there was nothing that could be done to help them change their mind, although as expected
the level of interest increased where the availability of grants was factored in. The SPA research
found that only nine per cent of NI heating oil consumers surveyed who could access gas said
they were likely to do so within the next three years. (Please note that this finding is based on a
small sample size of 47 NI consumers who could access gas.)
77
Refer to: www.detini.gov.uk/strategic_energy_framework__sef_2010_-3.pdf
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Policy support
3.54
The UK Government and Devolved Administrations are committed to
supporting increased energy efficiency and promoting low carbon
energy.
•
-
The flagship policy in the Bill is the 'Green Deal', a scheme whereby
householders, private landlords and businesses would be given
finance upfront to make energy efficiency improvements, which
would then be paid for from energy bill savings. The Green Deal will
be introduced from October 2012.
-
The Bill also seeks to establish a new Energy Company Obligation
(ECO),79 which will take effect from the end of 2012 and places
requirements on energy companies to help certain groups of
consumers who are more exposed to energy issues. ECO works
alongside the Green Deal by targeting appropriate measures at those
households which are likely to need additional support, in particular
those containing vulnerable people on low incomes and those in hard
to treat housing. ECO replaces existing obligations to reduce carbon
emissions (the Carbon Emissions Reduction Target (CERT) and
Community Energy Saving Programme (CESP)), which expire at the
end of 2012.
•
78
For GB, the Energy Bill 201178 includes the following elements:
Alongside this, the Welsh Government has published an Energy
Policy Statement on its ambitions for a Low Carbon Revolution80 and
www.decc.gov.uk/en/content/cms/legislation/energy_bill/energy_bill.aspx
79
By amending existing powers in the Gas Act 1986, Electricity Act 1989 and the Utilities Act
2000.
80
wales.gov.uk/topics/environmentcountryside/energy/renewable/policy/lowcarbonrevolution/?lang
=en
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the Scottish Government's Low Carbon Economic Strategy forms an
integral part of its overall Economic Strategy.81
•
For NI, DETINI's 2010 Strategic Energy Framework aims for an
energy system where 'much more of (NI's) energy is from renewable
sources and the resulting economic opportunities are fully exploited;
and energy efficiency is maximised'.82
•
The Devolved Administrations are also active through schemes
including arbed and Nyth/NEST in Wales, the Energy Assistance
Package in Scotland83 and Warm Homes in NI. In England, similar
funding is available through the Warm Front scheme. More details of
these schemes are set out in Annexe L.
3.55
The UK Government and Devolved Administrations are also implementing
specific initiatives related to microgeneration takeup (for example the
Renewable Heat Incentive programmes in GB and in NI, and Feed-InTariffs in GB) that are described in more detail in Chapter 6.
3.56
The measures highlighted above are applicable to both on-and-off-grid
households. However, existing and proposed measures mostly do not
distinguish between off-grid and on-grid targets or specific fuel types.
•
81
Off-grid households are a notable segment of the relevant population
for, and can benefit significantly from, these policies, given the fuel
types used, the limited alternatives available and the harder-to-treat
nature of a substantial proportion of the housing stock.
www.scotland.gov.uk/Topics/Business-Industry/Energy/Action/lowcarbon
82
DETINI Strategic Energy Framework, September 2010
www.detini.gov.uk/strategic_energy_framework__sef_2010_-3.pdf
83
The Energy Assistance Package is one of a range of fuel poverty and energy efficiency
schemes to which the Scottish Government has announced in October 2011 a 35 per cent
increase in overall funding. www.scotland.gov.uk/News/Releases/2011/10/05163256
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•
Our analysis shows that the issues faced by off-grid households
differ to some extent from those faced by on-grid households, and
indeed differ even between off-grid households in urban and in rural
areas, hence potentially warranting distinctions within policy.
3.57
Absent such distinctions, there may not automatically be intervention to
the degree that may be desirable among the off-grid population – in
particular the large proportion of this population that is located rurally –
given asymmetries that may exist in the costs and challenges of rolling
out such measures to different groups or areas or for specific fuel types.
3.58
Should policy intervention be considered, Government may therefore
wish to consider whether the introduction of policies targeted
specifically at off-grid households, or the establishment of targets within
existing policy that relate specifically to off-grid households or off-grid
fuel types, is warranted. There may be a reasonable case, both in terms
of maximising impact and redressing variations in cost-to-service across
affected groups, for such targeting. There will be a trade-off between
different prioritisation criteria that could, for example, include:
3.59
•
Needs – focused on the subset of the off-grid community that is
most vulnerable to high prices. These are consumers who combine
the most challenging aspects of the characteristics described earlier:
that is, with no real alternative whether because they live in deep
rural locations with little choice of suppliers or rent electricallyheated homes in urban areas; poor housing stock; and low incomes.
•
Volume or feasibility – focused on the subset of households that can
most readily be assisted, for example through efficiency measures or
connection to gas. Further work by others to refine our high level
analysis of potentially connectable households and assess household
needs, ultimately at local levels, would be beneficial.
Our view is that a strategically targeted form of intervention will deliver
a greater return than measures addressed more widely at the heating oil
market, much of which appears to be working reasonably well.
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3.60
We are aware of ongoing projects that are already seeking to assess and
thereby effectively target the needs of off-grid households by matching
information on their characteristics and location with available policy
solutions and funding, often working with parties with deep local
knowledge such as local authorities and housing associations. No doubt
there are many other examples and this list is not intended to be
exhaustive, but we cite for interest work undertaken by:
•
The Welsh Government, which is undertaking a study drawing on
data provided by Wales and West Utilities, to categorise off-grid
households according to their distance from the mains gas grid
which will affect their options for connection. This information will
be used to develop strategies to address the issues faced by off-grid
households and to best deploy available resources and funding
according to case-by-case circumstances.
•
GDNs, in planning the delivery of their commitments under the fuel
poverty network extension scheme.
•
Some energy suppliers, in delivering their obligations under schemes
to implement efficiency improvements such as CERT, CESP and in
future ECO.
•
Consumer organisations who have commissioned off-grid research,84
and other work by organisations such as the Centre for Sustainable
Energy85 and through initiatives such as The Future of Rural Energy
in Europe (FREE).86
84
For example, the Consumer Focus Report, and the Consumer Focus Wales report Off-gas
consumers and microgeneration published at:
www.consumerfocus.org.uk/wales/publications/off-gas-consumers-and-microgeneration.
85
For example through the website www.energyefficiencywales.org.uk, which was developed
by the Centre for Sustainable Energy with funding from the Welsh Government.
86
FREE is a three year initiative launched in 2010 which operates in rural communities across
England, Scotland and Wales to reduce levels of fuel poverty and carbon emissions in off-grid
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Consumer protection
3.61
Ofgem regulates the supply of gas and electricity in GB and the Utility
Regulator does the same for NI. In contrast, off-grid energy supplies are
not subject to monitoring by a sectoral regulator, although they are
subject to UK competition and consumer protection law. We have
received a number of representations that this situation is an anomaly
and that the greater consumer protections afforded to on-grid consumers
should be extended to consumers in an off-grid setting.
3.62
We note, however, that there are critical differences between on-grid
and off-grid energy supplies which have resulted in regulation for the
former.
3.63
•
On-grid energy supplies are not fully price regulated; 87 rather the
cost of transmission of electricity and gas using the respective grid
networks is regulated. The rationale for this is that the grids are
'natural monopolies' that it is undesirable or uneconomic to replicate
and hence there is no scope to control pricing through competition.
•
Heating oil, LPG and solid fuels are not delivered via natural
monopoly grids but via tanker/HGV and as such do not raise the
same issues of competitive constraint.
Ofgem and the Utility Regulator have, alongside their transmission price
regulation functions, also been granted powers to oversee certain other
consumer protections, for example, regulating the treatment of bad
debtors and disconnection. With respect to these protections, the OFT
has no analogous powers or remit. While we recognise that it is to some
areas. FREE is being delivered through a partnership between ACRE, Calor, NEA, the Rural
Community Action Network and the Commission for Rural Communities, funded by Calor Gas
Limited. Work has included mapping of off-grid areas and fuel poverty. Refer to
www.nea.org.uk/working-with-rural-communities-free-future-of-rural-energy-in-europe/print
87
Apart from in NI, where the Utility Regulator regulates supply prices for the dominant suppliers
of gas and electricity (Phoenix Supply Limited and Power NI). 2010 Energy Retail Report, p11.
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extent anomalous that a consumer has better protection when they live
in an on-grid property compared to an off-grid property, it is also the
case that the suite of consumer protection regulations enforced by the
OFT and Trading Standards – including the Unfair Terms in Consumer
Contracts Regulations 1999, the Consumer Protection from Unfair
Trading Regulations 2008 and the Consumer Protection (Distance
Selling) Regulations 2000 – apply to off-grid energy products and
services and aim to ensure that consumers are treated fairly. We discuss
these regulations further in Chapter 4.
3.64
Individual suppliers may also elect to offer additional support. While the
ability or inclination of suppliers to do this may vary by supplier and on a
case by case basis by customer, we have heard of some incidences of
practices that are helpful to consumers such as identifying and
prioritising vulnerable customers during delivery backlogs, or offering a
range of payment options such as prepayment, instalments, stamps and
direct debits. Consumers may also wish to explore such options where
available.
Addressing off-grid issues: the role of efficiency measures
3.65
The diversity of the off-grid population implies that the most suitable or
cost-effective solution to a home's heating needs may vary considerably
across households. A flexible rather than one-size-fits all approach
drawing on the full range of energy measures and policy support
available will allow the needs of different off-grid households to be most
effectively met. Such measures may include, as suitable to the specific
circumstances of a household:
•
Efficiency measures: enhancing existing insulation or installing
further insulation; upgrading to more energy efficient appliances
and/or taking measures to reduce one's energy use where possible.
•
Gas connection, where feasible (for example where households are
in close proximity to a mains gas grid).
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•
The installation of replacement heating systems other than gas or of
additional heating sources to supplement the existing central heating
system.
As described in paragraphs 3.54 and 3.55, there are energy policies in
place that support much of the above and hence play a part in shaping
the holistic solution set.
3.66
In general however, our discussions and research suggest that, for many
households, the benefits from improving home energy efficiency, for
example through insulation and/or the replacement of old and inefficient
boilers, may be greater and more consistent over the short to medium
term than the benefits from getting the best deal within existing market
constraints, as well as relatively immediate compared to more significant
intervention such as gas connection.88
•
For example, the Energy Saving Trust (EST) estimates that
consumers could save up to a quarter on their annual heating bills by
replacing their boiler and heating controls. 89 Which? estimates that
roof and wall insulation could save between £150 and £450 a year
and adding a modern boiler and heating controls could save a further
£200 a year.90 This compares to the SPA consumer research
findings where shopping around for 500 litres of heating oil only
found average price differences up to £26.
•
While the costs of insulation can be relatively low, the costs of
replacing a boiler are more substantial. For example the EST
88
The 2001 findings from the DTI-sponsored working group on fuel poverty seem consistent
with this conclusion: 'electric storage heating and insulation would remove 300-400,000 from
fuel poverty, while insulation measures alone would remove 200-300,000'.
89
Refer to: www.energysavingtrust.org.uk/Home-improvements-and-products/Heating-and-hotwater
90
www.which.co.uk/environment-and-saving-energy/energy/guides/home-heatingsystems/options-for-heating-your-home
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estimates the cost of replacing a boiler at £2,300.91 However, many
of the energy-related support schemes92 available relate to efficiency
measures (for example there is a boiler scrappage scheme in
Scotland) and this could help to alleviate associated affordability
barriers.
3.67
We therefore recommend that, where possible, off-grid consumers
carefully consider the possibilities for further improving the energy
efficiency of their homes and seek to maximise any support that may be
available for them to do so.
Other consumer considerations
3.68
In addition to the efficiency measures listed above, the SPA research
indicates that there are opportunities for consumers to shop around more
proactively, to maximise available assistance and to draw on prior
experiences of peak-time constraints in planning and managing their
purchases of oil. The suitability and effectiveness of such measures will
vary from household to household and we recognise that the incremental
benefit of such measures will still be limited for some households given
their individual circumstances. Nevertheless, consumers may wish to
consider for example:
•
Buying outside the peak winter season and/or making sure not to
leave purchases until the last minute, in order to increase flexibility
and hence bargaining power when purchasing.
•
Regularly shopping around (where not limited by contract terms) and
monitoring prices, albeit there may be a trade-off between benefiting
91
This figure relates to the replacement of a gas boiler, but we have assumed the cost of
replacing other types of boilers will be broadly in the same range. Refer to:
www.energysavingtrust.org.uk/In-your-home/Heating-and-hot-water/Replacing-your-boiler
92
Information on assistance is available at, for example, the Energy Saving Trust:
www.energysavingtrust.org.uk/Easy-ways-to-stop-wasting-energy/Energy-saving-grants-andoffers.
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from any supplier loyalty and obtaining lower prices that must be
taken into account in individual purchasing decisions.
•
Participating in heating oil buying groups.93
•
Considering schemes to assist in budgeting for payments, for
example paying by instalments, prepayment or (in NI) saving for fuel
payments using heating oil stamp saving schemes. Consumers
should, however, be careful to assess the terms and conditions of
any arrangements made to check that they can still readily monitor
and control costs if needed, shop around, and exit if pricing is not
competitive. The benefits of any arrangements should be balanced
against any limitations on a case by case basis.
•
Considering auto-top-up schemes that may help regulate and
increase security of supply; however, the same caveats as above
regarding terms and conditions apply.
•
Making applications for grants (in relation to insulation, boiler
replacement, fuel bills and so on) where qualifying criteria are met.
•
In line with paragraph 3.65, the above can be complemented by:
-
Considering back-up arrangements (for example portable heaters) in
case of supply disruptions in winter; and more generally considering
whether supplementing the central heating system with a mix of
other room heating alternatives may be beneficial on an ongoing
basis.
-
Considering, where possible, the suitability of alternative fuels. For
example consumers could research information on alternative fuels
93
Information and advice about buying groups can be found at, for example:
www.citizensadvice.org.uk/oilclubs where consumers can also download a Best Practice for Oil
buying Groups guide jointly produced by Citizens Advice, ACRE and the Federation of Petroleum
Suppliers. The SPA report also reviews consumers' experiences of buying groups.
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towards the end of a boiler's life cycle in preparation for possible
future switching opportunities.
3.69
Consumers can seek advice and obtain information on their energy
purchasing, use and options from a wide range of organisations including
the EST, Citizens Advice, Citizens Advice Scotland, the Consumer
Council for NI (CCNI), Consumer Focus, Consumer Focus Scotland,
Consumer Focus Wales, Which? and Action for Communities in Rural
England (ACRE).
•
Some useful contact details for consumers are available at:
www.decc.gov.uk/en/content/cms/about/contact_us/key_contacts/k
ey_contacts.aspx.
•
Additional information about available support can be found on
www.direct.gov.uk,94 the Welsh Government website,95 the Energy
Saving Trust Scotland website96 and www.nidirect.gov.uk.97
•
A campaign has also recently been launched by consumer groups,
jointly with the industry, the Department of Energy and Climate
94
For example:
www.direct.gov.uk/en/Environmentandgreenerliving/Energyandwatersaving/index.htm
www.direct.gov.uk/en/Pensionsandretirementplanning/Benefits/BenefitsInRetirement/DG_18594
0
www.direct.gov.uk/en/MoneyTaxAndBenefits/BenefitsTaxCreditsAndOtherSupport/On_a_low_inc
ome/DG_10018946
95
wales.gov.uk/topics/environmentcountryside/energy/efficiency/saving/?lang=en
96
www.energysavingtrust.org.uk/scotland/Scotland-Welcome-page/At-Home/Home-EnergyScotland/Energy-Assistance-Package
97
For example: www.nidirect.gov.uk/index/information-and-services/environment-and-greenerliving/energy-and-water-saving/energy-and-water-efficiency-in-your-home/insulating-and-heatingyour-home-efficiently.htm?WT.ac=Popular-Environment-Greener-Living-1
www.warm-homes.com
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Change (DECC) and the Department for Environment, Food and Rural
Affairs (Defra), issuing guidance on buying heating oil and using
buying groups.98 CCNI also provides relevant information for NI
consumers including on prices.99
3.70
To successfully improve their energy outcomes, it will be important for
consumers to be supported in the choices they need to make and with
the actions they should consider.100 Government, consumer
organisations and industry have an important role in considering the
provision of readily available and impartial information and advice to help
consumers to select the solution best fitted to their circumstances when
purchasing a new heating system, to effectively supplement their
existing central heating system, to prepare for a future juncture when
switching may be possible, and to become more informed buyers.
Evidence base
3.71
In the course of our work, we have found that public data on off-gas
areas and experiences are patchy or available only on a piecemeal basis
due to gas grid confidentiality issues and this may be a hindrance to the
effective application of any off-grid strategy. Accordingly we have
sought to identify and draw together a number of sources of UK off-grid
data to form an evidence base, including off-grid maps and bespoke
98
For example: www.citizensadvice.org.uk/oilclubs
www.consumerfocus.org.uk/wales/news/campaign-aims-to-cut-costs-of-winter-heating-oil
www.oilsave.org.uk
www.consumerfocus.org.uk/scotland/publications/top-tips-for-heating-oil
www.acre.org.uk/news/2011-news/acre-joins-launch-of-the-buy-fuel-early-campaign
99
www.consumercouncil.org.uk/energy/home-heating
100
For example, the qualitative findings in the SPA research indicated that consumers would
value more advice regarding switching between different fuels.
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consumer research, on factors that may be of relevance to future work
in this area.
3.72
We hope that all interested parties will find our report and the
accompanying evidence base useful in the further development of any
relevant policy and consumer engagement and support that may be
considered appropriate in light of this study, and in the consideration of
strategies to maximise the effect of funding that exists or may become
available in off-grid areas.
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4
HEATING OIL
Summary
4.1
The price of heating oil has been both volatile and rising in recent years.
This, combined with supply problems last winter (2010/11) has
prompted concerns that the market is not working well. The OFT has
looked in detail at the market for heating oil and our key findings are:
•
Over 90 per cent of the variation in the average national retail prices
of heating oil is explained by movements in the price of crude oil.
High and volatile heating oil prices overwhelmingly reflect high and
volatile crude oil prices. Heating oil suppliers make a gross margin of
perhaps six pence per litre on an underlying price of around 50
pence per litre, and out of this must cover their own costs including
staff and transport – in other words the retail margin accounts for
only around 10 or 15 per cent of the final price of heating oil.
•
In the course of our study, and via Consumer Direct, we received a
large number of complaints from consumers relating to domestic
heating oil. Nonetheless, our consumer survey found that overall
customer satisfaction is high. 79 per cent of respondents to the
consumer research were either very or fairly satisfied with heating oil
as a fuel to heat their home and/or water. Pricing aside, 94 per cent
of consumers are either very or fairly satisfied with the service
received from their main supplier.
•
There are many competing suppliers at both national and (in most
places) local level, even taking account of suppliers that operate
multiple brands. The 10 largest companies supply less than half the
market. 97 per cent of off-grid households live in a location served
by at least four suppliers that we know of, while less than 0.3 per
cent have access to only one or two. Furthermore, we believe that
barriers to entry are low in most areas.
•
We found no evidence of price fixing or other forms of collusion
between heating oil suppliers.
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101
•
Demand for heating oil is strongly seasonal. Prices are not obviously
seasonal; however, prices do seem to be higher in winter and
indeed, after controlling for crude oil prices, retail prices do rise as
temperature falls.101 Retail margins are strongly seasonal – firms
make enough money delivering high volumes in the winter months to
support their operations through the quieter summer – but do not
appear excessive overall. There is no evidence in the data we have
to support the hypothesis that suppliers are quicker to pass on
increases in the underlying oil price than decreases.
•
Severe weather in December 2010 triggered a sharp spike in
demand (40 per cent up on the previous year) at the same time as
hampering deliveries. Prices also spiked – while average prices for
December were in the region of 50-60 pence per litre, in some
places prices of up to 80 pence per litre were reported on single
days. Some of the price increase reflected higher costs of supply in
these conditions, for example longer driving times per drop.
Nonetheless it is likely there was also a profit element. However in
competitive markets it is not illegal to raise prices in response to
increased demand. Our analysis of the market suggests that, while
firms are able to make profits at times of peak demand, competition
will constrain the extent to which they do so over time.
•
On this basis, we find no grounds to recommend regulating prices.
•
We did, however, find breaches of some consumer protection law:
-
We found evidence of three specific heating oil websites making
claims that implied they were independent or were comparing prices
from different suppliers, when this was not the case. We have
already taken enforcement action to address this issue.
-
We received complaints that some heating oil suppliers were charging
a different price at delivery from that quoted at order, particularly
For details see Annexe G.
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during severe weather last December. Carmarthenshire County
Council took a successful case against GB Oils Limited (trading as O.
J. Williams), in August of this year.102 We are currently examining
this and related practices.
102
•
We are working with the industry trade bodies to promote
compliance across the sector, through a combination of self
regulation by the industry, supported by the OFT.
•
We also received complaints about price discrimination, and calls to
prevent it by making firms publish their prices. However, offering
different prices to different customers is not of itself illegal. Given
the strength of competition in the market, we are not currently
recommending mandated price publication.
•
Our consumer survey indicated that on the whole people find it is
easy to compare prices and switch suppliers. However, customer
loyalty is high – most people buy from their usual supplier, in part
because they value the relationship and in part because they do not
expect prices to vary much. The SPA mystery shop found some
price variation, suggesting potential benefit of shopping around in
the region of two to five pence per litre. Tests of price comparison
websites suggested that while these can be useful for obtaining
indicative quotes, it is worth telephoning to find the best deal.
•
There are particular features of the heating oil market in NI that
make it different from the rest of the UK. Throughout this chapter
we discuss the NI perspective separately where appropriate. In
particular, on market structure (paragraph 4.21), pricing (paragraph
4.61), delivery size (paragraphs 4.77 – 4.78), order size and
affordability (paragraphs 4.87 – 4.88) and the case for regulation
(paragraph 4.142).
See: www.tradingstandardswales.org.uk/prosecutions/carmarthengboils.cfm
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Introduction
4.1
The price of heating oil has been both volatile and rising in recent years.
This, combined with supply problems last winter (2010/11) has
prompted concerns that the market is not working well.
4.2
Concerns put to us included:
•
Fears that some suppliers may have market power or even monopoly
positions in some localities, or that they might be engaged in cartel
behaviour.
•
Concerns over excessively high prices, and whether there were
grounds for regulating prices in this market.
•
Concerns about price variations between consumers.
•
Complaints that some customers have not been treated fairly with
respect to billing and cancellation rights.
4.3
This chapter looks at heating oil, focusing on the domestic retail or
distributor level in the UK. It describes the product and supply chain, and
considers competition and consumer protection issues in the retail
market. It also includes a specific discussion of market conditions last
winter.
4.4
The analysis in this chapter is based on sources including public data,
research with consumers (see the SPA Report) and a data request we
sent to firms. We received 18 responses (from over 70 firms contacted)
from firms whose combined market share we estimate at around 40 per
cent of domestic heating oil sales in 2010.
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The product
4.5
There are two types of heating oil used in the UK: kerosene and gas oil.
Gas oil, also known as red diesel,103 is mainly for agricultural or light
industrial use in the UK. Kerosene is the most commonly used for
heating homes in the UK, and is the focus of this study. All references to
'heating oil' in this report mean kerosene unless otherwise stated.
4.6
Both gas oil and kerosene are produced (refined) from the distillation of
crude oil. They are 'middle distillates' – produced at the midpoint of the
distillation process, as opposed to the beginning (heavy distillates) or end
(light distillates). Kerosene cannot be produced in isolation from other
products and there is only limited flexibility in the refinery output mix.
Kerosene makes up around 16 per cent of the yield from a barrel of
crude oil.104
4.7
Kerosene is used both for aviation and for heating. Until 2008, when EU
environmental legislation105 required a reduction in the sulphur content of
heating oil, jet (or aviation) kerosene and heating oil kerosene had similar
specifications. Since 2008, jet kerosene is less likely to meet the heating
oil sulphur specification and they are less likely to be substitutable. See
Annexe E for more detail.
4.8
Refiners have only limited flexibility to switch between products, and
profitability depends on selling prices of each. Figure 4.1 shows the
spread (the gap between refined and crude prices) for jet kerosene
(which is the traded product most similar to heating oil kerosene)
alongside that for other distillates, some of which sell for more and some
of which sell for less than the price of crude.
103
Dye is added to distinguish it from diesel that is used for road vehicles and which is therefore
taxable.
104
UK Refineries - Data provided by the International Energy Agency.
105
1999 EU Sulphur Content of Liquid Fuel Directives, as amended by the 2005 Sulphur Content
of Marine Fuels Directive. In England and Wales, the Directive is implemented under The Sulphur
Content of Liquid Fuels (England and Wales) Regulations 2007.
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Figure 4.1: Gap between the price of refined products and crude oil
25
20
15
Pence per litre
10
5
0
-5
-10
-15
Jan 08
Jul 08
CIF Petrol 10ppm
Jan 09
CIF Diesel 10ppm
Jul 09
Jan 10
CIF Gasoil 0.1%
Jul 10
CIF Jet
Jan 11
CIF Fuel Oil low %
Jul 11
LPG (Propane)
Source: Graph produced by DECC with permission from Bloomberg
4.9
106
107
108
Heating oil is a small part of the overall UK market for petroleum
products, as Figure 4.2 indicates. In 2010, four million tonnes of heating
oil were sold, of which 2.5 million tonnes was for domestic heating. This
is less than a quarter of the 11.1 million tonnes of jet kerosene.106
Similarly, the UK market for heating oil is small compared with other
parts of Europe (where gas oil rather than kerosene predominates in
heating). For example 2009 domestic volumes were 20.5 million tonnes
in Germany, 4.4 million tonnes in Belgium, and only 2.2 million for
domestic use in the UK.107 Although heating oil consumption might be
expected to decline over time as efficiency of fuel use increases, there
has been no fall in demand in the last 10 years.108
DECC, inland deliveries.
Figures from OFTEC/Eurofuel and DECC – other countries' figures are for gas oil.
DECC, monthly volumes data.
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Figure 4.2: Petroleum products sold in the UK, 2010
Lubricating Bitumen
oils
2%
LPG
1%
4%
Fuel oil
3%
Gas oil
8%
Other
petroleum
gases
4%
Motor spirit
23%
Gas oil
(Derv)
32%
Heating oil
kerosene
6%
Jet kerosene
17%
Source: DECC, deliveries of petroleum products for inland consumption
The supply chain
4.10
The supply chain for heating oil is illustrated in Figure 4.3, and described
below. For more detail, see Annexe F.
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Figure 4.3: UK heating oil supply chain
UK crude oil
comes by pipe/
boat from source
Crude oil, intermediate
and finished products
imported from outside
the UK
Refineries in UK
produce heating
oil
Stage 1
Heating oil transported by pipe/
boat/ rail
Terminals (coastal import terminal or
inland distribution terminal)
Some
distributors
collect direct
from
refineries
Stage 2
Distributors
collect heating
oil in tankers
Distributor's depots
(wet depots)
Some distributors
don't have storage
so buy ex-rack
daily
Some
distributors
own
terminals
Distributors
deliver in tankers
Customers
Stage 3
Source: OFT research
•
Stage 1 – from source to refineries or coastal import terminals:
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-
Crude oil is transported from oil fields by pipeline or boat to one of
the eight operational UK refineries.109
-
There are also more than 16110 sea-fed coastal oil terminals that
receive oil from UK refineries and abroad.
