Morning, everyone, welcome to Centrica's 2017 interim results presentation. We're in a different venue today. Before we begin, just a word on safety in this building. There are no planned fire alarms today, so in the event of one, listen to the verbal instructions from UBS staff who'll direct you towards the fire exits, which are located at each side of the stage here and at the rear of the auditorium. As usual, I'm joined here today by our Chairman, Rick Haythornthwaite, Jeff Bell, up here with me our Group Chief Financial Officer, Mark Hodges and Mark Hanafin, who are the Chief Executives of Centrica Consumer and Centrica Business, respectively, and a number of other members of the Centrica team. After some brief remarks from me, Jeff will take you through our detailed financial results.
I'll then provide you with an update on aspects of our strategic progress, including our perspective on the UK energy supply market and our pricing announcement this morning, before Mark and Mark join us on the stage to take your questions. Moving on to the main headlines from today's first half results announcement. Firstly, we delivered solid financial performance despite the effects of warm weather, competitive pressures, and the prevailing political and regulatory uncertainties. Adjusted operating profit was down 4% to GBP 816 million. Within this, customer-facing operating profit was flat overall, while profit from the asset businesses was down, primarily reflecting the shutdown at Rough. Adjusted earnings were down by 11% to GBP 449 million, and earnings per share were GBP 0.082.
In terms of cash flow, EBITDA was up 2% and while adjusted operating cash flow was down 9% year-over-year at GBP 1.2 billion, this reflected the one-off working capital inflows in 2016 in UK Business. We remain on track to meet our 2017 full year target of over GBP 2 billion of adjusted operating cash flow. Underlying adjusted operating cash flow growth relative to the first half of 2016 was 0.3%, reflecting the strong delivery in 2016 and the impact on gross margin this year from a number of factors, including the warmer weather. The cumulative annual growth rate relative to the first half of 2015 is now 2.6% per annum. We delivered a further GBP 124 million of efficiency program savings in the first half of the year against our full year target of GBP 250 million.
We also made further strong progress on reducing net debt, down by over GBP 500 billion in the first half to GBP 2.9 billion. This means we are within our targeted GBP 2.5 billion-GBP 3 billion range, and we continue to expect to be within this range at the end of the year. As we said in February, we believe this net debt range to be our optimum sustainable level with the current portfolio in the current environment. Our second headline is that following completion of a number of transactions announced recently and implementation of the other aspects of our strategy, the company will have been fundamentally repositioned by the end of 2017. We've shifted the mix of our portfolio and have reallocated resources accordingly towards our customer-facing businesses.
We have reduced E&P CapEx significantly and announced over GBP 800 million of divestments in 2017, taking the total to over GBP 900 million in the last 2 years at the upper end of the GBP 0.5 billion-GBP 1 billion target range. We've reinvested over GBP 500 million incrementally in our customer-facing businesses since the start of 2016. Our efficiency program, targeting GBP 750 million of efficiencies by 2020 relative to 2015, is well ahead of schedule, and our efficiency delivery has allowed us to absorb the effects of inflation and foreign exchange and still fund our growth while keeping operating costs below 2015 in nominal terms. Finally, as we demonstrated at our Capital Markets Day, we've materially enhanced our capabilities and technology, providing a strong platform for customer-led growth.
In the first half of 2017, we launched new propositions focused on bundling and personalization in our core energy supply and services businesses and on delivering growth in our Connected Home, Distributed Energy & Power, and Energy Marketing & Trading business units. I'll touch upon all of these aspects in a little more detail after Jeff has taken you through the financials. In summary, we've carefully executed on our 2015 strategy over the past 2 years, and the last 6 months have been particularly busy. Centrica's on-
Thank you, Iain, and good morning, everyone. As usual, I'll start with the commodity environment, then cover the financial headlines and review divisional results before finishing on cash flow and net debt. With respect to commodity prices, while oil, NBP gas, and base load power prices all fell in the first half of 2017, they were significantly higher on average than the first half of 2016, and remained in a band between the 70/50/50 environment that broadly existed when we set out our strategy in July 2015, and our low case scenario of 35/35/35. Let me now cover the financial headlines. Revenue was up 7%, primarily reflecting the Neas Energy acquisition and the impact of foreign exchange movements on our North America Business. As you've heard from Iain, adjusted operating profits fell by 4% to GBP 816 million.
When including the impact of a GBP 27 million reduction in the capitalized interest credit, adjusted earnings were down 11% to GBP 449 million. Adjusted basic EPS was GBP 0.082, and the interim dividend per share is GBP 0.036, 30% of last year's full year dividend and in line with our established practice. On cash flow, EBITDA increased 2% to just under GBP 1.3 billion, and adjusted operating cash flow fell 9% to GBP 1.2 billion, which reflects the impact of the one-off working capital inflow in UK Business in 2016. Adjusting for this impact and for foreign exchange and commodity price moves, underlying adjusted operating cash flow growth was 0.3%. Group net investment, including acquisitions and disposals, was down 70% to GBP 131 million, in part reflecting this, net debt fell to GBP 2.9 billion.
Returning to adjusted operating profit, here you can see the split across our two customer-facing businesses with increased profit from Centrica Business and lower profit from Centrica Consumer effectively offsetting each other, and our asset businesses delivering lower profit, primarily reflecting the operational issues at Rough. In simple terms, the reduction in operating profit of GBP 37 million has three components. First, external factors including commodity prices, foreign exchange movements, and weather, with weather the largest component, reduced operating profit by around GBP 70 million. Second, choices we've made, including taking the Morecambe field offline and ceasing storage activities, reduced operating profit by a further GBP 80 million. Third, the change in the underlying operations of the business, primarily driven by cost efficiencies and energy marketing and trading significantly stronger margin contribution, which more than offset the impact of customer losses, increased operating profit by around GBP 110 million.
Let me now turn to each of the business units to provide some additional operational and performance detail, starting with Centrica Consumer. Profit from our Centrica Consumer division fell 20%. UK Home profit was down 23% to GBP 489 million, within which energy supply profit was down 26% to GBP 381 million, reflecting the impact of warmer weather on energy consumption, a reduction in the number of customer account holdings, and the implementation in April of a tariff cap for prepayment customers, which we estimate will impact our full year 2017 revenue by about GBP 50 million. This was partially offset by further cost efficiency, with cost per UK Home account down 6% compared to the first half last year.
Ireland again delivered a good performance, with operating profit increasing to GBP 33 million, driven by lower costs and a strong performance from our trading and power generation business. As a result, first half operating profit was up 38% and 26% on a local currency basis. North America Home profit increased to GBP 60 million, up 82% in GBP, although only up 62% in USD terms. This reflects a focus on more valuable customer segments, cost efficiency measures, with cost per customer down 5%, and reduced losses from the solar business. Despite actions taken to make the solar business more efficient and scalable, we have come to the conclusion that it could not become a materially profitable business. We have therefore taken the decision to close the business and expect to have exited the U.S. residential solar market by the end of 2017.
In Connected Home, revenue increased by a third to GBP 16 million, reflecting growth in the volume of products sold. In line with our plans to invest incrementally for growth, the business reported an increased operating loss of GBP 44 million. Centrica Consumer's adjusted operating cash flow reduced to GBP 484 million, broadly in line with the reduction in operating profit. Let me turn to Centrica Business, where profit more than doubled to GBP 222 million. This was despite UK Business only breaking even, reflecting the impact of reduced consumption from warmer weather and a 6% reduction in customer account holdings, and the impact of high wholesale electricity costs in the first quarter. UK Business's first quarter loss was GBP 13 million. However, we returned to profit in the second quarter, and at the half year was break even.
