REG - SSE Plc - Preliminary results for the year to 31 March 2015 <Origin Href="QuoteRef">SSE.L</Origin> - Part 3
15/07/2015 18:29
- Part 3: For the preceding part double click ID:nRST7125Nb
Conclusion
Creating sustainable, long-term value from wholesale markets for SSE and its customers is at the heart of SSE's Wholesale
businesses. The responsible production, storage and delivery of energy and related services; a focus on meeting the needs
of its customers; ongoing rigour in the development and delivery of new, and re-evaluation of existing, assets to optimise
its portfolio, mean that SSE's activities across its Wholesale businesses continue to support the group's core purpose and
first financial objective of annual growth in the dividend payable to shareholders.
NETWORKS
Networks Key Performance Indicators
Mar 15 Mar 14
ELECTRICITY TRANSMISSION
Operating profit* - £m 184.1 136.7
Regulated Asset Value (RAV) - £m 1,732 1,330
Capital expenditure - £m 467.2 349.2
Connection offers provided in required period 97 54
ELECTRICITY DISTRIBUTION
Operating profit* - £m 467.7 507.0
Regulated Asset Value (RAV) - £m 3,159 3,050
Capital expenditure - £m 327.6 308.3
Electricity Distributed TWh 39.6 40.4
Customer minutes lost (SHEPD) average per customer 69 77
Customer minutes lost (SEPD) average per customer 57 67
Customer interruptions (SHEPD) per 100 customers 70 75
Customer interruptions (SEPD) per 100 customers 60 68
SCOTIA GAS NETWORKS
Operating profit* (SSE's share) - £m 285.0 276.6
Regulated Asset Value (SSE's share) - £m 2,459 2,440
Capital and replacement expenditure (SSE's share)- £m 169.9 160.9
Uncontrolled gas escapes attended within one hour % 98.7 98.7
SGN gas mains replaced - km 1,042 1,088
Owning, operating and investing in Networks
The performance of SSE's economically-regulated electricity networks businesses is reported within Networks, as is the
performance of SGN in which SSE has a 50% stake.
Economically-regulated network companies with a growing Regulated Asset Value
SSE has an ownership interest in five economically-regulated energy network companies:
· Scottish Hydro Electric Transmission (100%);
· Scottish Hydro Electric Power Distribution (100%);
· Southern Electric Power Distribution (100%);
· Scotland Gas Networks (50%); and
· Southern Gas Networks (50%).
SSE estimates that the total Regulated Asset Value (RAV) of its economically-regulated businesses is £7,350m, up £530m from
£6,820m at 31 March 2014, comprising around:
· £1,732m for electricity transmission;
· £3,159m for electricity distribution; and
· £2,459m for gas distribution (being 50% of SGN's total RAV).
SSE is the only energy company in the UK to be involved in electricity transmission, electricity distribution and gas
distribution. Through Price Controls, Ofgem sets the index-linked revenue the network companies can earn through charges
levied on users to cover costs and earn a return on regulated assets. Although the Price Control mechanism is complex and
demanding, these lower-risk, economically-regulated, geographically-defined businesses provide a financial backbone and
operational focus for SSE and balance its activities in the competitive Wholesale and Retail markets.
The Networks businesses are core to SSE's strategy in the short-, medium- and long-term but they face challenges of
increasing scale and complexity in the years ahead. To ensure they get the level of senior management input they need to
address those challenges, the leadership of these businesses was re-shaped in December 2014, including the appointment of a
new Managing Director.
Financial performance in Networks
During 2014/15 operating profit* in Networks was £936.8m, contributing 49.8% of SSE's total operating profit. This
comprised (comparisons with the same period last year):
Networks Operating Profit Mar 15 Mar 14 Mar 13
Transmission operating profit* - £m 184.1 136.7 92.6
Distribution operating profit* - £m 467.7 507.0 511.6
SGN operating profit* (SSE's share) - £m 285.0 276.6 234.1
Total Networks Operating Profit* - £m 936.8 920.3 838.3
Electricity Transmission
Mar 15 Mar 14
Operating profit* - £m 184.1 136.7
Regulated Asset Value (RAV) - £m 1,732 1,330
Capital expenditure - £m 467.2 349.2
Connection offers provided in required period 97 54
Increasing operating profit* for Scottish Hydro Electric Transmission
In SHE Transmission, operating profit* increased by 34.7% to £184.1m. This reflects the increase in regulated revenue as a
result of the major programme of capital investment undertaken in recent years. Since the current RIIO T1 Price Control
started in April 2013, SHE Transmission's capital investment has totalled £816.4m. For 2015/16 as a whole, SHE
Transmission expects to invest over £600m, including the first full year of construction on the Caithness to Moray
transmission link.
Managing SHE Transmission through a period of rapid growth
SHE Transmission is responsible for maintaining and investing in the transmission network that serves around 70% of the
land mass of Scotland, including remote and island communities. As the licensed transmission company for an area with a
significant amount of generation from renewable sources seeking to connect to the electricity network, SHE Transmission is
required to ensure that there is sufficient capacity for projects committed to generating electricity.
As a result of the requirement to connect large volumes of dispersed renewable energy generation, SSE has committed to a
major programme of investment in electricity transmission infrastructure in the SHE Transmission area to support the
transition to lower carbon electricity generation, increase security of supply and promote economic growth.
SSE maintains a significant portfolio of work to develop and construct local connections for new generation sites across
SHE Transmission's licence area. In the year, 97 new connection offers were provided in the required period.
