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Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Sir Roger. I am delighted to have secured this debate, which is even more topical this morning than when I submitted my request last week.
The debate’s background is the rise in energy prices faced by domestic and business consumers over the past few years. Since 2010, energy bills for domestic consumers have risen on average by almost £300, and businesses say that energy bills are their second biggest cost. Many consumers find it difficult to pay their increasing bills and are concerned that they may face further rises. The issue’s importance was recognised by my right hon. Friend the leader of the Labour party when he announced that a Labour Government would freeze energy prices until 2017, thereby making an effort to help people facing today’s cost of living crisis. There is no doubt that that announcement struck a chord with the public, but the freeze was always envisaged as an interim measure to allow time for more fundamental questions to be addressed. It is important to have that discussion here today.
One fundamental question is how far there is effective competition in the energy market, or whether competition is, to a greater or lesser degree, ineffective and whether, as a consequence of any such weakness, lack of competition leads to higher prices for customers. Customers often feel there is lack of competition in the market’s operation. They see that when world prices go up, the price for the consumer goes up; but when world prices go down, the retail price does not appear to go down as far or as fast. That can be seen by comparing the movement of wholesale energy prices over the three years up to the winter of 2013. Wholesale energy prices were relatively stable from the winter of 2011, rising by an average of 1% a year, but during that period large energy companies increased their retail prices by an average of more than 10% a year. That is not just a recent phenomenon, and it is not just a phenomenon under this Government. If we go back to 2008, there was a dramatic rise in wholesale prices for both gas and electricity followed by a substantial increase in retail prices that was roughly commensurate with the increase in wholesale prices, but when there was a dramatic drop in wholesale prices in 2009—a drop of about 45%—it was not followed by a big drop in retail prices, which went down by only 5%.
We have to ask why that is the case. What does it show, and what needs to be done? Various reasons have been suggested for the apparent lack of effective competition in the market. It has been suggested that one factor might be customers’ lack of willingness to move from their traditional regional supplier, and it is certainly true that in most parts of the country—although in some parts more than others, with Scotland being one such example—most customers still stick with their traditional regional supplier. The dominance of the big six has barely shifted. The figures from the Department of Energy and Climate Change show that, until the end of 2012, at least, SSE, E.ON UK and RWE npower held exactly the same market share in gas as they did five years previously. British Gas’s market share dropped from 44% to 40%, and EDF’s share rose from 7% to 9%. Similarly, there were no real changes in the share of the electricity market held by those companies over that five-year period.
Some suggest there is inherent weakness in a system dominated by vertically integrated companies—that is what we have for the most part—in which both the supply and generation businesses are closely linked. Others point to the unwillingness of consumers to move because of the complexity of tariffs. Until recent changes, by some counts there were more than 400 tariffs across the various companies.
Of course, the companies point to other factors as being the principal reason for the gap between wholesale and retail prices and for the system’s apparent difficulties and shortcomings. I accept that it is a complex world and that the market is influenced by many factors, but important questions need to be asked, and it is certainly not just the Labour party that is asking those questions. As hon. and right hon. Members know, the consumer organisation Which? recently published material estimating that the flaws in the market, as Which? describes them, have left consumers paying almost £3.9 billion more than they ought to have paid since 2010.
Businesses are also concerned. Along with Which?, the Federation of Small Businesses wrote to the competition authorities a few days ago saying:
“We all want to see a transparent market where consumers and businesses alike can understand their bills, compare prices and switch easily. We want to see the presence of strong competition right across the industry drive affordable pricing that gives everyone the confidence they are paying a fair price for their energy.”
Small businesses, consumers and the Labour party are raising those concerns and questions.
Mr Gregory Campbell (East Londonderry) (DUP)
I congratulate the hon. Gentleman on securing this debate. Does he agree that, in addition to the lack of competition, there is widespread concern that millions of customers are making complaints, particularly against the big six?
Mark Lazarowicz
Indeed, and the figures have been rising, as the hon. Gentleman knows.
As I said at the start of my remarks, the Opposition see energy prices not just as the first step to reduce pressure on customers but as part of a much more fundamental reset of the energy market. In summary, we propose to get the energy companies to separate the generation and supply sides of their businesses, and we want to see all energy companies trading for energy in an open market by selling into a pool. We want a simplified tariff structure and a new, tough energy watchdog with new powers to police the market, including the power and remit to force energy companies to cut their prices when there is evidence of overcharging. All those proposals would make the market more transparent, and no doubt my hon. Friend the Member for Sunderland Central (Julie Elliott), our Front-Bench spokesperson, will refer to those proposals in more detail.
The proposals in the Labour party’s consultative document are welcome, and I note with interest the response to the consultation published today by SSE, although I have had only a brief opportunity to look at it this morning. I suspect that the Minister will say that, yes, there are weaknesses but they are being addressed. He will no doubt point to increased competition and to the new entrants into the market. Indeed, there has been an increase in the role and market share of new entrants, but they still represent a fairly small proportion of the market as a whole.
There is a long way to go, and we all know that many customers are reluctant to switch for all sorts of reasons. They might be uncertain about how to go about switching, for example. Some of my constituents switched and found that, after an apparently attractive offer, within a few months they were paying even more than they did under their previous supplier. The tariff simplification introduced by the Government, which on paper seemed a good idea, has in practice led to a number of difficult consequences. Many of us know of cases in which people have ended up paying substantially more following the tariff changes because those changes are in some cases biased against people who use little energy, either by choice or by lack of income or resources.
A much more fundamental change is needed, which is recognised across the industry. I also recognise that the weakness in the market is not the only reason for higher prices. World supply and demand is a major factor, and taxes and support for energy efficiency and renewables have an impact. There is certainly a need for changes there as well. Like many Members, I am concerned that the changes the Government have introduced so far will mainly result in the watering down of energy efficiency measures, which are the single biggest way of enabling consumers to cut energy waste and cost.
Albert Owen (Ynys Môn) (Lab)
Another factor in the increase in prices and the high prices is distribution cost. In the distribution areas, there is no competition at all. That monopoly contributes somewhere between 19% and 24% of a bill. Does my hon. Friend agree that we should look for greater competition in that area?
Mark Lazarowicz
Absolutely. That is one of the areas where a fundamental investigation is needed, with fundamental questions asked and fundamental changes made. I recognise that businesses have to make a profit for their shareholders and future investments. They are big businesses, so the profits will have big numbers in them. Nevertheless, there are fundamental questions. Today, SSE has made an announcement that promises an energy price freeze until at least 2016 and it is preparing to separate legally the retail and wholesale sides of its business. Those changes are in line with the policies announced by the Labour party last year.