We expect to be profitable in the second half of the year. North America Business operating profit of GBP 112 million was up 81% and 57% in dollar terms. Despite consumption being lower than normal due to another extremely warm winter in the U.S., optimization of our wholesale gas positions improved compared to 2016. As a result, the operating profit margin improved to 2.7%. Distributed Energy & Power gross revenue was up 25% to GBP 84 million, primarily reflecting the impact of the ENER-G Cogen acquisition in May 2016. The operating loss increased to GBP 19 million as a result of planned incremental investment in growth. Energy Marketing & Trading reported a GBP 105 million operating profit in comparison to a GBP 14 million loss in the first half of 2016.
This reflects a strong trading performance in the U.K., the impact of the Neas Energy acquisition, and the phasing of realized profit in the year of our flexible gas contracts, which were loss-making in the first half of 2016, but contributed GBP 40 million of operating profit in the first half of this year. These contracts are expected to make a small loss in the second half of 2017. As a result, we expect Energy Marketing & Trading's 2017 profit to be heavily weighted to the first half. Moving on to central power generation, operating profit was flat at GBP 24 million, with lower realized power prices in nuclear and the disposal of the Lincs Wind Farm being offset by higher achieved spark spreads in our CCGTs.
Centrica Business adjusted operating cash flow increased by 3% to GBP 445 million, less than the growth in profit, largely reflecting the one-off working capital inflow in UK Business in 2016. Moving on to Exploration & Production, where our future focus will be on Europe following the disposals of our Canada and Trinidad and Tobago assets. Overall production was down 7% to 35.2 million barrels of oil equivalent. In Europe, production was similarly down 7%, reflecting natural portfolio decline and our decision to undertake asset integrity works at Morecambe to help improve safety, operational efficiency, and underpin the residual life of the asset. This was partly offset by production from Cygnus gas field in the U.K. North Sea, which came on stream last December. In the Americas, production was down 6%, primarily due to the disposal of the Trinidad and Tobago assets in May.
European gas and liquids achieved prices were up, contributing to a 2% increase in overall realizations despite the lower volumes. European total cash lifting and other production costs also increased by 4%, primarily driven by the impact of weaker sterling on foreign currency denominated costs in Norway and the Netherlands. While additional costs due to Cygnus coming on stream were offset by additional cost efficiencies in the business. When taking into account the lower production volumes, unit cash lifting and other production costs increased 12%. Reflecting all of this, adjusted operating profit increased 13% to GBP 99 million. However, adjusted operating cash flow fell 18% to GBP 276 million, reflecting higher decommissioning spend in the first six months than last year and higher cash taxes paid.
E&P was again free cash flow positive for the first half of 2017, slightly more so than the first half of 2016, reflecting lower capital expenditure due to the phasing of project spend and disposals. Finally, Centrica Storage reported an operating loss of GBP 43 million for the period, with revenue down 85%, reflecting significantly reduced operations at Rough as we worked through the well-testing program. We announced in June that we would be making all relevant applications to permanently end Rough's status as a storage facility and to produce all recoverable cushion gas. Reflecting this change in operational use from a storage asset to a producing asset, a GBP 224 million post-tax charge was recognized in the half-year accounts.
Centrica Storage has now applied to the Oil and Gas Authority to produce up to 30 BCF of cushion gas in order to reduce the operating pressure of the reservoir to safe levels. Subject to approval, we would expect to produce about half this volume by the end of the year, with the remainder in the first quarter of 2018. As a result, we expect Centrica Storage to make a smaller loss in the second half. Longer term, we expect the cash flows from the cushion gas sales to broadly offset the cost of decommissioning the asset at the end of its life. Turning now to costs. Total reported operating costs were down 3% in the first half of 2017, as efficiency program savings more than offset the impacts of inflation, foreign exchange movement, and investment in growth.
After adjusting for items such as depreciation and amortization, impairments, smart metering, and portfolio changes to get to a like-for-like number, adjusted operating costs were down 5%, and after excluding growth investment, they were down 7%. Taking into account controllable costs of goods sold, you can see here we delivered a further GBP 124 million of efficiencies in the first half. Foreign exchange movements impacted our 2016 baseline by GBP 102 million, while inflation added a further GBP 44 million. When also including other net savings, not part of our efficiency program, total like-for-like controllable costs were lower in the first half of 2017 than in the first half of 2016.
The efficiency savings delivered in the first half are a combination of the annualization of 2016 savings and new 2017 initiatives, including the transformation of our customer operations, the utilization of digital and technology capabilities to enhance customer service and reduce call volumes, and the creation of a more integrated field operations model to drive efficiency and further supply chain improvements. We also saw a continued reduction in our global functional costs as shared service operating models became more embedded, and the procurement function continued to leverage the group's scale to reduce third-party costs. Moving on to net investment, capital expenditure was down 9% to GBP 385 million. Within this, E&P expenditure reduced by 24% to GBP 220 million, and we remain on track to spend around GBP 500 million for the full year, within our current targeted range.
As planned, we also saw increased organic investment in the growth areas. Total group net investment fell by 70% to GBP 131 million, which reflects increased disposal proceeds predominantly relating to the sale of the Lincs Wind Farm and no material acquisitions. Overall, we delivered net cash inflow of over GBP 500 million in the first half of 2017, with just under half coming from the disposals and the remaining from organic sources. As already referenced, EBITDA increased by 2%, although adjusted operating cash flow was down 9%, with the benefit of in-year phasing of 2017 cash taxes more than offset by a return to more normal working capital flows in UK Business. Cash interest payments also returned to more normal levels following a one-off interest payment received in 2016 relating to the GLID Wind Farm disposal.
A higher scrip take-up resulted in lower cash dividends paid, while other cash flows relating mainly to exceptional and pension deficit payments were broadly unchanged in total. Let me now turn to the outlook for our sources and uses of cash. This is a similar chart to the one we showed at our Capital Markets Day in June, updated for the disposal of the CCGTs at Langage and Humber, which is expected to complete in the second half of the year. With more than GBP 800 million of disposal proceeds expected for the full year and our targeted adjusted operating cash flow of over GBP 2 billion, we remain on track to achieve our targeted net debt range of GBP 2.5 billion-GBP 3 billion by the end of the year after taking into account working capital increases we typically see in the fourth quarter.
Let me now summarize using our financial framework. For the first half of 2017, underlying adjusted operating cash flow growth was 0.3%. The interim dividend of GBP 0.036 is in line with our established practice of paying 30% of the previous year's full dividend. Controllable costs were down, reflecting our continued progress on our efficiency program. Capital expenditure was GBP 385 million in the first half of the year, and we expect to be below the GBP 1 billion limit for the full year. Net debt was GBP 2.9 billion, and we expect to remain within our targeted net debt range of GBP 2.5 billion-GBP 3 billion at the end of the year, a level consistent with our financial framework parameters for our existing portfolio of businesses and also consistent with achieving the financial metrics for strong investment-grade credit ratings.
The group's return on capital employed remains well above our 10%-12% boundary condition. With that, let me hand it back to Iain.
Thank you, Jeff. Let me now provide a strategic update. We covered a lot of ground at the recent Capital Markets Day, so I'll mainly focus on progress in the half year and more recent developments. Let me start by returning to the summary slide from our Capital Markets Day 6 weeks ago. The key conclusions were that we have a clear purpose and strategy, and we have been executing against all aspects of this strategy over the last 2 years. The portfolio will have been fundamentally repositioned by the end of 2017 with a relative shift away from E&P and central power generation towards our customer-facing businesses. Centrica is in a much stronger position, both competitively and financially, given the progress made on cost efficiency and in reducing net debt.
