INSIDE THE COST OF ENERGY INSIDE THE COST

Transcription

1 INSIDE THE COST OF ENERGY INSIDE THE COST OF ENERGY 0b INSIDE THE COST OF ENERGY Revised 24 January 2014

2 0c RWE NPOWER ENERGY EXPLAINED CONTENTS INTRODUCTION Introduction 01 CEO foreword 02 The cost of energy 04 Policy and regulation costs 05 Supplier costs 06 Transportation costs 07 Commodity and production costs 08 Who powers the power stations 09 Why energy trading? 10 How do we price? 12 Data table 13 Notes & assumptions Welcome to Energy Explained a concerted effort to make the complex simple. Energy Explained seeks to create a better understanding of the facts behind the energy industry and to help people make informed decisions about the energy they use. The content of this report is based entirely on presenting factual information, not opinion, and that is key. Energy Explained is about transparency and presenting information clearly and simply. This is the second in a series of reports which explores the changing landscape of energy costs. We hope you will find it informative. Data and information used in this report is provided for use by the public and in the interests of increasing public awareness. All data referred to is derived from previously published npower data (such as data extracted from our segmental reports) or third party information compiled from publicly available sources. This report does not reflect or indicate in any way npower s future costs, pricing or business strategy. All statements, claims, expectations or assumptions made are based on the data used in this report only.

3 INSIDE THE COST OF ENERGY 01 CEO FOREWORD RWE npower launched Energy Explained in July 2013 with the intention of helping to rebuild trust in our industry by presenting facts rather than opinions, and committing to having an open and transparent debate about the rising cost of energy. At times during the current energy debate the facts have been in short supply, particularly amid rumours of profiteering and broken markets. At other times, government has listened to ideas that could make policy fairer for example, by paying for certain elements of social policy progressively through tax rather than regressively through energy bills. Today the need for facts rather than opinion has never been greater. Supply companies like npower have control over less than 20 per cent of energy bills, yet they are exposed to 100 per cent of the cost and blamed for 100 per cent of any price rise. While we must continue to keep our own costs as low as possible this report shows that we need to maintain scrutiny across all elements of the cost of energy. Changes, reforms and investments must be made in the most cost effective way to reduce the impact on customers, both small and large. In the last report I stressed the fact that energy suppliers only make a 5 per cent profit margin on an average household bill: lower than many other businesses and industries. This has resulted in a hunt to find where the hidden energy profits must be. This report begins to shine a light on these other areas of the energy industry: showing how electricity and gas is shipped across the country, how power stations are paid for, and how and why energy is traded. The simple fact is that there are no excessive profits, hidden or otherwise. We aim to make around 5 per cent from our supply business to reflect the financial risk and expertise involved in what we do, buying enough energy to guarantee our customers supply against an ever-changing landscape of increasing cost and regulation. The return we look for when making the decision to invest in a new power station tends to stand between 7 12 per cent over the lifetime of the investment, depending on the technology involved. This reflects the need to recoup the billions of pounds paid upfront, as well as the very real risk that energy markets and energy policy and therefore the financial success or failure of the power station can vary dramatically over the twenty or more years it will operate for. Actual profits for power generation can vary significantly year on year. In the first nine months of 2013, our UK power stations made a loss of 59m. Energy trading is a crucial part of any energy sector. Energy is difficult to store so supply needs to be constantly balanced with demand. In the UK we have an open trading market with more than 80 participants, many far larger than the so-called Big 6, including international banks, oil & gas companies, large industrials and independent energy traders. This is a far cry from a closed, Big 6 only system where profits are made from self-trading. There is still more our industry can and must do to build trust, increase transparency, improve customer satisfaction and make energy simple and clear. npower s introduction of clearer bills, fewer tariffs and a commitment to customers through our Standards of Conduct are examples of the actions we re taking to improve customer experience. Through Energy Explained, I want to provide facts, encourage debate, and demonstrate our commitment to being open and transparent about the cost of energy. I hope this report succeeds in all of these aims. Paul Massara CEO, RWE npower

4 02 RWE NPOWER ENERGY EXPLAINED THE COST OF ENERGY Energy bill for an average UK household Without improving your home s energy efficiency: This shows the cost of a typical household dual-fuel energy bill between 2007 and 2020 if the home s energy demand remains unchanged after PROJECTED PRICE RISE IF A HOME DOES NOT INVEST IN ENERGY EFFICIENCY 363 RISE IN POLICY IMPACT ON THE BILL 1, % % % % % 1, % % % % 1, % % % % 1, % % % % % % % % RISE IN NETWORK COST IMPACT ON THE BILL KEY Policy & regulation costs Supplier costs Transportation costs Commodity & production costs 67% Chart showing changes in costs between , with four main cost elements broken out using actual 07 & 11 data and Ofgem s new notional energy consumption values for 13,15 and 20 of 13.5MWh gas and 3.2MWh electricity for an average household each year. All costs calculated using 2013 prices.