David Mowat (Warrington South) (Con)
This debate is indeed timely, given the SSE announcement. The hon. Gentleman will also be aware that SSE announced this morning that of the four offshore wind farms it was planning, three will not now go ahead.
Mark Lazarowicz
I see that that is how it has been described by some in the media. I have not had a chance to look at the SSE comments in great detail, but I am not sure that the causal linkage that the hon. Gentleman suggests exists. It was interesting, given the various comments on the Labour party proposals, that SSE has welcomed the need for long-term stability in the framework for investment. Perhaps the single biggest problem for long-term investment in offshore wind has been the confused and mixed messages sent by the Government recently.
Mark Lazarowicz
I will draw to an end, because I know a lot of colleagues want to speak in the debate, including the hon. Gentleman. There is an increasing focus on price, the customer, the structure of industry, long-term prices and long-term investment, and that focus comes from many quarters. If it had not been for the intervention of my right hon. Friend the Leader of the Opposition and our policies last year, we would not have seen this welcome concentration of minds on the issues. That has encouraged many to bring forward their proposals for change. I hope that this debate will contribute to getting the changes in the industry’s structure that are so desperately and urgently needed.
Sir Roger Gale (in the Chair)
Order. At least seven Members have indicated a desire to speak, and we have an hour and a quarter for the debate. I will not impose a time limit at this stage, but I urge Members to exercise a degree of self-restraint. If everyone keeps their remarks to about six minutes, all Members should be accommodated.
David Mowat (Warrington South) (Con)
I did not rise to indicate that I wanted to speak, because I was with a colleague last night and I left my speech in the pub. I have been trying to rewrite it and I will happily now go ahead.
Sir Roger Gale (in the Chair)
Order. The hon. Gentleman did the courtesy of putting his name down to speak, which is why he was called. We try to call people, as a general rule, who bother to put their names in first. No doubt the circumstances he faces will lead to brevity.
David Mowat
Certainly the second part of my remarks will be brief, Sir Roger.
The issue before us is serious. Everyone at this debate is concerned about fuel poverty in their constituencies and high fuel prices. Most of us, I think, are concerned about energy intensive industries, particularly in the north-west and the north-east. Some 900,000 people work in industries where the price of energy is a significant determinant of profitability, and it behoves us all to take the issue seriously. We are where we are because issues have been raised on the market fairness and market effectiveness of the energy industry in the UK, and it is right that we look at that. The Secretary of State has talked about referring the industry to the competition authorities, and I support that.
It is important—the opening remarks did not do this—to distinguish between gas and electricity, because they are different markets. I want to talk a little bit differently about each of them. There are suggestions that the industry is some kind of cartel and “the big six” is, frankly, often used in this House almost like a swear word. We hear that the big six do this and do that. I have heard the shadow Secretary of State use the phrases “price fixing” and “secret deals”. If the Opposition have evidence of cartels or price fixing, that is extremely serious. If it exists, directors of public companies will go to prison. Fines can be levied that are several times the turnover of those companies. It is important that the Opposition bring that evidence forward, if it exists.
When words like “cartel” and phrases like “secret deals” and “price fixing” are being used, be aware of what is being suggested and be willing to take that forward and give that evidence to the competition authorities in the European Union and the UK and to the police. If such evidence does not exist, it might behove the Opposition to use more moderate language, which they were doing in their opening remarks in this debate, at least.
I want to make some comments on how the UK market compares with the EU market. One way to find out whether there is price fixing, cartels or other problems is to see how our market compares in structure and outcome with the rest of the EU. I have done a little analysis on that, under three headings. The first is out-turn prices for gas and electricity in the UK compared with other EU countries. The second is market structure. People say that we broadly have the big six in gas and electricity, and other countries in Europe do not have that structure. The third is the profitability of those energy retailers in the UK versus other places. I report that the answer is different for gas and electricity.
On gas, we have to distinguish between taxed and untaxed prices. In this country, we tax gas very little, while the EU taxes it much more heavily. It can appear that prices are higher there, so it is only fair to look at untaxed prices; on that basis, our gas prices are the second lowest in the EU, although it is true that they are significantly more than in some other countries. They are triple the prices in the United States of America, but we know that that is to do with shale gas and all that goes around that. Our gas prices are the second lowest in the EU, yet broadly speaking we have an EU energy market for gas, and some comparability would be expected. If a cartel is operating in the gas market, it is hard to see that it is being very effective.
On electricity, our retail prices are among the lowest in the EU. When we look at the position without tax, it is a little more nuanced. According to the EU portal, our untaxed electricity prices are slightly higher than those in Germany, Holland and France, although not by very much—5% or 6% higher. That is a lot of money, however, by the time that all works through. On the face of it, there might be a more significant issue with electricity than there is with gas. I would be interested to know whether Opposition Members are talking about the need for a price freeze for both industries or just for electricity.
Dr Alan Whitehead (Southampton, Test) (Lab)
Does the hon. Gentleman accept that the production of electricity using gas means that there is a substantial link between gas and electricity? Investors in new gas-fired power stations claim that the relationship between gas and electricity prices means that they are currently not particularly willing to invest. The hon. Gentleman’s decoupling of the two markets is a bit over-precise and ought to bear that fact in mind.
David Mowat
That is a fair point. It is true that no gas power stations are currently being built in this country, but the principal reason is that shale gas in the United States has meant that coal has become cheap on the world market. We will therefore be burning coal in this country at a great rate—even more so in Europe—until we are stopped.
I accept the hon. Gentleman’s point that the markets are not entirely distinct, but my point was simpler than that. I have looked at what we are paying in this country for gas, which is a separate market, and it is the second lowest price in the EU. Members should bear that in mind when making comments later in the debate.
I was about to come on to market structure. I have always thought it a little odd that having six participants was regarded as a monopoly. Looking elsewhere in EU, Germany has two retailers in electricity and three in gas, Holland has three in each and Italy has five in gas and two in electricity. France is a little different because of nuclear power. In terms of market concentration, the report I used for this is the—I do not have it here—
David Mowat
It’s in the pub. It was the “Energy Retail Markets Comparability Study” report completed for the Department of Energy and Climate Change, which stated that we have the least concentrated energy market in the EU, with the possible exemption of Austria. Opposition Members may want to reflect on that as well.
The next thing is profitability. Are companies making massive profits? The report states that there are two ways of looking at profits. They can be earnings before interest and tax, known as EBIT, or the return on capital employed or ROCE. On both measures, profitability in the UK market is similar to that in the rest of Europe. It is of course perfectly possible that I have missed the point—that every country in Europe has a cartel, of which the UK market is just one part, and that we are luckily going to fix that in the UK. That may well be the case, but all I am saying is that, by many measures, we seem to be no worse off, and often much better off, than some of our competitors.