Centrica is capable of delivering customer-led growth with clear strategic frameworks for both consumer and business divisions, stronger core businesses, and new businesses demonstrating growth with attractive unit margins. Our capabilities, people, processes, and technologies have been materially enhanced. Although our markets are changing rapidly and competition remains intense, we remain confident that we've established the initial platform from which to deliver the medium-term underlying growth and returns, which underpin our shareholder proposition. With that as context, over the next 25 minutes or so, I'd like to cover 6 topics. I'll remind you of the progress we've made in refocusing the portfolio. I then want to cover how we're thinking about customer accounts in the consumer division and provide a breakdown. I'll then provide a brief update on progress in our consumer and business divisions and our asset businesses.
Following a progress report on our multi-year efficiency program and an update on recent developments in the U.K. energy supply market, including our pricing announcement this morning, I'll conclude with a summary and outlook. Regarding the transformation of the portfolio, we've been reallocating resources from our asset portfolio to the customer-facing businesses. We announced back in 2015 that by 2020 we would shift around GBP 1.5 billion of investment from the asset businesses towards our customer-facing activities. We would target this additional resource on our focus areas for growth, energy supply, services, Distributed Energy & Power, the Connected Home, and Energy Marketing & Trading. Over the past 2 years, we've therefore reduced capital allocation to the asset businesses by around GBP 600 million, reducing E&P capital expenditure down into the GBP 400 million-GBP 600 million range from about GBP 800 million per annum. We've also announced divestments of over GBP 900 million.
In terms of reinvestment into the customer-facing businesses, we've so far spent over GBP 500 million in incremental investment, with the majority of the cash flow released from the asset portfolio, therefore being used to pay down debt and strengthen the group. Our investment focus into the customer businesses has been on building and accessing new capabilities, technologies, and markets. This includes the customer-facing acquisitions of Panoramic Power, ENER-G Cogen, Neas Energy, and FlowGem, additional organic capital expenditure, and revenue investment in our Connected Home and Distributed Energy & Power businesses. We remain on track to invest an additional GBP 100 million of revenue investment in our growth areas in 2017. We are paying for our incremental revenue investment for growth through our own efficiency program, which I'll return to in a moment.
We've also committed material resources towards new capabilities and propositions in our core areas in energy supply and services. This includes investing in new marketing capabilities, new propositions such as Local Heroes, and reward and loyalty schemes such as British Gas Rewards in the U.K. and Plenty in North America. Earlier this year, we announced the establishment of Centrica Innovations, under which we plan to invest on average about GBP 20 million a year over the next five years. It will help identify, incubate, accelerate, and partner with new technologies and innovations that will enable us to develop further offers, products, and services for our customers. In the first half of 2017, we made our first investment under Centrica Innovations, acquiring the assets of Rokitt Astra, a company who have developed a proprietary data. A recent decision to close our residential solar business.
In the U.K., with the disposal of the legacy energy management systems business. I'd now like to turn to the subject of consumer account holdings. In our Consumer division, we've seen significant movements in our customer account holdings with an overall reduction of nearly 700,000 since the middle of 2016. However, 60% of the net reduction is a direct consequence of our own choices, with the remaining 40%, or 276,000 accounts, reflecting the underlying movement in our core portfolio over the last year. This illustrates the problem with focusing on a single aggregated number, and we've decided to provide you with some additional granularity. This chart shows the movements of customer accounts within Consumer since the middle of 2016. The three bars in yellow on the left reflect choices we've made.
We lost 257,000 customer accounts as a result of the roll-off of a number of collective switch deals in the U.K. and low-margin aggregated customer books in North America. Just over half of these losses were in the U.K. We are currently no longer actively prioritizing customer acquisition in these channels because they're very low value. We've also decided to scale back our door-to-door channel in the United States, which has had an impact of 66,000 accounts. This is a challenging channel to manage to a consistently high standard, and there's considerable regulatory pressure in this area. In addition, in the U.S., we were running 90,000 services protection plan trials, which have come to an end. These three choices we've made accounted for over 400,000 of the reduction in customer accounts as we focus on value, not volume, with two-thirds of this reduction in North America.
Turning then to the underlying effects in green here, competitive pressures have resulted in a net 572,000 energy and services accounts switching away from us on both sides of the Atlantic in the last year. Against this reduction, we've added nearly 300,000 Connected Home customer accounts over the same period, which carry attractive gross margins. This gives us an underlying net reduction in our core of 276,000 accounts. This is split 144,000 in North America and 132,000 in the U.K. Even though the U.K. has higher losses in energy and services, Connected Home offsets two-thirds of these, whereas we've only just launched Hive in North America. As Connected Home continues to grow and we look to also grow our services accounts, we will be looking to stabilize and then begin to grow our overall consumer account holdings.
This reduction of 276,000 is the net impact on our core, and within that, we've also seen large numbers of customers joining us. We've been actively engaging more strongly with our standard variable tariff customer base and offering them more tailored propositions. We also have a number of other new offers being tested currently. We've seen significant numbers of customers choosing new offers, such as our multi-year fixed price offer. As a result of these actions, we're also seeing improved complaints and NPS levels, customer take-up of new propositions and tariffs, and higher levels of customer engagement. This is all part of our approach to customer segmentation and value management, which Mark Hodges outlined at the Capital Markets Day. This chart is the slide Mark showed at the time, providing an illustration of how our energy customer base is distributed by value.
Using the U.K. as an example, during the first half of the year, we retained 97% of our customers in the high and medium value segments and 91% of customers in the low and negative value segments. We're convinced that a stronger focus on customer segmentation and value management, new innovative propositions, and improved service and cost efficiency will serve our customers better and deliver more enduring value for Centrica. Let me now complete the consumer picture with an update of progress against the five pillars of our strategic framework. In some key marketing campaigns in the latter parts of the year, our plans continue to indicate that we will have sold 1 million hubs and 1.5 million products by the end of 2017, and we've just passed the 1 million product milestone recently.
Also, in Connected Home, I'm pleased to say that as of last week, we're now live in another new market, Italy. We have been prioritizing Italy for launch and potential partnerships, and we'll update you on progress later in the year. In addition to one-off sales of hubs and products, we've launched excuse me, a range of subscription offers, including our Welcome Home and Home Check propositions in the U.K. and North America. These are easy-to-use solutions that enable customers to personalize, control, and interact with their home through the Hive product range, and initial take-up has been good. Moving now to Centrica Business, where complaints were also down in the U.K. and North America energy supply. UK Business delivered a disappointing operating result, as you've heard from Jeff. However, performance improved in the second quarter, and we have a clear recovery action plan in place.
In wholesale energy, we delivered further strong performance in Europe with Neas Energy continuing to perform ahead of its investment case and good optimization performance in North America. We also continue to make good progress on our newer focus areas of energy insight, energy optimization, and energy solutions. Revenue and customer sites were up in our Distributed Energy & Power business unit. In energy insight, we deployed a further 6,000 Panoramic Power sensors in the first half, taking the cumulative number to 44,000 across 1,500 sites in 30 countries. In energy optimization, we now serve customers who own decentralized assets with installed capacity of over 10 gigawatts, and we've now commenced our pioneering Cornwall Local Energy Market trial.