-
NI has no refineries. Heating oil is transported by sea to one of three
terminals in Belfast or one in Derry.
-
Exchange contracts allow refiners to sell oil from other companies'
refineries, reducing the cost of delivering to areas remote from their
own refining facilities.111
•
-
Product is transported to terminals by: pipeline (51 per cent), sea (34
per cent) or rail (15 per cent).112
-
There are around 50 major terminals in the UK; some are based on
the coast for imports, others are based inland. Many are owned by
the major oil companies, sometimes in a joint venture.
•
4.11
Stage 2 – moving product to terminals:
Stage 3 – road distribution to customers:
-
Heating oil distributors (that is, retailers) collect oil from refineries or
terminals in trucks (buying 'ex-rack') or get it delivered to their depots
by a wholesaler or independent transport company.
-
Distributors can either deliver to customers direct from the terminal or
via their own depots. Most do both, though this varies by firm and
time of year. Some smaller distributors, especially in NI, do not have
storage facilities, so deliver straight to the customer.
Some heating oil distributors are also wholesalers and some are also
importers. However, in the event of the anticipated acquisition of Total
109
Since 2008 ExxonMobil at Fawley no longer produces kerosene specifically for heating oil as
a result of the change in sulphur content, described at Annexe E.
110
Downstream Oil – short term resilience and longer term security of supply Deloitte p42.
111
UK Downstream Oil Infrastructure Wood Mackenzie report p25.
112
UKPIA Statistical Review 2011 p8.
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Butler by the Rontec Consortium and subsequent sale on to DCC,113 no
oil majors would remain in retail distribution of heating oil in the UK, and
no UK refiners would also distribute.
Scope: retail supply to domestic customers
4.12
The final consumer could be affected by capacity and resilience at any
level of the supply chain. These issues are briefly considered in Annexe
F, but the focus of this study is the retail supply of heating oil to
domestic consumers – Stage 3 in the supply chain description above. At
this stage, the market for heating oil kerosene is more distinct from that
for jet kerosene, than at earlier stages in the process. While the other
elements of the supply chain obviously have a direct bearing on the retail
market they are beyond the scope of this report.
4.13
There are about 1.6 million domestic users of heating oil in the UK
(around six per cent of all households in the UK), mostly concentrated in
rural areas.114 Usage is highest in NI, where 68 per cent of homes use
heating oil.115 This is because natural gas was introduced in NI only
relatively recently in 1996. Figure 4.4 shows how use of heating oil is
distributed across the country.
113
114
115
otp.investis.com/clients/ie/dcc/rns/regulatory-story.aspx?cid=207&newsid=221166
Consumer Focus and NI House Condition Survey 2009
NI House Condition Survey 2009.
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Figure 4.4: Heating oil use across the UK
Source: UK Emission Mapping Methodology 2009, AEA, Ioannis Tsagatakis, Tony Bush, Helen
Walker, Neil Passant, Nicola Webb and Daniel Brookes. Refer to Annexe B for detailed underlying
source explanations.
4.14
At the retail level, few firms focus solely on domestic heating oil. It is
sold within a portfolio of fuels delivered to domestic and commercial
customers, often alongside other products or services such as boiler
installation.
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•
Most firms116 sell both transport and heating fuels, and on average
heating oil made up less than half of the total liquid fuel sales among
those that responded to our data request.
•
All the businesses who responded to our information request deliver
fuels to both commercial and domestic customers. For kerosene,
domestic sales made up around 75 per cent of sales on average
(though it was 100 per cent for some).117 Some firms reported that
the importance of domestic sales has increased recently because of
the contraction in commercial demand caused by the recession.118
Competition assessment
4.15
The following sections look at allegations of monopolisation and market
power, at barriers to entry, at the relationship between prices and the
number of suppliers in an area, at the possibility of collusion between
suppliers, at consumer behaviour and buying power, at allegations of
price discrimination and excessive pricing, and at events last winter. It
also addresses the question of whether there is a case for regulating
prices in this market.
Monopolisation and market power
4.16
During the market study consultation we heard a number of allegations
and concerns about monopolisation and market power by distributors of
heating oil. In essence, these allegations implied:
•
that some localities have been monopolised
116
13 of the 17 firms that answered this question in our data request. Our discussions with
firms suggest this is true of the wider market.
117
Data request responses from firms.
118
Meetings with firms.
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•
4.17
that many distributors are ultimately owned by a single company so
that what appears to be competition between rival suppliers is in
fact a monopoly.
We have considered these issues and concluded that there is no
monopolisation problem at a national level. At a local level only a small
number of rural or island communities face a very limited choice of
supplier. This section sets out the evidence behind our findings.
The national market
4.18
At a national level the retail market for kerosene is not concentrated,
although in recent years it has been consolidating. In 2010 the 10
largest distributors had a combined share by volume of the domestic
market119 of just over 40 per cent compared to 35 per cent in 2005
(throughout our analysis firms are only counted once, even where they
operate multiple brands).
•
Consolidation has mainly been driven by acquisitions by the current
market leader in domestic heating oil, DCC (predominantly through
its subsidiary GB Oils). Their market share has increased
substantially in the past five years. Acquisitions completed or in train
this year would lead to further increases – for example GB Oils'
merger with Pace Petroleum was recently approved subject to
undertakings,120 and DCC have recently reached conditional
agreement with Rontec Investments LLP to acquire oil distribution
assets currently owned by Total Butler.121
119
RDCO data from HMRC, share of domestic sales below the de minimus of 3,500 litres
individually or 10,000 litres in total in a year.
120
Acquisition by GB Oils of Pace Fuelcare, ME/4924/11:
www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils and OFT press release:
www.oft.gov.uk/news-and-updates/press/2011/104-11
121
otp.investis.com/clients/ie/dcc/rns/regulatory-story.aspx?cid=207&newsid=221166
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•
4.19
Other firms have also grown through acquisition, although not to the
same extent – for example, NWF (in the top 10 by domestic
volumes in 2010) has recently acquired Evesons.122
Beyond the top 10 distributors, in 2010 there were around 70 other
registered UK dealers who each sold more than 10 million litres to
domestic customers, and over 300 that sold more than a million litres.
The fragmented nature of the UK market is shown in Figure 4.5. Only a
handful of firms have sizeable national networks, but there is a
reasonable number of big regional firms, as well as a large number of
smaller businesses, particularly in NI.
Figure 4.5: Estimated shares of UK 2010 domestic kerosene market
29%
Firms with large national networks (3 firms)
Large regional and smaller national
networks with >1% market share (8 firms)
43%
Smaller firms with ~0.5-1% market share
(around 20 firms)
14%
Small local firms with less than 0.5%
market share (300+ firms)
13%
Source: RDCO data from HMRC, share of domestic sales below the de minimus of 3,500 litres
individually or 10,000 litres in total in a year. Firms selling more than one million litres in 2010
122
www.nwffuels.co.uk/latest_news/detail/?nId=23
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4.20
There is significant national variation in the demand for and supply of
domestic heating oil throughout the UK, as shown in Table 4.6 (where
the number of suppliers relates to those who delivered more than a
million litres each to domestic customers in 2010).123
Table 4.6: Heating oil use by country
England
Wales
Scotland
NI
Annual domestic heating oil volumes
(billion litres, 2010)
(Share of UK total)
1.7
0.3
0.2
1.0
(53%)
(9%)
(5%)
(33%)
Households using heating oil
(thousands)
(Share of UK total)
828
143
135
505
(52%)
(9%)
(8%)
(31%)
Estimated number of active
distributors
(Share of UK total)
150
25
25
180
(39%)
(7%)
(7%)
(47%)
Source: OFT estimates based on analysis of total volumes and estimated regional consumption
data from DECC124 (volumes); Consumer Focus Report (households using heating oil); firms'
registered location in RDCO Data from HMRC for firms selling more than one million litres to
domestic customers, augmented by information from trade associations, price comparison sites
and firms (number of distributors)
4.21
The market structure in NI is less concentrated than in the rest of the
UK, with a smaller share held by the market leader and more mid-sized
firms, relative to the size of the market. See Figure 4.7.
123
Firms' registered location in RDCO Data from HMRC; augmented with firm coverage
information collated by the OFT.
124
See www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/oil/oil.aspx (ET 3.13)
and www.decc.gov.uk/en/content/cms/statistics/energy_stats/regional/regional.aspx
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Figure 4.7: Estimated shares of NI 2010 domestic kerosene market
13%
Firms with > 5% market share (2 firms)
33%
Firms with >1% market share (16 firms)
29%
Firms with ~0.5-1% market share
(around 40 firms)
Small local firms with less than 0.5%
market share (around 125 firms)
25%
Source: RDCO data from HMRC, share of domestic sales below the de minimus of 3,500 litres
individually or 10,000 litres in total in a year, firms selling more than one million litres in 2010
4.22
The main industry bodies relating to heating oil distribution are:
•
The Federation of Petroleum Suppliers (FPS) – over 230 members in
the UK and the Republic of Ireland.
•
The NI Oil Federation (NIOF) – around 70 members.
•
The Oil Firing Technical Association (OFTEC) – focused on
installation and maintenance of equipment.
Local competition
4.23
Market structure at a national level helps in understanding the overall
competition environment. However a large number of suppliers at the
national level may mask greater concentration at the local level, and
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heating oil is sold on local markets so the number of suppliers active in
each area matters.
4.24
4.25
Retail supply is centred on supply infrastructure: depots, refineries and
terminals, or tanker parking areas.125 The retail supply 'footprint' of this
infrastructure (in effect the maximum distance delivery tankers can
travel economically) is driven by factors including:
•
The total distance.
•
The size of vehicle needed because of, for example, weight
restrictions or access to the customer's property.
•
Topography and road quality.
•
Weather and road conditions.
•
Route alterations to prioritise run-outs, and the extent to which new
customers can be economically added to existing routes.
•
The number of daylight hours and driver hour restrictions.
Evidence from around 10 firms we spoke to,126 alongside the evidence
provided to support past merger decisions,127 shows that firms may
compete most strongly within a radius of around 30 miles from their
125
For discussion, see the OFT's merger decision on the completed acquisition by GB Oils
Limited of Brogan Holdings Limited, May 2010. ME/4406/10:
www.oft.gov.uk/shared_oft/mergers_ea02/2010/GB_Oils-Brogans.pdf and acquisition by GB Oils
of Pace Fuelcare, ME/4924/11: www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils and
OFT press release: www.oft.gov.uk/news-and-updates/press/2011/104-11
126
Data request responses and meetings with individual firms.
127
OFT's merger decision on the completed acquisition by GB Oils Limited of Brogan Holdings
Limited.
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supply points,128 such as depots or terminals. Most firms said that their
routes extended 30 miles or less on average, although some deliveries,
and therefore some competition, does extend further.
4.26
It should be noted, however, that since routing is affected by severe
weather, the economic supply distance is likely to be more limited in
winter than summer.
Number of suppliers by delivery area
4.27
The size of area that firms cover from a single depot is likely to vary by
local area. To build the supply radii analysis above, we have collated
data on the postcode areas to which particular firms deliver. Figure 4.8
summarises data we have collected on the number of suppliers that
serve particular geographies (that we know of – some areas may have
more suppliers than shown).129 Again, firms are counted only once, even
where they operate multiple brands. There is variation across the UK,
but most consumers have a reasonably large choice of suppliers: 130
•
Around 60 per cent of GB households that are not connected to the
gas grid live in a postcode district served by eight or more suppliers.
•
All Northern Irish districts are served by 20 or more suppliers.
•
Less than three per cent of UK off-grid households live in a location
with fewer than four known suppliers, and less than 0.3 per cent
have access to only one or two suppliers.
128
Data request responses, which supported the findings of previous OFT merger decisions, for
example on the completed acquisitions by GB Oils Limited of Brogan Holdings Limited and of
Pace Fuelcare; and completed acquisition by DCC plc of CPL Petroleum Limited.
129
Particularly those shown as having three or more, since more extensive checking was done in
areas that initially appeared to have only one or two suppliers.
130
OFT collated coverage data, combined with GB off-grid household estimates provided by
Xoserve.
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4.28
These findings were broadly supported by the SPA research, which also
found that most consumers felt they have good choice – nearly 70 per
cent of those surveyed said they have a wide choice of suppliers,
compared with 30 per cent who said they have a limited choice, and
three per cent who responded that only one supplier served their area.131
The average number of suppliers reported was six (slightly lower than
the number we calculated based on supplier coverage information,
suggesting that consumers might not be aware of all suppliers in their
area).
131
Consumers were asked how many suppliers they were aware of that could supply their
home.
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Figure 4.8: Number of known serving suppliers, by postcode district
Source: Information about the postcode districts (for example AB10, BT6) firms report they are
willing to supply, collated from sources including price comparison and firms' websites, the FPS
and CCNI. Numbers in brackets count the number of postcode districts in each category
(including some very small postcode districts).
4.29
Those areas with fewest suppliers are in outlying and rural locations, and
are generally distant from terminals and refineries.
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•
The Isle of Wight has two suppliers of heating oil to domestic
consumers. The acquisition by GB Oils of Pace Fuelcare would have
reduced this to one supplier132 so the OFT has accepted divestments
on the Isle of Wight to restore pre-merger levels of competition.133
•
In June 2010, the OFT accepted divestments in the Western Isles as
part of the acquisition by GB Oils of Brogan Holdings, to restore premerger levels of competition.
4.30
The evidence suggests that most localities have good levels of choice –
based on our coverage data, the median134 is eight – but some areas do
have only low levels of choice, which in turn raises questions.
4.31
High levels of market concentration might be expected to lead to higher
prices in those areas. However, we would not expect these to persist if
rival suppliers can easily enter the market (for example a local
entrepreneur or a rival supplier in an adjacent locality who may see an
opportunity to undercut the incumbent supplier). We have therefore
examined how easy it is to enter the industry, barriers to entry and
expansion, and whether firms do enter and grow over time.
Entry and expansion
4.32
In a market with low barriers to entry, we would expect any excessive
profits to attract new entrants or expansion of existing suppliers. Entry
costs depend on the scale of entry, but we have seen evidence both of
small firms entering and surviving in the market, and of expansion at a
larger scale.
132
ME/4924/11: www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils
133
www.oft.gov.uk/news-and-updates/press/2011/104-11
134
That is, the mid point of the number of suppliers serving the off-grid population, when ranked
by number of suppliers.
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4.33
Although the overall number of firms has declined slightly over time,
around 10 per cent of the top 50 are new entrants since 2004, and
between 2005 and 2010, 18 of the top 50 distributors increased their
market shares year on year. At the same time, in 2010 firms with
market shares of less than 0.5 per cent numbered more than 300 in GB
and over 100 in NI – this is evidence of past entries into the market.135
Figure 4.9: Cumulative market shares over time (domestic heating
oil)
100%
90%
100%
Around 400 firms in total in 2004
Around 360 firms in total in 2010
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
All who sold more than 1m litres
Top 50
Top 25
Top 10
0%
2004
Top 5
Top 3
0%
2005
2006
2007
2008
2009
2010
Source: RDCO data from HMRC, share of domestic sales below the de minimus of 3,500 litres
individually or 10,000 litres in total in a year
4.34
This evidence that it is possible for small firms to survive, and for firms
to expand over time, is consistent with what we heard about the costs
of entry and expansion.
135
RDCO data from HMRC, domestic below de minimus, firms that sold more than one million
litres.
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4.35
The key costs of entry are:
•
Tankers: a new tanker costs around £140,000, or can be hired at an
annual cost.
•
Attracting customers: some firms described themselves as operating
in a declining market over the medium to long term, which makes
entry an unattractive proposition. However, consumption of heating
oil has not declined in the last 10 years.136 Limited expansion of the
GB gas network (and slow uptake even in NI despite its recent
transition from coal and its expanding gas network) along with high
costs of switching to alternative fuels mean a sizable market will
remain in the medium term. Customers new to heating oil are few,
but the relatively high rates of switching between suppliers that we
have seen in the consumer research (see the SPA Report) means
new or expanding suppliers can compete for existing customers.
•
Access to supply: A small number of firms reported that during
winter 2010, those who had pre-purchased heating oil had their
orders ring-fenced at some terminals and were therefore at an
advantage when supply was constrained.137 Pre-ordering oil is more
expensive and risky, so is generally more accessible to the larger or
more established firms, which could pose a barrier to new entrants.
However, we also heard some evidence that the difficulties of
getting access to wholesale supply have declined over time, as
branding agreements (where distributors carry the majors' brands),
are becoming less important in the industry, although some
companies still operate under this model.
•
Credit: Most firms need to buy their oil on credit from their
supplier(s), since a large majority of customers do not provide
payment authorisation at order and can take up to 30 days to pay
136
DECC, monthly volumes data.
137
Firms' responses to the OFT's data request.
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after delivery.138 A one-truck business might collect 25,000 litres of
oil from its supplier each day – costing perhaps £13,000 at recent
prices. Industry has told us that credit arrangements have recently
become tighter because of rising oil prices (which require higher
supporting levels of credit) and the recession (where suppliers or
banks offering working credit or guarantees impose more demanding
conditions due to higher lending risks). Data139 provided by a
wholesaler also showed that the average credit limit of its customers
reduced between 2009 and 2011.
•
4.36
Depots: It is challenging to obtain consents for new depots, and the
capital outlay is high. For example, a new storage tank can cost
approximately £250,000 to £500,000.140 A small number of
respondents also told us that it is more difficult for a new entrant or
expanding firm to get planning permission for storage facilities today
than it was for incumbent firms to acquire the relevant permissions
in the past. Similarly, since environmental and safety standards have
been raised over time (sometimes with arrangements allowing
existing facilities time to comply), it is more difficult and costly for
new firms to set up facilities that meet regulatory standards than
was the case for earlier entrants.
Access to depots is therefore perhaps the greatest barrier to entry (and
especially expansion) in the market. In areas close to terminals it may
not be necessary to have storage space at a depot, since it is possible to
deliver direct from the terminal. Firms responding to our data request
told us their domestic deliveries made direct from terminals ranged from
less than one per cent to 50 per cent.141 However, depots are
138
Meetings with firms.
139
OFT information request.
140
OFT information request and discussion with firm.
141
Data request responses from firms.
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particularly important in areas more distant from supply points.
Counteracting this concern, in some areas at least, is the possibility for
small firms to start by renting space at another firm's depot. More
importantly, we have heard several examples of expanding firms opening
new depots in recent years,142 and in contrast to concerns about the
entry barrier created by higher environmental and safety standards, we
heard examples of more modern equipment (such as bunded tanks) that
are easier to set up and less costly than earlier technologies.
4.37
The responses to our information request suggest that most distributors
expected to be able to maintain or expand their businesses.143 Customer
service and pricing were the most important ways to attract and retain
customers, with two distributors commenting that they aimed to win
disgruntled customers from 'poorly run businesses'. Some firms have
invested in new infrastructure, including tankers and computer systems.
Reasons for not expanding included the strength of local competition,
customers' bad debts and low profitability.
4.38
Even without growth, small firms can provide important competition,
since individual domestic consumers do not need to make use of an
extensive network. Some firms144 argued that small businesses benefit
from local knowledge and loyal customers. Indeed one of the primary
reasons for retaining brand names following an acquisition is because of
this loyalty. Some also suggested that small firms were better able to
deal with difficulties last winter, because their close relationships with
customers allowed them to more accurately prioritise urgent deliveries.
In NI, we heard that the very smallest businesses can compete strongly
in winter because they can reduce operations and avoid the fixed costs
142
For example by Carrs Billington, Stevenage Oil, Oil 4 Wales and Rix Petroleum. Source: OFT
desk research and Fuel Oil News.
143
Half of the 18 firms that responded to our request expected to grow, the majority of the
remainder to maintain their business.
144
Discussions with firms and responses to our data request.
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associated with maintaining business through the summer. The parties in
the GB Oils/Pace Fuelcare acquisition145 also argued that there should not
be a distinction made between the constraints posed by smaller or larger
distributors.
4.39
On balance, the costs of entry are likely to be particularly low in areas
that are close to supply points. The number of firms in the market, and
in most localities, suggests that barriers are low in most places, but they
are likely to be more significant (though generally not insurmountable,
judging by recent expansions) in areas where depots are essential. For
the most remote areas, this might be in addition to other barriers – for
example, we have previously heard from distributors that were reluctant
to supply the Western Isles because it is more expensive and logistically
difficult than supplying the mainland. 146 Entry into this type of market
may therefore be less common.
4.40
That barriers to entry are low in most places is reflected in the earlier
analysis (see paragraphs 4.27 – 4.31) showing that most areas do have
a relatively wide choice of suppliers. The following section considers
whether consumers in the small number of areas with few suppliers are
paying more as a result.
Pricing by geography
4.41
Although firms compete on both price and service, 47 per cent of
consumers said price was one of their top three most important
considerations when buying oil.147 Several firms agreed that price is
145
OFT's merger decision on the completed acquisition by GB Oils Limited of Pace Fuelcare,
ME/4924/11: www.oft.gov.uk/OFTwork/mergers/decisions/2011/gb-oils
146
OFT's merger decision on the completed acquisition by GB Oils Limited of Brogan Holdings
Limited
147
See the SPA Report.
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considered most important, but others felt brand/ reputation and
customer service were more important.148
4.42
The data we have seen suggest there are price variations across and
within regions. Retail and wholesale prices in recent years have been
lower in NI than elsewhere,149 perhaps in part because of the larger
volumes sold there.150
4.43
Elsewhere, variations of perhaps five to 10 pence per litre are seen
across (and in some cases within) postcodes.151 Note that prices
described in this report are inclusive of VAT unless otherwise stated.
4.44
Although variations of five to 10 pence sound high in the context of
average retail margins of around six pence (see paragraph 4.111), the
data that firms provided to us on their costs of purchasing oil showed
within-month averages that varied by 10 to 20 pence between the firms
with lowest and highest costs.152 Travel time per drop may also vary
significantly by area.
4.45
Short term variations in local supply or demand will ordinarily lead to
price variation across geographies. We would be more concerned by long
148
OFT information requests.
149
Seen, for example, in the Price Totem published each month by Fuel Oil News, in wholesale
and retail pricing data we received from firms, and in Sutherland Tables data.
150
Other prices are also lower in NI, perhaps reflecting costs such as land/rent and labour – see
ONS UK Relative Regional Consumer Price levels for Goods and Services for 2010
www.ons.gov.uk/ons/.../consumer-price...consumer-price.../uk-relative-regional-consumer-pricelevels-for-goods-and-services-2010.pdf
151
In the mystery shop carried out by SPA in July 2011, variations were generally less than five
pence per litre. Data from CCNI show an average variation across NI towns of eight pence per
litre.
152
Based on data from 13 firms. Part of this variation will be driven by the times of the month
that firms sold their volumes, and the prevailing wholesale purchase price at the time. Only some
will be due to contemporaneous variations in purchase prices across firms.
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term variations that could not be explained by variations in the costs of
supply. In particular if customers in certain areas were paying more
because they have little choice over which supplier to use.
4.46
Although there are some persistent variations in price across
postcodes,153 our limited data do not allow us to quantify precisely the
relationship between competitive conditions and price. This is primarily
because the number of suppliers in a particular area is likely to be linked
to factors affecting the cost of supply, such as distance from the nearest
terminal or refinery. For example, although travel time per drop may vary
significantly by area, the data we have do not allow us to assess what
proportion of price variations are explained by variations in cost factors
such as this.
4.47
Figure 4.10 shows the small sample of local pricing data we have for GB
(there are no postcodes in NI with fewer than 10 suppliers). On the face
of it prices seem to be higher in some of the small number of areas with
the very fewest suppliers.
153
For example, in the data collected by CCNI, heating oil in the most expensive area in NI costs
on average five pence per litre more than the cheapest area on a given day.
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Figure 4.10: Prices by number of suppliers for 25 GB postcodes
(average daily price from 05/08/2011 to 16/09/2011)
Average price in the period, by postcode (pence per litre)
68
66
64
62
60
58
Average in the sample
56
54
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Estimated percentage of the off-grid population with this many suppliers
3
4
5
6
7
8
9
10
11
12
13
14
3% 5% 6% 11% 12% 12% 15% 7% 6% 5% 3% 1%
15
1%
16
Number of suppliers
1
0%
2
0.3%
16+
12%
Source: price for standard delivery of 1000 litres of kerosene collected from BoilerJuice.com
each weekday between 05/08/2011 and 16/09/2011, averages across time and postcodes with
a given number of suppliers.
4.48
Most heating oil customers have a good level of choice (see paragraphs
4.27 – 4.31). We do not have data on how margins vary by geography,
but some limited pricing information (in Figure 4.10) shows that some of
those places with the fewest suppliers are paying more than elsewhere.
Much of this premium could plausibly reflect higher costs of supply – for
example if travel distances or other delivery costs were higher in the
most remote areas where there are also few suppliers. Our recent
merger decisions have been careful to protect competition in those
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areas,154 so far as is possible given that the market size in some areas
will naturally constrain the number of firms that can be supported.
4.49
In the next section we consider the allegation that apparently high levels
of competition overall mask collusion between suppliers.
Collusion
4.50
We have received no specific allegations of cartel activity where firms
make agreements, for example about price levels or market sharing. But
even without explicit agreements, if certain conditions are met,155 it can
be rational for firms to refrain from initiating price cuts which would be
unavoidable in more competitive circumstances. This is called tacit
collusion, or coordinated effects, and can mean that prices stay at 'focal
points' or prices. Among the consumers that wrote to us describing their
suspicions about collusion, the most common observation was of very
similar prices across suppliers. However, this pattern might also be seen
under intense competition, when firms face similar costs of supply and
compete to offer the best price.
4.51
A number of consumers and some firms have written to us highlighting
the fact that multiple brands operated by the same firm can agree prices
between them. However, there is no prohibition on businesses operating
multiple brands with similar or identical pricing, and this is common in
many industries (see paragraphs 4.148 – 4.152, though, for further
discussion).
4.52
For coordinated effects to be stable, firms must not have an incentive to
deviate by cutting prices and attracting more customers. One condition
for this is that a retaliatory mechanism is available – with firms able to
quickly cut their own prices in order to punish price cutting by another
154
For example, the completed acquisitions by: DCC plc of CPL Petroleum Limited; GB Oils
Limited of Brogan Holdings Limited; GB Oils Limited of Pace Fuelcare.
155
See: Market Investigation References: Competition Commission Guidelines
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firm. The frequent price adjustments in the market for heating oil do
mean such action is possible.
4.53
However, stability also depends on the market being sufficiently
concentrated for firms to be aware of the behaviour of their competitors,
and for significant deviation by an individual firm to be observable by
other firms. The market for heating oil is not concentrated at the national
level, or in most local areas of the country (where there are eight
suppliers on average), so coordination would be difficult. Daily varying
prices, rarely published prices, fluctuating demand, and price variation
across customers means that price levels are not transparent, so
establishing and monitoring focal points would be difficult. Because
geographic markets overlap, with different levels of competition in each
and a mix of large and small firms, it could be difficult for firms to
delineate areas and the associated pricing levels in each. The identity of
firms in each geographic area also differs, which makes market sharing
(where firms agree to operate in distinct geographies) unlikely.
