British Gas's new Zero Carbon tariff

British Gas has launched a consumer gas and electricity tariff that will cost 10% more than its standard rates but which offers better green credentials than any other consumer utility tariff in the UK market. The product has the following important features:

  • The electricity is derived from renewable sources. The company says that this is not the key ingredient of the tariff. Later in this note I try to explain why.
  • British Gas will buy and retire Renewable Energy Certificates for 12% of the electricity it supplies. This is probably the most important aspect of the proposition.
  • British Gas will 'offset' all of the carbon dioxide produced as a result of each household's purchases. This is the most expensive part of the deal for British Gas.
  • There will be a small donation to a green education fund for schools.

BG says that it makes no extra money from the sale of its Zero Carbon product. This looks a justifiable statement to us. The important other questions to ask are:

  • Why did BG decide that 10% was the appropriate premium to its main tariff? It could have designed a less costly offering with reasonably strong green features. Do mainstream 'concerned consumers' regard 10% as an acceptable price increment? Did BG need to 'gold plate' the new product to avoid any criticism that it was a proper green tariff?
  • How will the company manage to ensure that it buys high quality offsets, and not the dubious offerings sold by consumer offsetting companies?
  • The product is slightly complex and difficult to explain. Can BG cut through the competing claims of other green suppliers to build a large customer base for this high quality offering?

The proposition After recent price reductions, typical British Gas customers now spend £836 a year on gas and electricity. British Gas gave me these figures for the typical purchases:

  • 3,300 kWh of electricity costing £341.50
  • 20,500 kWh of gas costing £509.69
  • Total £836.50 after deducting a discount of £15 for buying both fuels.

(These figures for average consumption are widely used across the industry. They are slightly out-of-date and I believe actual averages are somewhat higher for electricity and lower for gas. This slightly alters the calculation for the typical price premium for the Zero Carbon product because the new tariff increases the electricity price more than the gas price.)

The Zero Carbon tariff increases electricity prices by about 16% above the standard level and about 7% for gas. For BG's typical consumer, the cost of electricity will rise by about £50 and gas will increase by about £35. The buyer gets the usual discounts for direct debit payment, for signing up online and for buying both fuels together.

The approximate 10% increase in the total price paid over the year buys 'belt and braces' carbon neutrality.

  • Renewable electricity. BG will supply all customers with electricity from renewable sources. This sounds important, but is actually less critical than it seems. There is a fixed supply of renewable electricity in the UK. It is all used at the moment, and it doesn't matter much who uses it. The important thing is that purchasing the electricity delivers a signal to generators to increase the supply of renewable power. At present, they don't actually need that signal. Many forms of renewable generation are extremely profitable because of the government's subsidy scheme. The constraint on producers tends to be the slow planning process and the difficulties of getting remote sites connected to the high voltage distribution system rather than the underlying profitability of renewable generation.
  • Purchase and retirement of ROCs. Those who generate renewable energy are eligible for subsidy in the form of Renewable Obligation Certificates (ROCs). A generator producing a megawatt hour (a thousand kilowatt hours) is able to sell these certificates for about £48 each, or slightly more than the electricity itself is worth. They are bought by other generators who have not themselves produced enough renewable electricity to meet the government's minimum target. British Gas commits to buying ROCs to cover an additional 12% of their Zero Carbon customers' electricity use. These ROCs are then 'retired' so that they are unavailable for resale. Effectively this means that they are torn up and ignored. The impact of this is to increase the price of ROCs, force other generators to pay more, and increase yet further the incentives to invest in renewables. The value of this part of the Zero Carbon package will be extremely complex to explain to customers, but it is the most innovative and exciting aspect of the tariff. Those of us who think markets can be used to help solve the carbon problem will be particularly keen on this part of the scheme.
  • Thirdly, BG will purchase offsets to counterbalance the full carbon cost of the electricity and gas sold. The company has not yet released details of exactly which projects it will support. In communication with the company, I raised the usual concern that consumer offsetting companies support schemes that do not offer verifiable carbon savings and which are almost certainly not 'additional' to what would have happened anyway. BG responded by stressing that it will only use certified emissions reduction schemes that are allowed under the Kyoto Clean Development Mechanism. It will then have to 'retire' these certificates as well and I presume it will do this. There are, as ever, concerns about some of the emissions reductions projects operating under the Clean Development Mechanism. But let's give BG the benefit of the doubt in the first year of the Zero Carbon product while it looks for projects that are genuinely additional to what would have happened anyway.
  • The company also makes a £5 donation to a schools' green energy fund.

In aggregate, the cost of these features comes to about £84, meaning that the company makes no extra profit on the Zero Carbon customers. The extra revenue from the tariff matches the cost.

Feature Cost to British Gas Summary explanation
Cost of ROC retirement £19 12% of 3,300 kWh at £48 per MWh
Estimated cost of offsetting electricity £16 3,300 kWh typically produces 1.4 tonnes of CO2 at generator at about £11 per tonne to offset
Offsetting gas £44 20,500 kWh produces 3.9 tonnes CO2 at about £11 per tonne
Donation to green fund £5  
TOTAL £84  

The consumer appeal BG has had some success in getting its 15m UK domestic customers interested in taking action to reduce carbon emissions. About 10% of its customers took up the company's offer of a bespoke energy audit of the home. BG says that 51% of these volunteers said that they would take further actions, and have achieved 10% average savings as a result.

BG says that it thinks that about a quarter of its customers will pay more for a green tariff, and that this number is increasing. This is in line with the impression we are getting from other companies with strong consumer brands.

Nevertheless, it is going to be an uphill task to persuade customers to take the new product. There are three problems:

  • British Gas is not necessarily the best positioned utility company to initiate a new green product. Though it has a huge customer base, its relatively high domestic customer prices in 2006 will have dented its ability to sell higher priced premium products today. Customers will be concerned that BG is attempting to profit from their willingness to pay a proper price for a green tariff.
  • ROCs are a mystery to all but a handful of nerdy specialists. I have seen people leave the room when they are mentioned. Retiring ROCs is a first-rate idea, but it won't excite middle England.
  • Consumers are beginning to be suspicious of offsetting. M&S has publicly said that it will 'only use offsetting as a last resort'. There may be 'good' offsetting and 'bad' offsetting, but asking consumers to believe that British Gas's offering is genuinely reducing emissions elsewhere in the world is a tough challenge.

Nevertheless, it is possible to sell this product as genuinely the greenest product in the UK market today. (I don't say that other companies such as Ebico and Ecotricity wouldn't challenge this assertion, but British Gas can certainly make aggressive and justifiable claims in its marketing.) With enough persistence and consistent advertising, this offering will work.

But I think it is a definite mistake to have launched this product alongside an offering in a lighter shade of green. A second new tariff, Future Energy, uses a much smaller £20 annual price premium to fund investment in renewable electricity and to give money to the schools' energy fund. If you are launching one complicated product, the last thing you do is increase the confusion by putting out another complex offering at the same time.

The company is rightly pressing Ofgem for a new labelling system that awards stars to good quality green offerings from UK utilities. Such a scheme would give British Gas a high rating for the Zero Carbon product and would help sell it to confused householders. Until we get a simple and comprehensible rating system, some consumers are likely to sit on their hands.

So, high marks to British Gas but considerable concerns about the marketing of the new tariff.