In energy solutions, ENER-G Cogen continues to perform in line with our expectations, and we now have over 1,400 long-term contracted sites across 13 countries, and overall, we have 600 MW of capacity under contract. Let me conclude the business review with a brief update on our asset businesses. I mentioned earlier that our announced and completed divestments now total over GBP 900 million, near the top of the GBP 0.5 billion-GBP 1 billion target range. In Central Power Generation, we completed our exit from wind generation ownership with the sale of the Lincs Wind Farm following on from the disposal of our interest in the GLID wind farm in 2016, and in June, agreed to sell our large gas-fired power stations at Langage and Humber. In E&P, we completed the disposal of our Trinidad and Tobago gas assets and announced the disposal of our portfolio of assets in Canada.
Once this transaction is complete in the second half of 2017, our E&P activity will be focused solely on European assets. In gas storage, as you've already heard from Jeff, we announced in June that following the results of our extensive well testing program and the decision that we could not safely continue injection and storage operations, we would be making all relevant applications to permanently end Rough status as a storage facility and to produce all recoverable cushion gas. Completing the picture for our asset business portfolio transformation, last month, we announced an E&P joint venture with Stadtwerke München and their Bayerngas Norge assets. The combination of both parties' assets will create a strong and sustainable independent E&P business with a compelling strategic rationale. The joint venture brings together two like-minded shareholders and combines a complementary mix of producing and development assets in Northwest Europe.
It will extend Centrica's reserves to production ratio from under seven to above eight years and reduce our net exposure to decommissioning. The entity will be self-financing with an 80% reinvestment rate, with the remaining post-tax operating cash flow being distributed to the shareholders. Our share of production will be 30 million-40 million barrels of oil equivalent per annum, lower than our previously announced 40 million-50 million barrels of oil equivalent targeted annual range. However, we believe this lower level is adequate to allow E&P to fulfill its role in Centrica's portfolio of providing cash flow diversity and balance sheet strength for the group, and the JV will have sufficient materiality overall to be sustainable.
The transaction is expected to generate GBP 100 million-GBP 150 million of gross NPV through synergies, and importantly, we see the joint venture as having the opportunity to participate in further consolidation should value-enhancing combinations arise. We also do not rule out the possibility of an IPO in the medium term. Centrica would be open to having a lower ownership percentage in a larger entity, just as we've done in this step, provided we retain sufficient influence to shape the strategic direction of the business. The transaction is expected to close in the fourth quarter. Let me touch briefly on progress in our GBP 750 million efficiency program, which is important to enable us to remain competitive and to build much stronger and scalable foundations for the future.
Jeff has already covered our continued strong performance in the first half of 2017, with delivery of a further GBP 124 million of savings and an additional 1,100 of like-for-like headcount reduction. We remain on track to achieve our 2017 full-year targets of GBP 250 million of efficiencies and a 1,500 reduction in direct like-for-like headcount. If we deliver on that target in 2017, by the end of this year, we will have delivered around GBP 650 million of savings since 2015 and be well ahead of our original plans.
In line with those plans, these efficiencies have been delivered from a number of areas, including the implementation of new organizational structures and operating models in our energy supply and services businesses, efficiencies in E&P, the creation of global functions, as Jeff outlined in our large support activities such as IT, procurement, finance, and HR to drive simplification and standardization, and the unlocking of material savings and third-party costs. We've also reduced organizational layers and increased spans of control across Centrica. Before summarizing, let me turn to the U.K. energy supply market. The market remains highly competitive, with the number of suppliers increasing over the past six months to nearly 60 and customer churn continuing at high levels. As you'll be aware, following a request from the Secretary of State, Ofgem has committed to consult on new measures to help make retail competition more effective and to protect vulnerable customers.
This would be in addition to the tariff cap for customers on prepayment meters, which was implemented in April of this year following the comprehensive two-year Competition and Markets Authority review. We have made clear proposals for how the market should be reformed and have done so in writing to BEIS, Number 10, and to Ofgem. Although there are a number of specific sub-recommendations, our proposals can be summarized into two themes. The first is effectively phasing out the standard variable tariff as we know it by the market-wide ending of evergreen contracts and changes to the default tariff mechanism. The second area of our proposal is to level the playing field with all suppliers paying a share of government-imposed social and environmental policy costs.
Along with differences in pace of smart meter rollout, this cost disparity leads to market distortions, and having reached nearly 60 suppliers, the additional incentive for new entrants is no longer necessary. We will continue to engage constructively with both the government and Ofgem to help deliver the best outcome for our customers and other stakeholders. We announced this morning that following our price freeze, which has now been further extended effectively to the middle of September, from that time, we would be increasing the price of our standard electricity tariff by 12.5%. This is our first standard tariff increase for nearly four years and follows four consecutive price cuts. It affects 3.1 million of our 8.4 million customers. With our gas price remaining unchanged, this means the average annual dual fuel bill for a typical household will rise by GBP 76 or 7.3% to GBP 1,120.
Since 2014, the costs of delivering electricity have been increasing. This has been largely driven by increases in transport and distribution costs and government policy costs, which generally affect electricity costs only. Centrica has obviously experienced the same cost pressures from these areas, but we've been able to hold off increasing prices until now thanks to our own efficiency program. However, we've been selling electricity at negative margins for some time, and with additional increases in these areas, we have had to announce this price rise beginning in mid-September. The electricity-only increase announced today means the overall dual fuel increase is at the lower end of competitor price increases this year.
You can see on the chart on the right, looks a bit like the CN Tower, you can see on the chart that we will retain a very competitively priced standard variable tariff position even after our increase has been implemented. Of the 10 largest suppliers, British Gas would be the third cheapest, only GBP 11 above the lowest priced and GBP 67 below the most expensive. Our dual fuel standard tariff rate will still be cheaper than 84% of the contracts in the market. One area we've been discussing with the government is the protection of vulnerable customers, and especially as we go into this winter, before any further changes to the market have been recommended by Ofgem. As a result, we've also announced this morning that we will be unilaterally protecting an additional approximately 200,000 vulnerable customers from our announced price increase.
These customers are those who automatically qualify for the Warm Home Discount, but who are not protected by the prepayment tariff cap. They will therefore see their average dual fuel bill protected at an average tariff level of GBP 1,044. Let me now summarize. 2017 has been a very busy year so far, and although some of the political uncertainty hanging over us has dissipated, energy supply markets in particular remain highly competitive, and we've seen impacts of very warm weather on our results. However, we've delivered a solid performance in the first half of 2017. We remain on track to achieve the 2017 group targets we set out in February. We expect to deliver adjusted operating cash flow in excess of GBP 2 billion again this year.
Per our financial framework, group capital expenditure remains limited to GBP 1 billion in 2017, with E&P CapEx expected to be around GBP 500 million. Having invested GBP 39 million of incremental revenue investment in our growth businesses in the first half of the year, we intend to spend around GBP 100 million for the full year. We remain on track to deliver a further GBP 250 million of cost efficiencies in 2017 and to reduce direct like-for-like headcount by a further 1,500. We expect net debt to end the year within the GBP 2.5 billion-GBP 3 billion range, the optimum sustainable level with the current portfolio in the current environment. We are meeting all boundary conditions of our financial framework and have announced a GBP 0.036 per share interim dividend.
As we laid out in 2015, any decision to reintroduce a progressive dividend will continue to be linked to our confidence in our ability to deliver underlying adjusted operating cash flow growth over the medium term, of course, assuming that we also will have achieved net debt levels within our targeted range by the end of the year. In summary, the strategic progress we've made over the past two years means Centrica will have been fundamentally repositioned by the end of 2017. We have clear strategic frameworks for both the Consumer and Business divisions, and with enhanced skills, capabilities, and technology, we can now address new customer needs and customer segments and apply ourselves to new markets in addition to strengthening our core.
