We believe that the priority for the Government should be to continue to aim for an effective global agreement which should set legally binding targets for developed countries out to 2030 as a minimum, supporting an extension to the EU Emissions Trading Scheme (EU ETS) with a reducing emissions cap to 2030 or even 2050. Regrettably, the Copenhagen Conference of parties in December 2009 did not form the basis for such an agreement. Without this global agreement, we believe that the scale and rate of low carbon generation investment in the UK implied by the Climate Change Committee’s scenario for 2030 will require additional policy support.

Creating an energy supply industry that emits significantly less carbon requires huge investment and, if we are to ensure that the interests of our customers and the UK's economy are protected, carbon emissions will need to be reduced in the most effective and efficient way. We also need to use a diverse range of low carbon technologies – including nuclear, renewables and coal with carbon capture and storage - to help ensure security of supply and avoid over-reliance on any single source.

The EU ETS is in our view the most efficient mechanism for reducing carbon emissions in sectors where there are potentially high emissions such as power stations and industrial plants. We believe long term carbon reduction targets are an essential part of an ETS, to give effective carbon price signals to investments with long payback periods. An uncertain outlook for carbon prices will not provide a reliable basis for investment in either nuclear or coal with carbon capture and storage technology.

Some lower carbon technologies, such as renewable technologies or carbon capture and storage, require additional support beyond that provided by the EU ETS. During 2009 the Government confirmed its strategy on how the target proposed by the European Commission for the UK in the EU Renewables Directive – that 15% of final energy consumption should come from renewable sources – should be delivered in the UK and we believe that renewable electricity can make the largest single contribution to this target. However, very high levels of wind generation can create difficulties for investment in other low carbon generation technologies which will need to be addressed, as well as challenges in the operation of the electricity system. An increase in wind capacity on the system will mean other plant runs less often, but will still be vital for security of supply on windless days. Such plant will need higher prices over shorter periods of operation if it is to remain viable. We also believe that nuclear power will be important in meeting security of supply and climate change goals and we were pleased to see that the Government has confirmed its view that new nuclear construction has a role to play in the UK’s energy mix. We have set up a joint venture with RWE npower called Horizon Nuclear Power, and we plan to deliver around 6,000 MW of new nuclear power station capacity in the UK by 2025. The programme is likely to involve more than £15bn of investment.

Effective policies are also needed to encourage much more efficient use of energy by consumers, including residential and smaller commercial customers, and to support the development of renewable heat and renewable electricity at a smaller scale.

climate change goals and we were pleased to see that the Government confirmed its view that new nuclear construction had a role to play in the UK’s energy mix in the White Paper it published in January 2008.

Effective policies are also needed to encourage much more efficient use of energy by consumers, including residential and smaller commercial customers, and to support the development of renewable heat and renewable electricity and small scales. We contributed to the development of Government policy on renewable heat and energy efficiency strategy in 2008 and in 2009.

The UK is currently entering a significant investment cycle as a large proportion of the UK’s coal, oil and nuclear capacity will close over the next fifteen years and this is coinciding with the need to radically reduce the carbon emissions from energy supply. The amount of new infrastructure needed by the energy supply industry to achieve both of these objectives will mean a paradigm shift in the amount of new energy infrastructure that must be built across the UK year-on-year to 2020 and beyond.

It is therefore vital that there is confidence in the long-term stability of the market. Energy policy that only looks to short-term political pressures tends to undermine long-term stability, and investor confidence. E.ON strongly supports policy stability as far as is possible to ensure that there is sufficient confidence in the market to produce the required levels of investment.

Of particular importance to delivering both security of supply and climate change goals is a planning system which can give developers confidence that their application to build a project will be considered and a decision reached within a reasonable and predictable timescale and that the criteria that will be applied are transparent and well understood. We therefore strongly supported the reforms proposed by the Government in the Planning Act 2008 which established an Infrastructure Planning Commission (IPC) which will reach decisions on major infrastructure projects in accordance with policies set out in National Policy Statements which will be subject to consultation with the public and Parliament.

We believe that competition continues to be the best guarantee of affordable prices to consumers and we support an approach which focuses on competitive markets, with more direct regulation of monopoly networks businesses. Prices in the market do however need to reflect the need for the new investment to deliver security of supply and climate change goals. Prices will also be influenced by global factors such as the price of gas which is significantly influenced by the oil market. lt is important that energy prices are affordable to customers of all income levels and those in fuel poverty need more protection when prices are rising. We believe energy suppliers can help customers in fuel poverty by facilitating or providing energy efficiency measures to help permanently reduce the household’s expenditure on delivering adequate warmth. Suppliers can also help ensure customers are taking advantage of relevant benefits from Government, and that they are on the most appropriate tariff.