4.54
There are also some external factors in the heating oil market that make
coordinated effects less likely. Because switching costs are low (see
paragraphs 4.63 – 4.69) and a sizable proportion of customers shop
around regularly, new entrants or firms that expanded from other areas
in response to artificially high prices could be expected to attract
customers away and destabilise the tacit collusion. This threat of new
entry is strongest in areas where barriers to entry are low or firms can
expand from geographically close areas. The growing role of buying
groups could also particularly encourage firms to price cut in order to
attract large orders.
4.55
Without reasonable suspicion or evidence of collusion in particular
geographies, we have not considered the matter further. We would, of
course, revisit the issue (subject to our prioritisation principles)156 should
contrary evidence come to light.
156
www.oft.gov.uk/shared_oft/market-studies/oft1302f.pdf
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Consumer behaviour
4.56
Consumer behaviour can also affect competitive outcomes in markets.
Even if the market structure is competitive it can to some extent be
undermined by consumer behaviour.157
Shopping around
4.57
The quantitative survey conducted as part of the SPA research found a
mixed picture with respect to shopping around. Although 38 per cent of
heating oil consumers surveyed obtain quotes from different suppliers
every time they buy and 19 per cent do so sometimes, 42 per cent
never obtain more than one quote.
4.58
The most common reason given in the SPA survey for not shopping
around was that consumers had found that their regular supplier is
usually the cheapest or very competitive (40 per cent cited this reason).
24 per cent said that there is very little difference in prices between
suppliers.
4.59
Some consumers observed that firms' prices are very similar, and that
shopping around is not rewarded. This is to be expected in a retail
market where the distribution margin is only a small proportion of the
total retail price (see paragraphs 4.104 – 4.105), especially where retail
competition drives margins down so they are close to costs. Nonetheless
the SPA mystery shopping exercise found a degree of price variation
157
As context to this section, in the course of our study we received over 200 written
complaints from consumers relating to domestic heating oil. Consumer Direct received nearly
1700 complaints between 1 January 2008 and 31 August 2011. Consumerline in NI received
over 270 in the same period. However, we found that overall customer satisfaction is high. 79
per cent of respondents to the SPA consumer research were either very or fairly satisfied with
heating oil as a fuel to heat their home and/or water. Pricing aside, 94 per cent of consumers are
either very or fairly satisfied with the service received from their main supplier.
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between firms, suggesting that the potential benefit to shopping around
may be in the region of two to five pence per litre.158
4.60
The SPA research159 found that although 79 per cent overall said it is
easy to compare firms' prices, the process is not interesting or
enjoyable: 24 per cent of those that do not always shop around said
they are too busy or don't have enough time, and in focus groups,
customers described it as 'too much hassle' or said they 'couldn't be
bothered'. This is consistent with evidence of consumer inertia for
energy purchasing in general, not only for heating oil.160
4.61
Increasing use of the internet161 has generated a number of
developments that may reduce the time and effort required to compare
prices and that in time may promote more shopping around:
•
Some, but not many, firms publish their prices on the internet. In NI,
some firms provide anonymous pricing data by participating in a
regular survey run by the Consumer Council which can help
consumers know whether they are getting a good deal.
•
Heating oil price comparison sites have also emerged. As a sales
channel they currently play a relatively small role in the heating oil
market, accounting for perhaps three per cent of sales in 2010 in
total, and varying by firm.162 They are more widely used for
reference though: 25 per cent of consumers surveyed say they have
used a price comparison site, and 84 per cent of these said they
158
See the SPA Report.
159
See the SPA Report.
160
The Retail Market Review - Findings and initial proposals Ofgem, 2011:
www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=1&refer=Markets/RetMkts/rmr
161
For example, see ONS (2011), Internet Access - Households and Individuals
162
OFT estimate based on data from firms.
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found it useful. The SPA research indicated that, while price
comparison sites can be useful for getting indicative prices and
saving time, it may be necessary to telephone to find the best deals
as not all firms participate in price comparison sites.163
4.62
While the internet and price comparison sites can play a role in
promoting competition, both firms164 and consumers165 voiced concerns
about the independence and reputability of such sites. In response to
these concerns, the OFT has recently taken action against a number of
price comparison sites, which have now improved their transparency as
detailed further in paragraphs 4.153 – 4.159.166
Switching
4.63
Heating oil consumers face few contractual barriers to switching
supplier. Unlike in LPG (see chapter 5), heating oil consumers own their
own storage tanks, and our research suggested that very few (perhaps
one per cent) are tied into contracts. The vast majority typically
purchase by calling to make an order a few days before they want a
delivery (sometimes called a spot purchase).
4.64
Many firms offer arrangements for automatic top-ups, or for consumers
to spread the cost of their payments using a budgeting plan, but without
any contractual barriers to switching. Nevertheless, these arrangements
might be expected to make consumers less likely to switch – for reasons
of convenience or because they are in debt to their supplier. However,
the proportion of consumers surveyed with one of these arrangements is
fairly low: only around 14 per cent of consumers make regular payments
163
See the SPA Report.
164
A small number of firms mentioned this in their response to our data request or in meetings
we held.
165
See the SPA Report.
166
See also our press release: www.oft.gov.uk/news-and-updates/press/2011/96-11
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to a supplier through the year to cover their oil costs, while 15 per cent
have their tanks topped up automatically.167
4.65
Absent contractual arrangements, switching costs are low: consumers
mentioned occasional inconveniences such as drivers not knowing the
location of a new customer's tank, but overall most do not consider it
difficult or inconvenient to switch suppliers.168
4.66
In practice, a sizeable proportion do switch suppliers regularly, although
they are not the majority. In the SPA survey:
•
21 per cent of those with a choice of more than one supplier switch
regularly.
•
54 per cent always use the same supplier, and another 25 per cent
usually use the same supplier.
•
Those more likely always to use the same supplier were people over
the age of 65 and those that do not use the internet.
4.67
Even where consumers are not switching suppliers, they may be
shopping around. Some consumers may call around to check prices,
before going back to their preferred supplier and asking them to match
the price.169 29 per cent of those who always use the same supplier
nonetheless get multiple quotes before buying at least half the times
they purchase.
4.68
Consumers do not necessarily have to switch to a rival supplier to obtain
lower prices if they can do so through the threat of switching. 41 per
167
Consumer research (quantitative survey element) – see the SPA Report for details. Those
using auto-top-up were more likely to say they always use the same supplier (84 per cent vs. 48
per cent for those not on auto-top-up). However, note the small sample base using auto-top-up.
168
Consumer research (focus group element) – see the SPA Report for details.
169
NI roundtable and meetings with individual firms.
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cent of consumers surveyed said they bargain with suppliers at least
some of the time, although 28 per cent have never tried to negotiate.
4.69
Firms' attitudes to negotiation also vary. Some told us that they never
negotiate, or that they do so with only a small number of their
customers, while others said half or even the majority of customers
bargain over prices.
Buying groups
4.70
4.71
We are also aware of collective bargaining through buying groups,
although consumers and industry have expressed mixed views to us.170
Our research with consumers found that:
•
Many who are part of a buying group are very positive and feel they
get better prices whilst maintaining the flexibility to buy ad-hoc if
they want.
•
Non-price benefits such as the convenience of devolving purchasing
responsibilities to others were also noted.
•
However, some consumers that are not part of a group (or once
were but have left) do not believe groups achieve preferential rates,
feel it is difficult to coordinate deliveries to meet needs, and that it
can be a challenge to identify someone to organise the group and
check orders.
•
Buying groups are currently limited, with around 14 per cent of GB
consumers in our survey buying through one of these groups, and
less than five per cent in NI.
For suppliers, the attractiveness of buying groups can vary, depending
particularly on factors that affect the cost of delivery:171
170
For more detail on consumers' views, see the SPA Report.
171
Discussions with firms.
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4.72
•
Where groups cover a large geographic area, the distances involved
may offset the savings from larger volume orders.
•
To meet varying needs within the group, buying groups can result in
more frequent, small drops which are less cost effective.
•
Each customer's purchase still needs to be delivered and invoiced
separately so administrative cost savings are limited, and concerns
can arise about coordinating timely payments and the bearing of
credit risks.
•
Some distributors prefer not to deal with buying groups (for example
because they believe it damages customer relationships and loyalty,
or because the large orders involved are impractical). We heard that
some firms offer deliberately high quotes when they are unwilling, or
have insufficient capacity, to deal with buying group orders.
Overall, while some groups provide a good service for their members,
this means of purchasing may not be suitable for all customers. The
savings the group can achieve may depend on the composition of the
group and the knowledge and negotiating skill of the administrator.
Guidance for consumers on how to get the best out of buying groups
has recently been published by the FPS, ACRE and Citizen's Advice.172
Conclusions on consumer behaviour as a competitive
constraint
4.73
Our research has illustrated the varying extent to which consumers
conduct active searching and switching in the market for heating oil.
Importantly, consumers feel able to understand and compare prices.
However, supplier loyalty remains a strong factor in the market, and
some consumers always use the same supplier.
172
Download the guidance from here:
www.citizensadvice.org.uk/index/campaigns/oilclubs/oilclubs-info.htm
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4.74
Although the threat of consumers shopping around and switching
suppliers is a constraint on firms' pricing, those who shop around may
pay less than those who do not, since many firms will individually
negotiate prices. This issue is considered in the next section.
Unfair pricing
Price discrimination
4.75
Some consumers and a small number of firms raised concerns about the
fact that the same supplier may charge different prices to different
customers.
4.76
Variations across customers in the price charged for heating oil could be
driven by factors including: differing costs of delivery, selective
discounting, and individual customers' negotiations. Another influence is
that when distributors receive customer orders, they buy oil ahead
accordingly to make these deliveries. The price distributors pay to their
suppliers can fluctuate during and across the day, and the price they
charge the customer will tend to reflect the value of oil purchased to
fulfil the order (or in stock at the time of the order). This helps to explain
why people in the same locality receiving an oil delivery on the same day
from the same supplier may pay different prices, because they may have
ordered at different times, leading to differences in the wholesale value
of the oil used to fulfil their order.
4.77
Some stakeholders raised concerns about the extent to which those who
order smaller amounts tend to pay more for their oil. For example, in NI
in July, the average per litre price for a 300 litre delivery was 64 pence,
compared to 59 pence for 500 litres and 58 pence for 900 litres.173
Distributors in other parts of the country confirmed that they often give
discounts for larger orders, and in the SPA mystery shopping exercise
173
CCNI Oil Survey – see www.consumercouncil.org.uk/oil-price-watch/
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conducted in July, the average UK price for 500 litres was 61.4 pence
per litre compared to 60.4 pence per litre for 1000 litres.174
4.78
However, a comparison of the gap between wholesale prices175 and NI
retail prices176 suggests that although distributors make smaller per-litre
margins on large deliveries, their total margins are higher for these bigger
orders (see Figure 4.11). This suggests that while smaller buyers are
paying more per litre, the distributor is receiving less per delivery.
174
See the SPA Report.
175
Wholesale jet kerosene prices.
176
Collected by CCNI.
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Figure 4.11: NI – total retail margins per drop
£100
900 litres
500 Litres
£90
300 Litres
£80
£70
£60
£50
£40
£30
£20
£10
19
/0
5/
11
19
/0
4/
11
20
/0
3/
11
18
/0
2/
11
19
/0
1/
11
20
/1
2/
10
20
/1
1/
10
21
/1
0/
10
21
/0
9/
10
22
/0
8/
10
23
/0
7/
10
23
/0
6/
10
24
/0
5/
10
£0
Source: Prices collected twice-weekly from around 30 firms by CCNI, compared to jet kerosene
price (OECD). Lines show: (Average price without VAT - wholesale price of jet kerosene)*(litres
in the drop)
4.79
While, as noted in paragraph 4.76, there are many reasons why prices
may vary between customers, we received complaints from some
consumers and consumer groups that at least some element of this price
variation is unfair and makes it difficult for consumers to compare firms
and be confident of finding the best deal. It was suggested by some
stakeholders that firms should be required to publish their prices to make
it easier for consumers to compare firms' offers and to ensure that all
customers of a particular firm get the same price.
4.80
Price discrimination can have a variety of effects. It can potentially boost
overall consumer welfare by allowing firms to offer lower prices to
consumers who may have lower ability to pay, while still covering their
fixed costs. Firms' flexibility to vary their prices across customers that
order on a single day also allows them to vary their prices in response to
short-term fluctuations in demand, for example by reducing prices during
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the course of the day if few customers are choosing them over
competitors.
4.81
Nevertheless, price discrimination can be problematic for competition if it
means that prices can be selectively discounted for those that shop
around or bargain hard, which means firms can charge more to existing
customers without fear of losing the custom of those that shop around.
Consequently, under some circumstances price discrimination can
potentially be a breach of the Competition Act or consumer protection
legislation.
4.82
The evidence for price discrimination in the industry comes from a
number of sources. Both firms and consumers told us some firms will
reduce prices for customers who bargain hard. We received a small
number of allegations that some firms charge those on auto-top-up plans
substantially more than other customers. Buying groups also argue that
they obtain lower prices than other customers, although this can in part
be driven by lower costs to serve these groups.
4.83
The concern is that those who shop around do not constrain prices for
those that do not shop around. However, several firms told us that
increasing numbers of customers are switching regularly, and that it
would be difficult to distinguish, at the time of calling to ask for a price,
between those that are shopping around and those that aren't. And
many consumers do shop around: in the SPA survey, 46 per cent said
they switch suppliers at least sometimes, and 50 per cent get quotes
from different suppliers at least half the times they buy. 41 per cent
bargain at least some of the time.
4.84
It is our view that the most proportionate response to concerns about
price discrimination is to improve price transparency for consumers using
auto-top up plans and to advise consumers of the value of shopping
around and bargaining for the best available price. This protects the
benefits of price variation across customers (particularly for buying
groups) while addressing concerns in relation to auto-top-up plans. This
approach can be implemented within the existing framework of
consumer law – our work with industry trade bodies on a best practice
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approach to pricing and price information will cover, amongst other
things, auto-top-up plans (see paragraphs 4.172 – 4.174).
Order sizes and affordability
4.85
While it is understandable that firms charge more per litre for smaller
deliveries, we have been told by firms and consumers that people are
increasingly buying heating oil in smaller amounts, which means that
consumers might be paying more than they otherwise would. From
firms, we heard that the average order size is around 900 litres, and
among consumer respondents to the SPA survey it was a little under
800 litres. In some cases, smaller orders may be driven by small tank
sizes – some newer tanks take up more space for a given capacity so
that consumers wishing to minimise the space taken up by their tank are
opting for smaller models. Only 20 per cent of consumers in our survey
had a tank that could hold more than 1501 litres, and the average was
around 1400 litres.
4.86
However, we heard from most firms we spoke to that smaller orders are
often due to high prices and people's inability to afford larger deliveries,
or unwillingness to pay large amounts in one go. In consequence, some
consumers have complained to us about being unable to order in
quantities of less than 500 litres. However, the threshold is designed to
ensure that the amount of oil delivered is accurately measured.
Regulations177 enforced by Trading Standards dictate the minimum
volume of heating oil that can legally be delivered by road tanker using a
mechanical meter.178
4.87
In NI, stakeholders told us that high prices were driving consumers to
buy small quantities of oil in 20 litre drums, even though this means
paying more per litre overall. While a handful of people argued that sales
177
Measuring Instruments under Statutory Instrument No. 1269:2006 (Liquid fuel delivered from
road tankers) Regulations
178
www.fpsonline.co.uk/BriefingNotes/MINIMUM%20VOLUME%20DELIVERIES.pdf
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in this way should be banned, we would not advocate removing
consumers' choice over buying in this way when they are unable to get
a bulk delivery, either because of delays in supply or because of limited
budget.
4.88
To deal with the difficulties of budgeting for oil, most firms offer
methods to spread the cost of purchases, and in NI consumers can prepay through Paypoint or (in most areas) through a stamp savings
scheme. Stamp savings schemes are run by some councils and charities,
where consumers buy stamps costing £5 or £10 to stick on a savings
card. Consumers then redeem the card with a heating oil distributor that
is part of the scheme. Paypoint is a pre-paid system that allows
customers to pay small amounts per week to a heating oil supplier. It is
similar to monthly payment plans but a bank account is not required,
since payment is via Paypoint rather than direct debit.
4.89
Fuel poverty is clearly a major concern, but goes wider than heating oil
and is primarily one for government rather than an enforcer of
competition and consumer protection law – see Chapter 3 for
discussion.
Excessive pricing
4.90
Despite a broadly positive picture of competitive conditions, the vast
majority of complaints received by the study related to high prices.
Consequently, we have directly examined claims that prices are
excessive (that is, not reflective of cost).
4.91
The key finding is that high prices, and price fluctuations, are
predominantly driven by the price of crude oil. The retail margin
fluctuates in response to the market's very seasonal demand, but it
accounts for only around 10 to 15 per cent of the price on average. This
margin, covering both costs and profits, works out at around £55 per
900 litre delivery (see paragraph 4.110).
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Background
4.92
Retail heating oil prices are usually quoted in terms of pence per litre,
including delivery costs. At present, VAT, at five per cent, is often
excluded from the headline pence per litre figure. (See paragraph 4.163
for the OFT's view of this practice. All prices in this report are inclusive
of VAT). Suppliers generally vary their prices daily, and very few
consumers have any form of fixed-price contract. As discussed above, it
is generally cheaper to buy in bulk.
4.93
The retail price of heating oil has in essence two components: the
wholesale price of heating oil and the distributor's margin.
4.94
There is no widely published wholesale price for heating oil. Distributors
in the UK typically buy their heating oil from a refiner or wholesaler at a
pence per litre price which is defined with reference to the international
wholesale price of jet kerosene. This is the most similar (albeit, as
previously explained, not directly substitutable) traded commodity for
which prices are published. Pricing information for wholesale jet
kerosene is collected and published by pricing agencies, based on prices
paid in large trades for delivery in Europe. The traded wholesale price of
jet kerosene itself closely follows the traded price of crude oil from
which it derives, plus an additional refining margin.
4.95
The jet kerosene reference price used to price heating oil will typically be
the price which prevailed the previous day or two days ago. For
example, a heating oil distributor may have a contract to purchase
heating oil at 'Platts plus X', where the Platts price is for jet kerosene
and the X amount may be around two pence per litre, reflecting
transport and other wholesale costs and profits as well as production
cost differences between jet kerosene and heating oil.
4.96
Both crude oil and wholesale jet kerosene are internationally traded and
their prices are outside the remit of this study. Nonetheless we note that
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other bodies are currently considering how wholesale prices are
reported.179
4.97
The remainder of this section focuses on analysing UK retail prices for
heating oil.
The relationship between heating oil retail prices, wholesale
kerosene prices and crude oil
4.98
As we have discussed the retail price of heating oil is heavily influenced
by the wholesale price of heating oil. In turn the wholesale price of
heating oil is driven by the wholesale price of crude oil. These
relationships are shown in Figure 4.12.
179
In April 2011, the International Organisation of Securities Commissions (IOSCO) announced
an investigation into commodity speculation, and will report its findings to the G20.
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Figure 4.12: Prices of crude oil, wholesale jet kerosene and retail
heating oil
0.70
£/litre (2010 prices)
0.60
0.50
0.40
0.30
0.20
0.10
Brent crude
Wholesale (Jet Kerosene)
Retail before duty
Retail after duty
Fe
b0
A 8
pr
-0
Ju 8
n0
A 8
ug
-0
O 8
ct
-0
D 8
ec
-0
Fe 8
b0
A 9
pr
-0
Ju 9
n0
A 9
ug
-0
O 9
ct
-0
D 9
ec
-0
Fe 9
b1
A 0
pr
-1
Ju 0
n1
A 0
ug
-1
O 0
ct
-1
D 0
ec
-1
Fe 0
b11
0.00
Source: Retail price – ONS (based on a purchase of 1000 litres bought mid-month), OECD data
on crude oil and Jet Kerosene (average in month)
4.99
The upward trend in heating oil prices since early 2009 is largely driven
by the price of crude. Taking a longer view, since February 2000 over
90 per cent of the variation in the average national retail prices of
heating oil is explained by movements in the price of crude oil (see
Annexe G).
4.100 A related result is that although a number of customers complained that
suppliers are quicker to pass on increases in cost associated with crude
oil prices than they are to pass on the effects when the price of crude oil
falls, this relationship is not evident in the data we have (see Annexe G).
4.101 The price of freely traded products is set by supply and demand. In the
case of heating oil, the core ingredient, kerosene, has more than one use
and is subject to demand pressures from all of those uses, not just from
heating.
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4.102 Although refiners have limited flexibility to switch production from, say,
kerosene to petrol they do have some flexibility in choosing between jet
kerosene and heating kerosene – currently, around three quarters of the
kerosene produced in the UK goes into jet fuel and just one quarter into
heating oil.180 This means the price of heating oil is strongly influenced
by demand for jet kerosene. A few of the people we spoke to said they
expect heating oil prices to rise over time (relative to, for example, gas
oil or petrol) as a result of continuing growth in air travel.
4.103 Reflecting increasing crude and wholesale prices, retail prices have been
rising over time. With the exception of a major price spike in 2008,
prices in summer 2011 were higher than they have ever been (see Figure
4.13).
Figure 4.13: Retail price of heating oil
0.80
Winter 2010/11
0.70
£/litre (2010 prices)
0.60
Beginning of recession - Dec
2007
0.50
0.40
0.30
0.20
0.10
Ja
n89
Ja
n90
Ja
n91
Ja
n92
Ja
n93
Ja
n94
Ja
n95
Ja
n96
Ja
n97
Ja
n98
Ja
n99
Ja
n00
Ja
n01
Ja
n02
Ja
n03
Ja
n04
Ja
n05
Ja
n06
Ja
n07
Ja
n08
Ja
n09
Ja
n10
Ja
n11
0.00
Source: DECC - www.decc.gov.uk/assets/decc/statistics/source/prices/qep411.xls
180
UK Refineries – data provided by International Energy Agency.
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Price composition
4.104 While margins in heating oil vary (we return to this later) overall the retail
margin is a small component of the total heating oil price. As illustrated
in Figure 4.14, costs and profits at the level of retail distributors make
up perhaps around 10 to 15 per cent on average of the final price of
heating oil. Because of the large proportion of price that is determined by
crude oil prices, a 10 per cent increase in the gross retail margin has
only a one per cent effect on price. Note that gross margins are the retail
price less the wholesale price of heating oil – distributors must cover
their own costs out of this (notably staff and transport), taking what is
left as profit.
Figure 4.14: Estimated price decomposition based on 2010 data
2010
65%
10%
10%
10-15%
5%
33
5
5
6
2
Crude oil
Refining margin
Wholesale margin
Retail margin
Duty
0.0
10.0
20.0
30.0
Pence per litre
40.0
50.0
Source: OECD, ONS, data provided by firms. The crude price shown is the average daily price of
Brent crude; refining margin is the average daily gap between wholesale jet kerosene and Brent
crude; the wholesale margin is the gap between average buying price (weighted by volumes)
indicated by firms who responded to our data request, and the average daily wholesale jet
kerosene price; the retail margin is the gap between average buying and selling prices provided
by firms who responded to our data request, weighted by volume; duty – (monthly average of
implied duty, calculated from retail prices collected once a month) – ONS. Note: the crude value
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is only a rough indication of input costs, since kerosene is one of a basket of products made
from crude oil. May not sum to 100 per cent because of rounding (to the nearest five, reflecting
the uncertainty of the estimates).
4.105 Compared with the price of petrol, very little of what consumers pay for
heating oil is made up of tax. For that reason, heating oil prices are more
responsive to changes in crude oil prices, and therefore more volatile.
Seasonality
4.106 A key feature of heating oil demand is that it is seasonal, with demand
concentrated in the winter months (see Figure 4.15).
Figure 4.15: Average UK monthly volumes 2005-2010
600
500
Thousand tonnes
400
300
200
100
0
January
February
March
April
May
June
July
August
September
October
November December
Source: DECC, DUKES Table 3.13 Deliveries of burning oil kerosene for inland consumption
4.107 Prices appear to be less seasonal than demand, and in fact their
variations across the months have been dominated by the effect of
crude oil prices, which are not necessarily higher in winter (see Figure
4.16). Only after controlling for the price of crude oil, does the effect of
seasonal demand (through temperature) show. Temperature is a proxy
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for demand, since demand rises when temperature falls. After controlling
for the price of crude oil, retail prices rise as temperature falls and
demand rises.181
Figure 4.16: seasonality in crude oil and retail heating oil
prices
2
Average deviation for the month, from the 13 month moving average
Retail (average 1999-2010)
Brent (average 1999-2010)
1.5
1
0.5
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
-0.5
-1
-1.5
-2
-2.5
Source: Crude oil data taken from OECD, retail heating oil prices, ONS, de-seasonalised by
removing 13 month moving averages.
4.108 Underlying mild seasonality in prices there is strong seasonality in retail
margins, which are the focus of retail competition. Firms told us that the
profits they make from domestic heating oil during winter compensate
for very low returns or losses during the summer months. This is
supported by the data we have seen and reflects the fact that revenue is
181
For details see Annexe G.
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strongly seasonal (with both volumes and prices182 higher in winter)
while firms incur many of their costs throughout the year.
4.109 Based on public data, Figure 4.17 shows differences between retail and
wholesale prices that range from negative in the quieter summer months
to eight pence per litre and higher in the busy winter months. This is in
contrast to a lack of seasonality in the gap between wholesale kerosene
and crude oil prices, perhaps because the majority of demand for
kerosene comes from aviation (where demand is only slightly seasonal,
and higher in summer) rather than from heating oil.183 The data we
received from individual firms showed a similar story about retail margins
being seasonal, but with a wider range of variability. Margins last winter
are discussed in more detail below.
Figure 4.17: gaps between crude oil, wholesale jet kerosene, and
retail heating kerosene prices
0.18
Wholesale minus crude
Retail minus wholesale
£/litre (2010 prices)
0.13
Duty
0.08
0.03
-0.02
Fe
b11
D
ec
-1
0
O
ct
-1
0
A
ug
-1
0
Ju
n10
A
pr
-1
0
Fe
b10
D
ec
-0
9
O
ct
-0
9
A
ug
-0
9
Ju
n09
A
pr
-0
9
Fe
b09
D
ec
-0
8
O
ct
-0
8
A
ug
-0
8
Ju
n08
A
pr
-0
8
Fe
b08
-0.07
Source: OECD (Crude oil and jet kerosene), ONS (retail heating kerosene).
182
After controlling for the price of crude oil.
183
DUKES Tables 3.13 Deliveries of petroleum products for inland consumption
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4.110 Because of seasonality, it is therefore important to look at average
margins across the year to assessing their overall adequacy. We asked
retailers the prices at which they buy184 and sell kerosene. The average
gap between the two (weighted by volumes) was approximately six
pence per litre in 2010185 (less in 2009). For a 900 litre delivery186 of oil,
this implies gross margins of around £55 per delivery (more on larger and
less on smaller deliveries) or about 10 per cent. There are no like for like
industries with which it is possible to compare the heating oil distribution
industry, so there is no litmus test for whether 10 per cent is high or
low. We would note, however, that 'gross margins' in mains gas
retailing are on average 20 per cent187 and that for the road haulage
industry the gross margin is on average 43 per cent188.
