Paul Massara - Chief Executive Officer, RWE npower HARDtalk

Now on BBC News, it's time for Hardtalk. Welcome to HARDtalk.

Britain's energy companies have pulled off a near impossible trick

of making themselves more unpopular than the nation's bankers. How come?

Rising gas and electricity bills are putting an enormous strain on

millions of households. The energy giants stand accused of

unjustifiable profiteering. It is become one of Britain's political

issues, with the Labour Party promising to impose a freeze on

prices. My guest is Paul Massara, the boss of NPower. Is it time for a

radical overhaul of the energy market?

Paul Massara, welcome to HARDtalk. Why do think the public has such a

negative view right now of your company and your industry? I think

right now we are going through a really tough time for consumers. You

have seen over the last couple of years, where wage inflation has been

very minimal. At the same time, there has been inflation in many

things, especially energy prices. They are rising much quicker than

inflation and people are concerned about that. The whole issue of

affordability is a real issue and they are worried. They cannot get

behind what is really happening in the industry with costs going up. We

will talk about the finances and the costs in a moment, but I am very

intrigued by something said by a competitor of yours, the boss of

Centrica, another of the big six. He said, we are in the eye of the

storm. Trust is at an all`time low, we understand that. We understand

the solution is in action, not words. Do you share that sentiment?

Completely. Trust in many industries, it is not just us, but

we are in the middle of the storm, trust in many industries has broken

down. The reason is that big companies had a very paternalistic

approach to consumers. Don't worry about it, we will tell you what we

need to do, we will look after you. Whether that is banks, MPs, the

Church, energy companies. Over time, people look back and they say, you

know what, you did not look after me. You did not do what was right. I

am not sure that I trust you any more. With the advent of the

internet, Twitter, people have access to a whole different sense of

information. They say they would rather trust what other people are

saying. It is not just our issue. If you can believe or disbelieve the

polls, they show that your industry is at the very bottom of the

corporate trust index. When you say you agree with everything that he

said about the solution being actions, not words, your action over

the last few weeks is running counter to that notion. Your main

action, the one that sticks in people's minds, is to raise your

energy prices by a greater amount than any other of the big six energy

companies. You need to take a step back. Why are energy prices rising?

That is the first thing to look at. For a period of time, we have had

three competing issues. The issues of security and supply, the issues

of how do we get CO2 reduction, and the issues of affordability. Up

until now, we have been pushing the CO2 reduction issue, more wind

farms, more green energy, get rid of coal, and we have been less worried

about security and supply, and worries about affordability.

Affordability has now hit the front page. People are concerned. It is a

cost of living issue. Energy is the first area they are looking at.

People are concerned about how they pay their bills. It seems to me

there are some pretty basic and simple facts. Ofgem, the regulator

for your industry, says that wholesale energy prices have risen

by an average of 1.7%, over the past year, while consumers have been hit

by an average price rise over that period of 11%. Why the fundamental

mismatch between wholesale prices and what you are demanding from

customers? What makes up the bill? 45% of the bill is made up of

energy, which is behind gas and electricity. 16% is managed by us.

The only bit that we manage. 20% is managed by transportation and

distribution charges, which are regulated, and another 17% which is

managed by government costs. It is the green levies, insulating

people's homes, that effectively has pushed up the bill such a lot. You

appear eager to blame the rise in price on the green element of the

pricing issue. Ofgem says the green element is less than 10% of the

bill. So it seems odd to me that so much of it can be blamed on that one

issue. There are other players in your industry running much smaller

companies, who have looked at what you do, and say they simply cannot

explain the nature of your big price rises. They are not prices that we

see in the liquid wholesale market, says Steve Fitzpatrick, boss of Ovo.