E.ON contributed to the development of a new Community Energy Saving Programme which took effect in 2009 and which imposes an obligation on suppliers to deliver energy efficiency and related low carbon measures in particularly deprived areas. Carbon Emissions Reductions Target, which is also significantly focussed on the fuel poor, also took effect in 2009.

In 2009 we set up Challenge100. Challenge 100’s aim is to eradicate fuel poverty for 100 families, in 100 homes in 100 days. We are working with a variety of partners using their expertise and a combination of practical targeted measures to address the specific needs of the individual families within the 100 homes, in order to create a positive change for 100 families in 100 days using existing funding frameworks and programmes.

We welcomed the Government’s clarification of the way forward for the rollout of smart metering, and support the Government’s view that smart meters should be rolled out over the next ten years. Whilst we would have preferred a distributor-led rollout, we are pleased that the model chosen includes a centralised communications function. Our own trial with Kettering Borough Council installed dual fuel smart meters in nearly 500 homes, and the results of the trial were very encouraging, with almost 80% of participating homes managing to reduce their energy consumption over 12 months. This project has provided vital data to help us plan a larger scale roll out.

We seek to engage with a range of stakeholders and with the Government so that they understand the needs of our business and the decisions we take but also so that we can take account of our stakeholders’ views as we develop our own thinking on energy policy. We do not have policies specific to the conduct of public affairs or for input into public policy making. Our views on major policy issues are expressed in documents which are available on our website (such as responses to formal Government consultations or Select Committee inquiries); or are on the public record elsewhere (such as Government departmental or Parliamentary Select Committee websites). Our views on policy issues are also communicated in writing to managers and other staff internally.

We monitor legislative and energy policy trends and changes in the UK, and review any new developments that might affect us as a business.

Our work in these areas includes the following:

• responding to consultation papers issued by Government departments or regulatory bodies;
• submitting oral and written evidence to Parliamentary Select Committees;
• discussion with Government departments and the Office for Gas and Electricity Markets (Ofgem);
• dialogue with non-governmental stakeholders such as environmental NGOs;
• individual meetings and briefings for key MPs and peers on energy policy;
• briefing MPs and peers on energy-related legislation, as appropriate;
• speaking at conferences and seminars;
• participation in trade association activity.

The UK Government is one of our primary stakeholders and we pay particular attention to its objectives. In general our lobbying focuses on how to deliver the Government's goal of secure, affordable and low-carbon energy supply most effectively. Engagement with EU institutions is generally conducted on behalf of the group by the E.ON group’s representative office in Brussels.

Policy positions developed in response to major Government consultations are subject to agreement by the E.ON UK Board and, where appropriate, the senior management of E.ON group-wide businesses operating in the UK. Our Director of Regulation and Energy Policy is responsible for our energy policy work and relations with Government departments and she reports to E.ON UK’s Director of Corporate Affairs. Our Director of Brand and Communications is responsible for the conduct of relations with MPs, the media, internal communications, and reports to the Chief Executive.

In 2009, Ofgem carried out its Project Discovery, its investigation into whether or not future security of supply can be delivered by the existing market arrangements over the coming decade. Ofgem published the first part of Project Discovery, future scenarios, in October 2009 and followed this up, in early 2010, with its conclusions on whether the current arrangements in Great Britain are adequate for delivering secure and sustainable electricity and gas supplies over the next 10 to15 years. Project Discovery identified a number of concerns with the current arrangements and concluded that significant action will be called for, given the unprecedented challenges facing the electricity and gas industries. The paper set out a number of possible actions, ranging from improvements in pricing and/or obligations on suppliers to deliver specific levels of supply security, through to more radical models that mandate investment in new generating capacity and gas infrastructure.

E.ON remains of the view that competitive markets provide the best outcome for customers. We do not believe that the need has been demonstrated for radical change to the current market structures, but we do have concerns around the ability of the current market framework to incentivise investment in low carbon generation. We responded to Ofgem’s consultation on Project Discovery, and have asked for closer alignment between Ofgem’s work, and a similar energy market assessment being carried out by the Government in order to ensure consistency. It is important that any measures introduced are considered in conjunction with other policy measures operating in the UK and the EU.

In February 2008 Ofgem launched a study into the GB energy supply markets, the Ofgem Energy Supply Probe. The initial findings were published in October 2008 where Ofgem found that the market was competitive; that it worked well for most customers and that there was no collusion between suppliers. However, it did find that certain groups of customers did less well out of competition than others, which led both to voluntary action being taken by suppliers such as E.ON to change their pricing and also to a number of new licence conditions, which were accepted by suppliers in 2009.