Financials
4.111 Determining the profitability of a firm's domestic heating oil business
requires detailed cost data. This data is challenging to isolate, as a
distributor's assets (for example, depots) and costs (for example, staff)
are shared across different products which are sold to domestic and
commercial customers. Although we requested the necessary detailed
information from a small number of firms, the difficulty of allocating
costs and a limited response to our data request has required that we
exercise caution in interpreting the data.
184
Compared with the international price of jet kerosene, the price that distributors buy at
reflects the different specification of heating oil kerosene, and additional wholesale margins
(including transport and other costs).
185
Based on the responses of 17 firms covering around 20 per cent of the market.
186
From the data provided to us by firms, the average domestic drop size seems to be around
900 litres, although it varies across the year.
187
Based on 2010 Ofgem figures.
188
Based on FAME data.
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4.112 For the firms that did answer our questionnaire the data show:
•
Domestic heating oil is not the main source of revenue.
•
Gross margins on domestic sales are slightly higher than for other
heating fuel sales, although drop sizes are smaller (and therefore
cost per drop for the supplier are higher).
•
Profit before interest and tax on commercial sales is often low or
negative (loss making).
•
Profit earned from domestic customers contributed
disproportionately to the overall profit of each firm's heat fuel
division.
4.113 One explanation of this might be that the commercial market is more
competitive than the domestic market. However the finding relates only
to a small number of firms so we would hesitate to put too much weight
on it.
4.114 We were unable to obtain reliable estimates of return on capital
employed (ROCE) due to the difficulty of allocating cost/capital and
because the book value of capital seemed likely to understate the value
of assets and over state the ROCE.
4.115 Published accounting statements for firms involved in heating oil
distribution show a wide range of profitability. Although these
statements do not isolate domestic heating oil (and for the largest
businesses include a wide range of activities) the majority of firms
issuing public accounts had a ROCE of below 20 per cent in 2010
(across all their businesses) which in our view is not excessive.
4.116 The wide range of profitability in the industry, combined with the
tentative conclusions of our more detailed study, seem inconsistent with
systematic and persistent conditions of excessive profitability across the
industry. Although the range of results seen could be consistent with
varying strengths of competition in different geographies there may be
other factors, such as different business strategies and product quality,
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driving the variance observed. Disparities in the efficiencies of firms, or
in the book value of assets, could create a further distortion when
comparing firms' return on investment (ROCE or ROTA). Long running
firms may have comparatively low levels of debt or have highly
depreciated asset bases. This could lead to variance in the return on
investment observed between different firms based on the age of their
capital base rather than their overall profitability.
4.117 Although overall we do not believe our evidence is consistent with
excessive profitability, we are nonetheless aware that there are very
specific circumstances in which prices can suddenly spike dramatically
and during which consumers can exercise little or no competitive
pressure. Last winter, and in particular December 2010, was one of
these periods. We discuss these specific conditions in more detail in the
next section.
Winter 2010/11
4.118 The harsh winter in 2010/11 caused complaint levels about the heating
oil market to rise. The OFT received complaints about high prices,
uncertain prices and delivery dates, and the way some firms set and
agreed prices and prioritised deliveries. This section presents evidence,
and our conclusions about whether the complaints were a symptom of
wider competition problems. Consumer law issues that were raised with
us in connection with last winter, such as lack of clarity over the price
that would be charged on delivery, are addressed in the following
section.
4.119 December 2010 was the coldest month since February 1986, and the
coldest December in 100 years. Snow fell across the country, including
in places where snow in December is rare.189 The severe weather
triggered a sharp spike in demand (see Figure 4.18). 40 per cent more oil
was sold in December 2010 than in December 2009 – in effect nearly
20 per cent of the year's total volume was sold in three working weeks.
189
Met Office.
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Figure 4.18: sales of heating oil
800
Dec 2010: 40% higher volumes
than Dec 09 and 5 year Dec
average; 18% of 2010 sales
700
Thousands of tonnes
600
500
400
300
200
100
0
n11
Ja
n1
Ja
n09
Ja
n08
Ja
n07
Ja
n06
Ja
n05
Ja
4
n0
Ja
n03
Ja
n02
Ja
n01
Ja
n00
Ja
Ja
n99
-
Source: DECC - www.decc.gov.uk/en/content/cms/statistics/energy_stats/source/oil/oil.aspx
4.120 Firms had difficulty meeting this volume of orders during a time of poor
road conditions and interruptions to their own supplies.190 We heard from
consumers who had difficulty in getting an oil delivery before Christmas,
and some firms stopped taking new orders to cope with backlogs. The
time between order and delivery rose to seven days or more, up from the
usual two to three working days.191
4.121 Some consumer groups and others we spoke to raised specific concerns
about the relatively low stocks of oil held in NI, with sea- fed terminals
operating on a 'just-in-time' basis that could cause difficulties in poor
weather. We note that firms responding to our information request did
not identify this as an issue last winter.
190
See Annexe F for more detail.
191
Responses from firms.
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4.122 Even taking into account the extreme winter conditions, demand for
heating oil in December 2010 was abnormally high. Figure 4.19 below
illustrates the relationship between temperature and sales – it shows the
extreme of temperature in December 2010, but also that demand
exceeded what might have been predicted given the past relationship.
Firms told us this was driven by the coincidence of extreme cold and
Christmas, a time when people generally top up their oil. In addition the
snowfall may have triggered an element of panic buying, perhaps fuelled
by media coverage of supply problems.
Figure 4.19: mean temperatures and heating oil sales (2004-2011)
800
Dec 2010
Sales of heating oil (thousands of tonnes)
700
600
500
400
300
200
100
-5
0
5
10
15
20
Mean temperature in UK (celsius)
Source: Met Office (mean temperature), DECC (Sales, January 2004 to March
2011). Decembers marked by pink squares.
4.123 Even amid these difficulties, most customers received the oil they
needed and only a small proportion experienced problems. Six per cent
of respondents in our research had received a late delivery at some point
in the previous year. Specific to last winter, we heard about the efforts
suppliers made to deliver to customers, sometimes in difficult and
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dangerous circumstances. DECC lifted restrictions on drivers' overtime
to enable deliveries to be made. DECC and the industry estimate that up
to a couple of thousand households (equivalent to around 0.1 per cent of
heating oil users) may have run short of fuel in the lead up to Christmas,
but few were without heat over the holiday.
4.124 Although most households received oil in the end, some were surprised
by the price. Two concerns were raised with us: first, that the spike in
prices was unjustifiable 'profiteering' by the heating oil industry, and
second that during the period some firms had either refused to quote a
price or had changed the price between when the order was placed and
the oil was delivered. We deal with the first of these allegations in the
following section. The second is addressed under 'Consumer Issues'
below.
Pricing in December 2010
4.125 Prices were high in December 2010, and rose rapidly. Average prices
went from around 40 pence per litre in mid October, to 52 pence per
litre in mid December.192 Among those 17 suppliers that provided us
with pricing data, average prices for the whole month were as high as
66 pence, and across these firms the average (weighted by volume sold)
seems to have been around 60 pence per litre. Elsewhere on single days,
prices of 80 pence or more per litre were reported.193
4.126 As at other times, a large proportion of December's price was made up
of the price of crude oil and the wholesale refined product. However,
gross retail margins also spiked significantly in December 2010, though
they varied very widely across firms. Some earned up to around 20
192
ONS (for an order of 1000 litres). Though prices were higher in July 2008 and during much
of 2011, far higher volumes were purchased during December 2010.
193
Article in The Times Heating oil crisis feared, 19 December 2010; House of Commons library
briefing SN/SC/5806 Heating Oil, 1 June 2011; Parliamentary debate, 21 December 2010
www.publications.parliament.uk/pa/cm201011/cmhansrd/cm101221/debtext/1012210004.htm
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pence per litre, almost double the average in the data we saw and
substantially higher than in the previous peak in January 2010.
4.127 From public data with larger sample sizes, a comparison of the retail
price in December 2010194 with the international wholesale price of
kerosene shows that the difference of around eight pence per litre was
only 20 per cent higher than the previous year's peak of seven pence per
litre.
4.128 There is little doubt that gross margins spiked sharply during the period
of extreme demand. This is in part because costs also increased. Drivers
of increased costs during December 2010 included reduced availability
of oil at some supply points and the need to travel long distances to
collect from alternative supply points, and increased time spent queuing
at terminals. In response to the difficulties, the government agreed a
temporary relaxation of regulations on drivers' hours, and firms incurred
overtime costs. Other costs included: 195
•
High volumes of customer telephone calls, requiring additional staff
time.
•
Difficult driving conditions making deliveries slower (and hence more
expensive).
•
Accidents and damage to vehicles from icy roads, which put
vehicles out of action and prevented deliveries.
194
ONS – based on an order of 1000 litres, mid-month, compared with the average wholesale
Platts price of jet kerosene in that month (simple average of daily prices). Note that prices
include VAT.
195
Data request responses from firms, adjusted to reflect VAT.
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•
Customers ordering from multiple firms to be sure of delivery. This
resulted in an increase in failed deliveries (because the tank had
already been filled).196
•
An increase in the proportion of small orders (on average 15 per cent
smaller than the previous December) which are more costly on a per
litre basis than larger orders.
•
Large numbers of consumers claiming they had run out and needed
to be prioritised. Prioritisation can mean less economical routing for
deliveries, and some claims were false from consumers looking to
gain priority.197
4.129 This is not to say that the spike in prices was driven entirely by
increases in cost. In free markets prices will typically rise in response to
increased demand, at least over the short term. In competitive markets
the profits thus garnered can only ever be temporary, as high profits
attract new firms to the industry.
4.130 In markets such as domestic energy where demand varies reasonably
predictably over time, the extent to which firms are able to take profit at
peak times depends on the industry's capacity to meet peak demand.
Provided entry barriers are low, high profits during the peak will attract
new entry – thus pushing prices down – to the point where a potential
new entrant can no longer expect to make enough during the peak to
turn an economic profit for the year.
4.131 Our analysis of this market strongly suggests that, while firms are able
to take profits at times of peak demand, competition will constrain the
extent to which they are able to do so over time.
196
Note that consumers could technically be in breach of contract in these circumstances, with
firms entitled to recoup some of their costs (although firms told us they generally do not).
197
Discussions with individual firms, and responses to the data request.
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4.132 Nonetheless, spikes in demand and prices are a feature of this market,
and are difficult for consumers and firms to manage. Both can take
action to reduce the likelihood of demand (in the case of consumers) and
price spikes, and improve their resilience when spikes do occur.
4.133 We understand that some distributors have increased kerosene storage
capacity, planned for greater provision of emergency 20 litre drums, and
established an industry code of conduct for prioritising deliveries in
severe weather. Representatives from all parts of the supply chain are
working with DECC, for example through their Downstream Oil Industry
Forum, to improve the resilience of the UK's oil infrastructure.198 The
Scottish Government chairs the Resilience Advisory Board for Scotland
(Fuel) which brings together the Scottish Government and key fuel
distributors to discuss how to improve fuel resilience in Scotland. The
UK Government has also been reviewing severe weather preparations,
including for the road network, which significantly hampered the
distribution of heating oil in December 2010.199
4.134 There are also steps consumers can take to smooth demand, reduce
their exposure to short-term price spikes, and improve their preparedness
for severe weather. These include buying early, and buying larger
amounts where possible, as well as organising alternative heating in case
of short-term emergency. Industry, government and consumer groups
have this year issued additional concerted publicity to encourage early
purchases wherever possible.200 We recognise however that consumers
may be constrained from buying early by the size of their tanks (an issue
mentioned by six per cent in the SPA consumer survey) or by their ability
198
For more information, see:
www.decc.gov.uk/en/content/cms/meeting_energy/en_security/downstream_oil/improving/impro
ving.aspx
199
www.dft.gov.uk/news/statements/hammond-20101221
200
See press releases for Consumer Focus: www.consumerfocus.org.uk/wales/news/campaignaims-to-cut-costs-of-winter-heating-oil; FPS www.fpsonline.co.uk/news_details.asp?ID=266;
and Oil Save www.oilsave.org.uk/news_details.asp?ID=18
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to afford large payments (mentioned by 26 per cent), particularly if they
are unwilling or unable to sign up for a budgeting plan with a distributor.
A case for regulation?
4.135 To summarise, our assessment of competition in this market is broadly
positive – it is characterised by lots of competing firms (see 'Local
competition' section) and low barriers to entry and expansion in most
areas (see 'Entry and expansion' section). There is also a relatively high
proportion of consumers that shop around and switch suppliers (see
'Consumer behaviour' section'). We have seen no evidence of collusion
between suppliers.
4.136 On the question of prices, we have found that the main driver is the
price of crude oil – this is, unfortunately, both volatile and rising over
time, suggesting that high and volatile prices are likely to remain a
feature of the heating oil market. Furthermore, demand peaks in the
winter and prices rise at this time. Over the course of the year, however,
gross margins do not appear excessive (see 'Excessive pricing' and
'Financials' sections).
4.137 Since we do not have evidence of collusion, and since it is not illegal to
raise prices in a competitive industry, we do not believe that the
complaints put to us about this industry reflect anti-competitive
behaviour that breaches competition law (though should evidence of
such behaviour come to light in future we would of course consider it,
subject to the application of our prioritisation principles).
4.138 However, we also received representations from consumers and
consumer organisations suggesting that the heating oil industry should
be subject to regulation in a manner similar to that of mains gas or
electricity, with the objective of constraining prices and/or margins.
4.139 On the aforementioned competition grounds we see no case for price
regulation of the industry. Although high and volatile prices are clearly
difficult for consumers, competition appears to be sufficient to keep
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retail prices down to a competitive level, and competition law exists to
prosecute any future anti-competitive behaviour should it arise.
4.140 Moreover the industry does not exhibit any of the usual features of
regulated industries. Regulation is a solution where markets cannot be
expected to work well of their own accord, for example where natural
monopolies arise. This is the case for gas and electricity, where the
transmission distribution networks are natural monopolies which it is not
feasible or desirable for multiple firms to duplicate. It is worth noting that
only these elements of the final price for electricity and gas are regulated
– the commodity price (generation costs for electricity and exploration
and production costs for gas) and retail costs are set in the market.
4.141 It is also worth noting that regulation would be unlikely to have a
significant impact on overall prices – probably no more than is currently
achievable by shopping around. This is because a price regulator would
have to allow the pass-through of legitimate input costs, most notably
the crude oil price.
4.142 We recognise that it is an oddity of the NI market that the most common
household heating fuel, heating oil, is unregulated while electricity and
gas, which are much less common, are regulated. We also recognise
that regulation allows for other interventions, not just price control. For
example initiatives to address fuel poverty or raise standards of conduct
with respect to doorstep sales can be implemented by way of licence
conditions. However, these issues do not of themselves amount to a
case for sector-specific regulation. Consumer law offers significant
protection from unfair trading – we discuss this in the next section.
4.143 Insofar as heating oil presents challenges for consumers in terms of high
prices and volatility, it is a matter for government to consider whether
further measures should be taken to support vulnerable off-grid
consumers and, in the longer term, to ease the transition away from
fossil fuel dependence. The Government already has a number of policies
and work programmes that bear directly on these issues.
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Assessment of consumer issues
4.144 The OFT's mission is to make markets work well for consumers. As part
of that process, the OFT is under a duty to enforce legislation which is
intended to protect consumers when they buy goods or services.
Examples of the key legislation that could apply to the heating oil
industry include:
•
The Consumer Protection (Distance Selling) Regulations 2000 which
protect consumers in relation to distance contracts by requiring the
supplier to provide certain information to consumers prior to the
conclusion of the contract.
•
The Consumer Protection from Unfair Trading Regulations 2008
which prohibits suppliers from engaging in unfair commercial
practices whilst providing goods or services to consumers.
•
The Unfair Terms in Consumer Contracts Regulations 1999, which
prohibits suppliers from using unfair contract terms in contracts
made with consumers for the sale of goods and services.
4.145 We have considered in the course of this study a range of issues relating
to the application of consumer protection legislation in the heating oil
industry.
4.146 In particular, we have closely examined three main consumer based
concerns that have become apparent during the course of the study:
•
Complaints that company ownership lacked transparency.
•
Concerns about the role played by price comparison sites.
•
Concerns about how heating oil suppliers indicate a price to
consumers, and the varying of prices between order and delivery.
4.147 We examine these points in turn below.
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Transparency of ownership
4.148 It was put to us via consumer complaints that the ownership of multiple
brands by large suppliers is not made clear to consumers, leading to
confusion about choice of supplier and creating an illusion that the
choice available to a consumer is greater than it actually is. We also
heard complaints that consumers may want to give business to a small
local supplier, and believe they are doing so, when in fact they are
buying from a large national firm.
4.149 In terms of how choice matters to consumers, our research found that
price is the main driver of choice of supplier but that to a fifth of
consumers the identity of the supplier was a consideration,201 particularly
for those consumers concerned with buying local or with security of
supply.202
4.150 Many businesses use a trading name that is not the company name and
a company may legally operate multiple brands in the same industry. In
acquisitions the brand value is often a significant part of the value of the
acquired asset and the new owner may continue to operate the old
brand indefinitely. However consumer protection and other laws impose
certain requirements which relate to the disclosure of business names
and ownership. For example, the Consumer Protection from Unfair
Trading Regulations 2008 provides that a trader must not make
misleading statements. That means statements that: (a) contain
information that is false, deceitful or likely to deceive, or information that
omits material information; and (b) causes or are likely to cause a
consumer to make a transactional decision he would not have otherwise
201
See the SPA Report – respondents were asked to think back to their last order and describe
their main reasons for choosing that particular supplier. 47 per cent mentioned price, 20 per cent
mentioned brand or reputation, and 13 per cent mentioned the desire to use a local supplier.
202
See the SPA Report - this issue was raised in interviews and focus groups. It was also raised
in response to our data request, where some argued that small local firms are better able to cope
with extreme conditions.
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taken.203 In terms of transparency of ownership in the heating oil
industry this means for example that:
•
Because a supplier's identity matters to consumers (as shown in the
SPA research), they should not be misled (by what is said or not
said) about the identity of the supplier in a way that affects their
decision about their order.
•
Information about company ownership should be clearly provided on
business documentation including, letters, notices invoices and on
any website operated by the company. 204
4.151 A number of the complaints received from consumers highlighted GB
Oils Limited which operates 42 brands, considerably more than anyone
else. DCC Group Plc, the owner of GB Oils Limited, have told us that
they have made the following changes to their procedures over the last
12 months, to reduce the risk of customer confusion when they contact
a distributor brand owned by DCC Group Plc. For example:
•
Any advertising material placed by a DCC brand (for example, an
advert in the Yellow Pages for a particular area) will identify that
that brand is owned by GB Oils Limited.
•
The website for any individual brand owned by DCC will identify that
it is owned by GB Oils Limited.
•
If someone calls a DCC depot the phone will be answered with the
wording 'XXXX a GB Oils brand'.
•
As before, invoices sent to an individual customer will identify that
the brand is owned by GB Oils Limited.
203
See regulations 5 (prohibits misleading acts) and 6 (prohibits misleading omissions) of the
Consumer Protection from Unfair Trading Regulations 2008.
204
See the Companies Act 2006 and related secondary legislation.
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4.152 We welcome these changes, which should help consumers be more
confident about how much real competition there is in their area, and
make informed decisions about their purchases of heating oil.
Transparency in price comparison sites (PCS)
4.153 Following concerns expressed to us about price comparison sites, we
conducted a web sweep on websites offering quotes for the supply of
heating oil. We identified more than a dozen such sites making a variety
of claims.
4.154 The OFT would have concerns205 in particular if:
•
The ownership of the sites was not clear, because they only
displayed a trading name.
•
The relationship between the site and other businesses providing
goods and services through the site was not clear. For example
whether the site was an independent intermediary or owned by a
heating oil supplier.
•
The number of quotes and identity of any supplier chosen on the
basis of those quotes was not available.
4.155 It is important that when consumers use (or decide whether to use), a
price comparison site they are able to make an informed choice – to
know whether they have done enough shopping around or whether they
need to look further. That requires them to know whether the site is
independent of any of the companies providing quotes. It is also
important that consumers know or can access how many different
businesses are being compared when a quotation is given.
4.156 On the basis of our preliminary sweep we examined a subset of sites in
more detail. We found:
205
For example in relation to the Consumer Protection from Unfair Trading Regulations 2008.
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•
WCF Limited which operates the website fuelfighter.co.uk, claimed
to make price comparisons but only quoted prices for its own
products and services. It also used false customer testimonials on
the site. The website has been changed to reflect its operation as a
website to order fuel from WCF Limited. The company and directors
have signed formal undertakings as to future conduct.
•
boilerjuice.co.uk, operated by BoilerJuice Limited, whilst a price
comparison website providing quotations from GB Oils Limited as
well as price quotations from other unrelated heating oil distributers,
was not transparent about its links to parent company DCC Group
Plc, which owns GB Oils Limited, the largest heating oil distributer in
the UK. The company made changes to its website to make its
ownership by parent company DCC Group Plc clear. Other changes
to the website include changes to the quotation process so
consumers can see how many firms are providing quotations. The
company and the directors signed formal undertakings as to future
conduct.
•
Johnston Oils Limited, owner of the website cheapheatingoil.co.uk
made changes to its website after the OFT contacted it and the OFT
sent a letter of advice.
•
In addition two other sites have made changes to their wording,
which have addressed our concerns.
4.157 In a separate decision, DCC Group Plc has recently sold BoilerJuice
Limited to the company's management, and it is now wholly
independent of DCC.
4.158 As a result of these changes, the ownership of these web sites is now
clear, any relationship with a business supplying heating oil is
transparent and the number of quotes that have been compared is stated
prominently. Needless to say, we expect the rest of the industry to take
note and ensure their sites and marketing materials do not mislead.
4.159 Our press notice in September 2011 detailing the above work can be
found at: www.oft.gov.uk/news-and-updates/press/2011/96-11
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Pricing practices
4.160 We were told of occasions when firms had refused to provide a firm
price before delivery, or charged a different price at delivery than was
quoted at order. Our research found that a third of customers are not
offered a guaranteed price for their heating oil when they place their
order, and we have also seen websites that say the price charged will be
the price applicable on the day of delivery.
4.161 However while it appears that many firms reserve the right to vary the
price, in practice price variation is an occasional rather than widespread
problem in the industry: the SPA consumer research found that only one
per cent of respondents had experienced these problems last year.206
4.162 Nonetheless we did hear of instances when prices had varied quite
significantly between order and delivery during the severe weather last
winter, and these complaints received some media coverage early in
2011.
4.163 The Consumer Protection (Distance Selling) Regulations 2000 (DSRs)207
require that when a contract is made over the phone or internet, the
consumer is given the price of the goods including all taxes.208
4.164 The Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs)209
prohibit contractual terms which, if not individually negotiated and
contrary to the requirement of good faith, cause a significant imbalance
in the parties' rights and obligations arising under the contract to the
detriment of the consumer. In our view such an imbalance could be
created by contract terms that reserved a firm's right to vary its price
206
See the SPA Report.
207
See OFT 698: A guide for businesses on distance selling
208
Regulation 7 of the Consumer Protection (Distance Selling) Regulations 2000.
209
See OFT 311: Unfair Contract Terms Guidance
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unilaterally at a point in time when the consumer had little choice but to
accept the order.
4.165 To ensure compliance with the Consumer Protection from Unfair Trading
Regulations 2008 (CPRs)210 firms should provide either a firm price, or
where the price cannot be reasonably calculated in advance, the way it
will be calculated, since failure to do so could be a misleading action
and/or omission that changes the consumer's transactional decision. In a
recent case brought by Carmarthenshire County Council against GB Oils
Limited (trading as O. J. Williams), it was held that the defendant did
engage in an unfair commercial practice contrary to Regulation 10 of the
CPRs.211
4.166 We appreciate that wholesale prices may move when there is a
significant delay between order and delivery, and that at times these can
move significantly. This can present difficulties for firms. However, we
understand that such delays occur only infrequently, and many suppliers
adhere to agreed prices even under these circumstances.
4.167 The OFT has previously published guidance on price variation clauses
within the UTCCRs. In essence the law requires firms to fix a price with
the consumer, or to ensure that the customer has adequate cancellation
rights if the price increases. In our view adequate cancellation rights
means allowing the consumer sufficient time to find an alternative deal.
4.168 We also note that when people buy oil via prepayment or auto-top-up
plans (to spread costs or avoid having to monitor fuel levels) they should
be told the basis on which the unit price is calculated, and be able to
make informed choices about the value of their plan relative to non plan
210
See BERR (2008), Guidance on the Consumer Protection from Unfair Trading Regulations
2008 p.37 paragraph 7.33
211
Carmarthenshire County Council v GB Oils Limited t/a OJ Williams, Ammanford Magistrates
Court, 15 August 2011. For more information on this case see
www.tradingstandardswales.org.uk/prosecutions/carmarthengboils.cfm
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prices. Consumers taking up such plans should not be subject to unclear
or onerous contract terms or unfairly prevented from leaving the plan.
4.169 We are currently examining these and related pricing practices.
4.170 We are also working with the industry trade bodies to ensure
understanding of and compliance with consumer protection legislation.
Self-regulation
4.171 The OFT and Local Authority Trading Standards have taken enforcement
action in this sector, and will continue to do so. Building on these, we
believe the industry itself can do more to ensure compliance with
existing legislation, help consumers get the best service possible, and
reassure customers that they are getting a fair deal.
4.172 During our study we have consulted with the main trade bodies for
heating oil distributors – the FPS in GB and the NIOF in NI. The FPS has
an existing code of practice, with additional commitments relating to
supply in severe weather.212 The NIOF has been in discussion with the
CCNI about developing and publishing a code of practice.213
4.173 Our own discussions have focused on the demands of consumer
protection law in relation to agreeing prices before delivery. Both bodies
are engaging with us and beginning work to strengthen compliance, with
the support of firms in the industry. Drawing on our previous experience
of successful self regulation,214 we are supporting the FPS to formulate
212
www.fpsonline.co.uk/Code%20of%20Conduct.pdf and
www.fpsonline.co.uk/BriefingNotes/CODE%20OF%20PRACTICE%20FOR%20SUPPLY%20OF%
20HEATING%20OIL%20IN%20ABNORMAL%20WEATHER%20AND%20SUPPLY%20CONDITI
ONS.pdf
213
www.consumercouncil.org.uk/energy/newsroom/item/646/a-joint-statement-from-theconsumer-council-and-northern-ireland-oil-federation/
See OFT 2009, Policy statement - The role of self-regulation in the OFT's consumer
protection work (OFT 1115)
214
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high standards around pricing practices, and to develop its capacity to
deliver training, monitoring and enforcement. The FPS also aims to draw
consumer bodies into discussions on a wider set of issues and has
already successfully worked with Citizen's Advice to engage consumers
on the subjects of buying groups and stocking up early for winter.
4.174 We will continue to engage with both the FPS and the NIOF to ensure
their members are aware of their legal obligations.