5 INSIDE THE COST OF ENERGY 03 With improving your home s energy efficiency: PROJECTED PRICE RISE IF A HOME INVESTS IN ENERGY EFFICIENCY This shows the cost of a typical household dual-fuel energy bill between 2007 and 2020 if the home s energy demand reduces in line with Government expectations. Government energy policy is aimed at significantly improving energy efficiency in households across Britain, making bills cheaper than they otherwise would have been.* RISE IN POLICY IMPACT ON THE BILL % % % % 1, % % % % 1, % % % % 1, % % % % 1, % % % % 272% RISE IN NETWORK COST IMPACT ON THE BILL KEY Policy & regulation costs Supplier costs Transportation costs Commodity & production costs 67% % 33% 50% % Chart showing changes in costs between , with four main cost elements broken out using actual 07 & 11 data and consumption values consistent with Government expectations for 13,15 and 20. The costs are calculated using 2013 prices and energy consumption falling from Ofgem s notional 2013 levels in line with DECC trends for household consumption each year to * For more information about how to save energy, visit

6 04 RWE NPOWER ENERGY EXPLAINED POLICY AND REGULATION COSTS Delivering infrastructure investment and implementing social and environmental programmes add costs to customer bills. The substantial risk caused by the continual changing of energy policy also adds significant costs to the energy industry. It s estimated that in the ten years running up to 2020, Britain needs 200 billion of investment in energy. This is how much is needed to deliver Government policy to tackle climate change and improve energy security, reducing Britain s reliance on fossil fuels and increasing the use of low carbon technologies. Even after the changes announced in the 2013 Autumn Statement, there are at least 16 separate policies and regulations that directly impact on energy bills. Usually when policy costs are discussed, the focus is solely on the one particular policy in question. However, policy costs are felt collectively it is the compound impact of all policy costs that matters, not the incremental cost of each. The impact of all these policies is expected to rise sharply between 2007 and 2020, accounting for around 300 of a typical bill by 2020, an increase of more than 270% since It is clear that these policy objectives are important to Britain s economy and wellbeing in the long term, and Government s stated assumption is that energy bills will be lower in the future than they would otherwise have been without the delivery of these policies. However, there is a question over affordability in the short term. We need a national debate to discuss how the investment needed for tomorrow can be made affordable today. The data has been re-analysed since July 2013 and updated. These costs reflect the changes announced in the 2013 Autumn Statement, due to be implemented by Government between April and August The costs of improving customer energy efficiency also use the latest data as to when costs are likely to be incurred, and assumes the full 7.6bn budget for implementing the new Energy Bill is used. This chart shows the cost of Government policy on a typical household dual-fuel energy bill at 2013 prices using Ofgem s new notional consumption of 13.5MWh gas and 3.2MWh electricity for 2013, 2015 & 2020 and Ofgem s old notional consumption of 16.5MWh gas and 3.3MWh electricity for 2007 & At least 16 Government policies and regulations, plus VAT, could impact on business or household bills: The Renewables Obligation Contracts for Difference Feed in Tariffs Ofgem s Project TransmiT The EU Emissions Trading System (EU ETS) The Carbon Floor Price The Climate Change Levy* The Carbon Reduction Commitment* The Smart Metering programme The Smart Grid programme Low carbon incentive mechanisms for networks The Energy Company Obligation (ECO) The Green Deal The Warm Home Discount Energy Efficiency Advice Provision The Capacity Mechanism. *Business energy cost only Key to chart VAT Carbon tax Supporting low carbon technologies Maintaining security of supply Improving customer energy efficiency Supporting vulnerable customers