I would like come back to his point. If you look to his announcement in

April 2013, he said, I am putting up prices by 8%, because the commodity

has moved by 7% and 9%. On the other hand, he says it has not moved,

which is interesting. If you go to their website, they have got a graph

of commodity prices, and they are rising rapidly and have risen

rapidly. I do not know where he gets that. But that is looking back. What

we are doing this pricing for the next year. What are the costs? Let's

focus on it. It has been green energy, eco, and transportation and

distribution charges, which everybody agrees are going up, and

the forward view of the commodity market is that prices are moving up

by 4%`5%. This is not something that is terribly new. Ofgem said in 2011,

we have found evidence that customer energy bills respond rapidly to

rises in supply and cost than when they are falling. You are very eager

to impose the cost that covers a wholesale price rise, but when the

price drops, you do not pass it onto the consumer. That is why, going

back to the beginning, you have such image problem. This is one of the

great myths out there. The spot price can go up and down. If you are

a small supplier, you do not have the ability to buy in the long`term

market. We know that our customers want a degree of certainty. So we

offer that. At the moment we are offering a fixed price going up to

2017. The fact is that we look at the longer term, which means that we

can stabilise, so that when prices move up, we do not have to move them

up as quickly, and when they move down we do not have to move them

down as quickly either. We flatten them out. What consumers want is the

lowest possible price and you do not give them that. Looking at the Ovo

figures, and Steve Fitzpatrick's opinion of what you do, he says that

time and again you cynically allow many of your customers to pay a

price that he says is at least 60% above the very best tariff that you

offer. Only the very well informed customer gets the best priced. You

know it but you persist in allowing so many of your customers to pay

over the odds. That is not true. They can ring up and ask if they go

on the right tariff. They can in theory, but what proportion of your

customers are paying the tariff that is not the most competitive? The

headline tariff. If somebody says to me, I locked into a five`year

contract and it is higher than the other prices, I tell him he has to

switch. He wants to be on a five`year contract. He has made that

decision. He wants certainty. They may or may not be the best decision

for him. I do not know. I am very struck by your bold statement, we

are long past the era of paternalism, where the public can

look at a gas supplier or an electricity supplier and expect

there to be a kind of paternalistic relationship between supply and

consumer. What do you make of these words, from the Archbishop of

Canterbury, who used to be a business executive in the energy

industry. He says that energy firms should be conscious of their moral

obligations. I completely agree with that. I have set up a meeting with

him to talk to him about it. When we made the decision about our price

rise, looking at all the costs that were coming forward to us, we do not

sit there and say wow, this is great, we will pass this on. We

lobbied the Government to make changes on some of the eco costs,

and we understand that it is tough for people. Wage inflation is not

going up very much, to have a 10% price increase on an essential is

very tough for people. If you understand the nature of fuel

poverty and the Citizens' Advice Bureau group say that one in four

families are now living in fuel poverty... If you understand that,

and you look at your rising profits, 330 million in 20 11, another 25%

increase to almost 400 million in 2012, you think to yourself,

actually if I take seriously this moral obligation, I will have to

change how I do my business. I may have to reduce my profit margins.

There are so many customers who are suffering. There is a lot in that

question. You have to let me break it down. Why is that effectively

profits have been going up? Over the last five years, we have invested ?5

billion in the UK. That is helping to create green energy, build new

plants, gas plants, that has helped to create jobs, securing the supply.

That is essential. The Government says we need ?110 billion to be

invested. That has to come from somebody. But your profits have gone

up massively. More and more of your customers are in fuel poverty. You

talk to me about moral obligation. What is this moral obligation.

Unless you are making a fair return on that investment, why would you

put it in? We put ?5 billion in. If you earn 5% in that, there is not

one year that we have earned that in that generation. Our generation

business is suffering hugely because of what is happening in the

marketplace. When people say that you are making all this money, we

have invested two times what we have taken out of the UK. We understand

the issue of affordability. Why are all these other costs on our bills

going up and why are they feeding it? One more question about moral

obligation. You, as I understand it, and it is a bit difficult to figure

it out, you are just over ?1 million a year. I am not. What do you earn?