Delivering the Beauly-Denny line
Transmission Investment for Renewable Generation (TIRG) is a mechanism that preceded Strategic Wider Works (see below) to
provide a framework for funding large transmission projects. SHE Transmission has one project in construction under this
mechanism - the replacement of the Beauly-Denny line between Beauly and Wharry Burn, near Dunblane. It is on programme to
complete the majority of its outstanding works associated with the Beauly-Denny network reinforcement in the summer of
2015. SHE Transmission has, to date, successfully constructed 537 new towers along its section of the 220km overhead line
route and has safely energised and integrated 127km of overhead line between Beauly and Tummel Bridge substations.
In February 2014, The Highland Council served SSE with a noise abatement notice regarding the substation at Beauly. SSE
announced in August 2014 that it would invest around £2.5m in noise abatement equipment. This equipment has been installed
and SSE and The Highland Council are continuing to monitor its impact.
Construction of two remaining towers and fitting a further 16km of overhead conductor will complete the 400kV works in SHE
Transmission's area. Energisation of the final 93km section is dependent on completion of Scottish Power Transmission
works to the south of Wharry Burn, which SP Transmission reports are scheduled to be completed in November 2015. The
remaining rationalisation schemes located at Beauly, Amulree and in the Cairngorms National Park remain on course to be
completed during 2015. Works to dismantle the original 132kV overhead line and to reinstate land used during construction
are progressing with a target completion date in 2016.
Based on expenditure to date £616.3 m and known issues, including the interface with SP Transmission's section of the line,
the forecast cost is now not expected to exceed £680m. Further discussions continue to take place with SP Transmission and
Ofgem on coordination with the networks in the south of Scotland; and the timescales and full cost of completion. SHE
Transmission is in discussion with Ofgem regarding recovery of efficiently incurred costs following completion of the
construction works.
Delivering under Strategic Wider Works
SHE Transmission is now two years into the RIIO-T1 Price Control. Under this framework Ofgem recognises the requirement
for SHE Transmission to significantly expand its network over the period of the price control to facilitate the growth of
renewable generation in the north of Scotland in order to meet national renewable energy targets. The exact timing and
scale of growth can be fluid and dependent on the changing requirements of developers.
To allow these projects to be delivered in this dynamic environment, Ofgem developed the Strategic Wider Works mechanism
whereby it considers on a case-by-case basis the evidence presented by SHE Transmission to decide whether a project is
needed. It then considers SHE Transmission's proposed solution in detail, scrutinises the costs and approves funding. SHE
Transmission is currently delivering three major projects under the Strategic Wider Works mechanism:
Caithness-Moray:
In December 2014, Ofgem announced its approval of capital funding of £1,118m (2013/14 prices) for the upgrade of SHE
Transmission's network between Caithness and Moray, including a High Voltage Direct Current (HVDC) subsea cable beneath the
Moray Firth. The project will enable the connection of up to 1,200MW of additional generation capacity in the north of
Scotland and the islands. It is scheduled to be operational by the end of 2018. Contracts have now been awarded for all
main elements of the work. Enabling works are under way at converter station sites in Caithness and Moray; and at
substation sites in Caithness, Sutherland and Ross-shire. Early exploratory drilling at the Noss Head landfall of the
subsea cable in Caithness has helped to identify the optimal location to minimise risk during the installation process.
Manufacture of the specialised subsea and onshore cables required is under way. Enabling works for onshore cable
installation in Caithness are due to begin later in 2015. The first revenues will be received in 2015/16.
Kintyre-Hunterston:
Construction of the new substation building at Crossaig is complete and transformer deliveries took place in March and
April 2015. All 50 steel towers between Crossaig and Carradale have been constructed and onshore cable installation in
Kintyre was completed in April 2015. Marine cable installation and remaining onshore works at Hunterston, in conjunction
with SP Transmission, are scheduled to allow energisation by the end of 2015. Ofgem has given capital funding approval of
£207m (nominal prices).
Beauly-Mossford:
All substation and underground cable works are now complete. The replacement overhead line is on schedule to be completed
in late 2015. Ofgem has given capital funding approval of £68m (nominal prices) for the works.
Working on future transmission links
SHE Transmission has a number of further projects at advanced stages in the development process. These projects will be
submitted for consideration by Ofgem once the necessary conditions are in place to support a needs case.
Western Isles:
SHE Transmission continues to work with all stakeholders on the development of grid links to the Scottish Islands,
particularly through the work of the Scottish Islands Renewables Delivery Forum. In order to enable generation developers
to commit to funding island connections, the UK and Scottish Governments are actively working on the delivery of an
islands onshore wind strike price with associated budget allocation. The UK Government is expected to confirm the position
(including EU State Aid approval) this summer, enabling developers to bid for CfDs in the auction scheduled to open in
October. SHE Transmission already has well-developed proposals for a cable connection between Beauly and the Isle of
Lewis. Work is under way with Ofgem to allow submission of a needs case in December 2015 to enable delivery of this
potential project.
Shetland:
The delivery of a transmission connection between Shetland and mainland Scotland is subject to the same conditions that are
being addressed through the work of the Scottish Island Renewables Delivery Forum. As in the case of the Western Isles
connection, SHE Transmission has a well-developed proposal for the installation of an HVDC circuit between Noss Head in
Caithness and Upper Kergord in Shetland. An option exists with a preferred supplier to deliver the cable within generation
developers' timescales. Subject to resolution of the policy issues affecting island generators, SHE Transmission is
working with Ofgem to prepare a needs case for submission in December 2015 to allow timely delivery of the connection.
East Coast:
SHE Transmission is planning to undertake works on the existing 275kV East Coast Transmission line to increase the capacity
available from these circuits. The line runs from Blackhillock in Moray to Kincardine in Fife. Development of a needs
case submission is under way for what is envisaged to be the first phase of works. This will also consider the optimal
timing for longer-term investment to upgrade the assets to 400kV as further generation is connected.