7 INSIDE THE COST OF ENERGY 05 SUPPLIER COSTS The competitive nature of the retail energy market in Britain, as well as the intense scrutiny of energy suppliers by media and politicians, provides significant pressure to keep operating costs as low as possible. The operating costs of energy suppliers like npower cover the cost of serving customers, metering, billing and employing customer service employees, as well as the expertise needed to buy electricity and gas in the wholesale market. The expected costs and benefits of smart meters are still being debated, but it is clear that as well as driving customer engagement in their energy use, they will aid energy suppliers in giving accurate, real time data to customers. 250 Energy suppliers like npower must manage 100% of the costs associated with energy, but only have direct control over less than 20% or 250 of a typical energy bill. 5% Energy suppliers made an average of 18 profit per household in 2007, an average - 5 loss in 2011, but aim to make an average of 5%. Key to chart Operating costs excluding smart meter roll out Introduction of smart meters Profit These costs making up less than 250 of a typical energy bill are the costs that an energy supplier like npower can directly control. Alongside operating costs, the cost of implementing the Government objective of putting smart meters in every home by 2020 also falls on energy suppliers. It is this cost that is driving the increase in supplier costs to Using Government estimates for the costs and benefits of smart meters, we estimate there will be a net cost of 28 per customer by The benefits of lowered usage are reflected in the cost predictions for homes investing in energy efficiency on p3 & p12. The profit margin energy suppliers make varies each year, but the larger companies aim to make a 5 per cent margin to reflect the significant financial risks taken in providing a reliable energy supply This chart shows the impact of energy supplier operating costs on a typical household dual-fuel energy bill at 2013 prices using Ofgem s new notional consumption of 13.5MWh gas and 3.2MWh electricity for 2013, 2015 & 2020 and Ofgem s old notional consumption of 16.5MWh gas and 3.3MWh electricity for 2007 &

8 06 RWE NPOWER ENERGY EXPLAINED TRANSPORTATION COSTS Most energy suppliers, including npower, do not own the wires or pipes used to transport the gas and electricity we supply to our customers. This job is done by the transmission and distribution network companies, with the supplier charged a fee by the network company for the use of their systems. Energy networks are natural monopolies and are therefore regulated by Ofgem. Network companies charge energy generators and suppliers for using their networks, within an overall framework agreed with Ofgem. Supply companies are notified of the detailed charges they will incur each year, though actual charges can generally be altered by network companies with only forty days notice. Charges depend on how frequently networks are used, how much power is transported, and the distance covered by the network from generation source to centre of demand. Customers in different parts of the country will therefore be charged different amounts for the cost of distribution and transmission. Since our July 2013 report, the network companies have produced new business plans showing an updated view of future costs. Ofgem s view is that these will remain broadly flat in real terms going forward. These plans also show that network operators expect a profit margin or return on their investments of around 7% each year. Transportation costs account for 25% of an average household energy bill, compared to 18% for costs from energy suppliers The cost of transporting energy will account for 301 of the average household energy bill by ~7% The network companies expect a profit margin or return on their investments of around 7 per cent each year as approved by Ofgem. 233 Key to chart Use of distribution network charge Use of National Grid charge Use of national gas network charge Gas storage costs Balancing and other charges This chart shows the impact of energy transportation costs on a typical household 100 dual-fuel energy bill at 2013 prices using Ofgem s new notional consumption of 13.5MWh gas and 3.2MWh electricity for 2013, 2015 & 2020 and Ofgem s old notional consumption of 16.5MWh gas and 3.3MWh electricity for 2007 &