Although the world remains uncertain and our markets are highly competitive, we've established a strong platform from which to compete and to deliver long-term shareholder value through both returns and growth. Thank you. I'd now like to ask Mark and Mark to join us on stage to take your questions. As usual, just raise your hand to ask a question. When I get to you, please identify yourself before asking your question. There are microphones at each station. You can lift them out. It's a very fancy room, this. I'm just saying that for our UBS colleagues. If you lift the microphones out, please press and hold down the silver button to speak. Thank you very much. Lakis, why don't you go first? You caught my eye. We'll go to Lakis, and we'll just keep going in the middle bank for a minute.
Am I on?
You are.
Yes. Okay. Lakis Athanasiou, Agency Partners. A few questions, one routine. On Rough cushion gas, are you planning to do more than the 15 BCM you mentioned in Q1 through 2018? What is happening with these services? You're backing out of solar. What about the rest of the business? Is that going to go to profit, or was the losses, which we presume are going to be there because we don't really know since you reduced your quality of reporting on North America Home. What's happening there? Also, mass markets. You got a count reduction, but we don't know where, again, because you've stopped spitting out regional customer numbers. What's happening? Is it Canada? Is it the Northeast? Is it Texas? What is going on?
Okay. I'm going to ask Mark Hodges to talk about services in North America, and talk about the current situation and the future. I think it's a little bit unfair to say we've stopped providing information and splitting things out. We do split things out regionally by business unit, obviously not sub-regionally, I accept. Just before we do, on Rough, on the cushion gas, there are 2 stages in this effectively. The first is a safety-related permission that we are seeking to reduce the pressure in the reservoir to below 1,500 pounds per square inch. The reason for that is that we believe the well stock will be particularly secure at pressures below 1,500 pounds. We saw some failures in our test regime at that sort of level, and if we take the pressure down to that level, the barriers will be even more secure. That's step 1.
Step 2 is for us to get permission from the Oil and Gas Authority and the Competition and Markets Authority to cease storage obligations and operations, and therefore, Rough would be returned to a producing asset. We currently have a production license for the area, but we are bound by the obligation to run it as a storage asset at the moment. Once we get those permissions, we would then be able to produce all remaining recoverable gas in the field. As you know, the value of that gas broadly covers the future net present cost of decommissioning, depending on the technology curve that we apply. That's what we're going to be doing on Rough. Now, Mark, in terms of services, North America.
A couple of things. One, we do see services in North America as an opportunity for growth. It's an important part of the business as we laid out at the Capital Markets Day. If you take the U.S. year-on-year performance, around half of the improvement is down to performance improvements in solar that we've made anyway, before the decision to exit. Then in terms of the rest of the business, the energy and services, it makes up the other half of the profitability improvement. Services is broadly flat from a profitability perspective, which is really ongoing competitive pressures because it's a competitive market, as you know, offset by our own operational efficiency. We continue to drive costs out of that business. What we're looking at is the franchise model.
We're looking, as we explained at Capital Markets Day, how do we improve the sophistication around some of the pricing of some of the products in North America as well as in the U.K. In services as a core pillar of the strategy, as we explained. I would like to grow it both here in the U.K. and in North America. If we need to think about some more disclosure to help you understand that, I'm sure the man on my right will help me think about that.
Just to finish, one more comment on that. We're not just bound to the U.K. and North America in the matter of services either. The model that we launched and showed you at the Capital Markets Day, the Local Heroes model, could be applied in other markets as long as we can find the right mechanism to guarantee the quality of the work. We are seeing services as a diversification, an important diversification beyond energy supply, as well as all the other pillars to the right of energy supply in both divisions.
Just one data point.
Yeah
Sorry, just one data point, Lakis, to your question in terms of services. Iain showed that there were 90,000 in terms of the protection payment trials. If you take that number out of the U.S. services business, it actually grew by 18,000 accounts in the first half of the year. Whilst that hasn't translated into any significant uplift in profitability, it did grow marginally in the first half of the year in terms of the business we're really interested in being in.
Let's go to we'll just do two or three more in the middle, then we'll just go to the remaining.
Mark Freshney from Credit Suisse. I have two questions. Firstly, on the balance sheet You've got over GBP 6 billion of gross debt. Net debt looks as if it's going to be less than half of that at year-end. You've got a balance sheet which is entirely inappropriate for the current size of the business. Is there anything you can do to try and reduce the interest charge and actually make that more efficiently? Secondly, on Connected Home, I know you've given us a lot of detail at the CMD last month or two months ago, but in my calculations, the annualized run rate of growth for revenue in Connected Home needs to be 100% each year for the next five years to reach the GBP 1 billion indicative. Can you give us more color on what the revenue uplift from going to new markets might be?
It appears a very aggressive target.
I think that one is definitely one for Mark Hodges. Similar questions that I've been asking him. No, I'm teasing. That will be one for Mark. Jeff, on the gross and net debt and interest charge?
Yeah. Very much take the point, [Iain], in building the financial resilience of the group and getting net debt to the level that we think is appropriate for the businesses we have. That has meant that we have a lot of liquidity and a lot of cash, because obviously the gross debt has termed out to a longer period. We are absolutely looking at all options and ideas, in terms of how we would potentially improve that. You would imagine, though, that in the current low yield environment, typical types of liability management options are more expensive. We continue to look at those. To date, we haven't found anything that we've felt is sort of economically attractive, but we'll continue to look at that going forward.
On that point, if I can just add one other dimension, Jeff. At the Capital Markets Day, we were very clear that we're not rushing out to do this, but we would re-expand the balance sheet if we found the right things to enter into, joint ventures or acquisitions. It's not like we're going on a wild spending spree. We'd be very careful about what it is that we target for investment. Clearly large acquisitions are outside of the current financial framework sources and uses of cash that we've been presenting. Mark, Connected Home growth.
Yes. Well, the answer is very much along the lines we gave at the Capital Markets Day. If you think about the dimensions of growth and what we're trying to do, and I recognize that we do need some attractive growth rates. I think about it in terms of the product range, which you know we're expanding. Iain's already referenced the camera, the Hive Hub with the audio analytics capability, the leak detector, adding to the capabilities we already have. Of course, over time, we would expect to integrate some third-party devices into our ecosystem to give the customers more choice. That's one dimension that would promote growth. There is the subscription model that we are pushing hard on now.
That lowers some of the price point pain from one-off purchases, and of course, builds an enduring revenue model that carries on year on year, so you're adding to it over time. We're working hard, having launched a couple of subscriptions here in North America to really make those work for our customers. There are then the channels that we go to market. We have more I think we can do in our existing businesses, whether that be British Gas, Direct Energy or Bord Gáis. Those are customer bases that we want to penetrate more with the product range. There are in the current markets we're in, there's more we can do. We're only a few weeks into our North American launch. We're learning a lot about our digital sales journey and what we can do to activate customers to access our products.
Finally, as you referenced, the partnership conversations are really important in new markets. We are talking to a number of very large organizations. I mentioned at the Capital Markets Day, they're not rooted in the energy sector, so in telecoms and banking and some energy players. Some of these conversations are with people who have huge customer bases in the way that we do in the U.K. I think that's a critical part of the growth agenda for Connected, is tying up those deals. The good news is people are really interested in our capability. They look to what we've done in the U.K., and that's perceived to be very successful. They're looking for us to help them replicate that kind of success in their own market. Those things all need to happen. I don't think it will happen in some straight line basis.
Iain does often ask me how we're going to meet the challenge. As we said, and Iain said in his remarks, we're confident of getting to the million hubs this year, which would be a great start.