I earn the lowest of all the big six energy providers. Well that means

nothing to me. I earn ?600,000. And then you get a bonus. No, that is

including my target bonus. My bonus last year was ?150,000. I am asking

personal questions with a reason, talking about the notion of a

conscience. A fellow boss of a big energy company has decided to forego

a bonus, which we believe to be well over ?1 million. He says he was to

show that he understands the pain his customers are feeling. You

prepared to make a similar gesture? The issue is, are we doing

everything we can to keep costs down? If he was earning ?5 million a

year and was willing to give 1 million, the him. We are doing

everything we can to get it right the consumers. My bonus is linked to

my performance and getting it right for customers and employee'

satisfaction. All my team are linked to that. Do you recognise that

because of the political climate that you guys are now in, in the

energy sector, that intervention in the market is now inevitable?

Intervention has been happening for a long time. New forms of

intervention, particularly the Labor Party's commitment to put a 20 month

flat out freeze on energy bills. To come back to the bill, 50% or 45% of

that is made on the commodity market. It's a gimmick. An absolute

gimmick. What will happen is, after the price is moved up, what do you

think will happen at the end of 20 months? Prices will move up. You say

you will hike the prices as soon as the 20 months are over? They will

move up or down, depending on what happened. Ed Miliband isn't going to

effectively cap all inputs, because he can't. He says he feels like

capping the price but the reality is they won't be capped. It is a

short`term solution, it's not going to solve anything in the long`term

for sustainable prices for consumers. I will tell you what Ed

Miliband is saying, he's saying the energy market is broken. There are

companies like yours overcharging people and he's determined to do

something about it. Do you not see the way the political wind is

blowing? Completely, I read the newspapers every day, I understand

what's happening. If you don't want that to happen then surely it's in

Cumberland on you to send a message to the public that you get it,

lowering your margins, cutting the prices, saying to Ed Miliband and

others that you don't need this mechanism of crude state

intervention because you are responding. So that would be fine if

the medicine you were diagnosing was for the right diagnosis. The

diagnosis is completely wrong. I will tell you why, we make a 5%

margin in the retail business, less than Tesco. You say we are the big

six, how many other supermarkets, eight of the... 80% of the

supermarkets are run by five people. What about phones and other

things? Let's look at fax. If we so good, if we had a massive cartel,

why is it only making 5% margins? I will tell you what I think, as you

give me this uncompromising message. It seems there is nothing you are

prepared to say you regret. Nothing you believe your business is getting

wrong. I wonder how that makes sense, given the terrible public

perception there is of your company right now. That's a

misinterpretation. What do you regret about the way you are doing

business now? The whole issue... Let's come back to the trust issue,

the issue of trust, that we effectively did not always get it

right for customers, absolutely right. The energy industry is... You

acknowledge you are still not getting it right? We are still not

getting it perfect. There are things we need to be better at. What?

Things when people switch. We would like to get the switching faster.

The government is looking at that. We think it's possible. We think we

should make it less cumbersome. It is difficult to do and we think we

should encourage people to do with. There is lots more we can do on

transparency. We have got nothing to hide. We are happy to go with

transparency. We have invested, over the last couple of years, ?200

million in getting our systems right about one thing. It's culture. We

have to get the culture right, where customers are put at the heart of

our business. So many times I have seen big energy companies being run

by engineers who are good at manufacturing plants, building

things, but have lost that customer focus. That's why I have committed

our business to be number one in customer experience by 2015. At the

moment, we aren't there, so we have a lot of work to do. Briefly, will

you give me a commitment that from now on he will tell your customers

what the lowest tariff possible is and move them from a tariff that is

costing them money? Absolutely. We will be writing to people... That's

different. You are saying the customer has to phone up and ask. We

also write to them. Without them having to ask? Absolutely. 100%

commitment? Yes. Let's talk about green levies. You

indicated that in your view they are a significant cost, partly

responsible for the rising bills. Are you suggesting to me that you

support the government's mooted proposal of putting this green levy

away from the energy bill and putting it into direct taxation?

Absolutely. And will you also promise me that, if that were to

happen, the Cameron government wants it to happen, you will pass on that

reduction immediately to your customers? You won't somehow take

some of the money for yourself? Absolutely. Simple as that? Yes.

