:00:00. > :00:09.Now on BBC News, it's time for Hardtalk. Welcome to HARDtalk.
:00:10. > :00:12.Britain's energy companies have pulled off a near impossible trick
:00:13. > :00:20.of making themselves more unpopular than the nation's bankers. How come?
:00:21. > :00:25.Rising gas and electricity bills are putting an enormous strain on
:00:26. > :00:30.millions of households. The energy giants stand accused of
:00:31. > :00:33.unjustifiable profiteering. It is become one of Britain's political
:00:34. > :00:39.issues, with the Labour Party promising to impose a freeze on
:00:40. > :00:44.prices. My guest is Paul Massara, the boss of NPower. Is it time for a
:00:45. > :01:13.radical overhaul of the energy market?
:01:14. > :01:19.Paul Massara, welcome to HARDtalk. Why do think the public has such a
:01:20. > :01:27.negative view right now of your company and your industry? I think
:01:28. > :01:32.right now we are going through a really tough time for consumers. You
:01:33. > :01:37.have seen over the last couple of years, where wage inflation has been
:01:38. > :01:41.very minimal. At the same time, there has been inflation in many
:01:42. > :01:44.things, especially energy prices. They are rising much quicker than
:01:45. > :01:48.inflation and people are concerned about that. The whole issue of
:01:49. > :01:51.affordability is a real issue and they are worried. They cannot get
:01:52. > :01:59.behind what is really happening in the industry with costs going up. We
:02:00. > :02:02.will talk about the finances and the costs in a moment, but I am very
:02:03. > :02:09.intrigued by something said by a competitor of yours, the boss of
:02:10. > :02:14.Centrica, another of the big six. He said, we are in the eye of the
:02:15. > :02:17.storm. Trust is at an all`time low, we understand that. We understand
:02:18. > :02:24.the solution is in action, not words. Do you share that sentiment?
:02:25. > :02:28.Completely. Trust in many industries, it is not just us, but
:02:29. > :02:32.we are in the middle of the storm, trust in many industries has broken
:02:33. > :02:39.down. The reason is that big companies had a very paternalistic
:02:40. > :02:43.approach to consumers. Don't worry about it, we will tell you what we
:02:44. > :02:48.need to do, we will look after you. Whether that is banks, MPs, the
:02:49. > :02:52.Church, energy companies. Over time, people look back and they say, you
:02:53. > :02:57.know what, you did not look after me. You did not do what was right. I
:02:58. > :03:00.am not sure that I trust you any more. With the advent of the
:03:01. > :03:04.internet, Twitter, people have access to a whole different sense of
:03:05. > :03:10.information. They say they would rather trust what other people are
:03:11. > :03:13.saying. It is not just our issue. If you can believe or disbelieve the
:03:14. > :03:23.polls, they show that your industry is at the very bottom of the
:03:24. > :03:26.corporate trust index. When you say you agree with everything that he
:03:27. > :03:29.said about the solution being actions, not words, your action over
:03:30. > :03:36.the last few weeks is running counter to that notion. Your main
:03:37. > :03:39.action, the one that sticks in people's minds, is to raise your
:03:40. > :03:48.energy prices by a greater amount than any other of the big six energy
:03:49. > :03:52.companies. You need to take a step back. Why are energy prices rising?
:03:53. > :03:57.That is the first thing to look at. For a period of time, we have had
:03:58. > :04:01.three competing issues. The issues of security and supply, the issues
:04:02. > :04:07.of how do we get CO2 reduction, and the issues of affordability. Up
:04:08. > :04:10.until now, we have been pushing the CO2 reduction issue, more wind
:04:11. > :04:13.farms, more green energy, get rid of coal, and we have been less worried
:04:14. > :04:21.about security and supply, and worries about affordability.
:04:22. > :04:27.Affordability has now hit the front page. People are concerned. It is a
:04:28. > :04:31.cost of living issue. Energy is the first area they are looking at.