Dr William McCrea (South Antrim) (DUP)
Listening to the hon. Gentleman, it is as if our constituents were getting a real bargain for gas and electricity, but I assure him that that is not what my constituents are telling me. They are facing a choice between heating and eating and do not believe that they are getting a bargain.
David Mowat
I thank the hon. Gentleman for that intervention. I have not said that people are getting a real bargain. I am trying to compare prices here with those in the rest of Europe, including the Republic of Ireland, and to examine whether there is evidence of exploitative behaviour. That is my point.
I wish we had less fuel poverty—I will come on to how we need to vote on measures to reduce it—and would like to see lower prices, which more competition can achieve. The Government’s work on making switching easier and price comparability is important, but switching is still too difficult and leads to stickiness in the market. If it was easier to switch, the market would work better and prices would be lower, so we need more work on that.
I agree that it would be better if there were more new entrants in the market. Having more game-changing new guys coming into the retail market would be beneficial. All I am saying, however, is that there is nothing in the structure of our market that implies that it is worse than elsewhere in the EU. Indeed, it would appear to be slightly better.
We need to be careful about what we wish for on energy policy, because security will be a significant issue over the next three or four years. In my earlier intervention, I mentioned SSE’s decision, announced this morning, to pull out of offshore wind, which I very much regret. I hope that there will be no trend of similar announcements from other players in response to the slow-motion car crash that is Opposition energy policy. We need energy stations to be built to replace ageing nuclear and coal power stations, and they need to be built pretty quickly or we will have a problem.
Finally, I have voted four times against the Opposition on matters of energy prices. Three years ago, there was a Government motion to reduce the solar subsidy from six times grid parity to four times grid parity, but the Opposition voted against the Government on what was a moderate reform to the market. They also voted against the Government on a Lords amendment regarding the accelerated replacement of coal. How we vote on green issues matters. Many of our constituents are in fuel poverty, and we need to be thoughtful as to how we vote.
Sir Roger Gale (in the Chair)
Order. I intend to call the Opposition Front-Bench spokesperson at 10.35 am, so I am imposing a six-minute limit on speeches.
Dr Alan Whitehead (Southampton, Test) (Lab)
Why are we having a debate on the energy market when, with the Energy Act 2013 having passed through the House, energy has apparently been done to death? The simple answer is that, although all the material that went into the Energy Act mentioned electricity market reform, the electricity market was the one thing that was not reformed as a result.
As my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz), whom I congratulate on securing the debate, outlined, the market in the UK is not working well, in particular because the present structure—I take issue with the suggestion that markets elsewhere in Europe are more concentrated than the UK’s—is concentrated and vertically integrated on both sides. The big six have 95% of the retail market and some 70% of the wholesale generation market. The hon. Member for Warrington South (David Mowat) mentioned Germany, where nearly 50% of generating capacity is in the hands of independents, communities or local agencies, which is a different landscape from the UK’s. Switching is only part of the solution to competition and to market dysfunction.
Indeed, what we need to understand about switching is that small suppliers, which have recently seen their miniscule share of the retail market marginally increase, are subject to a reduction in energy company obligation fees when they have fewer than 250,000 customers. When Mrs Miggins of 7 Acacia avenue switches and becomes a small supplier’s 250,001st customer, that costs the supplier £7 million in the changeover from non-obligation to obligation—[Interruption.] The Minister shakes his head, but I am afraid that that is how that works.
How one fixes and deals with market competition is about looking at the whole question—how the market works together. The Opposition proposals on the separation of retail and wholesale businesses and the development of a pool—essentially an exchange to secure transparency and access to the market for all, including independents—start to tackle that overall market issue. The Government will pray in aid an Ofgem report—I believe the final report is out tomorrow—about wholesale power market liquidity, and the “secure and promote” licensing conditions. It will, clearly—certainly in relation to what has been proposed so far—deal only with the day-ahead market, one end of the trading arrangements, and not with the arrangements whereby companies trade with themselves.
That is an essential question in dealing with how to get the market working better. In bilateral deals, companies trade with themselves. They not only buy extended amounts in advance and then whittle amounts down to balance, but, at gate-closure time, they trade with themselves so as to balance their own arrangements much better, to avoid being fined in relation to balancing arrangements. That provides, among other things, a particular advantage compared with independent suppliers or, indeed, retailers, who have to buy from the spot market or the day-ahead market to balance their own supplies. It is a completely integrated arrangement as far as self-supply is concerned.
It is no coincidence, therefore, that SSE announced this morning a price freeze until 2016 and possibly beyond, and a separation of supply from retail. I think that what we should read into that is that SSE anticipates a Labour Government making the changes and getting ahead of the game. That change is greatly to be welcomed, and we need to put that on the table in discussions on competition.
Damian Hinds (East Hampshire) (Con)
I congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate. As the hon. Member for South Antrim (Dr McCrea), who has just left the Chamber, said, the issue is very important to many of our constituents. They are at the sharp end and they feel the effect of the high price of heating their homes. It is also a big issue, of course, for firms and for the competitiveness of the UK economy.
There are several elements to the price we pay for energy: the wholesale cost, which accounts for about 44% of a typical dual fuel bill; the cost of supply; the policy costs; taxes, of course; and, finally, profits. Today we are focusing on competition and competitiveness in the market. That will flow through; it will be seen in companies’ profits, of course, and to an extent in the cost base—the part of the operating cost that is retail distribution in particular. Of course there is also the question of the allocation of costs, where there is vertical integration in the market. In 2012, the big six made an average margin on domestic energy of about 4.3%, which is not the sort of level to raise alarm bells. However, the question that many people want to ask is whether the vertically integrated companies are making super-normal profits elsewhere in the chain, and in particular in generation. That is a question that even the collective wisdom of all the hon. Members in Westminster Hall today will probably not be able to solve. It needs a full-on economic analysis by the competition authorities, and I hope that that will come soon.
For today, we are focusing on retail distribution. I do not want to get all theoretical about it, because, as the hon. Member for Edinburgh North and Leith said, the issue is a practical one that people feel in their pockets and in the heat or cold in their homes. Perhaps not the stupidest place to start a discussion about competitiveness in any market is the conditions for perfect competition. The things that are needed are a commodity product; many buyers; many sellers; no barriers to entry; perfect information; and no switching costs. In the market that we are concerned with, the first two are given: there is a commodity product, whether it is gas or electricity; and clearly lots of people need to buy it. Everything else in the list does not come naturally. There are not, naturally, many sellers. There would not naturally be perfect information or an absence of switching costs and barriers to entry. Those are the things that public policy should be concerned with, for competitiveness.