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5
LIQUEFIED PETROLEUM GAS (LPG)
Summary
5.1
In 2006 the Competition Commission (CC) published the findings of its
market investigation into competition in the supply of domestic bulk
LPG.215 Given the in-depth nature of that investigation, we have focused
on developments since then, and on areas that the CC investigation did
not cover, namely competition issues in cylinder LPG, and consumer
protection issues in the supply of domestic bulk LPG.
5.2
Our key findings are as follows:
•
For domestic bulk LPG, the CC investigation identified competition
problems in the market and introduced remedies to address these
problems. These remedies were implemented by means of two
Orders governing the supply of domestic bulk LPG to individual tank
customers and customers on metered estates respectively.216 We
have looked at the initial impact of the Orders, which came into
force in 2009. While it is too early to draw firm conclusions, the
Orders appear to have substantially increased switching rates for
individual tank customers but have had less impact on switching
rates for metered estate customers. The OFT will continue to
undertake its statutory duty to keep under review the effectiveness
of and compliance with the Orders.
•
We also considered consumer protection issues in connection with
the supply of bulk LPG. The OFT has concerns that some contract
terms may not be entirely consistent with consumer protection
215
Market investigation into supply of bulk liquefied petroleum gas for domestic use, June 2006
(the CC Report). The CC Report is published at: www.competitioncommission.org.uk/rep_pub/reports/2006/514lpg.htm
216
www.competition-commission.org.uk/inquiries/current/gas/lpg_order_final.pdf and
www.competition-commission.org.uk/inquiries/current/gas/notice_order_metered_estates.pdf
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legislation. We are engaging with suppliers to seek, where
necessary, improvement in the clarity of contract terms, particularly
concerning cancellation and switching rights. Among other things,
adequate and clear cancellation and switching rights ensure that
consumers have options in the event of their supplier varying the
price of LPG within the term of its supply contracts.
•
We found that cylinder LPG is relatively little used as a primary
source of domestic heating, and conversely that the domestic
heating market is a small part of a much wider and predominantly
commercial market for cylinder LPG.217 We have not sought to draw
definitive conclusions about the wider market. Nonetheless, some
features are worth noting. There are few cylinder LPG suppliers
upstream and some domestic cylinder LPG users have a limited
choice of retailers downstream. Furthermore, distribution and retail
arrangements for cylinder LPG are heavily constrained by vertical
agreements that in effect require dealers to deal exclusively with one
supplier. Given the concentration in the upstream market, these
agreements could potentially restrict competition. The OFT may
return to these issues in the context of the wider cylinder LPG
market at a later date (subject to OFT prioritisation principles).
Introduction
5.3
LPG performs the same household functions as mains gas, but is
delivered by road and stored on individual premises. It is either obtained
as a by-product when refining crude oil at refineries and petrochemical
plants, or directly from North Sea oil or gas wells. It is subsequently
delivered from the supply points in liquefied form to a primary storage
facility where it is stored by a process of refrigeration or pressurisation.
It is then ready for purchase by resellers. Once purchased, the LPG is
usually delivered to bulk distribution depots and cylinder-filling plants,
217
This is taken from Appendix C of the CC Report. More detail relating to the supply chain can
be found in this Appendix.
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some of which are combined on large sites, by means of large bulk road
tankers.218
5.4
There are two types of LPG – propane and butane. According to the
website of the UKLPG, which is the trade association for suppliers of
LPG in GB:219
•
'Propane is used primarily for central heating, hot-water, gas-fires,
convector heaters and for cooking.
•
Butane is used mainly in cylinders for portable applications in mobile
heaters in the home, and for leisure activities such as boats,
caravans and barbecues.'
5.5
Our study concerns the use of LPG as a fuel for domestic heating
purposes. Hence, this report focuses on propane gas, which is the main
type of LPG used for this purpose, and references to LPG in the
remainder of this section should be construed as referring to propane gas
(unless otherwise stated).
5.6
Households can be supplied with LPG in two different forms:
•
Bulk (tank) LPG, where propane gas is delivered by tanker to an
external storage tank on the customer's premises, which may be
sited above or below ground. This is the most common domestic
form of LPG used. In 2006, the domestic supply of bulk LPG was
the subject of an investigation by the CC, resulting in the
implementation of remedies aimed at improving competition in the
market.
•
Cylinder (bottled) LPG: this is usually delivered to households in prefilled gas cylinders and tends to be used in locations where a
218
This is taken from Appendix C of the CC Report. More detail relating to the supply chain can
be found in this Appendix.
219
www.uklpg.org/exceptional-energy/what-is-lpg
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customer is unable to site a tank, or where tanker access is an issue.
Various sizes of cylinder can be purchased for home heating: large
(typically 47 kg) sizes for central heating and smaller sizes (including
7 kg and 15 kg butane cylinders) for indoor room heaters. Small
propane cylinders are also available for patio heaters. Per energy
unit, cylinder LPG is more expensive than bulk LPG and it is used by
far fewer homes.
5.7
Around 150,000 households220 use bulk LPG and 25,000221 to 50,000222
households use cylinder LPG for heating purposes in the UK. It is
unlikely223 that households would switch from one to the other, as bulk
is cheaper and generally preferred, while cylinder is mainly used where
bulk cannot be supplied, for example due to space constraints.
5.8
The distribution of households using LPG across the UK is shown in the
following map.
220
CC Report, paragraph 2, page 3. The CC Report also found that an estimated one per cent of
households in NI use bulk LPG—2.5 per cent of those outside the mains gas network (paragraph
1, appendix H).
221
OFT estimate based on the difference between the figure given in the Consumer Focus
Report for bulk and bottled LPG households in GB and the number of bulk LPG households
estimated in the CC Report.
222
Supplier responses to OFT information requests, based on returns from at least 85 per cent
of the market.
223
Albeit possible, as we have heard of a few such instances from consumers and suppliers.
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Figure 5.1: UK map of domestic LPG use (both bulk and cylinder)
Source: UK Emission Mapping Methodology 2009, AEA, Ioannis Tsagatakis, Tony Bush, Helen
Walker, Neil Passant, Nicola Webb and Daniel Brookes. Refer to Annexe B for detailed underlying
source explanations.
5.9
LPG is attractive for its versatility, as the same supply can be used for
cooking as well as for heating. LPG also produces lower levels of
emissions than heating oil. However, it is costly to heat an average
home using LPG relative to other off-grid fuels.224 As with heating oil,
consumers have raised concerns with the OFT that LPG prices have
increased sharply in recent times. While Annexe J shows that such price
increases are correlated with underlying input cost rises, such concerns
will be considered further later in this chapter.
5.10
The rest of this chapter considers the market for LPG in bulk and
cylinder form separately, given the significant differences in their retail
structure and customer base.
224
Sutherland Tables data, July 2011.
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Bulk LPG
Introduction
5.11
In July 2004, the OFT made a Market Investigation Reference (MIR) to
the CC under section 131225 of the Enterprise Act 2002 of the supply of
domestic bulk LPG.226 The CC published its final report in June 2006 (the
CC Report)227 and the resulting Orders took effect in 2009.228
5.12
The CC's inquiry was detailed and we have not sought to replicate the
analysis. The scope of our study in respect of the Orders is limited to
assessing the initial impact and considering evidence of compliance. Our
analysis in this market study does not constitute a formal review of the
Orders resulting from the CC's inquiry, as it is too early (less than two
years after the later Order took effect) to conduct such a review.
Nonetheless our findings provide useful early feedback to inform our
future monitoring of the Orders.
5.13
Our study has also considered consumer protection issues that have
been raised with us in the course of our study.
5.14
The remainder of this section sets out:
•
An overview of the CC's investigation and its key findings.
225
Under section 131 of the Enterprise Act, the OFT may make a market investigation reference
to the CC where it has reasonable grounds for suspecting that any feature, or combination of
features, of a market in the UK for goods or services prevents, restricts, or distorts competition
in connection with the supply or acquisition of any goods or services in the UK or a part of the
UK.
226
Further information about the OFT's July 2004 Market investigation reference on the supply
of liquefied petroleum gas to domestic bulk storage tanks can be found at:
www.oft.gov.uk/OFTwork/markets-work/references/liquefied-petroleum
227
www.competition-commission.org.uk/rep_pub/reports/2006/514lpg.htm
228
See Annexe I for more details of the CC Orders.
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•
Background context based on the CC Report, describing the market
structure at that time and any significant changes since then.
•
Our analysis of the initial impact of the Orders, assessing the extent
to which companies are complying with the Orders and the impact
of the Orders to date on indicators such as switching behaviour.
•
Consumer evidence to our market study, focusing on potentially
unfair contract terms where we have received a number of
complaints.
The CC's investigation and its key findings
5.15
The CC's investigation concluded that there were features of the
domestic bulk LPG market which adversely affected competition. As
evidence of weak competition, the CC found that each year only around
three per cent of the major suppliers' customers ended their supply
arrangements, and that only one in six of these (0.5 per cent of the
customer base) did so to switch to an alternative LPG supplier.229
5.16
The CC found the following features which resulted in weak
competition:
•
Up-front charges to customers (meaning that the costs of removing
and installing tanks were borne by the customer).230
•
Poor customer information about switching. LPG suppliers did not
provide information to customers concerning their right to switch;
pricing information from other LPG suppliers was difficult to obtain;
and, in some cases, customers incurred search costs for finding a
cheaper supplier.
229
Paragraph 4.14 of the CC Report.
230
Paragraph 4.49 of the CC Report.
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•
Contractual restrictions on switching, which included lengthy fixed
minimum terms in introductory contracts.
•
Selective discounting – most suppliers offered selective discounts to
customers. These can reduce the potential rewards to competitors'
efforts to win customers away from their current suppliers, and
thereby discourage firms from competing to win customers from one
another.
5.17
The CC concluded that most customers in the market were paying
higher prices than would be the case if these features did not exist.
5.18
To address its concerns, the CC introduced a package of remedies in the
form of two Orders. These were aimed at easing switching between LPG
suppliers by providing for a timely tank transfer or removal process at no
cost to the customer, standardising and improving the information
suppliers must provide to their customers on the switching process, and
changes to all customer contracts to enable easier switching.231
5.19
Separate Orders were made in respect of domestic supply to each of
two distinct customer groups and took effect in 2009:
•
The Domestic Bulk Liquefied Petroleum Gas Market Investigation
Order 2008 (the 2008 Order) applied to bulk LPG customers with
their own dedicated tank, who represent around 91 per cent of the
bulk LPG customer base.232 This Order came into force on 13 April
2009.233
•
The Domestic Bulk Liquefied Petroleum Gas Market Investigation
(Metered Estates) Order 2009 (the 2009 Order) applied to bulk LPG
customers on a metered estate, who represent around nine per cent
231
See Annexe I for further details.
232
Paragraph 3.17 of the CC Report.
233
www.competition-commission.org.uk/inquiries/current/gas/lpg_order_final.pdf
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of the bulk LPG customer base.234 This Order came into force on 6
November 2009.235
5.20
5.21
The OFT has a statutory duty to keep under review undertakings and
Orders made following an MIR, and consider whether these have been or
are being complied with. For the domestic bulk LPG Orders, this has
involved:
•
Working with the industry to raise awareness of LPG suppliers'
obligations under the Orders.
•
Collecting annual switching statistics from suppliers236 to help assess
the effectiveness of the Orders over time.
•
Helping consumers, who may be affected by the Orders, to
understand their rights. The OFT has published advice on both the
Consumer Direct and the OFT website in the form of frequently
asked questions (FAQs)237 on how consumers can switch supplier.
More details regarding the CC's investigation and the OFT's role and
activities undertaken in monitoring the Orders since their inception are
provided in Annexe I.
234
The term 'metered estate' is used to describe a number of possible arrangements whereby
suppliers supply via an intermediary. In some case the supplier supplies the customer directly
through a central fixed storage tank which also supplies other customers. In other cases, the
supplier's customer may be an intermediary such as developer or an estate owner who resells
the LPG to customers on an estate. This arrangement is common, for example, on park home
estates.
235
www.competition-commission.org.uk/inquiries/current/gas/notice_order_metered_estates.pdf
236
Further details of the information required sought from LPG suppliers annually can be found
at Schedule 3 of the 2008 Order and Schedule 2 of the 2009 Order.
237
LPG Frequently Asked Questions can be found on the OFT website at:
www.oft.gov.uk/shared_oft/monopolies/OFT-Domestic-bulk.pdf
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Market structure
5.22
The logistics of bulk LPG supply require the supplier to use a depot. In its
report, the CC noted that a depot can supply domestic customers
economically to a range of up to 100 miles, although in practice
companies tend to focus their activities more locally than this.
Nonetheless, no distinct local or regional markets were identified by the
CC, with prices being broadly similar in all regions of GB and within NI.
The investigation concluded that the relevant markets were the supply of
domestic bulk LPG in GB and NI.238
5.23
The CC report found that:
•
In GB, four major national suppliers – BP LPG UK (BP), Calor Gas
Limited (Calor), Flogas UK Limited (Flogas) and Shell Gas Limited
(Shell) – supplied around 90 per cent of the market. Of these, BP
and Shell operated at all levels of the distribution chain and Flogas
and Calor operated only at the retail level.239 Around 20 smaller
companies supplied the remaining 10 per cent, generally on a more
regional or local basis.
•
NI had only two suppliers of bulk LPG – Calor Gas NI (CGNI)
(supplying the majority of customers) and Flogas NI. There was very
little cross border trade between Ireland and NI.
5.24
One important difference between the bulk LPG and heating oil markets
is therefore concentration in supply. Whereas the heating oil market is
fragmented, the bulk LPG market is highly concentrated.
5.25
Suppliers told us that the market had not changed significantly since the
CC Report, apart from increased switching as a result of the Orders, so
that its findings as to market structure remain generally valid. Evidence
238
Paragraphs 3.12-3.14 of the CC Report.
239
Appendix C of the CC Report.
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presented to us suggests some gradual growth of smaller players at the
expense of the major suppliers in recent years. According to their own
figures for the number of households supplied, the four major companies
supply over 85 per cent of households in GB, down from around 90 per
cent in 2003.240
5.26
The CC conducted some analysis on the choice of supplier faced by
consumers.241 Taking 50 miles as a conservative estimate of the range
over which a depot supplies, data provided by suppliers indicated that
there were few depots which do not overlap with others in their range of
supply, suggesting that most consumers have a choice of supplier and
there is a continuous chain through most of GB. However, the SPA
research found that consumers in rural areas often knew of only one
supplier in their area242 – this may reflect a combination of lack of
awareness of options, and genuinely little choice in some areas.
5.27
The majority of customers now sign two year exclusive contracts with
their supplier (the maximum period of exclusivity allowed by the Orders)
and under those contracts the supplier usually retains ownership of the
tank. We are aware of some instances where customers own and take
responsibility for their own tank but, as the CC Report indicated, in this
situation, the protections for tank safety afforded by the existing regime
are diminished.243
Implementation of and compliance with the Orders
5.28
In making an assessment of the extent to which companies are
complying with the terms of the Orders, we asked suppliers a number of
questions relating to their experience of the Orders. We also asked for
240
Data based on company returns and Appendix F3 of the CC Report.
241
Appendix E, paragraph 21 of the CC Report.
242
SPA Report, slide 53.
243
CC Report, paragraph 5.28 and Appendix D.
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documentation and any other evidence demonstrating their compliance
with the Orders. Table 5.2 provides a summary of some of the evidence
reviewed during our study and our findings.
Table 5.2: Review of evidence on compliance
Evidence reviewed
Findings
Company concerns and opinions about
compliance or implementation issues.
Companies are concerned that competitor
behaviour should be in line with the Orders
so that they compete on a level playing
field.
Documentation required in order to
complete tank transfers is not always
forwarded as quickly as possible.
At times the quality of documentation
provided is poor.
Satisfaction levels (rated out of 10, where
10 is the best possible score) with the
timeliness of the notices, statements and
documentation (as required by the Orders)
provided by competitors during the
switching process.
On average, respondent companies rated
their level of satisfaction with the
timeliness of documentation required for
switching as eight out of 10.
Satisfaction levels (rated out of 10, where
10 is the best possible score) with the
quality of documentation on the age,
condition and work done on the tank
provided by competitors during the
switching process.
On average, respondent companies rated
their level of satisfaction with the quality
of documentation required for switching as
eight out of 10.
Ratings ranged from four to 10 out of
10.244
Ratings range from seven out of 10 to 10
out of 10.245
244
This figure is based on a sample size of eight companies, covering at least 90 per cent of the
market.
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OFT review of core documents:
•
Current standard terms and conditions
•
Current standard customer invoices
•
Copies of letters sent refusing a
request to switch due to lack of
eligibility
•
Standard customer letters sent prior to
termination of fixed term contracts or
when exclusivity periods are coming to
an end.
Details on how companies have
implemented the requirement to provide a
telephone enquiry line
In parts some of these do not comply
fully.
Some letters sent towards the date of
expiry of exclusivity do not state clearly
that customers have the option to switch.
All companies which responded, including
the major suppliers, gave details of their
telephone enquiry service
Source: OFT analysis of supplier documentation and information
5.29
In line with the CC Orders, information on the Orders, the switching
process and LPG suppliers in regional areas can also be found on the
UKLPG website.
5.30
Though our assessment has been brief, the emerging picture on
compliance with the Orders is broadly positive and companies appear to
be taking the Orders seriously. In general, companies are satisfied with
the timeliness and quality of documentation supplied to them when they
are acquiring tanks from outgoing suppliers. Although there are some
shortcomings, companies are broadly implementing what is required.
5.31
Where issues have been identified, the OFT will continue compliance
discussions with industry and will continue to monitor progress going
forward. Our overall approach to monitoring and enforcement of the
245
This figure is based on a sample size of seven companies, covering at least 50 per cent of
the market.
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Orders is to encourage firms and customers to resolve issues, in the first
instance, with a sliding scale of further intervention depending on the
seriousness and persistence of any breach:
•
Where issues have been identified by consumers (or their
representatives) which point to possible non-compliance, the OFT
will advise consumers of the general rights afforded to them by the
Orders although it cannot intervene in individual disputes. The OFT
may ask to be kept in touch with any developments to ensure that a
breach of the Orders has been averted and any misunderstandings
cleared up.
•
If the issue persists, and if the OFT has not already done so, we may
pursue it with the supplier(s) concerned. If evidence of a breach is
found, we will ask that it is put right as soon as possible. In more
serious cases we may publicise the breach and the action taken to
rectify it. In any event, such cases might also cause us to review our
guidance to consumers on their rights under the Orders.
•
Should a breach still persist, OFT would discuss with the CC the
possibility of the CC issuing directions to require compliance, for
instance as per Article 21 of the 2008 Order.
Initial impact of the Orders
5.32
In this section we consider the available evidence on the initial impact of
the Orders. We look at the following indicators:
•
consumer awareness of the Orders
•
switching data
•
pricing behaviour.
Consumer awareness of the Orders
5.33
Our consumer research suggested little awareness of the CC Orders
among customers, although we note that this finding is based on
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qualitative interviews with a small number of bulk LPG customers, few
of whom had considered switching. However, interviewees generally
viewed the Orders as advantageous when described to them and
thought that they would make switching more attractive for them in
future. The Orders are still relatively new and with continued efforts
from industry and industry bodies,246 we expect customer awareness to
continue to grow which, given consumer reaction from the SPA
research, should encourage switching.
Switching data
5.34
The CC in its investigation noted the considerable costs faced by
customers wishing to switch supplier. These included charges for
installation and removal of tanks and the inconvenience caused by this.
The CC noted that the average cost of installing a tank ranged from
£250 to £650 whilst removal cost around £200 to £250.247 Costs
involved in cancelling contracts and uncertainty around the switching
process also contributed to customers' unwillingness to change
supplier.248
5.35
The CC found that customers on metered estates may face an additional
barrier to switching in the need for agreement between all customers on
a metered estate to be reached before a switch can take place. The CC
also acknowledged a potential countervailing factor which may facilitate
switching on metered estates.249 If residents on a metered estate work
together they can achieve lower prices and share some switching costs
(including non-monetary costs such as time taken to shop around)
246
Information on the Orders is provided by companies and available through the UKLPG website
at: www.uklpg.org/advice-and-information/how-to-switch-lpg-supplier
247
CC Report, paragraph 4.7.
248
Table 1 in Appendix G of the CC Report gives full coverage of switching costs faced by
customers at the time of the report.
249
CC Report, paragraph 4.13.
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between properties on a particular estate, thus reducing the cost per
household of switching.
5.36
At the time of the CC Report, switching rates for bulk LPG consumers
were low. In GB, only one in every 200 of the major suppliers' individual
tank customers switched to an alternative supplier each year, amounting
to only 0.5 per cent of the customer base in 2003.250
5.37
The Orders were devised with the aim of reducing switching costs, thus
easing consumers' ability to switch LPG supplier. An important factor in
determining the impact of the Orders therefore is to review the switching
rates of customers to see if these have increased since implementation.
5.38
The OFT is responsible for collecting annual switching statistics for both
individual tank customers and metered estates, from suppliers. We
therefore have two sets of data on which to base a preliminary
assessment.
Individual tank customers
5.39
Table 5.3 provides a summary of individual tank switches in the UK
across all bulk LPG companies since the 2008 Order was implemented.
(Note that the timing of the introduction of the Orders means that the
figures for 2009-10 represent only part of a year.)251
250
CC Report, paragraph 4.14.
251
For more information on the switching data collected, please refer to Annexe I.
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Table 5.3: Incidence of switching amongst individual domestic bulk
LPG customers in the UK since implementation of the Orders
All switches
away from
companies
Total number of domestic
bulk LPG customers
Switches as per cent of
the customer base
2009-2010
2010-2011
2009-2010
2010-2011
4751
5929
3.7%
4.1%
Source: OFT analysis of annual returns from suppliers to the OFT under the Orders
5.40
The data in Table 5.3 include not just customers switching between bulk
LPG suppliers but also those switching from other fuels, such as heating
oil, to bulk LPG and vice versa.
5.41
We have sought to isolate the annual number of customers of the major
LPG suppliers who switched between bulk LPG suppliers for comparison
with the CC's equivalent estimate of 0.5 per cent of GB customers in
2003. In GB, 3.7 per cent of individual customers of the major suppliers
switched between bulk LPG suppliers in 2010-2011, confirming that the
Orders appear to have stimulated a substantial increase in switching in
the GB market. However, data collected for NI show lower switching
rates, with only around 1.2 per cent of customers switching away from
their supplier (either to another fuel or to another LPG supplier) in 20102011. One supplier stated their view that the low rates are indicative of
customer satisfaction. We have not sought to study variations in
switching rates by market in detail. We note that low switching rates in
NI are consistent with findings at the time of the CC Report.252
5.42
The data also show smaller suppliers gaining customers. In some cases,
gains made are large. More than 10 smaller suppliers have expanded
their customer base by more than 10 per cent since the Orders were
252
Refer to paragraph 4.45 and Appendix H of the CC Report.
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introduced.253 In contrast, the major suppliers have either lost customers
or achieved only small increases in the number of customers served.
Smaller suppliers we spoke to confirmed that customers are switching to
them. Additionally, we are aware of at least two firms who have entered
the market since the Orders were introduced and we have heard from at
least one other supplier that the Orders make the market a more
attractive prospect for future entry.
Health and safety compliance
5.43
In considering the ease of switching under the Orders, several suppliers
and consumers noted that the location of tanks, in positions that are not
compliant with industry codes of practice on health and safety, can
prevent switching. For example, building work or plant growth close to a
tank may have rendered it non-compliant over time. A new supplier can
exercise its rights to refuse to take on a non-compliant tank and in this
case will not accept the new customer until the tank is repositioned in a
compliant manner.
5.44
Suppliers indicated that the proportion of non-compliant tanks among
customers wishing to switch appears substantial. Suppliers also
indicated that customers' reluctance to re-site the tank (or the
impossibility of re-siting the tank in a compliant manner) hinders
switching, as the customer will generally prefer to avoid the costs and
disruption of tank relocation by remaining with their existing supplier
who will still supply the tank. The incidence of such situations suggests
that the policy of companies differs so that whilst one supplier may be
willing to take on or continue supplying a tank, others may not; and it is
often only when a customer tries to switch, triggering a formal
assessment of the tank, that the issue is highlighted.
5.45
We discussed this matter with the Health and Safety Executive (HSE).
When approached for a view, the HSE has advised customers to explore
the reasons why an incumbent supplier considers the tank compliant and
253
Based on annual returns from suppliers to the OFT under the Orders.
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that these points could then be put to the new potential supplier.
The new potential supplier is then in a position to consider
this information but is not bound by another supplier's opinion and can
make their own judgements.
Metered estate customers
5.46
We also considered the switching data for metered estate customers, 254
as summarised in Table 5.4. In total only 30 metered estates (mainly in
GB) have switched away from their supplier since the implementation of
the 2009 Order, whether to LPG to other fuels. Among these we have
estimated that in GB 0.7 per cent255 of metered estate customers of the
major suppliers switched to an alternative LPG supplier in 2010-2011.
There is no comparable figure from the CC Report, but we note that the
percentage of switchers away from companies has dropped over the two
years that statistics have been collected – although this may also reflect
that most estates wanting to switch may have sought to do this in the
immediate aftermath of the introduction of the 2009 Order and are now
locked into a two year contract.
Table 5.4: Incidence of switching amongst metered estate customers
since implementation of the Orders
All switches away
from companies
Number of metered bulk
LPG customers
switching away
Switches as per cent of
the customer base
2009-2010
2010-2011
2009-2010
2010-2011
19
11
0.9%
0.5%
Source: OFT analysis of annual returns from suppliers to the OFT under the Orders
254
As defined in footnote 234.
255
Please note that this figure is higher than the total number of switches away from all UK
companies (0.5 per cent as shown in Table 5.4) due to differences in the customer base when
only data from the major companies are considered.
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5.47
The lower percentages of metered estate customers switching compared
to individual tank customers suggests metered estate customers
continue to find it difficult to switch. We noted that the CC had
identified additional barriers to switching for metered estate customers
(see paragraph 5.35), and the OFT has received a number of queries on
this issue since implementation of the Orders.
5.48
Contracts of customers on a metered estate tend to be staggered,
reflecting the times when they moved onto the estate, so that they
expire at different times. Thus all customers on a metered estate are not
out of contract and searching for a new supplier at the same time.
Some, but not all, suppliers are willing to terminate contracts before they
expire in return for an early termination fee but may not be obliged to do
this. Furthermore, in order to change supplier, customers within the
same metered estate need to be in a position to reach a unanimous
collective agreement about a new supplier, which may not always be
possible.256 In our view, unanimity has practical benefits in protecting the
individual rights of customers; the different timings of contract expiry
pose the more significant challenge in allowing switching to be
considered.
5.49
Nevertheless, switching by metered estate customers can and does
occur. It is important that residents are fully aware of their rights, and
can work together towards a unilateral agreement to switch to a new
supplier. For example, residents should compare prices, and advise new
residents that they are not obliged to sign a new contract automatically
(thus binding the whole estate for up to two more years). We have
discussed with industry their experiences of switching and the issues
arising. Revised guidance reflecting these discussions, for metered estate
256
These issues were recognised and considered by the CC in its investigation. Refer for
example to paragraph 20 of the following document: www.competitioncommission.org.uk/inquiries/current/gas/response_consultation_metered_estates.pdf
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customers wishing to switch, is provided in FAQs published by the
OFT.257
Price outcomes
5.50
In general, suppliers have told us that their pricing practices are not
fundamentally different today when compared with those at the time of
the CC Report. Consistent with this, we have heard from consumers that
a number of the potential pricing concerns identified by the CC persist in
the market.