9 INSIDE THE COST OF ENERGY 07 COMMODITY AND PRODUCTION COSTS Extracting and producing natural gas and generating electricity isn t just the province of the so-called Big Six energy companies. Britain imports a large proportion of its natural gas from a global market. There are more than 20 companies involved in operating power stations, and more than 80 participants in the UK wholesale energy markets. All commodity markets, from apples to energy, have prices that fluctuate over time due to changes in supply and demand. However energy, and particularly electricity, has the added complexity that it is difficult to store. The need to perfectly balance supply with demand at all times creates the need for a wholesale energy trading market and keeps prices lower than they might otherwise be. The wholesale price of electricity is set by the way power stations are ordered to produce electricity to meet demand at any given time. Britain s electricity market runs on the principle that the cheapest or least flexible power stations will run first, creating a merit order, with increasingly expensive power stations producing power at a later stage as demand increases. In this way, the overall wholesale price of electricity at any given time is decided by the so-called marginal plant the last power station that has been called upon in the merit order to meet the current demand. This market mechanism ensures that the required amount of electricity is produced in the cheapest way possible, giving the lowest possible wholesale price of electricity for the UK market. Gas is produced by oil & gas companies and sold on global wholesale markets. These wholesale prices tend to be very similar across Europe because the markets are interlinked with pipelines and transportation networks. However the retail price in different countries varies considerably. A country s position in a league table of retail prices can therefore be a useful indicator of the practical health of that country s energy market. This chart shows the predicted impact of commodity and production costs on a typical household dual-fuel energy bill at 2013 prices using Ofgem s new notional consumption of 13.5MWh gas and 3.2MWh electricity for 2013, 2015 & 2020 and Ofgem s old notional consumption of 16.5MWh gas and 3.3MWh electricity for 2007 & This data is sourced from Government s central projections with the policy costs of carbon removed. *Vaasaett data, Dec Lowest prices in Europe Britain has the lowest retail gas prices in Europe, second only to Belgium and Luxembourg, and retail electricity prices 10 per cent lower than the EU average* ,000,000,000 invested RWE has invested over 6 billion into the UK since 2007, including nearly 3 billion in new renewable energy generation. Key to chart Electricity costs Gas costs

10 08 RWE NPOWER ENERGY EXPLAINED WHO POWERS THE POWER STATIONS? Building a power station of any type is a huge investment in time, money and expertise. A single offshore wind farm, like the one RWE Innogy is helping its partners to commission at Gwynt y Môr in North Wales, or a gas-fired power station like the one RWE npower commissioned in Pembrokeshire in 2012, each cost more than 1,000 million. Investment in energy provides Britain with modern infrastructure that drives local economies and provides jobs and taxes. However, these benefits are only made possible by shareholders or other investors who commit funding on the expectation that their investment will be repaid and they will make a reasonable profit over the power station s lifetime. Before a positive return on the original investment can be made, the total income over the lifetime of the plant must be sufficient first to repay the cost of development and construction, as well as the fixed and variable cost of operating the plant. In a similar way to a personal investor expecting a higher return when investing in stocks and shares compared to a savings account, investments in infrastructure projects will only be attractive if the return expected is better than that of other lower-risk investments that could be made with the same capital. The profit a power station makes in any single year depends on the balance between the income it makes and the costs it incurs. Some costs such as taxes or employee salaries are fixed and will be incurred whether the power station operates or not. Other costs such as how much fuel is needed and the cost of that fuel vary with how much the power station operates. If a power station cannot cover these costs from the income it receives, it will make a financial loss and may be forced to close. The income a power station makes is dependent on the amount of power it can sell and the price it can sell it for. Some power station technologies receive further income via subsidy schemes that supplement their income to help cover their higher costs. Other power stations only operate at times of the highest energy demand and must recover their costs from very short periods of operation. Energy has increasingly become highly politicised and continual change to the elements of cost and income for power stations is becoming the norm. This is adding to the already unpredictable nature of energy costs and will impact on the appetite of investors to place their money into energy infrastructure. A 1,000,000,000 mortgage? A major power station can represent an investment of 1 billion. If we took out a high street mortgage to provide that 1 billion, we d need to pay more than 6 million each month to cover the interest costs and repayment of the loan (at 5% interest rate over 20 years). In reality, the construction and operation of a new power station is a far riskier prospect for investors than a high street mortgage. The financial lifecycle of a power station Money out Money out Money in Money in Money out DEVELOPMENT CONSTRUCTION OPERATION 1st 10 years: OPERATION 2nd 10 years: DEMOLITION 3 5 years 2 4 years 20 years 2 years