It is worth dwelling for a moment on history. There is a rumour, although I do not think that the hon. Gentleman perpetuates it, that there began to be a problem with high energy prices in about May 2010, and that it is all the fault of the present Government. That is of course absolutely and wholly untrue. According to the Office for National Statistics, in 2002, 2003 and 2004 the average monthly household energy bill was £70. That rose to £108 by 2009 at otherwise constant prices—a massive rise of 50%. The rise was even worse as a proportion of income for the poorest fifth of customers. The price came down, but only slightly, I am afraid, after 2009-10. If I had more time, I would talk more about the international comparisons, although my hon. Friend the Member for Warrington South (David Mowat) did that extremely well. We should remember that, of course, the biggest factors in the price of energy are, sadly, things that we cannot control, to do with wholesale energy prices. However, a lot could be said another day in another debate about how those markets might work more in this country’s favour.
Whatever the other main factors may be, we always want a more competitive market, and that always has an impact on price. There are two areas where that is particularly relevant: the number of sellers in the market and the barriers to new ones coming in. There are many markets in this country with high concentration ratios, including confectionery, soap powder and grocery retail. However, we would all agree that they are competitive markets in which companies compete hard with each other. A problem arises, particularly, when products are less comparable, at higher value, and harder to switch between; so in a market such as banks, where there are high concentration ratios, there are concerns about the way competitiveness works. Challenges therefore become important, and I greatly welcome what the Government have done to encourage more companies into the market, but we need more trusted brand names in the market, to which people would feel more comfortable about switching. I should be interested to hear what the Minister thinks could be done to encourage more of those in.
A bigger issue is comparability and ease of switching. I acknowledge that we are part way through a process. Much has already been done through the regulator and in legislation, and the full effects have not yet been felt. It would be wrong to prejudge things. Tariff complexity reached almost comic proportions when there were hundreds of tariffs, including one that came with a free football shirt, for some reason. That, combined with the intangible nature of the product, and the fact that none of us really understood the dynamics of consumption and volumes, made the market a hard one for any consumer to master.
There is more that I should like to say, but I will not be saying it this morning. Suffice it to say, we obviously have high energy prices, and we all care about that and want to bring the price down. Several issues are relevant, but we cannot say that lack of competitiveness is the largest, or even a very large, single factor. However, we know that factors in competitiveness need more attention, and I hope that the competition authorities will deal with that, and that the Government will continue their push for diversity and competitiveness in the market.
Barry Gardiner (Brent North) (Lab)
It is a pleasure to speak in the debate, and I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing it.
“The party’s over for the big six.” Those are not my words, but those of Evan Davis on the “Today” programme this morning. I was delighted to hear that, but was even more delighted to hear the comments of Alistair Phillips-Davies, the chief executive of SSE. He made them quite calmly, given all the furore when a few months ago my right hon. Friend the Leader of the Opposition announced that we would impose a price freeze and break up the vertical integration of the big six.
Alistair Phillips-Davies said, “If that’s what the customer wants, we are very happy to participate in that agenda.” Labour party policy, it seems, has moved from the unimaginable and unacceptable to the mainstream in just a few short months, and that has to be welcomed. If the second largest company in the UK is saying that it is happy to participate in that agenda, it seems that it has seen the writing on the wall.
Energy bills have risen by almost £300 for families and businesses. More importantly than simply that, however—this should be of specific concern to the Minister, whether he is listening or not—the employers’ federation, EEF, in its “Executive Survey 2014”, highlighted rising input costs as the primary risk to growth: I repeat, the primary risk. In 2014, 61% of companies surveyed by EEF cited input costs as a risk to their growth plans. That figure was up four percentage points on the 57% of just one year earlier. That is fundamental for business. Bills are going up because when the price of energy increases, energy companies pass that on, although they are reluctant to see the change passed on when prices go down, or at least they are not nearly so quick about it.
Why has that been possible? Why has it been allowed to happen? The answer is limited competition and weak regulation by Ofgem. Evidence presented to the Select Committee on Energy and Climate Change showed that the big six were engaged in inconsistent accounting. The hon. Member for Warrington South (David Mowat) asked for evidence—thank God he left his speech at the pub, because he managed to take twice as long as your recommended time limit without the speech, Sir Roger; goodness knows what would have happened had he brought it with him. He said that if anyone knows about such things, they should report it, so let us look at what evidence there is and at what has been presented.
BDO found that the vertically integrated companies were using four different accounting standards. The improving reporting transparency review conducted by BDO for Ofgem recommended that Ofgem
“Require the reporting of trading function results, including disclosure of the risk each trading function assumes”,
as part of companies’ segmented accounts. Ofgem, however, will not act on the proposal, because, it stated, that would have meant the need to change company structures and Ofgem does not have the powers to require such a change. That is, in part, because four of the big six are not UK companies, but it also shows that Ofgem is far too weak to effect the changes needed to our energy market.
It is worth noting that EDF opposed recommendation 2 of the improving reporting transparency inquiry—that would require an independent auditor to provide an opinion on segmental statements—and that the trading arms of the vertically integrated energy companies were implicated in the fixing of the benchmark price for gas. The hon. Member for Warrington South said, “Where’s the evidence?”, and asked us to produce it. Well, with the fixing of that benchmark price for gas, unusual trading activity reduced the price of gas just before the end of the financial year, and that was reported to the Financial Services Authority by a company responsible for setting so-called benchmark prices, ICIS Heren. The practice was indeed reported to the FSA at the time. That type of activity enables the big six to reduce the cost of gas relative to the price paid by independents, creating further barriers to market entry and ensuring that the big six retain their unhealthy monopoly.
I know what the Minister will say about competition in the market, because he has said it on a number of occasions in the House. It is the Government’s prepared agenda. They say, “Oh, but there were 14 players in the market before it was reduced to the big six by the Labour Government through the new electricity trading arrangements, or NETA.” There were 14 regional monopolies, not six national players; I wanted to nail that one before the Minister had the chance to say it.
My hon. Friend the Member for Edinburgh North and Leith has already said what Labour will do differently and that is clear. I am running out of time, but I must add that the decision of my right hon. Friend the Leader of the Opposition has proved prophetic, and it will prove right.
Mr Mike Weir (Angus) (SNP)
I am pleased to be able to make a contribution to the debate under your chairmanship, Sir Roger.
I congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate on such a momentous day, when SSE has announced a price freeze until January 2016, which neatly takes us past the next general election. I should declare an interest: I am a customer of SSE and pay by direct debit, so I will benefit from the freeze, with the added advantage of avoiding the annual argument when the company tries to put up the amount of the direct debit, even though use might have fallen.
SSE also announced that it is to split its generation and retail arms. The Labour party is, of course, seeking to take the credit—as good politicians, that is not surprising—but given what the chief executive said on the “Today” programme this morning, the decision is clearly a commercial one, driven by the fact that Ofgem is due tomorrow to announce possible further action against energy companies.