Thanks, Mark and Mark Freshney. Thank you. Let's keep going along the row.
Good morning. Chris Laybutt from JP Morgan. Just a couple of questions. Firstly, on the dividend, you said that you've got confidence of growing operating cash flow and you're now within the band for net debt. Has your confidence increased significantly, would you say, or moderately? How confident are you? Would be the question, I suppose. Therefore, how confident can we be of seeing some dividend growth in February? On the standard variable tariff customer margins, can you give us an idea of, perhaps at a group level, where you see margins at the end of the year? If we could also, just on the standard variable tariff customers themselves
Are those customers now paying a slightly higher margin, or are you just recouping costs for those customers? One more sneakily, Energy Markets and Trading, out of the GBP 105, Jeff, could you give us an idea of how much was U.K. trading? You mentioned those three buckets. An indication would be very handy. Thank you.
What I'd like to suggest in addition to Jeff commenting on Energy Marketing and Trading is to ask also Mark Hanafin at that time, just talk a little bit about what's going on in Energy Marketing and Trading. It's been a great result the first half. Firstly, on the dividend, it's not a very sneaky question, a very overt question. Look, first of all, we've been very clear about the philosophy, which is that we need to be confident in our ability to grow operating cash flow in the medium term, in line with our goal of 3%-5% per annum. Now, I'm encouraged that hitherto it's now 2.6% if you take it off a first half 2015 base.
The analysis that we show you, where we have to correct for foreign exchange and commodity prices and one-off working capital movements is obviously highly sensitive to small adjustments to cash flow in any particular period. We're doing our best to form a judgment from that. Obviously, as we go forward and get the balance sheet into the right place, we'll be looking really closely at that. Not only our historical delivery, which so far has been broadly in line with that 3%-5%, but obviously most importantly, what do we think about it going forward? We said in 2015 that the cash flow growth in the 2015-2020 period would be dominated by our cost efficiency in the early part, and would then have to do a handshake, if you like, with cash flow growth from gross margin, and in the second part.
Clearly we will be updating you in February around both aspects, how we feel about growth and how we feel about our cost efficiency going forward. At the end of the day, the dividend decision is a matter for the board, and we will obviously take all of these factors into account as we walk towards February, I can't say any more than that. The men in the front row would not appreciate it. Mark Hodges on SVT, various aspects of it, then we'll move to EM&T, Jeff and Mark.
Thanks. Chris, without trying to be unhelpful, we probably won't want to give a prediction of where net margins would be at the end of the year. Typically, as you know, looking backwards, we've operated at somewhere between 4% and 6% post-tax, at GBP 42 to about GBP 65 per dual fuel customer profitability. We don't have a target range. We do genuinely believe that profitability is an outcome of competition. As Iain described earlier, we've positioned, we think, our standard variable tariff well in the market to be competitive. The other thing we don't do is have deeply discounted fixed deals. The profitability of our fixed deals is pretty much on a par with where we are on the standard tariff. There's not a huge margin disparity.
The other thing we showed you was the value segmentation, Customers will disperse around that segmentation across all product types. It's not as if one product is in one end and another product is at the other end. As we described at the Capital Markets Day, the drivers of some of those value are things like propensity to churn, propensity to buy a second product. That can happen with a fixed product or a standard product. I think that's probably at this stage what we'd say on margins looking forward. The other big factor, of course, which we're very thoughtful about, is at the end of the day, this will partially be down to consumption and weather in the second half of the year as well, which at this stage is the biggest variable in terms of our performance looking forward.
Thanks, Mark. Jeff and the other Mark on EM&T.
I'm going to just comment briefly and then turn it over to Mark. I think my observation would be that the energy marketing and trading business broadly in the U.K., which includes the proprietary trading business, LNG, origination, is a bigger business than Neas. Of the remainder that isn't the flexible gas contracts, it would be weighted towards the historical U.K. EM&T business as the majority of it. The Neas business makes a significant minority or a reasonable minority of the balance as well. Mark can comment on the business itself.
Yes. I'd say probably about a third of the net margin, that's pre-OpEx, of the first half result is U.K. proprietary trading. It's been a strong performance across the board. LNG has performed very well. Origination has performed very well. Neas is running at maybe twice what we expected. Part of that first half performance is the extreme volatility that we saw in electricity prices across Northwest Europe at the end of last year and the beginning of this year. Of course, volatility on its own doesn't create profit. You have to be able to execute. I think across both Neas and the traditional trading businesses, we have been able to execute very well on that. In Jeff's presentation, he mentioned that there was about GBP 40 million in the first half related to flexible. This is a legacy flexible gas contracts.
Some of which are take or pay, we're looking at sort of a phasing in smaller losses in the second half. When you take all of that into account, I think the results are very heavily weighted towards the first half.
Christopher, thanks Mark. When we get to the end of the year, we'll need to explain this structural part, which are these legacy contracts. They go back 20 years. 2 out of 3 of them are going to be rolling off over the next year, which is in some ways good in terms of demystifying the result, but they are some of the more valuable ones that'll be rolling off. We're going to need to explain how this all is going to evolve when we get towards February. I'm going to take 2 more questions in the middle. Can I just see, are there questions in the wings? Yes, there are. Okay. We'll take 2 more in the middle, and there are 3 hands up. All right, 3. Let's start there, and then Ed.
Hi, it's Martin Brough from Deutsche Bank. Just a quick question on U.K. nuclear. Obviously, you're a minority investor there, not in full strategic control of what happens there. In terms of the balance between prices gradually being squeezed over time and very good operating performance in terms of outputs, but then issues around timing of CapEx or investments into the fleet. How do you regard the sort of outlook for dividends there? Is it a stable one? Do you expect a bit of a squeeze on dividends, or is there any chance of having to put a bit of cash in at some point if you need to do some investments that will result in some paybacks later on?
As you know, we've said that we hold the nuclear business as a financial investment effectively because its strategic optionality is limited, especially after we exited Hinkley Point C, which I don't regret. Mark, how should people think about the dynamics in the nuclear business?
I think obviously there's uncertainty around production levels, but the performance has been exceptional. The team in Barnwood have demonstrated over the period that we've owned the assets, terrific engineering skills to manage the plants and improve the load factors. This year is also shaping up to be a very good production year. It's of course exposed to the absolute electricity price. From that perspective, I would say that the capacity market revenues that are going to start coming in, particularly 2018, 2019, when we see the first of the T minus 4 auctions delivering, clearly add a lot of revenue into our nuclear business. We mustn't forget it's zero carbon electricity production. That will benefit from whatever mechanism that government ultimately decides needs to be in place to reward low carbon generation. At the moment, that's the carbon price support mechanism.
Thanks, Mark. Then two more, then we're definitely going to the wings.
Hi, morning everyone. It's Nick Ashworth at Morgan Stanley. A couple just on the growth businesses. Firstly on the revenue investment. You talked about the GBP 100 million that you are going to be investing in these new businesses through the course of this year. You also talked about going into a new market, Italy. I guess the question is around further new markets in that business. Because I know some of them were talked about at the Capital Markets Day. Are there more on the agenda for this year into next year? Presumably the revenue investment will continue into next year, given that there could be new markets or continuing on the investment in the markets you're growing into this year. If we could get a little bit more color around how that could progress over the next year or two.
Secondly, just a bit wider from that. We got a lot of detail around the growth businesses at the Capital Markets Day, and clearly we've got the revenue targets for 2022. In terms of a bit further down the P&L and thinking about the EBIT contribution and the profitability of these businesses, at what point do we get more color on that? How do you think that can evolve? Are there certain KPIs or targets that we should be thinking about as these businesses grow?