:04:32. > :04:36.People are concerned about how they pay their bills. It seems to me
:04:37. > :04:39.there are some pretty basic and simple facts. Ofgem, the regulator
:04:40. > :04:42.for your industry, says that wholesale energy prices have risen
:04:43. > :04:46.by an average of 1.7%, over the past year, while consumers have been hit
:04:47. > :04:56.by an average price rise over that period of 11%. Why the fundamental
:04:57. > :05:04.mismatch between wholesale prices and what you are demanding from
:05:05. > :05:07.customers? What makes up the bill? 45% of the bill is made up of
:05:08. > :05:15.energy, which is behind gas and electricity. 16% is managed by us.
:05:16. > :05:17.The only bit that we manage. 20% is managed by transportation and
:05:18. > :05:23.distribution charges, which are regulated, and another 17% which is
:05:24. > :05:25.managed by government costs. It is the green levies, insulating
:05:26. > :05:35.people's homes, that effectively has pushed up the bill such a lot. You
:05:36. > :05:45.appear eager to blame the rise in price on the green element of the
:05:46. > :05:50.pricing issue. Ofgem says the green element is less than 10% of the
:05:51. > :05:54.bill. So it seems odd to me that so much of it can be blamed on that one
:05:55. > :05:57.issue. There are other players in your industry running much smaller
:05:58. > :06:01.companies, who have looked at what you do, and say they simply cannot
:06:02. > :06:08.explain the nature of your big price rises. They are not prices that we
:06:09. > :06:15.see in the liquid wholesale market, says Steve Fitzpatrick, boss of Ovo.
:06:16. > :06:19.I would like come back to his point. If you look to his announcement in
:06:20. > :06:24.April 2013, he said, I am putting up prices by 8%, because the commodity
:06:25. > :06:29.has moved by 7% and 9%. On the other hand, he says it has not moved,
:06:30. > :06:32.which is interesting. If you go to their website, they have got a graph
:06:33. > :06:38.of commodity prices, and they are rising rapidly and have risen
:06:39. > :06:43.rapidly. I do not know where he gets that. But that is looking back. What
:06:44. > :06:48.we are doing this pricing for the next year. What are the costs? Let's
:06:49. > :06:50.focus on it. It has been green energy, eco, and transportation and
:06:51. > :06:53.distribution charges, which everybody agrees are going up, and
:06:54. > :07:07.the forward view of the commodity market is that prices are moving up
:07:08. > :07:10.by 4%`5%. This is not something that is terribly new. Ofgem said in 2011,
:07:11. > :07:13.we have found evidence that customer energy bills respond rapidly to
:07:14. > :07:17.rises in supply and cost than when they are falling. You are very eager
:07:18. > :07:20.to impose the cost that covers a wholesale price rise, but when the
:07:21. > :07:24.price drops, you do not pass it onto the consumer. That is why, going
:07:25. > :07:32.back to the beginning, you have such image problem. This is one of the
:07:33. > :07:36.great myths out there. The spot price can go up and down. If you are
:07:37. > :07:39.a small supplier, you do not have the ability to buy in the long`term
:07:40. > :07:52.market. We know that our customers want a degree of certainty. So we
:07:53. > :07:56.offer that. At the moment we are offering a fixed price going up to
:07:57. > :07:59.2017. The fact is that we look at the longer term, which means that we
:08:00. > :08:03.can stabilise, so that when prices move up, we do not have to move them
:08:04. > :08:07.up as quickly, and when they move down we do not have to move them
:08:08. > :08:10.down as quickly either. We flatten them out. What consumers want is the
:08:11. > :08:13.lowest possible price and you do not give them that. Looking at the Ovo
:08:14. > :08:16.figures, and Steve Fitzpatrick's opinion of what you do, he says that
:08:17. > :08:20.time and again you cynically allow many of your customers to pay a
:08:21. > :08:28.price that he says is at least 60% above the very best tariff that you
:08:29. > :08:33.offer. Only the very well informed customer gets the best priced. You