Ofgem has already taken action to force generators to trade fairly with independent suppliers or face financial penalties, and to post the prices at which they will trade wholesale power up to two years in advance, as well as ensuring that more information is given in annual statements. I have not always been the greatest fan of Ofgem, but in this case its actions appear to have borne some fruit. It will be interesting to see how things develop after the SSE announcement and whether others of the big six energy companies will follow suit.
Another competition problem arises, however, in how a price freeze will affect the smaller players in the market—especially in the gas market, where many buy gas on the spot market using the day-to-day price. At a time of international uncertainty, that price can fluctuate wildly. A freeze by the big six may cause problems for the smaller companies.
It has long been a major frustration that we find it difficult to discover the true costs of energy and have to wade through the opaque ways in which it is traded within companies. The Ofgem decision should at least give us some greater information. We have to take care and keep a close eye on how things work.
Last year, the “Dispatches” programme on Channel 4 investigated energy prices and described how E.ON, another of the big six, internally deals with its existing split between retail and wholesale markets. Apparently, its retail arm makes no money, because it pays huge rates of interest on money borrowed entirely from associated companies within the group. Although E.ON is already in theory split between generation and retail, it is far from clear what real profit is being made, because of the accountancy practices employed. Will the Minister assure us that the new Ofgem rules will tackle such abuses and make it clear what is actually being earned by both sides of the company?
We can all welcome a freeze on energy bills, but we should not get too carried away because far from everyone will benefit from such an action. Again on the radio this morning, it was pointed out that SSE has higher charges with some tariffs than other companies, and that it is possible to get a better deal by shopping around even among others of the big six companies. That illustrates another problem with a simple freeze, which is that many customers are on less than great tariffs, especially those on prepayment meters. A freeze will lock in those inequalities within the system. We need to look closely at the inequalities among the different tariffs and ensure that those with the most need get lower energy prices.
It is also worth noting that a simple freeze will produce regional anomalies, because the proportion of people paying by direct debit fluctuates wildly. For example, in the south-east of England it is 63% and in my own area of the north of Scotland it is 56%—curiously, the very two areas in which SSE is the dominant player—while in London it is only 41%, possibly because of the much more transient population and the many houses of multiple occupation in the city. The effect of the freeze will therefore vary greatly.
It is also worth noting in passing that a price freeze comes with a cost. SSE also announced today that it is shedding 500 jobs and pulling out of three of its proposed offshore wind farm developments. It has said previously that it is pulling out of some wind farm developments, but I remind the hon. Member for Warrington South (David Mowat) that although SSE is pulling out, several parties are involved in most of the developments, so that does not mean a development will not go ahead.
Many of us warned that a simple price freeze would have the effect of endangering the investment urgently required to ensure that we have an energy infrastructure that meets our future needs. SSE’s announcement is an indication that that could indeed be a problem. Both Ofgem and the Government need to address that to ensure the correct balance between prices and investment. If SSE’s decision to withdraw from the wind farm development is replicated by other companies, that will pose a real threat to future renewables development. The future is in renewables, and if we are to get prices down and keep them down we must ensure that such development goes ahead.
Albert Owen (Ynys Môn) (Lab)
It is always a pleasure to serve under your chairmanship, Sir Roger.
I speak today as a member of the Select Committee on Energy and Climate Change—we have already heard from another member, my hon. Friend the Member for Southampton, Test (Dr Whitehead). Over the past few years, the Committee has looked seriously at and conducted some in-depth inquiries into electricity market reform, profit, prices and poverty. We have been looking at the energy market in great depth, and I welcome its being raised on the political agenda, as that has focused attention on some of those big issues. For too long we were seen as not really addressing the big issues, but the subject has now become one, for a number of reasons. Prices have been hiked in recent years at a time when many households have seen their incomes frozen or cut. The cost of energy and the impact of energy prices have become a profound problem.
I want to talk about an area that has not yet been discussed this morning, but I will begin by talking about how we have got to this position, and why I and many others believe that the UK energy market is not working. There are historical reasons. In the 1980s and 1990s, there was an ideological privatisation of the energy market, and in the first instance monopolies were set up. British Gas became a vertically integrated monopoly in 1986, and liberalisation came in much later. Electricity monopolies were also set up. My hon. Friend the Member for Brent North (Barry Gardiner) was absolutely correct to say that privatisation created regional monopolies. Those monopolies still exist in transmission and distribution.
That is the issue that I shall concentrate on. The Energy and Climate Change Committee will hold an inquiry into the issue, because, as I said in an intervention earlier, it contributes to some 19% to 24% of the bills that all households and businesses in this country pay. There is a lack of competition within transmission and distribution. Companies pass on the costs of distribution and transmission to customers and we end up paying that bill. That is something we need to take seriously and look into.
At the moment, many of those companies are foreign-owned and have a profit motive, so their first priority is the shareholder. During the passage of the Energy Bill and the reform of the electricity market brought forward by the Government—whoever had been in government would have had to bring in such measures—there was discussion of the fact that National Grid is an American-owned monopoly that controls the high velocity distribution of electricity in this country, with its shareholders as its first priority. It will be the system operator of any new-build system in the future. We have a monopoly, then, that will have a big say in the development of new technologies and the different projects that go forward. There is a worrying lack of competition that impacts on prices.
The Minister is a generous person who tries to give an answer either on his feet in the debate or else in writing. Will he comment on the distribution and transmission systems in this country, in which there is no competition whatever at the moment? As I said, that contributes to the prices that businesses and other customers pay.
I want now to deal with the announcement made this morning by SSE. The hon. Member for Warrington South (David Mowat) spoke about the language used when we talk about the big six. I have been careful in my choice of language today, but I have not held back in any shape or form when the big six have been giving evidence to our Committee. They have been hiking prices considerably and are their own worst enemies, because of the lack of transparency within the system.
To be fair, the hon. Member for Angus (Mr Weir) was right: Ofgem has tried—a little late, to many people’s minds—to open up tariffs and make companies more transparent, so that we have a greater understanding of the market. But my right hon. Friend the Leader of the Opposition was absolutely right, and ahead of the game, when he suggested that we should have a price freeze—for two reasons.
First, as I said, energy price hikes have caused real hardship to families and businesses throughout the country. Secondly, the aim is to have a deliberate pause to look at the regulatory system itself, because it is not working as many who supported privatisation in the 1980s and 1990s thought it would, as it is not bringing down prices for businesses and domestic customers.