•
For example, there are still wide disparities in prices charged to
customers, even in the same locality, so that consumers remain
concerned over the transparency of pricing. However, consistent
with the CC Report, we have heard of individual instances where
customers have successfully negotiated down their prices or
achieved a reduction by querying imposed price increases.
•
The CC considered this issue in its report258 and decided not to
facilitate greater transparency of prices in such a way that would
make suppliers' prices more visible to other suppliers. This was in
part because of concerns that increasing pricing transparency to
other suppliers could potentially have adverse effects by facilitating
collusive practices. Nevertheless, the CC Report was not intended to
discourage steps to increase the transparency of pricing to
customers and the CC's remedies included measures to help
customers make comparisons. It is not anti-competitive for individual
firms to decide to publish their prices voluntarily, as for example we
are aware some companies do.
257
The FAQs are published on the OFT website at:
www.oft.gov.uk/shared_oft/monopolies/OFT-Domestic-bulk.pdf
258
Refer to section C of Chapter 4 and Appendix G of the CC Report, for a discussion of this
and other pricing issues.
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5.51
The above concerns are set against a backdrop of high and rising prices
for consumers, which will be separately considered in the next section.
Consumer issues
5.52
We note concerns raised during our study regarding disruption to supply
last winter. Prolonged periods of severe cold weather, snowfall rendering
certain areas inaccessible and supply failures at some refineries created a
situation where some consumers were left without an energy supply at a
very critical time. We are aware of a number of measures implemented
by suppliers at the time to overcome supply issues including the
recruitment of additional drivers, utilising 4x4 vehicles for deliveries, part
filling tanks to spread supplies available and topping up customers early.
We have talked with suppliers about ways to avoid a recurrence over
future winters. The larger suppliers have told us for example that they
have invested in additional bulk storage and snow-appropriate delivery
vehicles and put in place larger call centres to deal with additional calls
from customers. Suppliers also acknowledged the need for continued
investment in refineries to ensure security of supply.
5.53
Compared to the heating oil market, we believe that the LPG suppliers
are better able to make the investments necessary to ensure security of
supply because of their size in comparison to the average heating oil
distributor.
5.54
However, the most prevalent complaint raised with us was about
frequent and significant increases in the price of bulk LPG, including
sharp increases once an introductory pricing period had expired.
5.55
Data collected during our study259 demonstrate that the retail price of
domestic bulk LPG has increased sharply in recent years. In GB, the
259
The major suppliers provided us with their average purchase price of propane and average
retail price of bulk LPG on a monthly basis between January 2008 and March 2011. These data
are confidential to the parties and are therefore not published here. We also obtained similar data
from some smaller suppliers but over a shorter time period.
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average price charged by the major suppliers increased by two thirds
between 2005 and 2010. In NI, average price increases have been more
substantial, almost doubling during the period.260
5.56
•
LPG used in the UK is primarily produced as a by-product from the
refining of crude oil and hence its price is related to the price of
crude oil and the internationally traded price of propane. The LPG
price is also influenced by the relative demand for other refined
products, as production volumes are interrelated within the refining
process. Escalations in input prices, particularly over last winter,
have contributed at least in part to pushing up the price of LPG as
evidenced in Annexe J. Other operating costs also contribute to the
end price – particularly transport costs, given that road fuel prices
have also risen.
•
Suppliers told us that they do not pass on every increase and
decrease in input costs, instead trying to minimise the frequency of
price changes to the consumer. Data they have provided show that
in both GB and NI, retail prices tend to not fluctuate as much as
input costs. Some of the larger companies have told us that they
engage in hedging activities, such as investing in storage facilities
and buying forward, to provide greater price stability.
Although the price increases observed credibly appear to be driven in
part by external input cost pressures, and despite the efforts suppliers
have informed us they make to smooth price fluctuations, this does not
remove the challenge of managing the resulting price increases,
particularly where consumers are contracted to purchase exclusively
from a given supplier.
260
Supplier responses to OFT information requests. A LPG supplier told the OFT that any
differences in price increases between GB and NI are mainly attributable to the higher cost of
shipping product to NI and the ongoing distribution costs to customers, both of which were
impacted by sharply higher diesel costs which would have resulted in inflationary effects on the
NI LPG domestic central heating prices.
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5.57
Some customers complained that their contract terms meant they had to
accept these price increases, while others, whose contracts contained
price limits, complained that their suppliers did not abide by these.
5.58
The Orders imposed new contract terms on suppliers. These changes
have brought advantages to consumers, for example by reducing
exclusivity periods to no more than two years. This is likely to increase
competition in the market by allowing customers more opportunities to
switch supplier. However, where customers are locked into contracts
even for a minimum period, it is important that the contracts offer
sufficient protection for consumers against material variations, including
variations in the price.
5.59
In our view, consumers should either have some form of contractual
protection against price variation (for example price limits) or they should
be able to cancel the contract on reasonable terms if the price varies
significantly. If the price change reflects underlying costs, for example
wholesale LPG prices, then customers will not necessarily be able to find
a better deal elsewhere, and they may stay in their existing contract. If,
however, suppliers offer competitive introductory prices but then
unilaterally increase the price significantly mid-way through the contract
term, customers may choose to cancel.
5.60
With this in mind, we have reviewed a sample of current contracts
provided by suppliers.
5.61
We note that, prior to the CC Orders, the OFT had considered similar
issues before and as part of this work had agreed undertakings with
some bulk LPG suppliers to address concerns identified with a number of
contract terms. The OFT had identified concerns regarding clauses
where it considered that suppliers might be able to vary prices, but
reserved judgment pending further evidence of reaction to the revised
terms proposed. We consider that the complaints received in the last
year may suggest that certain prevailing contract terms could result in
consumer detriment.
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5.62
The OFT has therefore reviewed the terms of current customer contracts
against previous undertakings and in light of complaints received. In
conclusion:
•
Our review has identified concerns that some suppliers' contract
terms may not be entirely consistent with existing consumer
protection legislation. In particular, we have some concerns relating
to the clarity and fairness of termination rights and we are engaging
with the major suppliers to discuss these.
•
Furthermore, where contracts are terminated early by a customer in
line with their contractual rights, the OFT considers that the
provisions of the Order should apply to switching requests upon
termination. We will work with industry to seek to ensure that
guidance and contract documentation clarify this point where
necessary.
Conclusions
The initial impact of the Orders
5.63
For individual tank customers, the Orders appear to be facilitating an
increase in the amount of switching between LPG suppliers. In addition,
smaller companies generally appear to be gaining customers at the
expense of the major suppliers. As well as facilitating switching, it would
therefore appear that the Orders have been effective in stimulating entry
and the expansion of smaller firms.
5.64
Metered estate customers seem to continue to find it difficult to switch,
indicated by the low incidence of switching. While it is too early to draw
any firm conclusions, several of the constraints identified on metered
estate switching seem likely to persist, so that we do not have strong
expectations for large increases in switching levels absent any other
market developments.
5.65
We have found that some of the potential pricing concerns identified by
the CC persist in the market. However, the Orders have only been in
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operation for around two years and are still in their relative infancy.
Competition may further increase over time as the Orders bite.
Consumer protection issues
5.66
The OFT has concerns that some contract terms may not be entirely
consistent with consumer protection legislation. We are engaging with
suppliers to seek, where necessary, improvement in the clarity of
contract terms and protection of consumers' cancellation and switching
rights.
5.67
While competition appears to have improved, at least in some segments
of the market based on higher switching rates since the CC Orders took
effect, the likelihood that competition is continuing to evolve in this
market given that the Orders were only recently made, increases the
importance of enforcing consumer rights, particularly as regards
cancellation and switching. Such steps may help to reduce detriment in
the market directly but should also reinforce the effect of the Orders on
competition in the market.
Cylinder LPG
Introduction
The use of cylinder LPG for off-grid heating
5.68
LPG is also supplied in cylinders of varying sizes for a range of uses in
the domestic, industrial and commercial sectors. Domestic customers
use cylinders for heating or cooking in the home and for outdoors leisure.
Non-domestic customers use cylinders for a wide range of applications
including lighting, refrigeration and fork lift trucks. Cylinders contain
either propane or butane gas depending on their use and size.
5.69
For domestic heating purposes, LPG cylinders can be used in a central
heating system, in stoves for room heating, or outdoors in patio heaters.
5.70
Our focus in this study is on LPG as a main or central heating source, for
which large propane cylinders over 40 kg in size (typically 47 kg) are
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used due to the larger volumes typically consumed for this purpose. In
the remainder of this section, where we refer to 47 kg cylinders we refer
to all cylinders of a similar size that are used for home central heating
(and, usually in parallel, for cooking).
5.71
Retailers sell a portfolio of cylinders of varying sizes and to non-domestic
as well as domestic customers. Domestic sales are approximately onethird of total UK cylinder sales by tonnage.261
•
261
In 2010, total UK sales of all cylinder sizes were around 250,000
tonnes,262 of which around 50 per cent were 47 kg cylinders.263 We
do not have reliable data to estimate the proportion of these 47 kg
cylinder sales that relates to domestic use.264
•
A domestic customer will typically consume 24 47 kg cylinders a
year.265 Cylinders are typically delivered in pairs and sit in banks of
four, connected via a change over valve and pigtails (two cylinders
are connected and two cylinders disconnected at any time).
•
A full 47 kg cylinder is difficult to handle. Because of its size, the
customer usually has to organise delivery and collection.
Confidential data provided to the OFT by DECC.
262
Supplier responses to OFT information requests, based on returns from at least 85 per cent
of the market.
263
Supplier responses to OFT information requests, based on returns from at least 85 per cent
of the market.
264
The market structure makes it challenging to estimate total domestic volumes and customer
numbers. Suppliers are not aware of the proportions of cylinders supplied that are sold by their
numerous dealers and retailers into the domestic rather than non-domestic sector.
265
Supplier response to OFT information request.
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5.72
5.73
266
Cylinder LPG is a mature and declining market overall and, in respect of
47 kg cylinders, of a small size. Around 25,000266 to 50,000267
households rely on it for home central heating and suppliers expect this
number to continue to decline as householders improve their homes and
update their heating systems.
•
The limited use of cylinder LPG for central heating is largely due to a
general preference for bulk LPG where possible. Bulk LPG is
generally more economical than bottled LPG268 – although suppliers
indicate that retail price differences between the two forms have
reduced considerably over the past few years – and offers greater
ease of delivery and handling.269
•
Bottled LPG is therefore generally only used where bulk LPG is not
an option, for example due to lack of suitable space to locate a bulk
LPG tank or insufficient access for larger delivery vehicles – such as
on park home sites, whose residents, we understand from suppliers,
represent a significant proportion of domestic cylinder LPG users.
Given that bulk LPG is more expensive to use to heat an average home
than other off-grid fuels such as heating oil, solid fuels or electricity (on
an economy tariff),270 the even higher average price of cylinder LPG
OFT estimate based on Consumer Focus Report and CC Report data.
267
Supplier responses to OFT information requests. This figure cannot readily be accurately
estimated and the actual figure may be higher. However, suppliers have consistently indicated
that the cylinder LPG market size is small relative to bulk LPG.
268
This is supported by data provided by suppliers to the OFT on the average retail prices of bulk
and cylinder LPG.
269
During our study, we have also heard that people may choose cylinders over bulk deliveries
as the financial outlay required to buy two cylinders is lower than filling a bulk tank and hence
more affordable at the point of purchase. This is true however only for a small subset of
consumers.
270
Sutherland Tables data, July 2011. Refer to Table 3.7.
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provided to the OFT suggests that cylinder LPG consumers are more
likely than average to struggle with their heating costs.
5.74
In summary, many cylinder LPG consumers are in practice unable to
readily switch to alternative methods of heating or to bulk LPG and, on a
like-for-like basis, face above average heating costs. Conversely, due to
the factors mentioned above, cylinder LPG is not the most suitable
alternative fuel choice for many off-grid households.
Vertical agreements and competition issues
5.75
At the outset of our market study, we intended our examination of the
domestic cylinder LPG market to focus on vertical agreements271
between suppliers and their dealers that impose conditions such as
exclusive purchasing requirements and handling restrictions. This came
about as the initial consultation on the scope of our study had surfaced
complaints from dealers alleging that these agreements hampered
competition in the market, making it more difficult for them to switch
suppliers and preventing them from multi-sourcing cylinders.
5.76
While vertical agreements may have both pro-competitive and anticompetitive effects, those that on the balance of effects appreciably
restrict or distort competition are, in some cases, prohibited under
competition law.272 The OFT was therefore interested to consider the
potential competition aspects of such arrangements, particularly in light
271
As defined in the European Commission Guidelines on Vertical Restraints, a vertical
agreement (or restraint) is an agreement or concerted practice entered into between two or more
undertakings each of which operates at a different level of the production or distribution chain,
and relates to the conditions under which the parties may purchase, sell or resell certain goods
or services.
272
Relevant competition law may include, subject to the circumstances of the particular case,
the Competition Act 1998 (CA98) in the UK or Articles 101 or 102 of the Treaty on the
Functioning of the European Union (TFEU). However, exemptions from these laws, again subject
to the individual circumstances, may also apply such as under s9(1) CA98, or the Vertical
Agreements Block Exemption Regulation (330/2010/EU).
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of previous cases273 that at different times had raised potential antitrust
concerns regarding the vertical arrangements then existing in the
cylinder LPG market and resulted in changes in the market, primarily
relating to the length of the arrangements in place. The OFT's interest
was indicated in its scoping document at the time the study was
formally launched in March 2011.274
5.77
However, in the course of the study it became apparent that the vertical
agreements in place apply to the supply of a wider portfolio of cylinders
to dealers, of varying sizes for both non-domestic and domestic sales.
The assessment of any potential anti-competitive effect that may arise
from these vertical agreements requires a full assessment of harm. This
is not possible within this market study, which only contemplates a
small part of the wider cylinder market. Hence, the vertical arrangements
in place in this market have been set aside from the study, along with
any analysis of competition in this market as this cannot properly be
considered in isolation from the vertical arrangements in place. The OFT
may return to these arrangements in the context of the wider cylinder
LPG market at a later date subject to OFT criteria for the prioritisation of
its work.275 Any relevant information gathered in the course of this
market study will be retained so that it can be made available if required
for this purpose.
Focus of the remaining section
5.78
273
Setting the question of vertical agreements aside for the reasons
explained above, this section provides an overview of the cylinder LPG
Refer to Annexe K for more details.
274
This is published on the OFT website: www.oft.gov.uk/shared_oft/marketstudies/oft1302f.pdf
275
The OFT applies prioritisation principles to ensure that it makes the best use of its finite
resources and makes appropriate decisions about which projects and programmes of work are
undertaken. A copy of the OFT's prioritisation principles can be downloaded here:
www.oft.gov.uk/shared_oft/about_oft/oft953.pdf
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market for home heating, highlighting the market structure and
consumers' experiences. The analysis presented is intentionally high
level and preliminary in nature, given the small market size for domestic
heating with 47 kg cylinders.
5.79
5.80
The analysis focuses primarily on the GB market for domestic cylinder
heating, for the following reasons:
•
The NI market for domestic heating with 47 kg cylinders is very
small, with only around 200 households using cylinder LPG for home
heating276 and we did not receive representations from cylinder LPG
consumers in NI.
•
There are fewer cylinder suppliers in NI than in GB. Flogas has
indicated to the OFT that as far as it is aware and to the best of its
knowledge it believes its share of the domestic 47 kg cylinder
market for home heating to be negligible in NI. CGNI does supply
this market. However, CGNI has indicated that its domestic cylinder
sales for domestic heating business, being of a limited volume, are
priced in line with prevailing bulk LPG prices and therefore are more
likely to be more competitive than would be the case if priced to
reflect the small domestic heating business. The bulk LPG market is
already separately considered in this chapter.
We have not considered consumer protection rights under cylinder LPG
purchase contracts in our analysis, as the one-off nature of purchases277
and apparently more stable pricing compared to heating oil278 makes it
276
NI House Condition Survey 2009: NI Housing Executive. Please note that this is an estimate
and small numbers should be treated with some caution.
277
Consumers are not tied to a particular retailer from purchase to purchase, although
consumers may have ongoing obligations to a retailer in relation to the cylinders in their
possession.
278
Based on the mystery shopping exercise included in the SPA research, which found that
quoted cylinder LPG prices generally either remained the same or only increased slightly over a 2
week period. However, the number of repeat calls undertaken to establish this was necessarily
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less likely that harm will occur compared, for example, to bulk LPG
where consumers are tied to a supplier for a minimum exclusive period.
Furthermore, we have not received complaints from cylinder LPG
consumers regarding any contractual issues in the course of our study.
5.81
Our analysis – while, as stated, of a preliminary nature – indicates
constraints on the outcomes available to consumers using 47 kg
cylinders to heat their home, from factors including:
•
5.82
•
High market concentration, so that there is a limited choice of
supplier although there are numerous dealers and retailers. This
seems unlikely to change given the maturity of the market and its
small size.
•
While the number of retailers in the market suggests that choice is
available, in practice consumers did not tend to concur. This may
reflect a combination of a lack of awareness of their options and/or
genuinely little choice in some areas. In part due to this apparent
lack of choice, we have received little evidence of consumers
switching between retailers. However, the limited number of
representations received from a small available base prevents us
from drawing strong conclusions regarding consumer detriment.
We have also received complaints from consumers alleging that prices
are excessively high and rising. This must be considered against a
background of rising raw material costs.
These findings are described in more detail in the next section.
limited (10 calls) and so this finding should be considered indicative. This compares to more
volatile results for heating oil for a similar mystery shopping exercise. Please refer to the SPA
Report for more information on both mystery shopping exercises.
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Overview of the cylinder LPG market for home heating
Market structure
5.83
The supply chain for cylinder LPG comprises three levels: the supply
level (where cylinders are filled by suppliers), the wholesale level (where
cylinders are distributed by dealers), and the retail level (where they are
delivered to end customers).
5.84
At the supply level:
•
Suppliers purchase cylinders and fill them at filling plants, of which
there are at least 25 in the UK. We have heard that some suppliers
will also fill cylinders on a contract basis for others.
•
There are three major cylinder suppliers operating in GB: Calor Gas
(owned by SHV), Flogas (owned by DCC Energy) and BP Gas
(owned by BP plc). In 2010, these suppliers represented a combined
market share of between 85 and 90 per cent by volume of all
cylinders in GB. Variation reported to us relative to these shares279
for the 47 kg segment of the cylinder market does not materially
alter the picture of a mature and concentrated market.
•
The structure of supply has remained stable over many years. In the
1981 Monopolies and Mergers Commission Report into cylinder LPG,
the structure of supply looked very similar to today. At this time, the
three largest companies, with Calor as market leader, supplied
around 85 per cent of the market. A long tail of smaller firms
supplied the remaining 15 per cent of the market.280
279
Supplier data from OFT information requests, based on returns from at least 85 per cent of
the market.
280
'LPG A Report on the supply in the UK of LPG in containers of not more than 50KG capacity
and not less than 150 gram capacity.' MMC 1981
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5.85
5.86
281
•
Although the structure of supply has remained the same, expansion
and exit has occurred. Notably Shell UK Oil, previously the second
largest supplier, left the market and Flogas has successfully grown
its operations, largely through acquisition of smaller suppliers. 281
•
The majority of suppliers distribute their cylinders via a network of
independent dealers and retailers (stockists), and also through their
own retail outlets for direct onward sale to the public, as detailed
further below. It is widespread industry practice for suppliers to
control this distribution process using vertical agreements to enforce
exclusive purchasing and handling of their cylinders among their
dealers and retailers and to require supplied stock to be sold only at
specified branches.
•
Unlike Calor and Flogas, BP does not supply cylinders directly to end
users, working only through its dealer network.
At the wholesale level:
•
Dealers are categorised into different tiers. Larger primary dealers
distribute onwards to smaller secondary dealers and retailers.
Secondary dealers and retailers may also be supplied directly by the
supplier. All dealers distribute to retailers.
•
Dealers are an important route to market for suppliers. Dealers have
knowledge and experience of the cylinder LPG trade in their locality
and they own the key relationships with the finite number of end
customers available given the maturity of the market. Suppliers
provide product development and brand identity and support to
dealers in terms of financial, marketing and technical back-up.
At the retail level:
www.scotcourts.gov.uk/opinions/2008csoh13.html
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•
Similar to heating oil, and for similar reasons including the cost of
transport, retail competition is localised within around 20 miles282 of
the retail sites or nearby supply points where cylinders are stored or
collected.
•
As indicated, a high level of vertical integration exists within this
distribution structure. Among the three largest suppliers, Calor and
Flogas retail direct as well as supplying retailers through dealers, and
many dealers are active at both the wholesale and retail levels.
These various routes to market from supplier to end customer are
summarised in Figure 5.5.
Figure 5.5: Supply chain structure
Supplier
Dealer
Retailer
Consumer
Source: Discussions with suppliers and OFT information requests
5.87
While the cylinder market is highly concentrated at the supplier level,
there are over 1,000 dealers and over 14,000 retailers in the market.
5.88
As 47 kg cylinders are sold alongside other cylinders, this description of
the supply chain broadly applies to the wider cylinder market. However,
282
Supplier data from OFT information request.
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as these heavier cylinders are more specialised to handle in that they
require delivery, they are not universally stocked by all retailers.
•
Data provided to the OFT suggest that among all GB cylinder retail
outlets at least 40 per cent supply 47 kg cylinders.
•
An initial high level analysis, based on the delivery radii of the major
cylinder suppliers and the locations of filling plants, suggests that
most dealers (and hence consumers) in GB should have a choice of
at least two suppliers.
5.89
Dealers and retailers are dependent on upstream capacity and storage,
and suppliers' investment policies in these areas, for continuity and
resilience of supply. The limited number of supply, filling and storage
points means that, like heating oil and bulk LPG, capacity is susceptible
to disruptions and shortages, and road conditions affecting access to
supply points, in winter periods of peak demand.
5.90
Stock management is an important factor in the cylinder market. As with
bulk LPG where the supplier owns the tank, cylinder suppliers retain
ownership of the cylinders in which LPG is sold and loan them to dealers
and retailers. Reasons given for this include health and safety and cost.
•
As a flammable gas, propane is a potential safety hazard and suppliers
must check and maintain the quality of the cylinders when re-filling
them.
•
Cylinders are expensive to manufacture. At prevailing steel prices, the
replacement cost of a cylinder is high relative to the variable cost of
the gas contained. Hence the efficient management and re-use of
cylinders is important to suppliers' profitability.
-
To incentivise the return of empty cylinders, a new domestic
customer purchasing a cylinder for the first time may be asked to
sign a cylinder hire agreement and in some cases also pay a
deposit or hire charge. These costs are not always refundable or
may only be partially refundable on a sliding scale depending on
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the number of cylinders purchased, or the length of time a
customer has been with a supplier.
-
Returning customers will exchange their empty cylinder for a
filled one, paying the price of the fuel.
Consumer experiences
5.91
This section summarises feedback received by the OFT during the course
of the study from cylinder LPG consumers, via the SPA research as well
as direct from consumers.
•
The SPA research included qualitative research with seven cylinder
LPG consumers. This, however, represents a very small sample size
as it was challenging to recruit cylinder LPG consumers due to their
low incidence within the population, and not all of these consumers
used their cylinders for central heating.
•
Therefore, the OFT also contacted a sample of consumers who had
contacted the market study team, asking for their views on their
choice of retailer, whether they shopped around for different retailers
and their experiences of switching.
5.92
We report in this section on our findings based on the above inputs,
caveating that such findings remain indicative as the total number of
responses was still too small to be statistically significant and consumers
who have voluntarily corresponded with the OFT will typically be among
those with concerns regarding the market. This may be particularly
relevant for the consumer feedback on limited retailer choice, given the
information from suppliers on the high number of retailers in the market.
5.93
Many customers indicated that they did not have a good choice of
retailer, with only one or two in the area (up to 15 miles typically being
cited), and/or the number of retailers having reduced over time.
5.94
Where choice was available, customers unanimously stated they chose a
retailer on price, though the speed of delivery and reliability were also
important factors.
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•
Consumers value quality and timeliness of service, which are difficult
to observe and may cause reluctance to risk switching to a new
retailer.
•
Delivery distance did not seem to be a particular concern, perhaps
because the cost of delivery is included in the price.
•
While some customers stated that the brand made no difference to
their choice of retailer, it was not clear from the small sample of
respondents available whether customers were influenced by or even
aware of the supplier (manufacturer) brand (apart from Calor being
widely known).
5.95
5.96
Consumers generally did not shop around, or have stopped doing so, for
reasons such as:
•
Insufficient numbers of retailers available.
•
Retailers having similar pricing. However, the SPA mystery shopping
research suggests that despite this impression it may still be worth
shopping around. In six locations where multiple quotes were
obtained, the average price difference per location between the
highest and lowest quotes for two 47 kg cylinders was around £30.
•
Retailers not being keen to collect cylinders when a customer has
switched away. Customers may therefore fear that retailers will cease
to accept their business if they switch too often.
•
Some customers cited deposits on cylinders as a barrier to switching,
since it can be difficult to get the deposit back. The degree to which
this may affect switching will depend on the nature and variability of
deposit policies among competing retailers.
A consumer wishing to switch to a new retailer affiliated to a different
supplier has to return their empty cylinders to their previous retailer, as
well as organising delivery from the new retailer. This involves a certain
amount of effort on the part of the consumer, adding to their costs of
switching. However, we received limited evidence on the extent to
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which this troubled customers or (as indicated in paragraph 5.27) how
much consumers thought about the supplier brand as opposed to the
retailer, in part because few of the customers canvassed had much
experience of switching retailers.
5.97
In summary, albeit the results are indicative due to a very limited sample
size, consumers indicated a general dissatisfaction regarding available
retail choice and offered only limited evidence of switching. However,
consumers' main area of dissatisfaction related to high and rising price
levels, which is discussed in the next section.
Retail prices
5.98
Prices are quoted per cylinder and typically include delivery and VAT.283
5.99
The retail price data we have collected from suppliers284 in the course of
our study support consumers' main feedback relating to facing high and
increasing prices. Consumers have complained that prices of 47 kg
cylinders have more than doubled over the past decade. However, this
appears to be driven mainly by high and rising input costs, which are
detailed in Annexe J. Spikes in retail prices (for example in winter
2010/11) appear correlated with a sharp increase in propane costs.
Retail prices also appear smoothed relative to propane costs.
5.100 The mystery shopping conducted as part of the SPA research found
some large variations across the UK in the prices quoted for 47 kg LPG
cylinders (between £96 and £204 for two cylinders, with average prices
appearing higher in Scotland).285 The mystery shopping also indicated (as
283
As evidenced by the mystery shopping exercise included in the SPA consumer research.
284
The sample size is small (four suppliers) but covers at least 85 per cent of the 47 kg cylinder
LPG market. Data is considered indicative and for confidentiality reasons is not shown in this
report.