11 INSIDE THE COST OF ENERGY 09 WHY ENERGY TRADING? Across Britain, energy companies like npower have millions of customers that rely on their supplier to provide them with electricity and gas. When it comes to heating, gas is key. However, npower doesn t own the facilities to extract or produce gas, so we obtain all of the gas we supply to our customers enough to fill nearly 1.5 million hot air balloons each year on the open market from the many gas producers around the world for the cheapest price achievable. There s no possibility of self-supply. 80 participants There are more than 80 participants in the UK s wholesale energy market, including international banks, oil companies, large industrial buyers and independent energy traders. Many are much larger than the so-called Big 6 energy suppliers. The wholesale price of gas can fluctuate significantly minute by minute, as supply and demand and others factors take effect. To make sure suppliers get the lowest prices they can, and to ensure they can source enough gas to match customer demand at any particular moment, suppliers can t simply rely on buying the gas customers require at the moment they require it. Instead, expert teams plan as far in advance as possible. The biggest factor affecting how much gas customers will demand is also the most difficult to predict: the weather. This is one of the main reasons that energy trading exists at all. Over a period of up to three years, a suppliers energy traders contract ahead and gradually adjust and readjust their buying and selling positions according to their estimates of customer demand in the future. It is sometimes said that energy companies buy energy three years in advance, so would simply be able to plan a way around any Government-controlled price freeze. This is not true. We buy a proportion of the energy our customers will need up to three years ahead, but trying to buy all of it that far ahead would not make economic sense. This process is called hedging gradually contracting the energy customers will need for a given period days, weeks, months and years in advance to help smooth out the volatile wholesale costs. In this way customers get predictable prices that are as low as can be achieved, instead of highly unpredictable prices that fluctuate frequently. It s also often assumed that the energy wholesale markets are the exclusive province of the so-called Big 6, and that profits are made or hidden by companies self-supplying. This is also not true. The UK energy market has more than 80 active participants, including international banks, oil companies, large industrial buyers and independent energy traders. Any kind of self-supply or market manipulation by any party would simply not be accepted by these major international participants. The wholesale gas market The Wholesale Market Energy companies Industrial buyers Oil and gas producers Oil companies International banks Independent energy traders Energy suppliers Customers

12 010 RWE NPOWER ENERGY EXPLAINED HOW DO WE PRICE? There are more than 30 energy supply companies in Britain. How these companies set the price of their product is often misunderstood, even though it is similar to the way pricing decisions are made for many other products and services. Unlike many industries however, energy suppliers like npower control less than 20 per cent of the total cost of their product, yet are financially exposed to 100 per cent of the costs. Energy suppliers look at the different costs they will encounter when supplying energy and then judge how these cost elements are likely to develop in the future. Suppliers then set a price to reflect these costs and their competitive strategy, and add a desired profit margin that takes into account the financial risks. Currently suppliers aim for a profit margin of around 5 per cent. Supplier costs Supplier costs are the only part of the bill that they can control directly. They are discussed in more detail on p5. These costs make up around 18 per cent of the total bill. Transportation costs The cost of transporting electricity and gas across the National Grid and regional distribution networks is regulated by Ofgem, and managed by the seven electricity distribution companies, five gas distribution companies, and National Grid. They are discussed in more detail on p6. Network companies charge energy generators and suppliers for using their networks within an overall framework agreed with Ofgem over a number of years. Supply companies are notified of the detailed charges they will incur each year. Currently charges can be changed by network companies at just 40 days notice, making it difficult for supply companies to plan ahead efficiently. Suppliers also have to pay a share of National Grid s balancing costs when it becomes necessary to buy and sell energy at short notice to match demand. As this report shows, transportation costs amount to around 25 per cent of the bill, meaning suppliers like npower have to deal with substantial uncertainty in financial planning. Commodity and production costs The cost of buying energy from the wholesale market makes up the largest part of a customer s energy bill around 15% of the total dual-fuel bill is the commodity cost of electricity and 27% is the commodity cost of gas. This is explained in more detail on p7-9. All commodity markets can be volatile, with prices changing throughout the day. Sometimes prices change considerably in a short time, due to weather, global events, or an unexpected shortage of supply. Supply companies smooth out this price volatility by hedging buying blocks of electricity and gas days, weeks, months and years in advance of when it will be needed ensuring that the lowest price possible is paid for the energy that customers use. This process means suppliers are able to insulate customers from short-term price spikes. However, a sustained period of rising or reducing prices will be reflected in the retail price suppliers charge their customers. Energy suppliers don t publish their hedging strategies in a highly competitive market, this is commercially sensitive information. Policy costs There are at least 16 separate Government policies that directly impact on energy bills, as well as VAT. These policies are listed in more detail on p4. Some costs are directly determined by Government, whilst some, like the cost of energy efficiency schemes, are partly determined by the policy itself. In the case of the Energy Company Obligation (ECO), large energy suppliers are set a target of how many measures they have to deliver and how much carbon those measures must save. The companies must then achieve these targets in the most cost effective way they can in a competitive environment. Policy costs are spread out uniformly across customers meaning all households pay the same amount on their unit rate to support these policies. All households also have to pay a flat rate of 5 per cent VAT on their bills, broadly similar to the rate suppliers aim to make as a reasonable profit.