I would like the Minister and the Government to comment on distribution and transmission. When the Energy and Climate Change Committee has a thorough inquiry into that matter, I am certain that he and the Government will respond to our findings. The monopolies that exist in many areas are contributing to hardship throughout the business community and the United Kingdom. Transmission and distribution should be treated in the same way as retail and wholesale. I welcome SSE’s announcement today as a first step to common sense. We should have a freeze so that we can address those big issues.
Mr Iain McKenzie (Inverclyde) (Lab)
It is a pleasure to serve under your chairmanship this morning, Sir Roger. I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing this important and timely debate.
We are all agreed that the energy market is not working for families or businesses. Energy bills have risen by almost £300 for families, and businesses say it is the second biggest cost they face. With that in mind, businesses have focused on reducing their energy consumption, to the point that people in Inverclyde see that as almost an attraction to set up business there—by going back to the future. Previously, industry energy costs were subsidised by hydropower, and we still have that infrastructure. We are investigating that and hope we will be allowed to approach industries and businesses to offer them a subsidy on their energy costs if they set up in our area. We hope that transpires, because energy prices are a big issue.
It is not only we politicians who are saying that. In a recent survey, almost 80% of the people who responded said that energy costs were the biggest worry for them. More tellingly, in that survey only one in five people said that they trust their energy provider to act in their best interests. That stems from the days when we witnessed something that I am glad to say we do not witness as much—indeed, I hope it has ended—door-to-door selling to encourage people to switch energy supplier. That has unfortunately had a knock-on effect on those who are genuinely trying to assist people with energy costs, as the distrust is still there when they knock on the door. We have seen that in my own area.
In Inverclyde, we are trying an exciting new project called iHeat, which is not about reducing energy prices but assisting people in reducing consumption. We have been reasonably successful in installing insulation in most of the housing in Inverclyde, and so have gone beyond advice on insulation. We are also giving advice to families. It is traditionally thought that pensioners are the ones whom we have to advise on energy consumption, but that advice is now being targeted more at families who are struggling with their energy costs.
People are advised to look at switching tariffs. The hon. Member for Warrington South (David Mowat) touched upon that, saying that it is still not as easy as it should be, and indeed it is not. When I visited the iHeat project, I spoke to many of the staff who were assisting people in switching tariffs. They sometimes spent upwards of an hour on the phone, waiting to get through to an energy company for help with tariff switching.
The issue is not only about assistance with reducing energy consumption; it is about changing the marketplace and separating generation from supply. The current market structure may provide consumers with a reliable supply of energy, but there is no evidence to suggest that costs are fair and efficient. An incident across the water from me highlighted that. Scottish Power was making quite a bit of profit, but its maintenance was low and it plunged many rural communities into a situation of no energy supply not for days but for weeks. It was noted that fairness and efficiency, and its profit margin, did not extend to simple, basic, regular maintenance.
What should be done? We have three suggestions: separating the parts of the business that generate energy from those that sell to customers; selling energy in an open pool; and introducing a new, simple tariff structure. We also suggest that Ofgem should be abolished because it has failed to stand up for customers. Until those reforms kick in, we will put a stop to unfair price rises by freezing energy bills up to January 2017 for people having to cope with increasing energy costs and the cost-of-living crisis.
In future weeks, months and years, people will fall into fuel poverty, which is why we must introduce projects such as those suggested by iHeat. The number of families falling into fuel poverty is rocketing, and if we do not try to help them, their choice will be between heating and eating.
Julie Elliott (Sunderland Central) (Lab)
As ever, Sir Roger, it is a pleasure to serve under your chairmanship. I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing this important debate. No one could have predicted the news this morning, which has turned this debate on an important matter of concern on both sides of the House into one on the topical issue of the day. That is almost unprecedented.
I will start by responding to SSE’s announcement, which the Labour party welcomes. It shows that energy companies can and should freeze their prices to reset the energy market. We also welcome their decision to separate their generation and supply businesses. That is a vital reform necessary to improve transparency and competition in the energy market. SSE should go further and commit to freezing their prices until 2017, but they have said they will review the situation.
In a recent press article, the Minister said that the decision of my right hon. Friend the Member for Doncaster North (Edward Miliband) to freeze energy bills is extremely dangerous. Will he comment on that in the light of SSE’s announcement? He also said that most voters will see that as a gimmick, but companies of the size and complexity of SSE do not employ gimmicks in the energy market. Perhaps he will comment on that.
The Minister of State, Department for Business, Innovation and Skills (Michael Fallon)
The hon. Lady has tempted me. When she clarifies her party’s policy, perhaps she will confirm that the price freeze will apply to all companies, not just the big six? Does she intend to catch all the smaller companies, or just the big six?
Julie Elliott
I will outline our policy, but it is not for me to answer questions about it today; it is for the Minister to respond to the debate.
Before coming to the bulk of what I want to talk about, I want to comment on some of the issues raised by the hon. Members for Warrington South (David Mowat) and for East Hampshire (Damian Hinds). The hon. Member for Warrington South referred to SSE’s announcement on wind farms. We need to look at the detail of that, but while energy company profits have been rising during the last few years, renewable energy investment has been falling, and only about half of such investment is coming from the big six. Despite huge annual price increases since 2010, investment in clean energy has halved under the Government’s watch, costing jobs and threatening our energy security. Furthermore, there is no correlation between profits and investment. The energy companies with the biggest profits do not make the biggest investment in clean energy.
The Minister has commented on energy costs. Electricity prices in the UK, excluding tax, are the fourth highest in the EU15 and second highest in the G7. They are not what the hon. Gentleman quoted: they are among the highest in Europe. Gas prices are not as high, and are at the European average.
Barry Gardiner
I am listening carefully to my hon. Friend’s comments. She is doing very well. Will she comment on the fact that in the UK the profit margin for shareholders has been between 5% and 7%, whereas on the continent it is between 2% and 3%? The hon. Member for Warrington South did not mention those figures when he compared the UK with the continent.
David Mowat
I am glad that my remarks have at least made this into a debate. On gas, it is impossible for us to get to the bottom of these numbers in a debate, particularly those given in the intervention from the hon. Member for Brent North (Barry Gardiner). Does the hon. Lady think that our gas prices are not among the lowest in the EU?
Julie Elliott
My understanding is that our gas prices are at the EU average, according to the Department of Energy and Climate Change.
David Mowat
I want to put on the record the fact that our gas prices are the second lowest in the EU, according to the EU energy portal and the International Energy Agency. I realise that we cannot spend our time bandying this around.
Julie Elliott
I will go with the Government’s stats.