285
This research is based on a necessarily limited number of telephone quotes (27 calls, of
which only five were to Scottish suppliers) and should therefore be considered indicative only.
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described in paragraph 5.95) price variations within the local areas
sampled. Supplier data286 and discussions tended to support the
impression that price variations exist. One dealer stated their view that
prices varied considerably by area, in some areas due to limited
competition.
Conclusions
5.101 The LPG cylinder market for home heating is small, focused in GB rather
than NI, and characterised by high supply concentration, declining
demand in a mature market, and limited evidence of consumer
switching. We have set aside from this market study the questions of
the extent to which existing vertical agreements may affect these
features and whether these may give rise to any concerns regarding the
operation of the wider cylinder market in the UK, which are beyond the
scope of this study. These questions have been reserved for possible
future consideration which, if progressed subject to the OFT
prioritisation principles, would take into account any relevant feedback
from this limited part of the market.
5.102 Within the portfolio of off-grid energy options, cylinder LPG is not the
most suitable alternative fuel choice for many households due to its
relative expense (bulk LPG is generally more cost-effective due to
volume efficiencies) and some disadvantages in terms of handling.
5.103 While a small segment of the off-grid energy market, cylinder LPG users
therefore appear to be a potentially vulnerable segment, including a
number of park home residents (who may be further constrained by
relying on the supply procured through their site owner). Cylinder LPG
users may have only a limited number of local suppliers, may pay higher
heating costs on average than any other off-grid consumers, may be less
able to readily switch to a different fuel type and are susceptible to road
delivery disruptions. The SPA research indicates that in some areas
286
The sample size is small (four suppliers), but covers at least 85 per cent of the 47 kg cylinder
LPG market. Data is considered indicative.
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consumers may benefit from shopping around. Consumers should extract
any benefit that is possible from shopping around and seek to minimise
costs through improvements to insulation where possible and efficient
energy use, maximising available grants where qualifying criteria are
met.
5.104 However, in light of the potential challenges faced by cylinder LPG
consumers, this group could be a candidate for targeted assistance or
support, for example from policy-makers or consumer organisations.
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6
MICROGENERATION
Summary
6.1
Our key findings are as follows:
•
•
The installation base for microgeneration technologies is growing
rapidly and is currently estimated to be around 82,000 units per
year. The most popular microgeneration technologies are solar
photovoltaic (PV) and solar thermal. Government financial
incentives such as the Feed-in-tariffs (FIT) have been crucial in
driving domestic uptake.
•
The domestic market for microgeneration technologies is
fragmented with thousands of certified installers distributed across
the UK. There are also a number of manufacturers providing a wide
range of certified products.
•
Given the complexity of the technologies, and consumers' reliance
on advice from salespeople, consumers are vulnerable to mis-selling
(for example being sold a technology inappropriate for their needs)
and misleading claims (for example overstatement of likely
benefits). Complaints data from various sources confirm that such
problems are just starting to arise in this market.
We are monitoring these trends closely and expect that most of
these complaints will be addressed by suppliers and are confident
that the arrangements in place through the REAL Assurance Scheme
Consumer Code will support this. The OFT will undertake any
additional work, including enforcement action, as may be necessary.
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Introduction
6.2
Microgeneration is the onsite generation of heat or electricity by
individual households for small scale domestic use.287 It comprises a
range of different technologies, including heat pumps, solar thermal,
solar photovoltaic (PV) panels, micro wind, micro hydro, and micro
combined heat and power (CHP).
6.3
With its lower running costs and green credentials, microgeneration is
potentially an attractive longer term alternative for consumers off the
gas grid (including those currently using heating oil and LPG) who are
facing rising and volatile energy costs. Indeed, off-grid consumers are
seen as being ideally placed candidates for early adoption of
microgeneration. This is evidenced by uptake to date being highest
amongst this group.288
6.4
Although new, the value of the domestic market is already substantial.
Based on current annual uptake of about 82,000 units, we estimate it
to have a value of approximately £697 million in 2011.289 With rising
oil prices, Government policies including financial incentives that
reduce upfront costs, and an increasingly environmentally aware
population, uptake is expected to grow substantially.
6.5
However, as with many nascent markets, there are emerging consumer
issues in the microgeneration market that, if not addressed early, risk
undermining consumer confidence and growth. These issues are mainly
287
According to sub-section 82 (8) of Energy Act 2004, the capacity in relation to the
generation of electricity is 50 Kilowatts and in relation to the production of heat 45 kilowatts
thermal. This is largely consistent with the definition in European Directive 2004/8/EC.
288
'The Microgeneration Customer Journey – A report into the domestic uptake of
microgeneration in the United Kingdom' was prepared by the EST for DECC (March 2011).
289
Derived from volume and costs data from Ofgem Feed-in-Tariffs database, the Renewable
Heat and Energy Uptake Journey research proposal, and the Renewables Consumer Journey
Research (2011) by Purple Market Research on behalf of the EST.
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centred round allegations of poor quality service, mis-selling of
technologies, and misleading information as to expected returns or
payback times.
6.6
In this section, we assess the scope and viability of microgeneration as
a current and future alternative source of energy for off-grid
households. Of course many of the issues for consumers looking to
install microgeneration are common to both on-grid and off-grid
communities.
6.7
In our assessment, we consider:
6.8
•
The main types of microgeneration technologies available (both
heat generating and electricity generating technologies).
•
Microgeneration as an option for off-grid households, noting also
the role of insulation in the economics of domestic heating.
•
How to ensure that the nascent market for microgeneration gets off
to a healthy start, so households can invest in microgeneration with
confidence.
Overall we believe that microgeneration has the potential to be a viable
and attractive alternative source of energy for off-grid households over
the longer term. However, there remain significant barriers to take-up.
Government policy can and does address many of these. Successful
growth will also depend on the market being competitive and working
well for consumers as it develops.
Microgeneration Technologies
6.9
For the purpose of this study, we have focused on the most common
microgeneration technologies used by domestic consumers in the UK to
meet their heating and electricity needs. These are:
•
Heat generating technologies:
- Heat pumps (ground source heat pumps and air source heat
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pumps).
- Solar thermal (hot water, underfloor heating).
•
Electricity generating technologies:
- Solar (Photovoltaic panels).
- Micro wind turbines.
6.10
We have not considered micro hydro and micro combined heat and
power (CHP) technologies in any depth as the number of installations
to date is very small.290
6.11
The benefits of microgeneration technologies are their lower running
costs and lower cost to the environment. The extent to which these
benefits are realised will depend to a large part on the characteristics
of the property in which they are installed – in particular the
technologies are likely to perform well only in well-insulated homes.
6.12
Table 6.1 provides a short description of the main technologies,
suitability factors, and their low carbon credentials in terms of
expected reduction in CO2 emissions.
Table 6.1 – Domestic microgeneration technologies
Technology
Heat Pumps:
Ground Source
Heat Pumps
(GSHPs)
Air Source Heat
Pumps (ASHPs)
Description291
ASHPs and GSHPs operate in a manner similar to household
fridges, but in reverse. They take heat from the ground or air
and compress it. While both pump types require electricity to
run, when running properly they produce up to three units (kJ)
of heat output for each unit (kWh) of electricity used (to
power the pump). Heat pumps provide hot water and space
heating and work best in well insulated buildings. ASHPs are
most suitable for small properties while GSHPs are more
290
According to volumes data from Ofgem E-Serve's Feed-In Tariff Update, Issue4/June 2011,
current weighted average uptake stands at 17 micro hydro and 8 micro CHP units per month.
291
Data on carbon savings were obtained from the EST website.
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suitable for properties where there is a large amount of land
available to install the heat pipes. Per annum, for a threebedroom semi-detached house, carbon savings for a typical
performing ASHP are approximately -105kg against gas and
4,600kg against electricity. For GSHP savings are in the region
of 280kg against gas and 4,895kg against electricity.
Solar Thermal
Solar thermal systems collect heat from the sun which is then
used to provide hot water (but generally not space heating) for
household use. These systems are the most popular form of
microgeneration in the UK at present and suit households with
a higher demand for hot water, especially in the summer.
Carbon savings are approximately 250kg switching from gas
and up to 570kg from electricity.
Solar
Photovoltaic
(PV) Panels
Solar PV generates electricity when exposed to daylight by
converting solar radiation. It can produce electricity even on
cloudy days. Solar PV is most suitable for houses with a south
facing roof although in some cases they can be mounted on a
pole. A typical 2.7kWp domestic system can generate CO2
savings of approximately 1,200kg per annum (against using
mains electricity).
Micro Wind
Turbines
Domestic micro wind turbines range from 1kW to 6kW. The
turbine works by converting the wind energy captured by the
rotor into electrical energy by means of a generator. This
generated power can be stored in batteries or synchronized to
the national grid. If a wind turbine is placed in a suitable site it
can provide a reliable and economical means of generating
clean energy. For a 6kW system, CO2 savings are
approximately 5,500kg per annum (against using mains
electricity).
Source: Information obtained from various sources including the Energy Savings Trust (EST)
website,292 the Micropower Council,293 and NHBC Foundation Report.294
292
www.energysavingtrust.org.uk
293
www.micropower.co.uk
294
NHBC Foundation report (2008), A review of microgeneration and renewable energy
technologies.
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6.13
As the table suggests, these microgeneration technologies are typically
used to meet either the heating or electricity needs of a household, not
both. Electricity generating technologies can of course be used to
provide heat through electric heaters but this is a relatively inefficient
way of heating space.295
Awareness and uptake of microgeneration
6.14
In this section we look at the extent to which these technologies
represent a real alternative to traditional fuels for off-grid households
and communities. Specifically we look at consumer awareness of
microgeneration, uptake to date, and barriers to uptake.
Awareness
6.15
Available evidence shows that public awareness of most
microgeneration technologies and what they offer to the individual
household remains limited. A 2009 attitude tracker survey by Defra296
found that a large proportion of the general public are unaware of some
of the main types of microgeneration technologies, with heat
technologies (excepting solar thermal) having overall the lowest levels
of awareness. This finding of a relatively lower level of awareness of
heat generating technologies compared to electricity generating
295
In addition, using electricity as a source of heating (as well as for other domestic energy
uses) will reduce the potential income from selling unused electricity back to the grid. Moreover,
energy bill savings are likely to be substantially reduced as the amount of electricity generated
may not be sufficient to meet all of the household's energy needs leaving the household possibly
needing to buy electricity from the provider.
296
Defra (2009) Public Attitudes and Behaviours Towards the Environment Tracker Survey. A
research report completed for Defra by TNS. Based on a sample of 1,335 respondents, the
survey found that levels of awareness for different technologies range between 29 per cent and
54 per cent.
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technologies is supported by numerous other studies including a more
recent survey conducted on behalf of the EST.297
6.16
An earlier study by EST298 revealed that on-grid consumers knew
substantially less about microgeneration technologies than off-grid
consumers, as illustrated in Table 6.2.
Table 6.2 – Awareness of microgeneration technologies
I know little or nothing about this technology
Technology
On-grid
Off-grid
Overall
GSHP
52%
44%
51%
ASHP
75%
58%
72%
Solar
Thermal
15%
10%
15%
Solar PV
21%
16%
20%
Micro wind
32%
25%
31%
Source: Purple Market Research/EST
Uptake
6.17
Low levels of awareness have been reflected in relatively low uptake
across technologies to date. Table 6.3 shows that as of 2008
estimates of the number of installations of microgeneration
technologies stood at less than 200,000, most of which was solar
297
Renewables Consumer Journey Research (2011) undertaken by Purple Market Research for
the EST. Based on a sample of 1,223, the survey revealed that, with the exception of solar
thermal, over 50 per cent of respondents had little or no knowledge of the main heat generating
technologies that can be installed in the home.
298
'The Microgeneration Customer Journey – A report into the domestic uptake of
microgeneration in the United Kingdom' was prepared by the EST for DECC (March 2011). This
report draws on evidence primarily from previous EST studies and surveys. Based on a sample of
1,058 on-grid and 164 off-grid respondents, it found that compared to on-grid consumers, a far
lower proportion of off-grid consumers said they knew little or nothing about microgeneration
technologies.
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thermal. This means that less than one per cent of UK households had
installed a renewable energy technology at that time. We have no up to
date figures for total installations but note that take-up of electricity
generating technologies has increased markedly since the introduction
of feed-in tariffs (discussed in more detail later in this chapter).299
Table 6.3 – Estimated installation of microgeneration technologies
(up to 2008)
Total
Percentage of
households
(approx)300
Number
accounted for
by:
GSHP
ASHP301
Solar thermal
Solar PV
Micro-wind
England
72,60076,100
Scotland
12,59013,100
Wales
6,1306,410
NI
16,70017,300
UK
108,000 113,000
0.36%
0.56%
0.50%
2.34%
0.44%
1,620
n/a
66,80069,600
2,511
1,297
1,057
96
10,70011,100
95
410
155
n/a
5,5905,830
155
142
583
73
14,40015,000
232
473
3,415
169
97,490101,530
2993
2322
Source: Element Energy 2008302
299
Although data on the rate of installations are available for 2010 and 2011, the most recent
year for which data on the estimated number of installations are available is 2008.
300
Using data from Consumer Focus Report, Welsh Government; OFT analysis of NI Utility
Regulator data and 2009 NI House Condition Survey data, we estimate the number of
households in the UK to be 25,843,000 of which England accounts for 21,407,000, Scotland
2,330,000, Wales 1,365,000, and NI 740,000. Refer to Annexe A for more details.
301
There have not been many ASHP installations under the major UK microgeneration
programmes for England & Wales. However, there have been ASHP installations under various
pilots but data for these are not readily available.
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6.18
NI has the highest rate of installations. Indeed the pattern across
nations reflects the proportion of households who are off-grid – 80 per
cent of households in NI are off-grid with much lower proportions in
the other three nations. This is not surprising – the pattern of off-grid
households being more aware of microgeneration is reflected in the
pattern of uptake. Research by the EST has confirmed that uptake
amongst off-grid consumers is higher than average.303
6.19
However, the Purple Market Research survey304 found that adopters of
microgeneration technologies tend to be middle class home owners
living in larger rural properties that are not connected to the gas grid. A
substantial proportion of the off-grid population – those living in flats,
social housing, or rented accommodation – do not fall into this
category.
6.20
The higher uptake amongst (at least a subset of) off-grid households
almost certainly reflects the fact that the running costs of
microgeneration technologies are considerably lower than those of
other off-grid energy sources. For consumers on mains gas, the
difference is smaller.
6.21
This suggests that the off-grid population represents a promising class
of early adopters of microgeneration technology. In the next section
we discuss Government targets, policies and financial incentives aimed
302
Obtained from the 2008 report 'Numbers of microgeneration units installed in England,
Wales, Scotland, and NI' prepared by Element Energy on behalf of The Department for Business,
Enterprise and Regulatory Reform (BERR).
303
According to the 2008 report 'YIMBY Generation – yes in my back yard: UK householders
pioneering microgeneration heat' by the EST, 29 per cent of those who switched to
microgeneration were heating oil users, eight per cent electricity and 19 per cent were users of
other fuels such as LPG and solid fuel. 'The Microgeneration Customer Journey – A report into
the domestic uptake of microgeneration in the United Kingdom' which was prepared by the EST
for DECC (March 2011) also reported that adopters of microgeneration are typically not
connected to the gas grid.
304
Renewables Consumer Journey Research (2011) by Purple Market Research for the EST.
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at stimulating future uptake. Later we discuss the barriers to uptake
and other factors that limit the attractiveness of microgeneration as an
alternative source of energy.
Government targets, policies and financial incentives
6.22
In March 2007, the European Council established a target of generating
20 per cent of the EU's energy from renewable sources by 2020 and in
2008 a new Renewable Energy Directive (Directive 2009/29/EC)
resulted in agreement of country shares of this target. The UK target
was set at 15 per cent of gross final energy consumption.
6.23
To meet this target for final energy consumption, the UK has set
specific targets for heat and electricity generation. For heat the target
was set at 12 per cent with a potential for 22 per cent of that to be
met by the domestic sector. For electricity the target was set at 30 per
cent305 with two per cent of this coming from small scale sources.
However, the NI Executive has committed to a non statutory target of
40 per cent of electricity generated from renewables by 2020.306
Policy
6.24
While these targets set the broad foundation that supports the
microgeneration market, its growth is driven by four key Government
strategies that augment each other – The UK Low Carbon Industrial
Strategy, The UK Low Carbon Transition plan, UK Renewable Energy
Strategy, and the Microgeneration Strategy. Although the first three
strategies are not focused on microgeneration, they seek to create an
environment within which microgeneration can become a mainstream
source of fuel for domestic consumers.
305
See
www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/renewable_ener.aspx.
306
See www.detini.gov.uk/strategic_energy_framework__sef_2010_-3.pdf
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6.25
The 2009 Low Carbon Industrial Strategy sets out the case for moving
to a low carbon economy and provides a strategic view of Britain's low
carbon potential. The strategy aims to provide an environment that
encourages businesses and workers to be in a position to take
advantage of the new demand created by climate change policies. The
accompanying 2009 Low Carbon Transition plan describes, sector by
sector, how carbon savings can be achieved in order to meet the UK's
2020 carbon emissions target. On the domestic side, the Government
requires that all new homes be built to higher environmental standards
with a 'zero carbon' requirement from 2016 (that is, net carbon
emissions over a year must be zero).
6.26
The 2009 Renewable Energy Strategy puts forward a roadmap for
achieving the UK's target of 15 per cent energy from renewables by
2020. It focuses on reducing UK dependence on fossil fuels and
moving to using more renewable sources of energy.
6.27
At a more granular level than the other strategies, DECC's 2011
Microgeneration Strategy307 focuses on non-financial barriers and is
centred round small-scale renewable and low carbon technologies. It
sets out plans to complement the financial incentives that have been or
are being put in place to bolster the microgeneration market.
Financial incentives
6.28
307
In terms of financial incentives, the UK Government and Devolved
Administrations have put in place several schemes to encourage
domestic adoption of microgeneration technologies.308 Some of these
schemes are UK wide (covering all the devolved territories) whilst
others are only available in one or some of the devolved territories. By
helping to reduce upfront costs, these schemes have been and
www.decc.gov.uk/en/content/cms/meeting_energy/microgen/strategy/strategy.aspx
308
There are other Government supported energy efficiency financial schemes but these do not
cover microgeneration. For that reason they are not included here.
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continue to be instrumental in stimulating an increase in the adoption
of microgeneration technologies. Table 6.4 lists the main current
schemes and indicates their geographic coverage. Further information
on these schemes can be found in Annexe L.
Table 6.4: Main current Government and Devolved Administration
financial incentives that support microgeneration installations
Current
Schemes
Renewable Heat Incentive (RHI)
Feed–in Tariff (FIT)
Green Deal
NI Renewable Obligation (NIRO)
Renewable Incentive NI (RHI NI)
Carbon Emissions Reduction Target
(CERT)
Interest Free Loan Scheme (IFLS)
Nyth/Nest
Arbed (Wales' Strategic Energy
Performance Investment Programme)
Community Energy Savings
Programme (CESP)
Energy Assistance Package (EAP)
England
√
√
√
Wales
Scotland
√
√
√
NI
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
Source: DECC, Department of Enterprise Trade and Investment (DETINI), Element
Energy,309 NI Executive, Ofgem, Scottish Government, and the Welsh Government
6.29
Currently, the two main schemes directly supporting the uptake of
microgeneration in GB are the FIT (electricity generating technologies)
and the RHI (heat generating technologies). The FIT scheme has been
in operation in GB since April 2010. In February 2011, the Secretary of
State for Energy and Climate Change announced the start of the first
review of the FIT scheme. In doing so, he explained that a principal
objective of the review was to determine how the efficiency of FITs
will be improved to deliver the expected savings in 2014/15 that were
committed to in the 2010 Spending Review. As such, one aspect
309
Element Energy Limited for BERR: Numbers of Microgeneration Units installed In England,
Wales, Scotland, and NI, 2008
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under consideration is tariff levels. DECC have said that they will
consult on the comprehensive review later this year, with tariffs
remaining unchanged until April 2012 (unless the review indicates the
need for greater urgency).310 We note, however, that those who have
already installed an eligible low-carbon electricity generating technology
and are receiving FITs will not be affected by the review and will
continue to receive the FIT at the current levels.
6.30
The RHI for domestic GB consumers is not due to come into full effect
until October 2012.311 However, as an interim measure, a Premium
Payment scheme of £15m, available from 1 August 2011, was set up
to fund up to 25,000 household installations. Under this interim
measure, any household in England, Scotland, and Wales can apply to
secure funding for solar thermal installations. However, funding for the
installation of heat pumps is only available to those off the gas grid.
6.31
The main financial incentives available in NI are similar to those in GB.
The NI Renewable Obligation (NIRO), which was introduced in 2005,
provides similar support to the FIT for electricity generating
technologies. With regard to heat generating technologies, DETINI
launched a public consultation in July 2011 on the introduction of a
RHI in NI. Like its counterpart in GB, the NI RHI is expected to be
implemented in October 2012. A Renewable Heat Premium Payment
scheme of £2m will also be available in advance to domestic
households until March 2012 (with further funding available as required
until October 2012).
310
www.decc.gov.uk/en/content/cms/meeting_energy/renewable_ener/feedin_tariff/fits_review/fits_
review.aspx
311
The RHI for non-domestic installations in the industrial, businesses, and public sector has
been in operation since July 2011.
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Impact on installations
6.32
Under the FIT scheme, the rate of domestic installations of electricity
generating technologies increased from a few hundred in April 2010 to
over 3,800 a month by June 2011.312
6.33
Given the success of the FIT scheme in its first year of operation and
the past relatively greater popularity of the heat generating
technologies (see Table 6.5 below), there is the possibility that the RHI
may have an equal or greater multiplier effect on the number of
installations of heat generating technologies.
6.34
However, while the RHI is expected to have a significant positive
impact on the number of installations, the delay in defining the
qualifying criteria and its subsequent implementation could limit
growth. According to several industry stakeholders who spoke to or
submitted their views to the OFT Off-Grid Market Study team, the
uncertainty round the RHI has hampered the demand and supply of
heat generating technologies, with focus being switched to electricity
generating technologies.
6.35
The increase in the popularity of electricity generating technologies is
anecdotally evidenced by the data shown in Table 6.5. Under past
schemes (and as evidenced by 2010 data) heat generating
technologies accounted for the vast majority of installations. However,
since the introduction of the FIT and with greater certainty round this
scheme, domestic installation of electricity generating technologies has
far exceeded that of heat generating technologies.
312
Obtained from Ofgem E-Serve's Feed-In Tariff Update, Issue5/September 2011. Total uptake
increased to, on average, 4932 a month of which 77 per cent can be attributed to domestic
installations. Around 98 per cent of installations were of solar PV.
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Table 6.5 – Estimated number of installations per month
Technology
Estimated number of
installations per month
as at 2010313
Estimated number of
installations per month
as at June 2011
1,083
1,083
2,083
2,083
833
42
3,730
48
Heat Generating
Technologies
GSHP
ASHP
Solar Thermal
Electricity Generating
Technologies
Solar PV
Micro-wind
Source: Ofgem314 and EST315
6.36
With recent Government policies, financial incentives, rising oil prices
and a growing number of consumers who are concerned about the
environment, the outlook for installations is positive. Indeed, according
to a 2008 National House Building Council (NHBC) Foundation
report,316 lower energy costs are the main driving force encouraging
homeowners in the UK to explore the idea of adopting microgeneration.
Similarly, results from the 2011 Purple Market Research317 showed that
the availability of funding and rising oil prices provide the greatest
impetus for installation. At present, replacing a mains gas boiler is
313
It is assumed that absent the RHI, the rate of installation for heat generating technologies has
remained the same.
314
Ofgem E-Serve – Feed-in Tariff Update – Issue 5/September 2011.
315
Purple Market Research Renewable Heat and Energy Uptake Journey research proposal
(2011) commissioned by the EST.
316
NHBC Foundation report (2008), Zero Carbon: what does it mean to homeowners and
housebuilders?
317
Renewables Consumer Journey Research (2011) undertaken by Purple Market Research for
the Energy Savings Trust.
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typically cheaper than installing most microgeneration technologies.318
Therefore, reducing the relative cost of renewable energy is likely to be
crucial in prompting households to switch to microgeneration
technologies.
6.37
The implication is that to achieve a significant increase in installations,
schemes such as the FIT, RHI, and Green Deal must be successfully
implemented. In particular, it is important to ensure that there is
certainty around qualifying criteria and tariff and incentive levels.
Raising awareness of these schemes and the qualifying technologies
will also be important as will raising awareness of the continued likely
increase in the cost of fossil fuels. Nevertheless, since the RHI and
Green Deal are yet to come into force, for now microgeneration heating
solutions for off-grid consumers are limited.
6.38
Despite the current absence of funding for heat generating
technologies, by achieving economies of scale, community schemes
may offer some households an opportunity to reduce the cost of
installation. A 2011 study by EST319 found that with a community of
50 dwellings, community-scale projects could reduce capital costs by
seven per cent for solar PV and 34 per cent for solar thermal compared
to individual purchases. There have been a number of such schemes
across the UK. For example, in 2010, under the Government sponsored
Low Carbon Community Challenge initiative,320 12 local communities
across the UK were awarded up to £500,000 to undertake green
measures such as the installation of microgeneration technologies.
Under this initiative, approximately 20 homes in Oxfordshire will
receive funding for the installation of solar panels and two thousand
318
Installation of a microgeneration technology costs between £2,000 and £23,000 (see Table
6.6) whereas a straightforward replacement of a gas boiler typically costs £2,300 (see
www.energysavingtrust.org.uk/In-your-home/Heating-and-hot-water/Replacing-your-boiler)
319
'The Microgeneration Customer Journey: A report into the domestic uptake of
microgeneration in the United Kingdom' prepared by EST for DECC.
320
www.energyefficiencynews.com/microgeneration/i/2786
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homes in Wales will receive power through the installation of two wind
turbines.
Barriers to uptake
6.39
Even with the existence of Government financial incentives, there are
still barriers that may constrain supply and limit the demand base
hence hindering growth in the microgeneration market. The most
significant of these are:
Cost and payback period
6.40
Mirroring the main drivers of installations, installation costs and the
resulting lengthy payback periods are cited by respondents to the
Purple Market Research survey321 as the main deterrents to uptake.
Although Government finance schemes have incentivised many
households to install a microgeneration technology, for many the
upfront costs – in the range of £2,000 to £23,000 as shown in Table
6.6 – remain a barrier. According to the Purple Market Research
survey, 57 per cent of those who are not yet actively considering
adopting microgeneration technologies would require a 50 per cent or
greater reduction in upfront costs in order seriously to consider
installation. The survey also found that 63 per cent of all respondents
are only prepared to wait five years or less to recoup their investment
in a microgeneration technology – a payback period which is not
feasible for most microgeneration technologies. The SPA qualitative
consumer research found that the age of some participants was also a
concern as they did not expect a return in their lifetime.
6.41
Table 6.6 provides a summary of the estimated annual running costs,
installation costs, and payback period for the main microgeneration
technologies. This compares to annual costs of £1,096, £1,611, and
£2,272 for heating an average-size three-bedroom house with gas,
321
Renewables Consumer Journey Research (2011) by Purple Market Research for the EST.