13 INSIDE THE COST OF OF ENERGY 011 Electricity Gas The wholesale and retail markets Physical delivery Physical delivery The wholesale and retail markets 20+ power station operators 100s of gas production companies globally 80+ participants Wholesale Market 80+ participants Wholesale Market 30+ energy supply companies Supply Companies Distribution 7 companies Networks 5 companies Distribution Networks 30+ energy supply companies Supply Companies Business Homes Homes Homes Homes Business THE WAY ELECTRICITY AND GAS GETS TO HOMES AND BUSINESSES ACROSS THE COUNTRY The physical delivery of electricity and gas is performed by a number of regulated network companies. The production and supply of electricity and gas to homes and businesses through competitive wholesale and retail markets has many more than six participants.

14 12 RWE NPOWER ENERGY EXPLAINED DATA TABLE A typical household dual fuel energy bill (at 2013 prices) Data July 2013 Updated Data Jan 2014 Energy consumption basis Old Notional* Old Notional* Old Notional* New Notional* Energy Efficient** Government energy policy & regulation costs Tax Carbon tax Supporting low carbon technologies Maintaining security of supply Improving customer energy efficiency Supporting vulnerable customers HMG funded Universal Electricity Rebate Total Supplier Costs Operating costs exc Smart Introduction of smart meters Profit Total Energy transportation costs Use of distribution network charge Use of National Grid charge Use of national gas network charge Gas storage costs Balancing and other charges Total Commodity & production costs Electricity costs Gas costs Total Total *Ofgem revised their notional average household energy consumption at the end of 2013 from 16.5MWh to 13.5MWh for gas and from 3.3MWh to 3.2MWh for electricity. ** Based on DECC trends for household consumption each year to Gas consumption reducing to 13.0MWh in 2015 and 12.2MWh in 2020, and electricity reducing to 3.0MWh in 2015 and 2.6MWh in 2020 due to their policy intervention. RPI adjustments have been used as follows: 2007: 1.09, 2011: ; 2015: 0.945; 2020: 0.83.