:08:34. > :08:40.know it but you persist in allowing so many of your customers to pay
:08:41. > :08:44.over the odds. That is not true. They can ring up and ask if they go
:08:45. > :08:47.on the right tariff. They can in theory, but what proportion of your
:08:48. > :08:52.customers are paying the tariff that is not the most competitive? The
:08:53. > :08:55.headline tariff. If somebody says to me, I locked into a five`year
:08:56. > :09:02.contract and it is higher than the other prices, I tell him he has to
:09:03. > :09:09.switch. He wants to be on a five`year contract. He has made that
:09:10. > :09:14.decision. He wants certainty. They may or may not be the best decision
:09:15. > :09:17.for him. I do not know. I am very struck by your bold statement, we
:09:18. > :09:20.are long past the era of paternalism, where the public can
:09:21. > :09:22.look at a gas supplier or an electricity supplier and expect
:09:23. > :09:30.there to be a kind of paternalistic relationship between supply and
:09:31. > :09:32.consumer. What do you make of these words, from the Archbishop of
:09:33. > :09:35.Canterbury, who used to be a business executive in the energy
:09:36. > :09:42.industry. He says that energy firms should be conscious of their moral
:09:43. > :09:50.obligations. I completely agree with that. I have set up a meeting with
:09:51. > :09:53.him to talk to him about it. When we made the decision about our price
:09:54. > :09:57.rise, looking at all the costs that were coming forward to us, we do not
:09:58. > :10:00.sit there and say wow, this is great, we will pass this on. We
:10:01. > :10:03.lobbied the Government to make changes on some of the eco costs,
:10:04. > :10:10.and we understand that it is tough for people. Wage inflation is not
:10:11. > :10:15.going up very much, to have a 10% price increase on an essential is
:10:16. > :10:18.very tough for people. If you understand the nature of fuel
:10:19. > :10:21.poverty and the Citizens' Advice Bureau group say that one in four
:10:22. > :10:24.families are now living in fuel poverty... If you understand that,
:10:25. > :10:27.and you look at your rising profits, 330 million in 20 11, another 25%
:10:28. > :10:30.increase to almost 400 million in 2012, you think to yourself,
:10:31. > :10:47.actually if I take seriously this moral obligation, I will have to
:10:48. > :10:50.change how I do my business. I may have to reduce my profit margins.
:10:51. > :11:00.There are so many customers who are suffering. There is a lot in that
:11:01. > :11:05.question. You have to let me break it down. Why is that effectively
:11:06. > :11:10.profits have been going up? Over the last five years, we have invested ?5
:11:11. > :11:13.billion in the UK. That is helping to create green energy, build new
:11:14. > :11:22.plants, gas plants, that has helped to create jobs, securing the supply.
:11:23. > :11:26.That is essential. The Government says we need ?110 billion to be
:11:27. > :11:33.invested. That has to come from somebody. But your profits have gone
:11:34. > :11:38.up massively. More and more of your customers are in fuel poverty. You
:11:39. > :11:41.talk to me about moral obligation. What is this moral obligation.
:11:42. > :11:45.Unless you are making a fair return on that investment, why would you
:11:46. > :11:49.put it in? We put ?5 billion in. If you earn 5% in that, there is not
:11:50. > :11:54.one year that we have earned that in that generation. Our generation
:11:55. > :12:02.business is suffering hugely because of what is happening in the
:12:03. > :12:06.marketplace. When people say that you are making all this money, we
:12:07. > :12:10.have invested two times what we have taken out of the UK. We understand
:12:11. > :12:13.the issue of affordability. Why are all these other costs on our bills
:12:14. > :12:16.going up and why are they feeding it? One more question about moral
:12:17. > :12:20.obligation. You, as I understand it, and it is a bit difficult to figure
:12:21. > :12:29.it out, you are just over ?1 million a year. I am not. What do you earn?