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heating oil or LPG respectively.322 The relatively higher number of
installations for solar thermal is consistent with it being the cheapest
technology.
Table 6.6: Running costs, installation costs, and estimated payback
periods (as at August 2011)
Technology
Annual running
costs per
annum323
GSHP
£655
ASHP
£745
Solar thermal
No running
costs
No running
costs
No running
costs
Solar PV
Micro wind
Average Installation Costs
(estimations)
2011
2020
£8,000 £7,434
£20,000
£6,000£6,181
£10,000
£3,000-£6,500
£3,264
£11,000 £14,000
£2,000 £23,000
Estimated
Payback
period324
8-15 years
8-15 years
8-20 years
£5,974
12-25+ years
£3,126
10-15 years
Source: NHBC Foundation Report325/Element Energy 2008326/Purple Market Research/EST327
322
Data from Sutherland Tables, July 2011.
323
Information on running costs was obtained through correspondence with EST.
323
NHBC Foundation report (2008), A review of microgeneration and renewable energy
technologies.
323
Element Energy Limited for BERR: The growth potential for Microgeneration in England, Wales
and Scotland (Final Appendix), 2008
324
Estimations of payback periods are based on current financial incentives and current levels of
usage for the fuels being replaced.
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6.42
According to industry participants, in the long run, as the market
develops and the costs of using fossil fuels rise, microgeneration
technologies are expected to become relatively cheaper than other
energy sources. This will result in shorter payback periods. The quality
and performance of these technologies are also likely to improve.
However, much will depend on consumers placing a higher value on
low running costs than on upfront costs.
Installer capacity and skills
6.43
327
In some areas in the UK, there are a limited number of installers of
microgeneration technologies. This is mainly due to low consumer
demand and the process for MCS certification, particularly amongst
smaller companies, being seen as onerous and expensive. However,
even in areas like London, with a large number of properties and a
considerable 'able to pay market', there are relatively few installers.
There are also concerns over the lack of skilled labour capable of
meeting the MCS standards, which prevents companies from
expanding their businesses. For example, in a recent EST report,
concerns over skill shortages and lack of places on training courses
were highlighted.328 Further details on the number of installers in the
UK are provided in the next section.
Renewables Consumer Journey Research (2011) by Purple Market Research for the EST.
328
EST 2010 report, Microgeneration in the capital: An investigation into the drivers and barriers
facing the London Industry.
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Uncertainty around future market scenarios
6.44
With the RHI for domestic consumers still in its development stage,
manufacturers are reluctant to commit to product development of
microgeneration heat generating technologies and installers are less
willing to get MCS certification for these technologies.
6.45
Although for existing users and businesses there is clarity around FIT
levels, for consumers looking to install or businesses looking to enter
the market, the current review of the FIT presents a period of
uncertainty as to future tariff levels.329 It is important that consumers
clearly understand, in a timely manner, the implications of any changes
that may be introduced.
Planning permission
6.46
The Permitted Development Rights introduced in England in 2008 and
Scotland in 2009 and the relaxation of permitted developments in
Wales in 2009 and NI in 2011 have made it easier to secure
permission for domestic installations.330 However, obtaining planning
permission remains a barrier.331 Both homeowners and installers are
reluctant to seek planning permission, as there is still lack of clarity
329
With regard to the non-domestic sector, a fast track consideration was given to large-scale
(over 50 kilowatts) and standalone solar PV projects as well as farm-scale anaerobic digestion
projects (up to and including 500 kilowatts). Following consultation during the first half of 2011,
proposed changes to tariff levels came into force on 1 August 2011.
330
Ground source heat pumps are permitted and with some exceptions so are solar thermal and
solar PV. Air source heat pumps and micro wind are not currently covered.
331
See for example,
www.decc.gov.uk/en/content/cms/meeting_energy/microgen/solar_pv/solar_pv.aspx and
www.energysavingtrust.org.uk/Generate-your-own-energy/Wind-turbines/Choosing-a-site-andgetting-planning-permission
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over what works require building control notification.332 This is most
likely to affect ASHPs and micro wind, both of which need planning
permission and also solar thermal and solar panels, for which there are
still exceptions to the permitted development rights.333
The market for microgeneration
6.47
Industry and consumer bodies play an important role in increasing
awareness of the benefits and functionality of microgeneration. They
are also instrumental in moving it from being a niche market to being a
mainstream market. In recognising the importance of industry and
consumer bodies, a key aim of the Government's Microgeneration
Strategy is to strengthen the ability of these bodies to tackle nonfinancial barriers in the market.
6.48
The main industry and consumer bodies providing information and
guidance for consumers and businesses wishing to participate in the
microgeneration market are the Microgeneration Certification Scheme
(MCS), the Renewable Energy Association (REA), the Renewable
Energy Assurance Limited (REAL), and the EST.
332
EST 2010 report, Microgeneration in the capital: An investigation into the drivers and barriers
facing the London Industry.
333
See www.planningportal.gov.uk/planning/
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Table 6.7: Industry and consumer bodies
Description
Industry bodies
MCS
Launched in April 2010, the MCS is an independent, industry led body
supported by the DECC.334 It is responsible for the assessment and
certification of heat and electricity generating microgeneration
products and installers in the UK. To be eligible for the FIT and RHI
incentives, both the product and installer must be MCS certified. The
body provides assurances that rigorous standards on quality, safety,
and performance of microgeneration technologies are met across the
industry. To be MCS certified, members must also abide by the REAL
Assurance Scheme Consumer Code.
REA
REA was established in 2001. It represents renewable energy (power,
heat, and fuels) producers in the UK. During 2010, it had a
membership of 650 companies, covering generators, project
developers, fuel and power suppliers, equipment producers, and
service providers. The REA sponsors the REAL Assurance Scheme.
Consumer Bodies
REAL
The REAL Assurance Scheme was set up in 2006 by the REA to
provide quality assurance for UK consumers wishing to buy or lease
small-scale energy generation systems for their homes, a community
building or a small business. It has a membership of 4,036 firms.
EST
The EST is a non-profit organisation, which was established in 1993. It
is funded by the UK Government, Devolved Administrations, and the
private sector to help promote sustainable use of energy by providing
free and impartial advice on saving or generating own energy.
Source: REAL website, MCS website, REA website, and EST website
Competition
6.49
At this stage of its development, the market is fragmented with a
number of manufacturers and small independent installers. While it is
difficult to fully evaluate competitive conditions due to the early stage
of market development, to date, we are not aware of any issues that
334
Gemserv Limited, a company commissioned by DECC, is responsible for the administration of
the MCS scheme.
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could be expected to restrict competition. Membership of trade bodies
can be instrumental in a company being able to access consumers
(such as those wishing to apply for FIT and RHI funding). Therefore,
industry bodies play an important role in facilitating competition and
have obligations to ensure that firms are treated without bias.
6.50
To be eligible for FIT or RHI funding, the consumer must ensure that
the technology and installer are both MCS certified. Currently, there
are 3,462 MCS certified microgeneration products being sold by a
number of manufacturers in the UK and across the UK, there are 3,111
MCS certified installers.335 Information provided by REA suggests that
although some manufacturers will supply directly to domestic
consumers they typically sell to an agent or wholesaler who in turn
supply installers.
6.51
Based on data obtained from the MCS and the REAL Assurance
Scheme, Table 6.8 provides a summary of the number of MCS and
REAL members across the UK who supply and install the five main
heat and electricity generating technologies.
335
Further information can be obtained from the MCS website www.microgenerationcertification.org
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Table 6.8 – Microgeneration installers (August 2011)
Technology
Membership of the
REAL Assurance
Scheme
Number of MCS
approved installers
GSHP
960
556
ASHP
1,217
651
Solar Thermal 1,636
939
Solar PV
3,321
2,443
Micro wind
466
143
Source: MCS website and REAL website
6.52
Solar PV and solar thermal account for the highest number of installers.
Although there are a number of installers operating in the UK, the
geographic spread reveals that some areas are differentially served by
installers. Widest coverage by MCS installers is in South East England
with 2,336 and South West England with 2,317 whilst only 1,617 and
1,786 MCS installers cover the whole of NI and Scotland respectively.
This means that for some consumers, installer choice and availability
might be limited.
6.53
With various Government initiatives currently driving market growth,
the number of products and installers and the geographic spread are
expected to increase to cater for the growing demand for renewable
energy. In turn, a well supplied market is likely to encourage further
demand.
Consumer issues
6.54
Satisfaction amongst microgeneration users is high. According to the
Purple Market Research survey,336 90 per cent of respondents who
installed microgeneration technologies were satisfied with performance
336
Renewables Consumer Journey Research (2011) undertaken by Purple Market Research for
the EST.
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levels337 and nearly a quarter said that performance exceeded their
expectations. In the SPA consumer research, users also expressed
satisfaction with their choice of microgeneration technology. For
instance, a user of heating oil stated that 'we used to use about 2,000
litres of oil and now the last couple of years since we've had the heat
pump, it's been 1,500'. Another participant noted that 'I haven't
quantified it but I do know that before we had the solar power panels
for the hot water, we had the boiler on 365 days a year and now we
have the boiler on for probably only 6 to 8 months in a year'.
6.55
With reports of positive experience, improvements in the technologies
and reduction in costs are likely to make microgeneration an attractive
alternative for off-grid consumers in the future. However, at present,
there are features of the market that make it susceptible to problems
that if not addressed may undermine growth. A number of problems
were identified from responses to our Off-Grid Market Study call for
evidence, extensive desk research, and from Consumer Direct data
which, for January to August 2011, contained an average of 179
complaints a month about microgeneration technologies. The main
concerns regarding microgeneration can be summarised as follows:
Table 6.9: Main concerns of microgeneration consumers
Consumers who have already
installed a microgeneration
technology
Complex product – unable to use
effectively
Poor quality installations/products
More joined up redress mechanism
337
Consumers thinking of or in the
process of installing a
microgeneration technology
Complex product – poor consumer
knowledge
Misleading claims/omissions
Poor service and selling practices
More joined up redress mechanism
With equal numbers saying they were very or quite satisfied.
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Complex products
6.56
Microgeneration technologies are complex to operate and are not easy
to understand. This is compounded by the fact that microgeneration
technologies are experience goods whose quality can only be verified
after installation. In EST's 2008 YIMBY report,338 65 per cent of a
sample of 167 users of microgeneration were found to have had
difficulties or uncertainties with operating the system's controls to
make the best use of the technology. The Purple Market Research339
survey also found that 22 per cent of respondents did not know what
technology best suits their home.
6.57
The effective operation of microgeneration technologies also require
properly insulated properties. Consumers without proper insulation may
find that their chosen technology works poorly and does not yield the
expected benefits. Therefore, insulation should be regarded as a
prerequisite in moving to microgeneration, especially as a substantial
proportion of homes in the UK are poorly insulated.340
6.58
Challenges faced in understanding how best to use the technology are
exacerbated by the difficulties encountered in obtaining independent
assessment and advice. According to the Purple Market Research
survey, 10 per cent of respondents said that not being able to obtain
impartial advice has made it difficult for them to install
microgeneration. Indeed, 42 per cent of respondents said they would
consider paying for impartial independent advice if they were thinking
about installing.
338
EST (2008) YIMBY Generation – yes in my back yard: UK householders pioneering
microgeneration heat.
339
Renewables Consumer Journey Research (2011) by Purple Market Research for the EST.
340
Data from Consumer Focus Report and NI House Conditions survey (2009) reveal that a
substantial proportion of both off-grid and on-grid consumers live in poorly insulated properties.
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6.59
Under the current system of separate certification for product and
installer, installers are more likely to encourage installation of the
technology that they are certified to install rather than provide an
independent assessment of what is most suitable for the consumer.341
As such, there appears to be a risk that consumers may install certain
technologies without being fully informed of the suitability or overall
benefits. A 2010 investigation by Which? into the sale of domestic
solar thermal systems found that 10 out of 14 companies exaggerated
the potential savings and none of the 14 companies investigated
identified all the important technical challenges before providing a
quote. 342 In 2011 Which? conducted an investigation into the sale of
solar PV that also found problems. Out of the 12 MCS certified firms
investigated, using the Government's required SAP assessment
methodology, three quarters were found to overestimate the annual
amount of energy that the PV system would produce and eight
underestimated the payback period.343
6.60
Together, possible installer bias or lack of knowledge and the
complexity of microgeneration technologies create an environment
where customers may not be provided with the necessary or correct
information before deciding which technology best suits their property
and needs. This is supported by the Consumer Direct data which
indicates that allegedly misleading claims or omissions are just starting
to become a feature of the market.
341
See www.which.co.uk/documents/pdf/draft-microgeneration-strategy-which-response237753.pdf and Consumer Focus Scotland 2010 Report 'Power at Home – Improving Consumer
Access to the Benefits of Microgeneration'
www.consumerfocus.org.uk/scotland/files/2010/11/Power-at-home.pdf
342
www.which.co.uk/news/2011/06/solar-panel-firms-give-consumers-poor-advice-says-which-256929
343
www.which.co.uk/about-which/press/press-releases/product-press-releases/whichmagazine/2010/04/solar-sellers-slammed
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Misleading claims
6.61
Our consumer research indicated that some microgeneration users
thought they would see a return on their investment earlier than
expected and the Which? investigation found that firms provided poor
advice and made unrealistic claims about the benefits of the
technology. Which? found that 10 out of the 14 companies
exaggerated the potential savings that could be made from switching
to solar thermal. Consumer Direct data also revealed that the number
of complaints about mis-selling and misleading claims increased by 75
per cent for the year to August 2011.
6.62
The Advertising Standards Authority (ASA) has also recently taken
action against some firms for making misleading claims. In 2008, the
Advertising Standards Authority (ASA) upheld a complaint against
Danfoss Heat Pumps Limited after finding that it could not substantiate
claims that consumers could reduce their heating costs by up to 70 per
cent.344 In a more recent case the ASA ruled that claims made by ACS
Renewable Solutions that their air source heat pumps would reduce
winter fuel bills by 40 per cent were misleading.345
6.63
Concerns about mis-selling and misleading claims can undermine
consumer confidence in the market. For instance, in the Purple Market
Research survey only nine per cent of respondents said they would
trust installers to provide impartial information and advice.
Poor quality products/service and selling practices
6.64
A number of complaints to Consumer Direct about microgeneration
technologies relate to poor quality goods and services. In 2010, poor
344
www.asa.org.uk/ASA-action/Adjudications/2011/8/Danfoss-Heat-Pumps-UKLtd/SHP_ADJ_157342.aspx
345
www.asa.org.uk/ASA-action/Adjudications/2011/8/ACS-Renewable-SolutionsLtd/SHP_ADJ_141588.aspx
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quality goods accounted for 27 per cent of complaints. Pressure selling
and cold calling accounted for about nine per cent. For the period
January 2011 to August 2011, although there has been a decline in
these types of complaints, the figures remain significant at 14 per cent
and seven per cent respectively.
6.65
Results in the EST's 2008 YIMBY report346 also highlighted that 17 per
cent of respondents who use microgeneration complained about the
unreliability of the system (for example, component breakdown and
leaks) and a further 12 per cent complained that the system provided
less heat or hot water than expected. The latter is consistent with misselling or misleading claims and with poor product quality. In addition,
concerns over quality of service are reflected in results from the Purple
Market Research survey, which found that 53 per cent of respondents
at preparation or installed phase had doubts about the skills and
experience of installers.
6.66
As with mis-selling and misleading claims, poor quality service and
selling practices can cause significant detriment, leading consumers to
withdraw from the market.
Redress mechanism
6.67
At the moment, consumers have two main avenues for redress outside
of court action – provisions under the MCS accreditation scheme and
the REAL Assurance Scheme Consumer code allow for complaints
resolution between consumers and members. Members who do not
comply with the rules governing these schemes (including the findings
from the complaints process) can have their membership revoked. Last
year, following audit compliance checks, REAL excluded three
companies from the scheme due to non-compliance. As MCS and REAL
certification are crucial for consumer access to Government financial
incentives such as FIT and RHI, for members, the threat of exclusion
346
EST (2008) YIMBY Generation – yes in my back yard: UK householders pioneering
microgeneration heat.
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can be a significant deterrent against non-compliance. The important
deterrent role played by MCS and REAL is consistent with the high
level of satisfaction reported by respondents in the SPA research.
6.68
Our view is that, while REAL and MCS play a crucial role in ensuring
consumers obtain redress where appropriate, there are opportunities to
further strengthen this regime. For both consumers already using or in
the process of installing microgeneration technologies, seeking redress
can be challenging. For instance, separate MCS accreditation of
installers and technologies make redress and accountability difficult,
with installers and manufacturers expecting the other to accept
responsibility for faults. As a result, consumers may find it difficult to
determine which party is liable if the technology does not perform as
expected.
6.69
In addition, since complaints regarding installation can be made to
either REAL or the relevant MCS accreditation body, consumers may
be confused as to which avenue to pursue. MCS certification bodies
handle complaints regarding the technical aspects of the installation
while REAL deals with complaints about the standard of service or
aspects of the contract. However, since there is separate accreditation
for installers and products, the consumer must first ascertain the
nature of the problem and whether it is best handled by REAL or MCS.
Given the complexity of the technologies, this may not always be
straightforward.
6.70
If the consumer is not happy with the outcome of the complaints
process under the REAL scheme, they can seek independent
arbitration. Arbitration can cost from £100 and the outcome is
binding.347 In its response to DECC's 'Consultation on a
Microgeneration Strategy', Which? notes as a concern that arbitration
is costly to the consumer, does not generally find fault, and the
347
See www.realassurance.org.uk/consumers/independent-arbitration
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outcome can deny the consumer the right to go to the courts if they
are not happy with the results.348
Actions and recommendations
6.71
Our research found that satisfaction amongst users of microgeneration
is high. Against that background the OFT uses its complaints database
as an 'early warning system' to monitor trends in the market. The
latest Ofgem and EST figures record 6,900 installations a month349
generating 179 Consumer Direct complaints.350 We expect that most of
these complaints will be addressed by installers and are confident that
the arrangements in place through the REAL Assurance Scheme
Consumer Code will support this. Alongside Trading Standards, the
OFT will monitor the market and will undertake any additional work,
including enforcement action, as may be necessary.
6.72
The OFT also recognises the need for the following:
•
Clarity around Government schemes. In particular, the FITs scheme
is currently under review. While the outcome of the review is not
yet known, it is important that Government, trade bodies and
industry work together to ensure that any changes that may be
made are understood in a timely manner by consumers.
348
See www.which.co.uk/documents/pdf/draft-microgeneration-strategy-which-response237753.pdf
349
Number of installations for electricity generating technologies is based on Ofgem data
www.ofgem.gov.uk/Sustainability/Environment/fits/Newsletter/Documents1/Feedin%20Tariff%20(FIT)%20Update%20Newsletter%20Issue%205.pdf. The Ofgem data contains
a lag on current market activity and so will not reflect any recent changes in the rate of take up.
Monthly installation for heat generating technologies was based on estimates from the Purple
Market Research Renewable Heat and Energy Uptake Journey research proposal (2011)
commissioned by EST.
350
Thus the proportion of complaints to number of installations is about three per cent. This is
substantial. For instance, in our Second Hand Car Market Study, the proportion of complaints to
number of transactions was less than one per cent.
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6.73
•
Availability of independent assessment. While consumers can
access information and independent advice on technologies, it is
difficult for them to obtain an independent assessment of the
options for their property. As the market develops, this service may
emerge. If not, the Government may wish to consider sponsoring
such a service.
•
Opportunity to further strengthen redress mechanisms. Consumer
satisfaction levels in the market are high and in this regard we
would highlight the important role played by REAL and MCS in this
industry and the fact that consumers have access to redress
mechanisms via the MCS and REAL. There is an opportunity to
further strengthen these mechanisms in the future by further
integrating the approach to consumer redress.
Much of this work is already in hand. In its recent Microgeneration
Strategy, the UK Government has begun the process of addressing
some of these issues. In particular, there are recommendations around
strengthening the role of the MCS and the REAL Assurance scheme in
terms of providing independent assessment and more robust redress
mechanisms. Some of these recommendations do not extend to the
Devolved Administrations and for a comprehensive approach will need
to do so.
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7
CONCLUSION AND RECOMMENDATIONS
7.1
Off-grid consumers represent a diverse population using a wide range of
different fuel types. Some face challenges that include fuel poverty,
limited possibilities to improve the energy efficiency of their homes, and
potential disruptions to supply because they are dependent on the road
transport network for delivery of their fuel. The most pressing concern
that consumers have repeatedly raised with us relates to the high and
increasing level of prices. Affordability concerns are not likely to abate
given expected upward pressures on energy prices in general, both ongrid and off-grid. Furthermore, these price trends may not be directly
remediable given that they are to a large extent driven by the
internationally traded prices of oil and LPG.
7.2
While we recognise that wider challenges exist for some off-grid
consumers, the OFT's remit is to consider competition and consumer
protection issues for these consumers. Our study has examined
competition in the supply of heating oil but has not found evidence of
either market power or coordination problems, with a choice of supplier
generally available to consumers, low barriers to entry, and no apparent
evidence of collusion. These features indicate that, while firms are able
to make profits at times of peak demand, competition will constrain the
extent to which they do so over time. In some outlying areas, consumers
may face a limited choice of suppliers. However, this is true of many
services in such localities and is not readily susceptible to competition
remedies.
7.3
Hence, while a number of parties have advocated price regulation in the
heating oil market, the OFT does not see any justification for this on
competition grounds. Moreover, even if we had identified market power
concerns, any such regulation would be challenging to administer and
may not be cost-effective given the large number of firms in the market.
7.4
However, further support for off-grid consumers should come from the
enforcement of existing consumer protections by the OFT and Trading
Standards. Such enforcement is particularly important in sectors, such
as this, which include a number of vulnerable consumers. We note the
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recent actions taken by the OFT against some heating oil firms and price
comparison websites, and by Trading Standards in relation to heating oil.
Our study has also identified potential consumer protection concerns in
the domestic supply of bulk LPG and microgeneration. We are taking
appropriate actions in these matters as summarised below.
7.5
Beyond this, the UK Government and Devolved Administrations can of
course consider policy interventions targeted towards the vulnerable
parts of the off-grid population. In this respect, we hope the evidence
base from our study will be of use to all interested parties.
7.6
The OFT's key actions and recommendations from this study are
summarised as follows.
Summary of the outcomes and recommendations from our study
Heating oil
•
It is important that consumers can genuinely shop around and make
informed decisions about which suppliers to use. The OFT has taken action
against several heating oil companies and price comparison sites in order to
prevent consumers being misled when searching online for heating oil
supplies. This was announced in September 2011. The changes secured
mean that domestic heating oil consumers will be better able to compare
deals on offer. It should also be clear to any heating oil company running a
price comparison site that the law requires transparency around ownership
and links to heating oil suppliers.
•
The OFT also notes the court case successfully brought in August 2011 by
Carmarthenshire County Council against GB Oils Limited (trading as O. J.
Williams). In light of this case and of complaints received from consumers
elsewhere regarding allegedly unclear pricing practices, in particular over last
winter, the OFT is now examining this and related practices.
•
We also recommend that the industry strengthen its codes of practice in
relation to consumer protection and redress. The OFT is working with the
FPS and the NIOF to support their activities in this regard.
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LPG
•
The OFT has considered the compliance of industry, to date, with the
Orders made by the CC in respect of the supply of domestic bulk LPG.
Some areas of possible compliance weakness exist. The OFT will
engage with the industry to address and monitor these areas. A breach
of the Orders, if found, could lead to enforcement action.
•
The OFT maintains FAQs on the implementation of the Orders and
recommends that consumers – particularly those on metered estates,
where switching rates remain low – consider these FAQs if they have
queries about the Orders or experience difficulties switching.
•
The OFT is engaging with the industry regarding concerns that some
terms in domestic bulk LPG consumer contracts, particularly as regards
early termination rights, may not be fully consistent with existing
consumer protection legislation.
•
Furthermore, we take the view that the Orders apply even where
contracts are terminated early and we recommend the industry make
this clearer in its consumer guidance.
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Microgeneration
•
We have identified a particular risk of mis-selling problems within the
microgeneration industry, and some recent evidence of such problems
materialising. We expect that most of these complaints will be
addressed by installers and are confident that the arrangements in place
through the REAL Assurance Scheme Consumer Code will support this.
The OFT will undertake any additional work, including enforcement
action, as may be necessary alongside Local Authority Trading
Standards.
•
Going forward, the OFT recommends that Government and the devolved
administrations should continue ongoing work considering:
-
Measures to increase access to and use of independent advice.
-
Opportunities to further strengthen existing independent redress
mechanisms if significant problems do materialise.
Provisional decision not to make a market investigation reference to
the CC
7.7
A possible outcome from a market study is a market investigation
reference (MIR) to the CC. The OFT has considered whether this would
be appropriate in respect of the main market where this study has made
a competition assessment – the heating oil retail distribution market.
7.8
In order to make a MIR to the CC, the OFT must have reasonable
grounds for suspecting that any feature, or combination of features, of a
market in the UK for goods or services prevents, restricts or distorts
competition in connection with the supply or acquisition of any goods or
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services in the UK or part of the UK (the 'reference test', as detailed
further in Annexe O).351
7.9
7.10
351
The OFT has only assessed whether the main sector we have reviewed
in the course of our off-grid energy market study – the domestic heating
oil retail distribution market – meets the reference test. We have not
applied the reference test in respect of the other fuels because:
•
For bulk LPG: The CC has already investigated the domestic bulk
LPG market. Instead of looking at issues already addressed by that
investigation, we have focused on evidence of the initial impact of
the Orders.
•
For cylinder LPG: while there are some features of this market which
may give rise to competition concerns, these concerns would, if
valid, go beyond the supply of cylinders for domestic heating and
therefore require consideration of the wider cylinder LPG market
(including commercial and industrial customers) beyond the scope of
this study. We may return to these issues in the context of the
wider cylinder LPG market at a later date (subject to OFT
prioritisation principles).
•
All other energy markets examined (microgeneration, solid fuels and
electricity) have, within the context of this particular study, been
considered primarily in relation to their role as alternatives to heating
oil and LPG rather than individually in their own right.
As regards heating oil, and as set out in Chapter 4, the OFT has not, in
the course of its study and on the basis of the evidence seen to date,
found reasonable grounds for suspecting the presence of any feature or
features of the heating oil retail distribution market in the UK that may
prevent, restrict or distort competition in connection with the supply or
acquisition of domestic heating oil in the UK or part of the UK.
The reference test is set out under section 131 of the Enterprise Act 2002.
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7.11
Therefore, the reference test is not met and the OFT does not propose to
make a MIR to the CC in respect of the domestic heating oil retail
distribution market.
7.12
For the avoidance of any doubt, our study has not examined the
wholesale market for petroleum products in detail and does not reach
any conclusions on this market.
7.13
We are consulting on our provisional non-reference decision and invite
relevant views. Responses should be emailed to offgrid@oft.gsi.gov.uk
by 5pm on Friday 18 November 2011. Alternatively, they can be sent
to:
Off-Grid Energy Market Study
Office of Fair Trading
Fleetbank House
2-6 Salisbury Square
London EC4Y 8JX
7.14
We will consider any responses received and will publish our final
decision on a MIR in due course.
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