It's not the price. It is also the consumption. The fact is, we have

some of the leakiest and oldest houses in Europe. Therefore, the

energy obligation to insulate people's homes is the right thing to

do. The question is, who should bear the cost? Up until now, we have been

sharing it. The reality is, by spreading it evenly across the

customer base of the big suppliers, the small suppliers are free riding.

And the big suppliers are actually charging everyone equally. If it

moves to taxation, then on the basis they can actually be paid.

Effectively, it's less regressive. That has to be a better way. You

want to be absolved of the responsibility for paying that

eco`tariff yourself? We don't want the consumers to pay it. The reality

is, we will probably still have to charge the homes and we will

probably have to charge that back to the Treasury. But if you are a

company that cares about moving the UK to a more renewables based energy

economy, a commitment to the carbon emissions targets the government has

set, why is it, for example, that you have decided to close the

biomass energy production facility you have in Tilbury? Great question.

We were one of the first people to launch biomass. We converted a call

station to biomass. We were pioneering. We actually did

something that no one else had done. You claimed a lot of credit for it.

The government appears to have withdrawn a subsidy. And the

government, effectively, have said that because we were an early

starter, they weren't prepared to give us the same terms that they are

prepared to give somebody else who hasn't converted. Unfortunately, we

can't make that work. It's not economical to do it. Nobody would

put the capital in that's required. Therefore, we have had to close. We

think that's the wrong solution. But let me come back to the green. We

have been the biggest investor in wind, offshore wind, and onshore

wind. We have done more. You have done something for green because

clearly you have made a commitment to renewables and you have decided

to pull out of nuclear altogether, which is, relatively speaking,

emissions light. You have also joined in the so`called dash for

gas. You are one of the companies that is most reliant on gas for

energy production. That's not going to help the government meet its very

ambitious long`term greenhouse gas emissions cuts. We come back again

to the three things we set we were struggling with. Security of supply,

CO2 reduction and affordability. We have just signed up to a 30 year

deal with EDF at a price that is ?93 a kilowatt. `` 35 year deal. That's

double the price today of power. Somebody has to pay for that. We've

committed for 35 years of yellow that's not my children, that's my

grandchildren who will be paying double the price of energy. That's a

bet that gas prices will shoot up in the next seven or eight years,

because if they are not, we have doubled the price and somebody has

to pay for that. That's why energy prices are going up and it's a

classical example of the consumer having to pick up the bill for going

green. But the government's targets are clear and are very ambitious. It

seems your message here is that your company can't make the sums add up

when it comes to some vital pieces of infrastructure. You already

talked about the closing of the Tilbury plant and there's talk of

closing other facilities. Are you suggesting you are loathed to invest

in new energy capacity in Britain because you don't believe you can

make money here? Because of the overall climate set by this

government? The regime they have set, the contract for difference is

for offshore wind, is not attractive enough and we, as well as other

players, are beginning to look at that... You are thinking of backing

out? We can't put our capital debt to the extent we would have liked

to, so we're looking at our plans. There will be less ambition to what

we feel we can do because the numbers don't add up. Final thought.

The government is intent on decarbonising energy reduction and

is also facing a massive rise in the demand for power in the next 30` 40

years. Can this circle be squared? Is the private sector going to

deliver the extra capacity that is needed to keep the lights on? I

think the issue will be can they get their 110 billion and the more the

government intervenes and the more the government creates uncertainty,

with things like freezes or other changes, it means there is less

certainty for capital investment. Will the lights stay on? This year

they will. And looking forward? I don't know. Margins get tight in

terms of the amount of capacity that's fair. Are we seriously to

take your words at face value? You think there is a real question about

whether the UK, as a whole, has the capacity of the next ten years to

keep the lights on? Absolutely. That's becoming a real issue.

Margins, the capacity, spare capacity, to meet the peak

requirement, when everybody is switching on their kettles, has

dropped from about 15% to 5%. That is extremely low by historical

levels. Unless the government can create a stable environment and

their political league stable environment to attract new capital,

that capital will not come in. `` politically stable environment.

Thank you very much for coming on HARDtalk. Thank you.