Ian McCaig the head of First Utility says energy bills will double again with ten years
First utility boss: bills could double in the next 10 years
As energy prices continue to rise, Ian McCaig explains why his firm is the only one that can help people cut their power consumption
By Andrew Cave
9:00PM BST 19 Oct 2013
Ian McCaig has a message for British consumers: turn your heating down or even off.
“When did it become OK to walk around our houses in shorts and T-shirts in the middle of winter?” he says. “It just doesn’t make sense.”
It’s hardly what one might expect from a British electricity and gas supplier.
However, First Utility is not a conventional power firm, while McCaig, an Ayrshire-born coal miner’s son who was previously boss of internet travel firm lastminute.com, is not a traditional power company boss.
“The simple message is that if you join First Utility you’ll spend less on energy,” says the chief executive of Britain’s seventh largest energy supplier.
“But the really important sub-text is that we’re the only provider that can look a customer in the eye and say: ‘We want you to consume less’.
“That’s the answer for British households. We want to help consumers consume less because, unless we do that, prices are only going one way and that’s up.
“We need to be honest with consumers about that because as a country we’ve made a commitment to renewals and to being a low-carbon economy. We’ve been deficient in terms of our energy policy over the past decades which means that we’re effectively hitting a capacity problem.”
That argument, stresses McCaig, doesn’t even begin to take into account the expected increases in global commodity prices over the next 10 years.
He believes the overall effect of higher heating bills can only be mitigated within the context of the current Government commitments by a package of measures including more energy-efficient housing. The issue of high energy bills was brought into sharp focus last week when British Gas announced a 9.2pc increase in gas and electricity bills.
“Put everything together and there’s only one outcome,” he says of the inevitability of higher prices.
“If you combine that with a long-term trend that would see an increase in global commodity prices, then that would just accelerate and augment that process.
“British energy prices to consumers have doubled in the last six years.
“I’m not saying they’ll double again in the next six but it’s perfectly reasonable to predict that they could do so over the next 10.”
That would mean a large increase in the number of Britons deemed to be in “fuel poverty” – generally defined as people spending more than 10pc of their income on domestic energy.
“The answer to that is to consume less societally,’ continues McCaig. “I’m very passionate about that.”
McCaig, 47, is enthusiastic about shaking up the energy sector more generally.
First Utility, a spin-out from the former independent telecommunications firm, First Telecom, began trading in 2008 – just as the financial crisis was about to hit.
It has built up a base of 200,000 customers, making it a minnow compared with the industry’s so-called “Big Six”.
British Gas owner Centrica alone has 20m customers. Meanwhile, SSE, which trades as Scottish Hydro, Southern Electric and Swalec, earlier this month announced an 8.2pc hike in fuel bills. SSE has 10m customers.
Independent energy firms have less than 2pc of the market. On its own First Utility has less than 1pc. However, the company punches well above its weight in power marketing, announcing earlier this month that it will freeze its prices until at least April.
This followed the company moving customers on its iSave V12 plan to a more expensive tariff in June – an increase calculated by the pro-switching organisation, USwitch, as costing consumers £196 a year. McCaig said the company’s average energy bills were increased by 9pc in April.
First Utility blamed rising wholesale energy costs, network costs and Government environmental obligations, saying it had held off price rises for longer than the major suppliers.
The company is also lobbying strongly over the changes being made to Britain’s energy sector.
McCaig welcomes reforms stemming from the industry’s Retail Market Review which come into effect in the second quarter of next year and are aimed at making power pricing more transparent.
“It will address what’s been an issue historically in the industry where the incumbents have leveraged very large customer bases to offer loss-leading introductory tariffs,” he says.
“That’s been a good thing for those taking up those tariffs but not for the millions of existing customers sitting on existing tariffs who are being leveraged in order to produce that effect.”
That difference in prices has historically been as high as 20pc and McCaig believes the reforms’ effects in stopping some industry bad practices more than make up for criticism that they stifle pricing innovation.
In the longer-term, he envisages not only smart meters but a “smart grid” that could be used to develop “time-of-use tariffs” that effectively link consumers’ lifestyles to how much they pay for their power. Then there’s the Energy Bill, also due to come into effect next year, addressing Britain’s future energy generation.
Unlike the Big Six, First Utility generates no electricity itself. Instead, it secures its supplies on the world energy trading markets through a close relationship with investment bank Morgan Stanley, which owns 10pc of its equity. Another 50pc is owned by three of its founding families.
That hasn’t stopped the company from making strong representations to the Government.
“What we believe has been insufficiently addressed is the whole area of how the wholesale market operates,” says McCaig.
He argues that independent operators are disadvantaged by Britain’s system for the long-term trading of power supplies.
“The vast majority of energy here is just traded within the incumbents of the Big Six, who effectively match what they generate with what their customers are consuming,” he says.
“What that means is that, while an independent provider like us can get access to energy further into the future we pay more for it.
“The system needs to change. There’s a dysfunction there.”
This is one of two issues with Britain’s power market that the Labour Party has identified as problems – the other one has to do with the way the industry is regulated.
McCaig doesn’t like Labour’s suggested remedies, however. Ed Miliband surprised the power industry at the recent party conference by announcing that, were he to be the next Prime Minister, Labour would implement a 20-month cap on bill prices. They would also investigate breaking up the vertically integrated suppliers.
The proposals have been met with horror by several of the major players and McCaig isn’t in favour either.
“A price freeze for 20 months would be extremely problematic across the whole industry,” he says.
“The incumbents will say it would mean that the whole economics around their investment on the generation side are completely distorted and the UK is a less attractive place to invest.
“Our issues are different because we don’t generate. But if a 20-month price freeze comes in on a pre-determined date, we would need to buy energy forward and pay a lot of money to hedge that risk.
“We would have to price that into our tariffs going into a price freeze so prices would undoubtedly go up. And you could see prices going up after the 20-month period as well.”
McCaig also agrees with some of the sentiments recently voiced by SSE, which blamed green energy policies for higher prices.
“Britain has commitments to renewables, a low-carbon economy and the energy company obligation and all the costs that come from that,” he says.
“All those costs are going up, so how am I supposed to absorb all those increases in costs if I have no opportunity to move price?”
Nor does McCaig agree with Miliband’s plan to replace Ofgem with a different regulator.
“I don’t believe that the right remedy here is to effectively dismantle a regulator and then create another one,” he says.
“Instead, you need to broaden and sharpen Ofgem’s function and say that it is also responsible for creating an open, transparent and functioning wholesale market.”
First Utility is pushing for a “self-supply restriction” whereby the suppliers of electricity who also generate it are limited in the amounts they can supply to themselves, with the remainder having to be traded on the market.
“That would mean that more traders would come in to trade energy,” says McCaig.
“There would be more products and there would be a level playing field on pricing.”