:12:30. > :12:35.I earn the lowest of all the big six energy providers. Well that means
:12:36. > :12:41.nothing to me. I earn ?600,000. And then you get a bonus. No, that is
:12:42. > :12:46.including my target bonus. My bonus last year was ?150,000. I am asking
:12:47. > :13:00.personal questions with a reason, talking about the notion of a
:13:01. > :13:03.conscience. A fellow boss of a big energy company has decided to forego
:13:04. > :13:06.a bonus, which we believe to be well over ?1 million. He says he was to
:13:07. > :13:14.show that he understands the pain his customers are feeling. You
:13:15. > :13:17.prepared to make a similar gesture? The issue is, are we doing
:13:18. > :13:23.everything we can to keep costs down? If he was earning ?5 million a
:13:24. > :13:28.year and was willing to give 1 million, the him. We are doing
:13:29. > :13:33.everything we can to get it right the consumers. My bonus is linked to
:13:34. > :13:35.my performance and getting it right for customers and employee'
:13:36. > :13:40.satisfaction. All my team are linked to that. Do you recognise that
:13:41. > :13:43.because of the political climate that you guys are now in, in the
:13:44. > :13:51.energy sector, that intervention in the market is now inevitable?
:13:52. > :13:55.Intervention has been happening for a long time. New forms of
:13:56. > :14:06.intervention, particularly the Labor Party's commitment to put a 20 month
:14:07. > :14:09.flat out freeze on energy bills. To come back to the bill, 50% or 45% of
:14:10. > :14:17.that is made on the commodity market. It's a gimmick. An absolute
:14:18. > :14:22.gimmick. What will happen is, after the price is moved up, what do you
:14:23. > :14:28.think will happen at the end of 20 months? Prices will move up. You say
:14:29. > :14:32.you will hike the prices as soon as the 20 months are over? They will
:14:33. > :14:35.move up or down, depending on what happened. Ed Miliband isn't going to
:14:36. > :14:39.effectively cap all inputs, because he can't. He says he feels like
:14:40. > :14:49.capping the price but the reality is they won't be capped. It is a
:14:50. > :14:53.short`term solution, it's not going to solve anything in the long`term
:14:54. > :14:59.for sustainable prices for consumers. I will tell you what Ed
:15:00. > :15:03.Miliband is saying, he's saying the energy market is broken. There are
:15:04. > :15:08.companies like yours overcharging people and he's determined to do
:15:09. > :15:11.something about it. Do you not see the way the political wind is
:15:12. > :15:17.blowing? Completely, I read the newspapers every day, I understand
:15:18. > :15:20.what's happening. If you don't want that to happen then surely it's in
:15:21. > :15:27.Cumberland on you to send a message to the public that you get it,
:15:28. > :15:29.lowering your margins, cutting the prices, saying to Ed Miliband and
:15:30. > :15:34.others that you don't need this mechanism of crude state
:15:35. > :15:40.intervention because you are responding. So that would be fine if
:15:41. > :15:44.the medicine you were diagnosing was for the right diagnosis. The
:15:45. > :15:50.diagnosis is completely wrong. I will tell you why, we make a 5%
:15:51. > :15:54.margin in the retail business, less than Tesco. You say we are the big
:15:55. > :16:01.six, how many other supermarkets, eight of the... 80% of the
:16:02. > :16:07.supermarkets are run by five people. What about phones and other
:16:08. > :16:14.things? Let's look at fax. If we so good, if we had a massive cartel,
:16:15. > :16:18.why is it only making 5% margins? I will tell you what I think, as you
:16:19. > :16:21.give me this uncompromising message. It seems there is nothing you are
:16:22. > :16:25.prepared to say you regret. Nothing you believe your business is getting
:16:26. > :16:28.wrong. I wonder how that makes sense, given the terrible public
:16:29. > :16:32.perception there is of your company right now. That's a
:16:33. > :16:37.misinterpretation. What do you regret about the way you are doing
:16:38. > :16:40.business now? The whole issue... Let's come back to the trust issue,
:16:41. > :16:43.the issue of trust, that we effectively did not always get it
:16:44. > :16:48.right for customers, absolutely right. The energy industry is... You
:16:49. > :16:52.acknowledge you are still not getting it right? We are still not
:16:53. > :16:58.getting it perfect. There are things we need to be better at. What?
:16:59. > :17:01.Things when people switch. We would like to get the switching faster.