SHE Transmission has a number of additional potential SWW reinforcements at earlier stages in the planning and development
process. It continues to work with communities and other interested parties to identify the best available options to
progress the necessary consent applications in order to meet the needs of generators.
Responding to proposed regulatory changes for electricity transmission
In its Final Conclusions on Integrated Transmission Planning and Regulation (ITPR) published in March 2015, Ofgem confirmed
its position on significant changes proposed to the regulation of electricity transmission, and that it will take steps to
implement:
· an enhanced role for the System Operator in identifying system needs and development of options to meet them;
· measures to mitigate the conflict of interest with the System Operator's role;
· a broad framework for the regulation of transmission asset delivery; and
· expanded use of competitive tendering where Ofgem believes it can drive efficiency, with a focus on new substantial
assets that can be easily identified and separated from the surrounding network.
Ofgem issued its formal consultation on the licence modifications to enhance the role of the System Operator and mitigate
arising conflicts of interest in April 2015, with these modifications currently envisaged to take effect later this year.
The other changes remain subject to further, more detailed development by Ofgem and DECC (the Department of Energy and
Climate Change). SHE Transmission will continue to engage with these parties as their proposals develop in order to
understand at the earliest opportunity the potential impact on SHE Transmission's future investment programme.
Supporting sustainable growth
SHE Transmission is committed to maximising the positive economic and social impact of its work and the lasting benefits it
can deliver for the communities it works in. In the course of the efficient delivery of its construction programme, it
actively promotes opportunities for the local supply chain and supports a diverse range of training and employment
opportunities in the local and regional economies. To measure and enhance its impact, SHE Transmission has commissioned
work which showed that the Beauly-Denny project is delivering Gross Value Added for the UK of around £528m (2010 prices)
and has supported an average of 2,000 jobs each year over seven years.
Electricity Transmission priorities for 2015/16 and beyond
For SHE Transmission, the core activity for the rest of this decade will be construction. Against this background, its
priorities for the rest of 2015/16 and beyond are to:
· meet key milestones in projects under construction, in a way that is consistent with all safety and environmental
requirements;
· provide an excellent service to all generation and demand customers who rely on its network;
· continue to implement the new operational regimes for the 2013-21 Price Control and maintain high levels of system
availability;
· work within the changing policy and regulatory framework and, where appropriate, achieve regulatory approval for new
links in an efficient and timely manner;
· make progress with projects in development, including implementing the programme of consulting with, and updating,
interested parties;
· maintain and develop effective stakeholder relationships; and
· ensure it has the people, skills, resources and supply chain relationships that will be necessary to support
growth.
Electricity Distribution
Performance in Scottish and Southern Energy Power Distribution (SSEPD)
The performance of SSEPD's two electricity distribution companies, Scottish Hydro Electric Power Distribution (SHEPD) and
Southern Electric Power Distribution (SEPD), during the year to 31 March 2015 was as follows (comparisons with the same
period in 2014):
ELECTRICITY DISTRIBUTION Mar 15 Mar 14
Operating profit* - £m 467.7 507.0
Regulated Asset Value (RAV) - £m 3,159 3,050
Capital expenditure - £m 327.6 308.3
Electricity distributed TWh 39.6 40.4
Customer minutes lost (SHEPD) average per customer 69 77
Customer minutes lost (SEPD) average per customer 57 67
Customer interruptions (SHEPD) per 100 customers 70 75
Customer interruptions (SEPD) per 100 customers 60 68
In a year of relatively mild weather which included several periods of high winds affecting in particular the north of
Scotland, SSEPD's networks achieved a reduction in both the number of supply interruptions and the average time each
customer was without power.
The decrease in operating profit principally results from a reduction in revenue across the two networks compared with
2013/14 and higher ongoing depreciation charges.
If, in any year, regulated networks companies' revenue is greater (over recovery) or lower (under recovery) than is allowed
under the relevant Price Control, the difference is carried forward and the subsequent prices the companies may charge are
varied. In 2013/14 the two networks over-recovered regulated revenue by £25m and this was reflected in the 2014/15
tariffs. During 2014/15 there was an under recovery of approximately £38m, meaning the year on year comparison has been
impacted by around £63m as a result of timing of revenue collection. Due to a change in the regulatory framework the £38m
under recovery in 2014/15 will not be reflected in customer charges until 2016/17.
Volume of electricity distributed
The total volume of electricity distributed by the two companies in the year to 31 March 2015 was 39.6TWh, compared with
40.4 in the previous year. Under the electricity Distribution Price Control for 2010-15, the volume of electricity
distributed does not affect companies' overall allowed revenue (although it does have an impact on the timing of revenue
collection).
Investing in distribution network resilience
Capital expenditure in electricity distribution networks was £327.6m in the year to 31 March 2015, taking the total for the
2010-15 Price Control to £1,441m. The RAV of SSE's electricity distribution networks at the end of the 2010-15 price
control is estimated at £3,159m.
SSEPD's network in the north of Scotland includes 111 subsea distribution cables which are critical to serving customers in
59 island communities. During 2014/15, SSEPD invested £6.9m in the replacement of the cable connecting the Scottish
mainland with Jura, which also supplies the islands of Islay and Colonsay. It expects to complete remaining work to
protect the new cable during 2015. It has engaged actively with the development of Scotland's National Marine Plan to
ensure that marine licensing arrangements recognise the interests of customers in a secure and cost efficient energy
network serving the islands.
Investment also included the widespread roll-out of innovative new technology capable of delivering significant benefits to
customers. For example, during 2014/15 SSEPD installed 2,100 Bidoyng smart fuses on its low voltage networks. Under
certain fault conditions, the smart fuse allows automatic restoration of customer supplies within three minutes. It also
allows faster and more efficient location of underground cable faults and can allow detection of imminent faults before
they result in unplanned power interruptions. SSEPD is currently the largest user of this technology in Great Britain,
reflecting its commitment to the timely application of innovations that enhance customer service and deliver operational
efficiencies.