15 INSIDE THE COST OF ENERGY 13 NOTES & ASSUMPTIONS Element of bill General Consumption VAT Energy Efficiency Obligations (e.g. ECO, CERT / CESP, etc) Social Obligations (e.g. Warm Homes Discount) FiT Capacity Mechanism Renewable Obligations / CfD Carbon Support Cost EU ETS & Carbon Cost Distribution and Transportation Network charges, and Balancing costs (DUoS, TNUoS & BSUoS) Commodity costs (net purchase cost) Operating Costs (excl Smart meters Cost to Meter (smart meters) Margin Basis / Source(s) RPI factors consistent with July report, and taken from Networks quoted assumptions to align all periods to 2013 real costs. RPI projections deduced from multiple sources (GILTs and HM treasury data). In the treatment of demand destruction, it is assumed the only costs to fully vary with consumption are commodity costs, maintaining security of supply, carbon tax, profit, VAT. Old notional: Power 3300 kwh & Gas 16500kWh average based on 2013 OFGEM notional average figures. New notional: Power 3200kWh & Gas 13500kWh updated from 1 Jan 14 by OFGEM following consumption trends review Demand destruction: % fall calculated based on DECC Annex C final energy demand Sept 13 published figures for total UK consumption (domestic sector). Standard VAT rate of 5% prevails across all future periods 2013 costs based on 1.7bn industry cost pa (NERA 2013 report). DECC report to Sept 13 suggests c 50 average for 2013 but we expect a ramp up in Q4 13 volumes and costs. Power / gas split based on DECC Mar 13 indications, though split may differ slightly across Big 6 depending on their base volume market share per fuel cost takes 69 average DF cost, less 31 ECO average annual cost programme savings to Mar 17 following Government Autumn statement proposals to scheme 2020 costs of 77 assume scheme costs revert back to 1.7bn post Mar 17 and increase by 20% by 2020 (more expensive measures and search costs). This cost is reduced by DECC s assumed growth in UK housing stock by 2020 to 53m Class 1 meters. Data from DECC March 13 bill impacts report for 2020 of 1.5MWh which uses 4.5MW and 16.6MW consumption per account assumptions and 2015 based off published DECC targets of 1.13bn (for UK industry with 250k accounts or higher) over 4 years to 2014/15 fiscal year c 300m/49m accounts = 6/acc Removal of obligation from energy bill via universal rebate from Autumn 2014 for two years as per Government Autumn 2013 Statement. DECC March 2013 bill impacts report data for 2013 and 2020 used data not in public domain so assumed linear ramp up to 2020 from Our internal estimate of 10/MWh by Figure published for 2013 of 8.2/ MWh. For 2020 DECC bill impacts report shows 13/MWh. From 2014 suppliers can choose a mix of RO or CFD and from 2018 onwards only CFDs continue. Therefore for 2015 assume 1/MWh for early CFDs. Also for 2015 RO assume linear growth of charge difference from occurs from 2014 to 2017, then stays flat to 2020 (as no new sites under RO from 2018). This leads to 11.8/MWh estimate for DECC and Government budget statements available for years 2013 through to DECC Sept 13 published Updated short-term traded carbon values for policy appraisal used to obtain / tc02 forecasts in total by year through to 2020 Applied a 0.4 conversion factor into /MWh. Whilst network charges are broadly flat in real terms where customer usage is unchanged from 2013, if demand reduces as expected then network charges become an increasing component of the customer bill as network companies seek a fixed income to cover their fixed assets. Our view of historic 2013 gas transport costs is based on published tariffs. These tariffs have been applied to the old notional volume reference point (16,500kWh) to illustrate the charges faced by a typical customer. Given the fixed nature of allowed revenues for gas network operators, we have held this assumption flat at new notional consumption on the basis that the same cost is recovered from a typical customer. An individual with lower consumption may see lower gas transport costs prices are based on official OFGEM published prices by region as released in April 13; Indicative prices for 2015 are also produced by OFGEM; Costs for 2020 closely align to DECC s estimation balancing costs are based on published data. For 2015 and 2020 there are no references available so we have assumed a flat trajectory a on real time basis to EU ETS & carbon cost elements deducted from total energy cost to leave net purchase cost. Broker curves used as at end of October for baseload rates, with 8.4% line loss for electricity accounts made up of 1.4% transmission line loss (according to Ofgem), and 7% line loss for distribution (collated by Energy Network Operators) 2.4% electricity demand shape cost added to the cost as per Elexon estimates Method for costs is consistent with OFGEM s approach for their monthly SMI reporting, using an 18 month ahead buying pattern 2020 cost derived from DECC updated Sept 13 central price growth % assumptions between 2015 and 2020, net of any carbon price support assumed increases. Supplier costs comprise all costs to compete, serve and metering, including apportioned central support costs Consolidated Segmental submissions from all suppliers for 2012 used to compute metering and operating costs in total. This was then presumed to be flat in future years on a real time basis as no definitive third party forecast is available. Adopted DECC March 13 Bill Impact figures of 0.4/MWh for power and 0.1/ MWh for gas at 2012 real prices for 2013 trial costs 2020 costs are assumed to be post implementation phase costs and are net of assumed customer benefits of c 23/ DF account. The net costs are much higher than DECC 6/DF account cost estimates for 2020 as involves more tasks and less perceived benefit compared to DECC Q Impact Assessment assumptions 2015 is a linear interpolation of the 2013 and 2020 costs, assuming implementation remains steady over the rollout period. Forecast margins based on assumed acceptable supply market margins of 5%, delivered equally on each fuel. Recent OFGEM segmental results shows an average of c4 4.5%. Other notes Margins equalised across fuels to show no bias, though in years with cold spells gas profits may inflate. OFGEM use 4000kWh for power and 16900kWh for gas in SMI reporting. FT article 6 May 13 Energy UK statement suggests 1.7bn or 69/ DF acc for ECO1. Introduced from 2017 onwards so only affecting 2020 in table. Gas affected by oil backwardation forward curves and power impacted by changes in charging mechanism from Costs in total match back to external sources but splits more implicitly derived. SMART programme estimate c 15 20/acc annual cost.

16 0a RWE NPOWER ENERGY EXPLAINED RWE npower Windmill Hill Business Park Whitehill Way Swindon Wiltshire SN5 6PB United Kingdom T +44 (0) I