:17:02. > :17:04.The government is looking at that. We think it's possible. We think we
:17:05. > :17:08.should make it less cumbersome. It is difficult to do and we think we
:17:09. > :17:13.should encourage people to do with. There is lots more we can do on
:17:14. > :17:16.transparency. We have got nothing to hide. We are happy to go with
:17:17. > :17:19.transparency. We have invested, over the last couple of years, ?200
:17:20. > :17:25.million in getting our systems right about one thing. It's culture. We
:17:26. > :17:29.have to get the culture right, where customers are put at the heart of
:17:30. > :17:32.our business. So many times I have seen big energy companies being run
:17:33. > :17:34.by engineers who are good at manufacturing plants, building
:17:35. > :17:41.things, but have lost that customer focus. That's why I have committed
:17:42. > :17:48.our business to be number one in customer experience by 2015. At the
:17:49. > :17:51.moment, we aren't there, so we have a lot of work to do. Briefly, will
:17:52. > :17:55.you give me a commitment that from now on he will tell your customers
:17:56. > :18:02.what the lowest tariff possible is and move them from a tariff that is
:18:03. > :18:06.costing them money? Absolutely. We will be writing to people... That's
:18:07. > :18:11.different. You are saying the customer has to phone up and ask. We
:18:12. > :18:16.also write to them. Without them having to ask? Absolutely. 100%
:18:17. > :18:20.commitment? Yes. Let's talk about green levies. You
:18:21. > :18:25.indicated that in your view they are a significant cost, partly
:18:26. > :18:28.responsible for the rising bills. Are you suggesting to me that you
:18:29. > :18:31.support the government's mooted proposal of putting this green levy
:18:32. > :18:43.away from the energy bill and putting it into direct taxation?
:18:44. > :18:46.Absolutely. And will you also promise me that, if that were to
:18:47. > :18:49.happen, the Cameron government wants it to happen, you will pass on that
:18:50. > :18:52.reduction immediately to your customers? You won't somehow take
:18:53. > :18:58.some of the money for yourself? Absolutely. Simple as that? Yes.
:18:59. > :19:02.It's not the price. It is also the consumption. The fact is, we have
:19:03. > :19:05.some of the leakiest and oldest houses in Europe. Therefore, the
:19:06. > :19:10.energy obligation to insulate people's homes is the right thing to
:19:11. > :19:17.do. The question is, who should bear the cost? Up until now, we have been
:19:18. > :19:20.sharing it. The reality is, by spreading it evenly across the
:19:21. > :19:25.customer base of the big suppliers, the small suppliers are free riding.
:19:26. > :19:29.And the big suppliers are actually charging everyone equally. If it
:19:30. > :19:36.moves to taxation, then on the basis they can actually be paid.
:19:37. > :19:40.Effectively, it's less regressive. That has to be a better way. You
:19:41. > :19:50.want to be absolved of the responsibility for paying that
:19:51. > :19:53.eco`tariff yourself? We don't want the consumers to pay it. The reality
:19:54. > :19:56.is, we will probably still have to charge the homes and we will
:19:57. > :19:59.probably have to charge that back to the Treasury. But if you are a
:20:00. > :20:03.company that cares about moving the UK to a more renewables based energy
:20:04. > :20:06.economy, a commitment to the carbon emissions targets the government has
:20:07. > :20:08.set, why is it, for example, that you have decided to close the
:20:09. > :20:15.biomass energy production facility you have in Tilbury? Great question.
:20:16. > :20:21.We were one of the first people to launch biomass. We converted a call
:20:22. > :20:28.station to biomass. We were pioneering. We actually did
:20:29. > :20:32.something that no one else had done. You claimed a lot of credit for it.