Responding to feedback from customers
SSEPD recognises the particular importance of its performance when exceptional weather events cause widespread disruption
to customer supplies. Following extensive consultation in the first half of 2014 and via constructive engagement with DECC
and Ofgem storm reviews, SSEPD's 'Reconnecting with Customers' initiative has resulted in faster electricity supply
restoration, enhanced customer welfare support and clearer communications during storm events.
These improvements were recognised by stakeholders following exceptional weather events which affected the north of
Scotland during 2014/15. The most recent of these events occurred in early March 2015 and resulted in the fastest ever
restoration of supplies following a 'Category 2' event in the north of Scotland, with over 110 high voltage faults tackled
and all customers' supplies restored within 24 hours. SSEPD has also heavily promoted its Priority Services for vulnerable
customers and worked with other agencies to identify customers with medical or other needs that require special attention
during a power outage.
In addition it has invested in improved customer communications by:
· further developing the industry-leading Power Track app, which gives real time information on outages by postcode;
· introducing a new rolling news website for up-to-the-minute information during storms; and;
· delivering more and earlier information through customer contact centres and social media channels about power
restoration times.
SSEPD remains focused on listening to its customers and delivering continuing improvements, both to the resilience of its
network and to the service it provides when power cuts occur. This work is in line with the new RIIO-ED1 price control,
under which financial incentives for customer satisfaction will be an increasingly significant contributor to revenues.
Keeping costs down and improving customer service for RIIO ED1
The DPCR5 price control period came to an end on 31 March 2015 and SSEPD is starting to tackle the challenges and earn the
potential rewards of the new RIIO-ED1 regime which began on 1 April 2015 and will run until 31 March 2023.
SSEPD has long supported the incentive-based RIIO framework for networks' price controls given the clear benefits to
customers of increased transparency and greater focus on outputs and innovation. It is clear from the reduction in network
allowed revenue under the RIIO-ED1 settlement, the subsequent fall in underlying 2015/16 charges and the service
improvements required that customers will benefit from this process.
On 3 March 2015 British Gas lodged an appeal with the CMA on the RIIO-ED1 final determination affecting five Distribution
Network Operator groups, including SSEPD.
SSEPD is focused on achieving the efficiencies required by the new price control and ensuring that investors receive a fair
return on the funding needed to operate and invest in the distribution networks for customers' benefit. It will engage
with the CMA as required to help ensure that any outstanding issues are addressed in the right way and that the GB energy
sector continues to benefit from a stable and transparent regulatory framework. The CMA's determination of the appeal will
not have an impact on distribution companies' base revenues in 2015/16.
Co-operating with investigation
On 20 January 2015, SSE plc was notified that the Gas and Electricity Markets Authority had launched an investigation into
whether SSE plc and the energy companies in SSE plc's group which provide electricity connections services had breached
Chapter II of the Competition Act 1989 and/or Article 102 Treaty on the Functioning of the European Union in respect of the
provision of non-contestable connections services in the Southern Electric Power Distribution area. The investigation is
ongoing.
Working for a new energy solution for Shetland
Since April 2014 SSEPD has been working closely with Ofgem to prepare an open competitive process to obtain from the market
the lowest cost and most efficient solution to meet the future energy needs of customers on its network in Shetland from
2019. The future solution will take into account learning and enduring elements from the Northern Isles News Energy
Solutions (NINES) project, which was developed to reduce maximum demand and enable the connection of more renewable energy
generators in the context of the isolated island network. SSEPD is also working with Ofgem to determine the best approach
in considering the timing and potential impact of a mainland transmission cable link.
Following public consultation with customers and market participants, final preparations for the competitive process are at
an advanced stage. The Pre-Qualification Stage began in April 2015 and, subject to final agreement with Ofgem, an
invitation to tender will be issued in June 2015. SSEPD is committed to working with Ofgem, communities and interested
parties to conduct the required process and to deliver long-term, timely arrangements to meet the future needs of its
Shetland customers.
Electricity Distribution priorities in 2015/16 and beyond
During 2015/16 and beyond SSE's priorities in Electricity Distribution are to:
· comply fully with all safety standards and environmental requirements;
· place customers' needs at the centre of plans for the networks, particularly by improving reliability so that the
number and duration of power cuts is kept to a minimum;
· ensure that the networks are managed as efficiently as possible, delivering required outputs while maintaining tight
controls over day-to-day operational expenditure;
· implement the changes required to deliver the cost efficiencies and customer service improvements to deliver a fair
return to investors under the new RIIO-ED1 price control;
· ensure that there is adequate capacity to meet challenging demand on the electricity system; and
· continue progress on the deployment of innovative technology.
Gas Distribution
SGN Mar 15 Mar 14
Operating profit* (SSE's share) - £m 285.0 276.6
Regulated Asset Value (SSE's share) - £m 2,459 2,440
Capital and replacement expenditure (SSE's share)- £m 169.9 160.9
Uncontrolled gas escapes attended within one hour % 98.7 98.7
SGN gas mains replaced - km 1,042 1,088
Performance in SGN
SSE receives 50% of the distributable earnings from Scotia Gas Networks (SGN), in line with its equity holding, and also
provides some, but reducing, level of support through a managed service agreement.
The increase in SGN's operating profit* reflects the timing of allowed revenue recovery, continued good operational
performance and efficiencies. In terms of operational performance, 98.7% of uncontrolled gas escapes were attended within
one hour of notification, the same as last year, both exceeding the Ofgem standard of 97%.