The first was introduced in September 2009 and addressed concerns over unjustified price differentials by ensuring that differences in terms and conditions to customers were cost reflective, and by prohibiting undue discrimination. The second was introduced into suppliers’ licences in October 2009, with implementation dates ranging between October 2009 and July 2010, and was aimed at promoting competition and consumer engagement and included obligations on suppliers to improve the information available to customers and to improve the transparency of their generation and supply activities.

The technical and commercial rules and obligations that govern participation in Great Britain’s gas and electricity sector are set out in a series of multilateral codes. Ofgem has been carrying out a review of the way these codes are governed, and invited our stakeholders to provide their views on the scope of any such project. We have been active in this review process as, whilst we welcome some of Ofgem’s proposals, we feel that others could bring significant uncertainty to the energy markets and the risk of unnecessary change.

The distribution licence requires Central Networks to provide formal offers for connection in response to an application made under the Electricity Act 1989 within three months of the date of receipt.

In December 2009 Ofgem launched an investigation into Central Networks’ compliance with its licence obligations. Central Networks is responding fully to the requests for information it has received from Ofgem.

Our distribution business, Central Networks, has worked closely with Ofgem to agree its revenues and the associated regulatory agreement for the next five years (April 2010 to March 2015). To ensure value for money for customers, the new price control will hold DNOs accountable for what they deliver rather than just reporting their overall investment. Changes have also been made to the way incentives are calibrated and DNOs’ effective rate of return is now more closely linked to their performance, and the new price control places more emphasis on the DNO’s role in enabling low carbon technologies.

The planning process for 2010 to 2015 is now finalised and Central Networks has secured an increase of around 24% in network investment. Ofgem has also introduced a £500m low carbon network fund, and DNOs can apply for funding for appropriate, low carbon projects. The next five years will be particularly important - electricity networks will play a key role in supporting the introduction of electric vehicles and providing heat, and we are very involved with the development of ‘smartgrid’ solutions to support the overall transition to a low carbon economy.

Ofgem’s two-year review of the regulatory framework for distribution businesses, ‘RPI-X@20’, continued throughout 2009. This review is very important for Central Networks as it will set the framework for distribution businesses for the coming years, and we are working closely with Ofgem on it. It is clear that the UK faces considerable change if it is to meet carbon reduction targets, and we support the tailoring of the regulatory framework to achieve this and are committed to playing our part in creating a sustainable and low carbon energy sector.

Central Networks maintains a priority services register (PSR) to provide a service appropriate to the needs of those customers who rely on electricity for medical reasons or are particularly vulnerable during an interruption. In January 2009, we created two free priority telephone numbers for these customers to use in the event of a power cut. Our call handlers are trained to offer practical help, advice and support to all customers, but they also receive additional training to help those with priority needs.

We have written to over 184,000 customers letting them know our dedicated number and asking them to update their details, and supplied 4,000 corded telephones (that will work in a power cut) with our dedicated priority service contact number printed on the handset to those customers with the most critical medical dependencies.

In March 2009 Central Networks became the first distribution network operator in the UK to establish a permanent Customer Panel to better understand the requirements of customers and address their needs. The panel represents a wide range of customers and key stakeholder groups are also represented including the police, local authorities, the Major Energy Users Council, the Environment Agency, Nottingham Elders Forum, Consumer Focus and the Royal National Institute for Deaf people (RNID). The panel is chaired by CN’s Managing Director.

We have been actively working with the Government, Ofgem and the industry in a number of areas in order to promote improved access to networks for renewable generation, both onshore and offshore. We have contributed to the development of the new licensing and commercial arrangements required for new offshore electricity transmission networks. Our focus has been to maintain support for the high level policy decisions that have already been taken whilst providing suggestions for operational improvements and guidance on undecided policy issues.

We have also been fully involved in work to reform the transmission access arrangements onshore. This has meant attendance in a large number of industry work groups dedicated to producing new models for reform, as well as meetings with Government and Ofgem to explain our views. Additionally, we have directly participated in the work of the Electricity Networks Strategy Group in order to promote more strategic investment in network capacity. Our aim has been to provide practical solutions that will promote faster connection and a stable investment climate for new generation projects, whilst ensuring that customers are protected from excessive increases in costs.

We have continued to offer green energy products to our customers. Confirmation that an energy product meets the minimum standards of the industry guidelines is provided through a verification scheme developed by energy suppliers that was launched in 2009. Energy products that comply with the guidelines carry an easily identified logo.

We have also launched SolarSaver, which helps customers invest in solar panels for their property, using the Feed-In Tariff introduced in early 2010 to support their investment. We fit smart meters to SolarSaver customers’ houses too, which helps us and to monitor the output of the panels.