What would a genuinely competitive energy market look like? It would provide good customer service, competitive pricing, pressure on supplier costs and profit margins, high levels of consumer engagement, and a wide range of retailers and rivalry between suppliers, with changing market shares and new entrants. That is what our energy market would look like, but it is not what it looks like today. It provides consistently poor levels of customer service. Complaints to the energy ombudsman are up 71% compared with last year. There are uncompetitive prices. Energy companies often say that prices here are lower than in the rest of Europe, but that is true only when tax is included. There is evidence of what is known as “rockets and feathers”. If pricing is competitive, falls in the wholesale cost should be passed on as quickly as when it increases. However, in 2011 Ofgem found evidence that energy bills respond more rapidly to rising supplier costs compared with falling costs.
There is mixed evidence on supplier costs. In a competitive market, operational costs should converge, but the Institute for Public Policy Research found that operational costs for energy suppliers had in fact diverged.
On high and rising profits, given the complex ways in which energy companies organise their affairs, it is not clear exactly how much money they are making. That is not completely straightforward. The segmental accounts, which they file with Ofgem, usually have gaps and provide a snapshot of earnings. They show collective profits up by about £1 billion a year compared with 2010, at a time when sales are down and there have not been any significant reductions in fuel or operating costs. Most companies publicly aspire to a 5% margin on supply, but that is significantly higher than any other comparable industry and is obviously on top of their profits from generation.
Levels of consumer engagement are low. Notwithstanding what seems to be a one-off spike in switching following the last round of price increases in November 2013, the number of people switching supplier has fallen by about half since 2008, and switching levels are the lowest on record. That was clearly outlined by my hon. Friend the Member for Inverclyde (Mr McKenzie). The situation is exacerbated by very low levels of trust in the industry. A recent report by Edelman showed that energy companies are less trusted in the UK than in nearly every other country in the world. That is a frightening state of affairs.
There is a static market, which is dominated by the big six firms, which hold 97% of the domestic market and 82% of the smaller business market. The domination of those six firms does not in itself indicate that competition in the market is ineffective, but the fact that no new entrant has achieved anything like the scale of operations to challenge the big six suggests significant barriers for newcomers. There has been little change in companies’ market shares in the past six years, and much evidence suggests that “sticky” customers—those who have stayed with the companies they were with before privatisation—pay a premium compared with those who switch, as my hon. Friend the Member for Ynys Môn (Albert Owen) highlighted.
What are Labour’s plans to promote competition in the energy market? We will make companies buy and sell all their electricity via a pool or open exchange. Currently, most energy is traded bilaterally or even within vertically integrated companies. Other European markets have much more exchange-based trading, such as in Nord Pool, which is one reason why those markets are more liquid, more transparent and more competitive.
We will ring-fence supply and generation businesses within vertically integrated companies. If companies can supply most of their own generating capacity, they have much less incentive to trade on the open market. That again makes it more difficult for independent generators and suppliers to find a market to trade in, and prevents any proper scrutiny of the prices companies pay for electricity from their own power stations. We will therefore put a ring fence between companies’ generation arms and their retail businesses.
In the retail market, we will make it much easier for consumers to find the best deal by introducing a simplified tariff structure. I accept that Ofgem has taken some steps to reduce the number of tariffs, but to drive real consumer engagement we need to create a consistent pricing system and standardise the tariff structure. We propose to create a simple structure with a daily standing charge and cost per unit.
To sustain the benefits that those structural reforms will bring, we will create a new regulator. Our green paper proposes additional powers to penalise anti-competitive behaviour to ensure that consumers get what would be expected from a functioning, competitive market. Therefore, if wholesale prices fall and that reduction is not passed on fairly by suppliers to consumers, the regulator would have the power to require suppliers to do that. We also propose additional protections for non-domestic customers in bringing the off-grid market under the regulatory framework. A Labour Government would, until our reforms kick in, put a stop to unfair price rises by freezing energy bills until 2017.
I end with a few questions for the Minister. I outlined the comments he made about Labour’s proposed price freeze being “extremely dangerous”, but does SSE’s announcement today prove that he was completely wrong? Does he now welcome SSE’s move and agree that it should go further and commit to freezing its prices until 2017? The Minister and his colleagues have argued against Labour’s plans to ring-fence generation and supply in separate businesses within energy companies. Given SSE’s announcement today, does he now admit that they were wrong on that as well?
According to Which?, only one in five people trust their energy provider to act in their best interests. If the Minister believes that the energy market is working so well, what does he put that statistic down to? Does he also accept that the 5% profit margin that the big six energy companies aspire to is greater than in comparable industries and utilities in Europe?
The Minister of State, Department for Business, Innovation and Skills (Michael Fallon)
I, too, congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate and on his immaculate timing in fitting it between SSE’s announcement this morning and the forthcoming publication of Ofgem’s assessment. We have had a good debate on some of the major issues.
My hon. Friend the Member for Warrington South (David Mowat) made an excellent speech, which was all the more impressive for him not being able to stick to his prepared text. He made some important points of comparison with the European Union and the key point that all of us need to have regard to the need to ensure that energy companies are able and willing to invest in the new energy capacity the country requires. He also made the point that, in the end—this answers a question from the shadow Minister, the hon. Member for Sunderland Central (Julie Elliott)—it is not for politicians to decide on profit margins or the merits or disadvantages of vertical integration. Such matters need to be weighed up on the basis of evidence and investigated by regulators that are independent of Government.
The hon. Member for Southampton, Test (Dr Whitehead) is usually knowledgeable on these matters, but he was not right about the effect of the threshold on the smaller suppliers. Three suppliers now have more than 250,000 customers and a taper is in place to deal with what I think he called the £7 million problem.
My hon. Friend the Member for East Hampshire (Damian Hinds) emphasised the importance of switching. I will later give him the latest statistics on that, which are encouraging.
The hon. Member for Brent North (Barry Gardiner) was a little out of date in his reference to the Engineering Employers Federation. It was concerned about energy costs, but I do not think that he has picked up its latest release, which followed my right hon. Friend the Chancellor’s excellent Budget last week, in which it welcomed the new support package being given to the most energy intensive industries. He was also not quite right about the regional monopoly among the suppliers. After 2000, the 14 suppliers were free to compete nationally, not just in their regions, but after 10 years, we discovered that there was still a regional concentration and that obviously needs to be looked at.
The hon. Member for Angus (Mr Weir) spoke about the importance of transparency. I confirm that that is one issue that Ofgem has been looking at and a great deal needs to be investigated. The hon. Member for Ynys Môn (Albert Owen) asked me about distribution and transmission. Perhaps he will allow me to write to him on some of the detail. It is difficult to get more competition into the major transmission network, but he makes a point about distribution companies. They are monopolies at the moment, although they are rigorously regulated. Perhaps he will allow me to write to him on that particular point.