A small but growing part of SGN's operating profit* is derived from non-GB regulated activities. In February 2015, SGN and
its partner Mutual Energy were awarded conveyance licences for the Northern Ireland Gas to the West project. This
investment of around £250m will involve the construction of 200km of high and intermediate pressure pipeline and 500km of
gas mains and services, bringing natural gas to around 40,000 customers in eight medium-sized towns west of Belfast for the
first time. Construction is planned to begin during 2015 and continue into 2017, with the first connections planned
towards the end of 2016 and first revenue earned in 2017.
Implementing the new Gas Distribution Price Control
SGN is focused on ensuring its outputs under the new RIIO framework are met, incentives are maximised and innovation is
delivered effectively while running an efficient, safe and reliable network.
SGN's investment programme is key to this and, within overall cost allowances of over £4.6bn (at 2012/13 prices), Ofgem has
allowed around £2.8bn over the eight year price control which runs until 2021 to cover new investment and to manage the
risks relating to SGN's existing assets. This investment will allow SGN to:
· deliver a safe and reliable network for its customers;
· minimise the impact on the environment and better communicate its work to customers and communities; and
· deliver new customer-driven initiatives to help reduce fuel poverty and increase awareness of the dangers of carbon
monoxide.
Investing in gas networks and securing growth in its RAV
At 31 March 2015, SGN's total RAV is estimated at £4.9bn (SSE share £2.46bn). During 2014/15, SGN invested £339.8m (SSE
share £169.9m) in capital expenditure and mains and service replacement projects, compared with £321.8m (SSE share £160.9m)
in 2013/14. The majority of the mains replacement expenditure was incurred under the Iron Mains Risk Reduction Programme
(IMRRP) which was started in 2002. This requires that iron gas mains within 30 metres of homes and premises must be
replaced over a 30 year period. In 2014/15, SGN replaced 1,042km of its metallic gas mains with modern polyethylene
plastic pipe.
Innovating to deliver sustainability and efficiency
SGN continues to extend the delivery of biogas through its network, with 10 working biogas plants connected to date.
Biogas is expected to play a key role in meeting 2020 decarbonisation targets, while also contributing to the security and
affordability of the UK's energy supply. During the year, SGN opened its first biomethane injection site at Portsdown
Hill, Hampshire, enabling highly efficient use of biogas with potential for wider application of conditioning technology to
other forms of gas in the future. SGN aims to supply 250,000 customers with green gas by 2021 and currently supplies
around 67,000 homes.
Through Ofgem's Network Innovation Competition, SGN is also delivering two pioneering projects with potential to deliver
substantial benefits to customers in the years ahead. The 'Opening up the gas market' project will deliver a 12 month
trial to explore widening the range of gases that can be delivered through the network, with potential to enhance security
of supply and deliver a significant annual saving for UK gas customers.
During 2014/15, SGN became the first UK gas distribution company to use the innovative robotics tool CISBOT, which allows
inspection and maintenance tasks to be carried out inside a live gas main, minimising associated road excavations and
removing the need for disruption to customer supplies.
Gas Distribution priorities
During 2015/16, SGN's priorities are to:
· deliver excellent levels of safety and operational performance;
· create an inclusive and engaged team, proud to work for SGN;
· shape the future of a low-carbon environment by leading the way in the development of green gas;
· minimise its effect on the environment and have a positive impact on local communities;
· meet regulatory outputs and maximise incentives, while continuing to deliver value for all stakeholders;
· deliver a strong financial performance and an acceptable shareholder return; and
· grow unregulated income to support the core business and build a diversified portfolio of assets in the UK.
Networks - Conclusion
The continuing success of SSE's economically-regulated Networks will be founded on efficiency and innovation in operations,
such as restoring power supplies following interruptions; and investments, such as upgrading the transmission network in
the north of Scotland. This efficiency, innovation and investment, in turn, underpin SSE's ability to target annual
dividend increases of at least RPI inflation.
RETAIL
Retail Key Performance Indicators
Mar 15 Mar 14
Restated
Energy Supply
Operating Profit * - £m 368.7 246.2
Electricity customer accounts (GB domestic) - m 4.37 4.66
Gas customer accounts (GB domestic) - m 2.96 3.21
Energy customers (GB business sites) - m 0.45 0.42
All-Island energy market customers (Ire) - m 0.80 0.81
Total energy customer accounts (GB, Ire) - m 8.58 9.10
Electricity supplied household average (GB) - kWh 3,842 3,991
Gas supplied household average (GB) - th 438 465
Household/small business aged debt (GB, Ire) - £m 106.2 117.8
Customer complaints to third parties (GB)2 1,528 1,208
2 Energy Ombudsman, Consumer Focus and Consumer Direct
Energy related services
Operating profit*# - £m 17.7 24.1
Home Services customer accounts (GB) - m 0.35 0.37
Meters read - m 13.0 14.1
Enterprise
Operating profit*# - £m 70.4 56.8
SSE Contracting Order Book - £m 97 85
# Operating profit for the year to March 2014 restated in line with establishment of Enterprise division and as set out in
the Notification of Close Period on 29 September 2014
Supplying energy and essential services across the Great Britain and Ireland markets
SSE is one of the largest energy suppliers in the competitive markets in Great Britain and in Ireland. At 31 March 2015,
it supplied electricity and gas to 8.58 million household and business accounts. It also provides other energy-related
products and services to 350,000 household and business customers.
As an energy and essential services supplier, the principal purpose of the Retail business is to meet the needs of its
customers in a reliable and sustainable way; in doing so, it is focused on attracting and retaining customers by offering
industry-leading customer service, value for money and strong energy and non-energy propositions under a recognised and
differentiated brand.