Thanks, Nick. If it's okay, guys, I'll quickly answer both parts, which is just that clearly in a success case, we would want to grow the revenue. That will mean that we would deepen the J curve potentially before we actually get back to break even, it would result in a higher growth rate. Clearly these businesses are showing signs of natural growth with the trends of the market. We will be updating obviously on what our investment plans are for these businesses in February, we're right in the middle of beginning the planning process at the moment. We're cautiously optimistic on that. I think in terms of the new markets, we've mentioned a number of them, Italy for Connected Home is first, in DE&P, we've already entered into Denmark and Sweden and Hungary and Italy.
There's some material shifts going on. In terms of the quality of EBIT margin, we're not disclosing that fully, Mark Hodges did talk about 20%-40% unit gross margin in his presentation at the Capital Markets Day, which I think gives you a pretty good clue as to the sort of quality of businesses we see. Therefore, provided they're attractive, I can assure you we're not going to invest in them if we don't think they have attractive unit margins. We will be showing you as the growth curves accelerate, hopefully they will, we clearly recognize the need to provide you with some better operating KPIs. It's just a bit early. Ed, we're going to move over to Fraser McLaren.
Edmund Reid from Lazarus. Three questions. The first one is on the cost of the smart meter rollouts in H1, also your expectation on the trajectory going forward in terms of the rollout, given that you're quite a long way ahead of your other big six competitors. Second question is on prepayment customers. Are those customers profitable post the price cap? The third question is on EV charging. Clearly that's in the news. Seems like a huge opportunity. Is that an area that you are looking at?
Okay, just briefly on EV charging, we had it in the media call as well. Look, we have been involved in that a little bit in terms of deploying charging points. We are looking as a technology vector into how the EV market is going to change ultimately the way in which the distributed system works. We will be looking at the integration within the home of EVs. Whether we're going to get into the charging part of it, I don't know yet. There are lots of companies across Europe that are doing that with integration with Wi-Fi and other things. It's early days. Mark Hodges on the other two, smart meters and prepayment profitability.
Yeah. On smart meters, as you know, we continue to lead. As you say, we're up to about 4.5 million meters installed. We still think it's a good thing to do for customers. The NPS of those customers is still higher than the average. It's about 15 points higher, so that's a good way of engaging our customers. We also know that calls to us on billing inquiries are a lot lower. We know that customers are saving money on average. With that many meters now, we know that annually they're saving around 3.5% of their annual bill. We're fundamentally still in the position where we think a smart meter rollout is a good thing to do. There are challenges. We've been around them a number of times in this room.
The number of SMETS1 meters becomes a slightly bigger concern because we need to figure out how to make those interoperable. We've had continued delays with the DCC and SMETS2, although we're hopeful that we're working through those now and we can begin SMETS2 at scale in the first half of next year. There are challenges. To your point about how will this continue, and it will have an effect on cost. There are some challenges. There is some public perception issues. There's been a lot in the media recently around smart meters and safety. We put a huge amount of emphasis on safety of the installations that we're involved in. There are some customers who at this stage don't want a smart meter.
Because it's an opt-in scheme, not an opt-out scheme, nobody quite knows what will happen as you go well beyond early adoption, and nobody's going to, in the end, force customers to take these meters. There is, I think, a belief amongst certain people that as more players install more meters and it becomes the norm, that takeup will naturally increase. I think that's still to be proven. In terms of cost, we don't disclose separately the cost of the program, but of course it's one of the contributory factors to the underlying cost we talked about this morning going up, and it's a small part, but it's a part of why we've increased the electricity prices today.
Thank you, Mark. Thanks, Ed. Fraser?
Oh, sorry. Prepayment meter customers.
Oh, sorry. Go ahead.
Yeah. In terms of the profitability, they are making a contribution. Jeff outlined the financial impact in the year. What we're doing to maintain or improve the profitability is obviously reduce our cost to serve. Generally, our whole cost efficiency program is to make sure that any gross margin impact that we see, we try to offset as much as possible with our own cost efficiency.
Thanks, Mark. Fraser McLaren and John Musk.
Good morning. McLaren from Merrill Lynch. Just three quick questions, please. On vulnerable customers, does the 200,000 reflect your view on the extent to which caps might be extended, or is it just a starter for 10? Secondly, how should we think about the timing of accounting in earnings terms for Rough given the mismatch between gas revenues and the closure costs? Finally, on pension payments, you made an extra GBP 76 million of additional contributions in the first half. Could you remind us, please, about how much we should expect in the future?
The last two are going to be for Jeff and vulnerable customers, Mark Hodges.
There is a debate to be had around what's the right group of vulnerable customers. Ofgem we're expecting to come out and consult with the industry in the next few weeks. We will obviously actively participate in that debate. There are various definitions. It's quite a difficult thing to tie down vulnerability. What we wanted to do today was at least make a start. We're not really making a declaration of limiting it to this group, but equally, these are the people we feel have been missed, they're not covered by the prepayment meter cap. We think it's the right thing to do to shield them from this particular increase whilst the broader debate takes place. I'm sure it will take some time to resolve this issue.
We wanted to be front-footed, do what we think is the right thing for this group of customers, and then let the wider consultation take its natural course.
Yeah, for Rough and pensions.
Yeah, in terms of Rough, the decommissioning liability is effectively set up. It kind of has a two-sided balance sheet entry, one setting up the liability and one for the asset itself. Effectively, the P&L impact, so to speak, will occur over the next four or five years, assuming that we're successful in turning it into a producing asset. That will effectively run through the DD&A effectively of that asset, so that at the end of it, once we've produced the gas, it'll just be a balance sheet cash flow item at that point as it's decommissioned. Sorry, on the pension, say again the pension question.
Pension payments, I think.
You made an extra GBP 76 million of payments in the first half of this year into the fund to reduce the deficit. How much are you planning to spend in the future?
Yeah. The GBP 76 is part of our natural asset-backed contribution profile that we have in place. We, as part of the last triennial deficit negotiations that we concluded with the pension trustees at the end of last year, seize that broadly continuing on for about a 15-year period. In the short term, though, this year into next year, it's a little higher as the old one isn't completely rolled off while the new deficit payments come in. It's a little higher next year. It's about GBP 100 million, and then it sort of falls back down into that GBP 75 million in the future years after that. Obviously, every three years, we end up back revisiting that, and the next one is March 2018, which doesn't seem all that far away now.
As we get later next year, we'll be re-looking at that, and we'll have to see where both asset values and discount rates have got to in that time.
John Musk.
Morning, everyone. It's John Musk from RBC. Just one question left, which was on the rising complaints in home services in the U.K. Just to get some color on that and whether that's potentially any indication that you're going too fast on some of your cost efficiencies.
Mark?
Thanks, John. Look, we had a disappointing performance in Q1 actually in terms of services complaints. Our complaints are down in home energy in the U.K. significantly, again, 18% or 100,000 complaints in absolute terms. In home services, they were up by 42%, which is actually 20,000 additional complaints. Really, it was the hangover of a move we made at the back end of last year. We closed a site in Oldbury, and we shifted some work that was distributed around our network to Stockport, and we just didn't quite execute it as well as I would have liked us to. There's a lot of learning in that as we move forward. The good news is most of those complaints were for inconvenience. We were getting some of the scheduling and dispatching of engineers wrong. We fixed that.
That was fixed by the beginning of Q2, and we've seen a significant improvement during Q2, and I would expect that to continue during the second half of the year. It's certainly not a trend, and something that we've extracted the full learning from in terms of making those kinds of organizational changes.
