Under the CERT scheme, energy giants could be fined 10 per cent of global turnover if they fail to meet energy saving targets
Insulation is meant to save you money, but it could end up proving very costly indeed for the UK's largest energy companies.
Here is a nice dose of schadenfreude for those among you who are less than keen on the Big Six energy companies (given energy companies are currently jostling with the unholy trinity of journalists, politicians and estate agents for the title of Britain's most loathed, that means pretty much everyone).
By my back-of-an-envelope calculations, regulator Ofgem could, by the end of next year, be allowed to level fines of somewhere between £3bn and £4bn on the UK's largest energy firms. Although the final figure could, in fact, be much, much higher.
Under the rules of the mandatory Carbon Emission Reduction Target (CERT) scheme, the Big Six have until December 2012 to fund domestic energy efficiency measures capable of saving up to 293 million tonnes of lifetime CO2 emissions by December 2012.
According to a recent report from Ofgem, they are in serious danger of falling a long way short of the target and need to pretty much double the current rate of deployment for domestic insulation measures from 100,000 to 200,000 a month if they are to make it. As energy and climate change secretary Chris Huhne put it today, they need to "pull their finger out".
The standard response to an ultimatum is to ask, "What is going to happen if I don't do as you say?" Well, that is where this story gets interesting – or scary if you are an investor in an energy company.
According to DECC, the legislation underpinning the CERT scheme means that "failing to meet the Carbon Emissions Reduction Target places an energy supplier at risk of being fined by Ofgem up to 10 per cent of its global turnover".
You did read that right – 10 per cent of their global turnover.
Let's start with the most conservative estimates of what the liability could be. Recent figures on energy sales from Ofgem show that in the past year RWE npower posted revenues of £6.2bn, Scottish Power hit £3.5bn, EDF made £6.3bn and E.ON reached £6.6bn. On the same day Centrica released results confirming that British Gas revenues for 2010 stood at £12.7bn. Meanwhile, Scottish and Southern Energy's (SSE) consolidated annual results for the year to the end of March 2011 showed revenues of £28.3bn, although that included generation activity. Add that little lot up and you have £63.6bn – 10 per cent of which is £6.36bn.
The figure would be lower if you just focus on energy retail sales and strip out SSE's other activity, taking my guestimate back to between £3bn and £4bn - but that remains a pretty conservative estimate. The key words are "global turnover". As countless commentators have observed, our energy infrastructure is owned by a handful of foreign firms, which raises the question as to whether the fines are confined to UK operations or can be extended to the German, French and Spanish parent companies that control most of the Big Six. The wording of DECC's statement today hints at the later, but according to Ofgem the fines could only be levelled against the global turnover of the retail arms that are covered by CERT obligations, not the global turnover of the entire groups.
This would limit the fines somewhat - as just one example, Ofgem said RWE npower generated revenues of £6.2bn last year, but Germany-based RWE Group recorded total turnover of €53.3bn. However, it still raises the prospect of fines being calculated against some international sales, and even if fines are based solely on retail energy sales there is the potential for them to run to billions of pounds.
Of course, the chances of Ofgem pursuing all the fines it would be entitled to are slim to none. If the energy companies miss the CERT targets, they will immediately launch an intensive lobbying campaign insisting they got very close to the overall goal, accusing the government of shifting the goal posts throughout the scheme (which it did in order to make the scheme more robust and stop energy firms gaming the system by dishing out millions of energy-efficient light bulbs that people did not really need), and arguing that they desperately need the money to invest in low-carbon infrastructure.
Ofgem was also at pains to stress that any fines would be a "last resort" and that, under the rules, the watchdog would first issue an order calling on energy companies to step up efforts to meet the targets. Only if that failed would they then launch an investigation that could result in fines.
However, the potential for large fines gives Ofgem and DECC another stick to prod the Big Six with, and given that Chris Huhne has spent most of the past three months kicking the energy giants about price rises, dubious sales practices, and now slow progress on energy efficiency, he might just be inclined to use it.
It is possible to envisage a scenario where, come 2013, a government with an election round the corner could be tempted to slap massive fines on energy companies that have failed to meet energy efficiency targets at the same time as cranking up prices. It could even make such a move more populist still by reinvesting the money raised through the fines in the multibillion-pound grid upgrade programme Ofgem has to oversee if we are ever to deliver low-carbon energy infrastructure.
This is all entirely hypothetical, and over the years the Big Six have shown an uncanny ability to wriggle off the hook when threatened with large fines. Moreover, they would be entirely justified to argue that we need to better support their efforts to invest in energy efficiency and low-carbon generation if we are to meet the UK's renewable energy and emissions targets.
But the risk is there and I'd argue it would be in the interests of both the Big Six and the country as a whole for them to urgently accelerate their energy efficiency programmes and ensure the CERT targets are met, rather than again test the watchdog's resolve to impose fines that it would be perfectly entitled to level.