Financial performance in Retail
During the year to 31 March 2015 operating profit* in Retail was £456.8m. This comprised (comparisons with the same period
last year):
Operating Profit * Mar 15 Mar 14 Mar 13
Restated Restated
Energy Supply* - £m 368.7 246.2 363.2
Energy related services* - £m 17.7 24.1 29.3
Enterprise* - £m 70.4 56.8 52.5
Total Retail Operating Profit* 456.8 327.1 445.0
In 2014/15, SSE's profit margin (operating profit as a percentage of revenue) in Energy Supply was 4.6% (before tax)
compared with 2.9% in 2013/14 and 4.2% in 2012/13. Energy Supply profit margin has averaged 3.9% over both the past five
and three years.
The recovery in Retail performance follows an increase in household electricity and gas tariffs in November 2013 and a
sustained focus on operational efficiency through 2014/15, particularly in the Energy Supply business, which, after a
difficult 2013/14, earned a profit margin closer to the more typical level reported for 2012/13. Profit in Energy Supply
is naturally volatile and, in fact, SSE expects to see a reduction in Energy Supply profit during 2015/16 following its
reduction in household gas prices in Great Britain in April 2015.
SSE is an efficient energy supplier committed to maintaining relatively low operating costs in order to make a fair profit.
Early analysis of the Consolidated Segmental Statements submitted to Ofgem by other obligated energy suppliers suggests
that SSE's indirect costs per customer are around 20% lower than the average across the rest of the major suppliers. On
the strength of running its business efficiently for customers, SSE aims to earn a medium-term (i.e. three to five years)
average profit margin of around 5% across the whole of its Energy Supply business.
As demonstrated by the extension of its unconditional freeze on standard household energy prices in Great Britain,
originally introduced in March 2014 and now extended until at least July 2016, SSE is responding to customer concerns over
future increases in the cost of energy. Guaranteeing such unprecedented price stability and peace of mind for customers
would not be possible without taking a longer-term approach to managing costs. Costs and therefore profitability in Energy
Supply are inherently volatile and SSE therefore continues to focus on performance over the medium term, i.e. a three to
five year average.
Operating profit for Energy Related Services fell by £6.4m, reflecting a reduction in customer numbers in Metering,
Telecoms and Home Services. Some of the activities within Energy-related Services also support SSE's aim to be a supplier
of energy and essential services, offering customers energy and non-energy propositions.
Operating profit for the new Enterprise division was £13.6m higher than that reported in 2013/14, due to the one-off
benefit of the disposal of the gas connections business on 1 September 2014.
Preparing Consolidated Segmental Statements
Since 2010, Ofgem has required the leading energy suppliers in Great Britain to publish a Consolidated Segmental Statement
(CSS) setting out the revenues, costs and profits or losses of their electricity generation and energy supply businesses.
SSE expects to publish its CSS for 2014/2015 before 31 July. The CSS, which will be reviewed by SSE's auditors KPMG under
guidelines set by Ofgem and reconciled to SSE's published financial statements for absolute transparency, is expected to
show that SSE's profit margin in its domestic electricity and gas supply business in Great Britain was 6.0% (before tax) in
2014/15.
This means that SSE's operating profit from the supply of electricity and gas to a household in Great Britain was an
average of £69 during 2014/15. From this profit, SSE is required to pay tax and interest. Across the six years since the
CSS was introduced in 2009/10, up to and including March 2015, SSE expects to have made an average profit margin of 5.1%.
Particularly for asset-light businesses like Energy Supply, SSE firmly believes that profit margin earned before interest
and taxes (EBIT margin) is the most effective way to measure profitability because:
· it is widely accepted as the most appropriate measure for this sector, and is relied upon by both industry analysts
and investors;
· it takes into account all costs associated with the supply of energy, including overhead and non-variable costs,
depreciation and amortisation; and
· there is greater availability of data on an EBIT basis, increasing the robustness of any benchmarking analysis and
enabling simple like-for-like comparisons to improve transparency and understanding.
Energy Supply and Energy Related Services
Fulfilling SSE's responsibilities as an energy supplier
SSE appreciates that its customers rely on its core products of electricity and gas to power and heat their homes in order
to live comfortably. It takes this responsibility very seriously and has therefore sought first and foremost to offer all
its customers peace of mind about their future energy costs at a time when energy affordability remains a serious concern.
In March 2014, SSE became the only energy supplier in Great Britain to offer an unconditional commitment not to increase
standard household energy prices until 2016, and in January 2015 extended this promise further still, until at least July
2016. This is the longest price commitment of its nature the GB energy market has ever seen. By July 2016, SSE's standard
household prices will not have gone up for more than two and a half years; prices will have, in fact, been cut at least
twice in that period.
Guaranteeing not to increase prices for such a long period of time requires a responsible, long-term approach to managing
all of the costs of supplying energy; SSE therefore continues to believe that its commitment should also be judged over the
long term. In the meantime, SSE will continue to pass on savings where possible and make the most competitive offers it
can, whilst providing absolute peace of mind for those customers who prefer the flexibility of a standard variable tariff.
SSE would like to extend its price freeze again, or even cut prices if further costs can be taken out of energy supply, and
will work with the new UK government or indeed any stakeholder to find such solutions. It believes further savings for
consumers worth around £100 - forecast to rise to around £200 by 2020 - could be made with political action to end the
practice of levying policy costs on energy bills. Recouping the cost through energy bills takes no account of an
individual's ability to pay and is therefore socially regressive, with the impact likely to worsen as policy costs on
energy bills increase into the latter part of this decade. SSE has therefore continued to call for more of these levies to
be moved into general taxation, making bills cheaper and fairer for those less able to pay.