Any more here? Okay. We have three, I think, or two or three here. Please. Please. Thanks.
Thank you. This is the 200,000 customers that you've automatically given the GBP 76 credit. Is this the extent of all your customers who receive Warm Home Discount, or is this a subset of the customers?
Deepa, thank you. Because of our organizational changes, actually, Mark Hodges is not going to answer the one on UK Business. It's now been passed to Mark Hanafin, he will cover that. I will cover the lifting cost item because that now reports directly to me, Mark Hodges will continue to talk about the 200,000 customers. Mark Hanafin on UKB.
Okay. Yes, we had a disappointing first quarter. There were quite a number of factors that all went against the business in UK Business. We had warmer weather. We had extreme electricity costs. Those electricity cost volatilities that I described helping EM&T hurt UK Business. Some of that will come back because you're signing contracts over one, two, three years. Therefore, those very high costs at the beginning are causing losses in those contracts, obviously, they're being priced appropriately to deliver value over the period. The third area was lower customer numbers. There was a couple of other aspects as well that hurt. One was continued highly competitive environment and margin pressure. There was also some variances in the settlements process of estimating and imbalances, which, of course, is a part of the nature of the business, which were outside of the usual range.
It's just a variable that happens in all of the supply businesses. That was the reason. There are some very positives, though, in the business. Customer retention in the higher value SME area was down just 1% since the middle of last year. The losses were mainly planned. They were in the very low margin multi-site I&C area where we had looked to reduce. Bad debt charges are continuing to fall significantly. We've had very strong debt collection performance. Complaints are down very significantly, NPS is up. I think there are some positives there. In terms of the new organization, since March, we've created Centrica Business, which UK Business is now part of. Immediately we see that the interface with trading potentially gives us some opportunities to improve the value proposition for UK Business.
Similarly, some of the innovations in North America, some of you will have seen the energy portfolio products in the Capital Markets Day. Those kinds of innovations we look at applying that to the U.K. as well.
Thanks, Mark. Deepa, on lifting and other production costs, firstly, there are a number of factors going on, but as Jeff mentioned in his presentation, there is a bit of inflation starting to re-enter the market as you've seen higher prices and also stable prices, which is encouraging more activity. Actually, there's quite a long way to go before the supply chain is anywhere near tight. I don't expect that to be a rapid acceleration. The second is that our volumes are actually down in the first half, partly because Morecambe was shut down, and the shutdown of Morecambe is also adding costs as we are repositioning Morecambe for the new configuration. Finally, prices are up in the first half versus last year. That obviously indicates that you're starting to see better margins, and that's flowing through into adjusted operating profit.
I think in summary, I would say that the lifting costs still of around GBP 12.5 are feasible. We need to keep a very close eye on that because the sustainability of our new joint venture with Vår Energi in Norge depends on the ability to replace reserves at a sensible rate. Lastly, we had the 200,000 Warm Home Discount customers again. What was the question? I've forgotten.
Deepa, was it the narrow group or the broader group? It's the narrow group, so the people who automatically qualify for Warm Home Discount as a matter of right and who are not already covered by the prepayment meter cap are the ones that we've looked after with the announcement that we made this morning.
How many more customers did you pay last year, the Warm Home Discount?
It varies every year. This group of 200,000, last year, it was around 600, I think, from memory. Was the broader group in terms of it being means tested.
Thanks, Deepa.
Iain Turner from Exane. Just going back to the Warm Home Discount. What's your thinking there between differentiating between the core group and the broader group in terms of your sort of policy going forward? Is it just a question of cost, or do you think that the plans that people have put forward were for the broader group to be covered by some sort of vulnerable cap.
Yeah. In terms of today, I think it's quite simple. This is a defined group. There's no argument about who they are because with the broader group, there's a degree of means testing, and it's actually to do with if people have to apply, as you know, for the discount. This is relatively straightforward, easy to define, easy for us to credit the money back to that group. What we really wanted to do was make sure that what we would consider the most vulnerable, we had shielded from today's increase so that we can then go and have a much broader ranging debate with the regulator around what the long or certainly the medium-term solution to this particular issue should be. That was the thinking behind the action we took today. It's not a statement of intent. We're not drawing up any kind of boundary lines.
We will engage in the conversations in good faith. It's obviously a very topical issue. It's been a very thorny issue for some time. I'd like to think we'll play our role in now trying to think about how we can resolve it.
Iain, I think I'm right in saying, Mark, that the 200,000 customers are actually contained within the 3.1 million who are affected. From an economic point of view, if we manage to rebate them correctly, actually, there's only about 2.9 million who'll be economically impacted by our price rise. Although we've counted them within our 3.1 million because technically speaking, it applies to them. Right. We've got a few more. Jenny. Who else do we got? Two. Couple more questions only. Okay. That's manageable, I think. Jenny first, and then we'll
Thanks. It's Jenny Ping from Citi. Just one for me. You talked about the volume effect because of the warm weather. Have you done any work or analysis on what part of that decline is actually due to the weather versus just general decline in consumption volumes?
Mark?
We've seen over many years consumption volumes coming down. There are actually predictions each year, as you know, made. We tend to see somewhere between about 1%-1.5% in terms of homes becoming more efficient over time, people becoming more aware with smart meters of managing their energy efficiency, things like rolling out thermostats. There is a general trend. It gets very difficult because actually, you're down to the behavior of the customers, a warm period following a cold period means that people can actually leave their heating on or vice versa. It becomes quite difficult to disentangle in detail. There is an element of a trend over the last five years of consumption, I think declining a little bit every year.
Last question.
Hi, it's Dominic Nash, Macquarie. Two very quick ones actually, both on Hive. Firstly, you say you're selling 20,000 Hives a week in run rate in the U.S. Is that on target? Secondly, who is your partner in Italy? What sort of industrial segment are you looking at for your partnership?
Firstly, it's 2,000 a week, not 20,000 a week so far in North America. Clearly we've been selling somewhere in the region of 5, in a low week, about 5,000 hubs a week, 20,000 a month. We were with Amazon last week, they were bragging about how many Alexas they're selling, they're measuring that in tens of thousands a month. We are starting to measure Hive in tens of thousands a month too. We're at the low end of the tens, obviously, we're hopeful. Mark, partnerships, do you want to say any more? I don't think we probably want to disclose.
No. Don't want to disclose. I wouldn't pick it to any territory. The key point I was making earlier is we're not restricted to just energy. We're talking to telcos. We're talking to insurance companies. There are other sectors who are very interested in what our technology can do for their business and their customers. I think that's actually very exciting.
This is genuinely a lot of incoming. It's not us rushing around trying to market Hive to lots of people. We are getting a lot of incoming interest in partnering with it, and the judgment we have to make is who do we select and getting the commercial terms right. As Mark outlined earlier, many of these companies that are ringing us up are actually They've got very large customer bases. It's quite encouraging the number of incoming calls we're getting. Are there any last questions? Well, ladies and gentlemen, thank you very much. In summary, a solid set of results. I think hopefully in line with what many of you expected. We have made a lot of progress strategically in repositioning the portfolio this year.
By the end of this year, we will have finished phase one of repositioning Centrica after the collapse in oil and gas prices. We're very encouraged by the platform we've developed to deliver returns and growth going forward. Obviously, we will be talking more about our growth prospects when we meet you again in February. Obviously, we have a trading update to come later in the year. In the meantime, thank you very much. For those of you who get a break over the remainder of the summer, I hope you enjoy it. Thank you