The hon. Member for Inverclyde (Mr McKenzie) wants to see simpler tariffs. We certainly do, too. That power has been taken and Ofgem has managed to simplify the tariff structure, which will apply from next week. He also said that supply should be separated from generation. I make the point again that integration has advantages and disadvantages. The best way to weigh those up is independently on the basis of evidence so that we can understand whether change is needed.
The hon. Member for Sunderland Central was not able to clarify whether Labour’s proposed price freeze will apply to the very smallest companies outside the big six. There still seems to be some confusion about that. She asked me specifically whether I welcomed SSE’s announcement this morning. The answer is yes, I do. I strongly welcome that and I am sure that customers of other suppliers will be asking whether they will follow suit. She asked me whether that was evidence that the market is not working well. That is exactly why we have referred the market to Ofgem for the annual competition assessment.
Competition is at the heart of our energy policy. Consumers get the best deal when suppliers face tough competition. Competition also helps to deliver innovation, and ensures that prices are kept as low as possible. Investors will only have confidence in a market that they see as fair and in which all participants compete on equal terms. That is what—
Michael Fallon
I hope that the hon. Gentleman will allow me to proceed, because I have a number of points to cover.
That is what both Government and Ofgem are working to achieve. Through the Energy Act 2013, supported by all the major parties in the House, we have introduced far-reaching reforms to the electricity market and supported Ofgem’s reforms to the retail market and the improvements that it is seeking in liquidity in the wholesale market.
Poor liquidity in the wholesale market is cited by small suppliers and independent generators as a key barrier to entry and growth. Since 2010, trading in the day-ahead market has grown rapidly. The amount of power traded on the day-ahead exchanges has increased from just 6% in 2010 to more than 50% last year.
However, we also need to strengthen liquidity in the forward market. That is one of the key concerns. From next week, Ofgem will be introducing tougher licence conditions that further strengthen forward market liquidity. Those conditions will require the big six suppliers and the largest independent generators to trade fairly with small suppliers or face financial penalties. They will also impose a market-making obligation on the big six, meaning that they will have to post the prices at which they will buy and sell power up to two years in advance. That will make it easier for independent suppliers to buy power for their customers. Knowing that the big six will buy power at the prices that they post will also help independent generators to sell their output in the forward market. The new licence conditions will be supported by Ofgem’s powers to fine companies if they are in breach of them. We have underpinned those reforms by taking powers in the Energy Act to act if Ofgem’s reforms are delayed or frustrated.
Michael Fallon
I hope that the hon. Gentleman will forgive me if I do not.
Our work to break down barriers to entry into the retail energy market is already bearing fruit. The supplier base that we inherited had shrunk, as I have said, from 15 majors in 2000 to just six in 2010. In 2011, we raised the customer threshold for participation in the key energy programmes from 50,000 to 250,000. Since 2010, 11 new companies have entered the domestic supply market—they include one that now has more than 800,000 customers—and we see more companies preparing to enter. There are now 18 independent suppliers, which are increasingly penetrating the market share of the larger, more established players. Their market share, although small, has doubled since 2010, and we will continue to work to remove barriers to entry and growth.
According to industry figures—this is the answer to the point made by my hon. Friend the Member for East Hampshire—between October and February alone, about 1.5 million customers switched their electricity supplier and, of those, nearly 500,000 switched their account to one of the smaller suppliers. The smaller suppliers are of course the ones that would be most exposed by Labour’s price freeze. They are less able to absorb any increased costs arising from network charges or increases in the price of wholesale energy and would struggle to compete with the big six in those conditions, so we do need an answer to the question that I put to the shadow Minister.
I was also asked about consumer engagement. An engaged consumer base is a key component of a competitive market, which is why we are reforming the retail energy market and making it easier for consumers to navigate. In 2010, we inherited a market that was not working in the best interests of consumers. There was a profusion of more than 350 complex tariffs, no doubt supported by Opposition Members, but that complexity made it very difficult for people to work out how to get on to the right tariff for their circumstances. Bills were complicated and unclear, making it difficult for consumers to compare their existing tariffs against others on offer.
The retail market review that Ofgem has already carried out has simplified tariffs and limited suppliers to offering just four simply structured tariffs per fuel. New rules, introduced next week, will make bills clearer and simpler. Suppliers will be required to tell their customers about the cheapest tariff that is available to them and the savings that they could make by moving to it. That information will now be provided on bills and annual statements. By June, all customers on poor-value dead tariffs will be moved to the cheapest variable tariff.
The measures that I have outlined demonstrate our determination to drive greater competition in the energy market, but those measures are not, of course, all that we are doing. My right hon. Friend the Prime Minister announced last autumn that the competition authorities would carry out an annual competition assessment. The first assessment is being carried out by Ofgem, the Office of Fair Trading and the Competition and Markets Authority. We expect it to be published very soon.
Barry Gardiner
I am grateful to the Minister for eventually giving way. He has spoken about competition a great deal. Does he accept that the whole purpose of vertical integration by a company is precisely to be a bulwark against competition and, although what he has said about introducing greater liquidity into the long-term market is absolutely right, does he not accept that that would be achieved by breaking up that vertical integration?
Michael Fallon
That is something, as I have said, that we require independent investigation to establish on the basis of evidence. There are arguments in favour of vertical integration. I am not putting them forward today, but there are those who argue that vertical integration can lower the cost of capital and lead to more efficient risk management. These are issues on which the evidence needs to be properly weighed—with the greatest respect, neither by the hon. Gentleman nor by me, but by independent investigators who are detached from the political process. I am very disappointed to see that the regulator would be abolished if Labour ever came to power. The evidence needs to be weighed independently, and we need to have a proper judgment. The first competition assessment is being completed—
Michael Fallon
If the hon. Gentleman will allow me, I will not, because I am running out of time. The first competition assessment is now being carried out by the three competition authorities and will be published very, very soon. The independent authorities set out the scope of the assessment in December. They are looking at all aspects of competition in the energy markets, including market share and how easy it is for innovative new entrants to enter the market and compete. They have also been examining, as I have said to the hon. Member for Brent North, the impact of vertical integration, the degree of consumer engagement in the market and, indeed, the levels of profitability, to which a number of hon. Members have referred.
Real progress has already been made to incentivise the driving forces of competition: greater consumer choice and increased participation in the energy markets. However, we are not complacent. By commissioning an annual competition assessment, we are creating a formal process for the independent regulatory authorities to test the effectiveness of our reforms and to test annually whether the market is working in the interests of consumers.
I do not want to speculate on the outcome, but it is essential that we respect the independence of the process and any decisions that the regulatory authorities may take to strengthen competition and to protect the consumer. Independent regulation is fundamental to investor confidence. I hope that hon. Members on both sides of the House will therefore be able to support the independent regulator and the competition authorities when they publish their assessment very shortly.