Supplying energy to customers across Great Britain and Ireland
In the year to 31 March 2015, SSE's energy customer accounts in Great Britain and Ireland fell from 9.10 million to 8.58
million. This comprised:
SSE Energy Supply customer account numbers Mar 15 Mar 14
Electricity customer accounts(GB domestic) - m 4.37 4.66
Gas customer accounts (GB domestic) - m 2.96 3.21
Energy customers (GB business sites) - m 0.45 0.42
All-Island energy market customers (Ire) - m 0.80 0.81
Total SSE Energy Customers 8.58 9.10
SSE's total customer base is now the same size as it was in 2008, having peaked at 9.65 million in March 2011. The decline
in customer account numbers reflects the increasingly challenging and highly competitive market conditions in Great
Britain, in which there are 10 suppliers of scale (with over 250,000 customers) competing to retain and gain customers.
This is in addition to a growing number of smaller suppliers, who are exempt from the cost of certain government social and
environmental policies, and therefore have a competitive advantage, and a strong focus by other suppliers on Internet
Comparison Sites. At the same time, the dynamics of the energy market are undergoing a fundamental transformation with the
rise of digital technologies and smart metering.
For SSE, the corollary of this has been a period during which it has focused on offering both new and existing customers
stability and peace of mind while laying the foundations for future growth. Having driven further operational efficiencies
through 2014/15, SSE is now making significant investments in improving the customer experience with new, state-of-the-art
digital platforms, an enhanced customer relationship management (CRM) system and more engaging communications. With these
tools in place, SSE is well placed to compete for customers.
All of this reaffirms SSE's view, which it has put to the Competition and Markets Authority (CMA) that the retail energy
market in Great Britain is working in the interests of consumers. Whilst SSE recognises that the CMA's analysis of the
retail market is still in development, its characterisation of the retail sector so far does not reflect SSE's experience
or market realities. It is clear that customers are very engaged with the market and are exercising their ability to
switch and benefit from supplier competition in a tough and evolving marketplace.
SSE continues to have an appetite for change that is in the genuine interest of customers and is engaging constructively
with the CMA to help identify ways in which the market can be further improved for customers, as well as seeking to ensure
that analysis of important issues such as sector profitability or the potential savings available to customers by switching
is conducted robustly, fairly and representatively.
Meeting customers' need for energy
SSE estimates its household customers in Great Britain used, on average in the year to 31 March 2015:
Mar 15 Mar 14
Electricity supplied household average (GB) - kWh 3,842 3,991
Gas supplied household average (GB) - th 438 465
Relatively low consumption was driven by a continuation of the mild weather conditions that have characterised the two
years to March 2015. This is illustrated by the fact that in the year to 31 March 2015, the UK mean temperature was 0.7
degrees Celsius above the 1981-2010 climatology (based on provisional Met Office data).
While annual consumption varies considerably based on the weather, customers' use of electricity and gas is now more than
13% lower than it was five years ago (measured on an underlying year-on-year basis), largely due to the impact of
structural, technological and behavioural energy efficiency improvements. The impact of ongoing efforts to help customers
use energy more efficiently is also reflected in the fact that, on a weather-corrected basis, energy consumption by SSE's
household customers in 2014/15 was the lowest since 2006.
Putting customers first
At the same time, SSE is doing what it can to provide customers with value for money, peace of mind and industry-leading
customer service. To that end, in the year to 31 March 2015, SSE has:
· announced a 4.1% average reduction in standard household gas prices from 30 April 2015;
· committed to cap these prices at their new level until at least July 2016, extending its already unprecedented
freeze on standard household energy prices;
· launched an industry-leading offer of two years' free unlimited broadband to give customers additional value and
deepen customer relationships;
· introduced 'continuous improvement hubs' through which customer service advisers, who help customers every day, are
encouraged to identify ways in which the customer experience can be enhanced;
· began identifying repeat callers so that their queries can be picked up immediately by the appropriate teams and
resolved more swiftly; and
· decided to introduce a new system to tackle call waiting by enabling customers to request a call back rather than
holding on in a queue.
This focus on continuous improvement and putting customers first has been acknowledged by three independent reports in
2014/15:
· in June 2014, SSE was named best major energy supplier for customer service satisfaction for the fourth year in a
row in the National Customer Satisfaction Index UK (NCSI-UK);
· in September 2014, Ofgem published the results of its Complaints to Energy Companies report, which found SSE was the
only major supplier to improve its performance since their last survey two years earlier; and
· Citizens Advice reported that SSE was again the best performing major energy supplier for complaints in the Energy
Supplier Performance report with a score of 44.5 per 100,000 customers for the period from October to December 2014. To
put this into context, the next best performing supplier had a score of 72.3.
Although disappointingly the overall number of complaints to third parties increased during 2014/15, SSE continues to
perform far better than the rest of the industry, accounting for around 2% of all Ombudsman complaints in March 2015
despite having a market share of over seven times that amount. That said, SSE is determined to improve its complaints
performance and, partly through the initiatives outlined above, aims to reduce the overall number of customer complaints in
2015/16.
Treating customers fairly
Underpinning SSE's approach to dealing with customers is the principle, now enshrined in energy supply licences, of
treating customers fairly. The Treating Customers Fairly standards continue to be embedded in SSE's decision-making, from
the Board through to the Executive Committee and throughout the organisation. SSE published its updated Treating Customers
Fairly Statement in August 2014 and has since been working on further improvements for customers, which will help form the
basis of its TCF statement for 2015. These include:
· being among the first energy suppliers to reduce voluntarily the amount of time it takes to switch supplier to just
17 days, inclusive of the two-week 'cooling off' period;
· committing to refer customer complaints to an internal 'centre of excellence' whenever a same-day resolution is not
possible;
· the joint publication with the Dementia Services Development Centre at Stirling University of a handbook offering
heating and lighting tips to people living with dementia and their carers;
· a commitment to roll out enhanced disability and equality training to ensure customer service advisers can provide
the best possible support to elderly or disabled customers;
· the introduction of new video call facilities to enable real-time, face-to-face conversations with customers who
have impaired hearing; and
· an end to charges for the removal of prepayment meters, subject to customers successfully completing a credit
check.