:20:33. > :20:35.The government appears to have withdrawn a subsidy. And the
:20:36. > :20:38.government, effectively, have said that because we were an early
:20:39. > :20:41.starter, they weren't prepared to give us the same terms that they are
:20:42. > :20:44.prepared to give somebody else who hasn't converted. Unfortunately, we
:20:45. > :20:48.can't make that work. It's not economical to do it. Nobody would
:20:49. > :20:54.put the capital in that's required. Therefore, we have had to close. We
:20:55. > :21:01.think that's the wrong solution. But let me come back to the green. We
:21:02. > :21:04.have been the biggest investor in wind, offshore wind, and onshore
:21:05. > :21:07.wind. We have done more. You have done something for green because
:21:08. > :21:10.clearly you have made a commitment to renewables and you have decided
:21:11. > :21:18.to pull out of nuclear altogether, which is, relatively speaking,
:21:19. > :21:22.emissions light. You have also joined in the so`called dash for
:21:23. > :21:27.gas. You are one of the companies that is most reliant on gas for
:21:28. > :21:30.energy production. That's not going to help the government meet its very
:21:31. > :21:36.ambitious long`term greenhouse gas emissions cuts. We come back again
:21:37. > :21:39.to the three things we set we were struggling with. Security of supply,
:21:40. > :21:43.CO2 reduction and affordability. We have just signed up to a 30 year
:21:44. > :21:51.deal with EDF at a price that is ?93 a kilowatt. `` 35 year deal. That's
:21:52. > :22:01.double the price today of power. Somebody has to pay for that. We've
:22:02. > :22:05.committed for 35 years of yellow that's not my children, that's my
:22:06. > :22:09.grandchildren who will be paying double the price of energy. That's a
:22:10. > :22:12.bet that gas prices will shoot up in the next seven or eight years,
:22:13. > :22:15.because if they are not, we have doubled the price and somebody has
:22:16. > :22:18.to pay for that. That's why energy prices are going up and it's a
:22:19. > :22:21.classical example of the consumer having to pick up the bill for going
:22:22. > :22:28.green. But the government's targets are clear and are very ambitious. It
:22:29. > :22:31.seems your message here is that your company can't make the sums add up
:22:32. > :22:33.when it comes to some vital pieces of infrastructure. You already
:22:34. > :22:36.talked about the closing of the Tilbury plant and there's talk of
:22:37. > :22:39.closing other facilities. Are you suggesting you are loathed to invest
:22:40. > :22:42.in new energy capacity in Britain because you don't believe you can
:22:43. > :22:50.make money here? Because of the overall climate set by this
:22:51. > :22:53.government? The regime they have set, the contract for difference is
:22:54. > :22:56.for offshore wind, is not attractive enough and we, as well as other
:22:57. > :23:00.players, are beginning to look at that... You are thinking of backing
:23:01. > :23:04.out? We can't put our capital debt to the extent we would have liked
:23:05. > :23:08.to, so we're looking at our plans. There will be less ambition to what
:23:09. > :23:11.we feel we can do because the numbers don't add up. Final thought.
:23:12. > :23:14.The government is intent on decarbonising energy reduction and
:23:15. > :23:21.is also facing a massive rise in the demand for power in the next 30` 40
:23:22. > :23:24.years. Can this circle be squared? Is the private sector going to
:23:25. > :23:33.deliver the extra capacity that is needed to keep the lights on? I
:23:34. > :23:36.think the issue will be can they get their 110 billion and the more the
:23:37. > :23:39.government intervenes and the more the government creates uncertainty,
:23:40. > :23:42.with things like freezes or other changes, it means there is less
:23:43. > :23:53.certainty for capital investment. Will the lights stay on? This year
:23:54. > :23:57.they will. And looking forward? I don't know. Margins get tight in
:23:58. > :24:00.terms of the amount of capacity that's fair. Are we seriously to
:24:01. > :24:04.take your words at face value? You think there is a real question about
:24:05. > :24:07.whether the UK, as a whole, has the capacity of the next ten years to
:24:08. > :24:09.keep the lights on? Absolutely. That's becoming a real issue.
:24:10. > :24:12.Margins, the capacity, spare capacity, to meet the peak
:24:13. > :24:18.requirement, when everybody is switching on their kettles, has
:24:19. > :24:22.dropped from about 15% to 5%. That is extremely low by historical
:24:23. > :24:24.levels. Unless the government can create a stable environment and
:24:25. > :24:32.their political league stable environment to attract new capital,
:24:33. > :24:37.that capital will not come in. `` politically stable environment.
:24:38. > :24:41.Thank you very much for coming on HARDtalk. Thank you.