Working with customers to manage energy-related debt
At 31 March 2015, the total aged debt (i.e. debt that is overdue by more than six months) of SSE's domestic and small
business electricity and gas customers in Great Britain and Ireland was £106.2m, compared with £117.8m at 31 March 2014. A
bad debt charge of £65.3m was recognised in the period (compared to £67.8m in the same period last year).
Debt levels have stabilised following an increase in 2013/14, reflecting the lower consumption of energy during this
period, as well as SSE's efforts to engage with customers with arrears as early as possible, agreeing payment arrangements
that have lower balances from the outset and helping to spread the cost of energy across the year. SSE will continue to
work sympathetically and constructively with customers who are struggling with debt, making better use of data and insight
to target proactive customer contact more effectively.
Helping vulnerable customers
SSE helps customers in need to manage their energy costs in a number of other ways:
The Warm Home Discount (WHD) scheme enables pensioners and vulnerable customers to receive help with their fuel bills in
the form of a £140 rebate. As part of the WHD Scheme, SSE's Priority Assistance Fund provides additional support to low
income and vulnerable customers, including debt relief, free energy efficient appliances, and help with bespoke payment
arrangements. More than 330,000 customers received assistance from SSE worth over £51.3 million through these initiatives
and partnership projects with National Energy Action (NEA), Citizens Advice and the Home Heat Helpline.
SSE also operates a free Careline priority service, dedicated to helping customers who are elderly, disabled or have
special medical needs. It takes a proactive approach to monitoring top-up behaviour of its prepayment customers to
minimise the risk of 'self-disconnection'. Between the start of December and the end of February (or longer if the weather
is unseasonably cold), SSE has a no-disconnection policy covering all household customers.
In September 2014, SSE announced, along with other suppliers, that it would use any future unclaimed credit balances which
cannot be returned to customers to help provide additional support for vulnerable customers. It committed, in advance, a
total of £8.8m to cover the next two years and has already spent more than £8m providing relief to vulnerable customers
struggling with debt.
Working to reduce customers' energy consumption
Helping customers use energy more efficiently is the most sustainable way to keep bills low over the longer term. With
that in mind, SSE was pleased to meet, ahead of the 31 March 2015 deadline, all of its targets under the first phase of the
Energy Company Obligation (ECO), which mandates energy suppliers with more than 250,000 customer accounts to install energy
efficiency measures in customers' homes. SSE is now focused on delivering against its targets for the final phase of the
current ECO scheme before 31 March 2017.
In the first two years of ECO ending 31 March 2015, SSE has:
· promoted the installation of almost 250,000 energy efficiency measures, including loft, cavity and solid wall
insulation and boiler replacements;
· helped improve the energy efficiency of over 210,000 homes across Great Britain;
· delivered energy efficiency improvements equivalent to 4.59 MtCO2 saved; and
· provided around £850m of notional lifetime bill savings for vulnerable customers.
In December 2014, SSE agreed a settlement with Ofgem under which it made a contribution of £1.75m to support vulnerable
customers after it did not meet on time its targets under the previous Community Energy Saving Programme (CESP). SSE
committed to learning from this and to working hard to ensure that other obligations such as ECO are delivered on time.
It is clear that, beyond 2017, the UK will need to continue to improve the energy efficiency of its building stock. With
the existing ECO scheme coming to an end in 2017 and no successor scheme currently in place, this represents a valuable
window of opportunity to review and improve upon previous initiatives to drive take-up of energy efficiency measures. SSE
is keen to engage constructively with the new UK government and any interested parties on ways to achieve this, but
believes that in principle any scheme should:
· be funded progressively through taxation, taking into account an individual's ability to pay;
· be as cost-effective as possible;
· ensure that the benefits are targeted primarily at the most vulnerable households;
· minimise administrative complexity, for example by introducing deemed scoring;
· minimise the risk to customers of fraud; and
· be designed to ensure a smooth transition between schemes.
Rolling out smart meters to customers across Great Britain
The rollout of smart meters to every home in Great Britain represents a unique opportunity to transform the relationship
between customers and the energy they use. Empowering customers with real-time data about their energy usage, providing
them with more accurate bills and unlocking innovation in tariffs and propositions, smart meters have the potential to
drive ever greater consumer engagement with energy.
In preparation for the introduction of the critical infrastructure that will enable mass rollout to begin, SSE has been
focused primarily on building and testing systems and gradually ramping up delivery, in line with its strategy of 'doing it
once and doing it right'. At 31 March 2015, SSE had installed over 40,000 smart meters in customers' homes. In the coming
year ending 31 March 2016, it expects to install a further 210,000 smart meters to bring the cumulative total to 250,000.
With the cost of the rollout being levied on customer bills, and with the net benefit of smart meters largely dependent on
consumers embracing the technology, it is critical that the programme is delivered in a way which is both cost-effective
and customer-centric. In other words, if the cost of the programme increases, or consumers become disengaged with the
technology, the business case will be eroded and the opportunity will have been missed.
SSE has consistently stated that achieving a cost-effective and customer-centric rollout will require a delivery window of
five unconstrained years. However, despite ongoing delays to critical infrastructure such as that provided by the Data
Communications Company (DCC), and other constraints still inhibiting suppliers' ability to install smart meters at volume,
the end target of 100% of homes by 2020 has not moved. This means that the delivery window is shrinking; with less time to
achieve the same target, the only logical outcome is that costs will increase and the customer experience will be worse
than it would otherwise have been.
In order to ensure that the crucial smart opportunity is not missed, while remaining supportive of the role of DCC, SSE is
calling for:
· delays to the front end of the delivery
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