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Dr Daniel Poulter (Central Suffolk and North Ipswich) (Con)
I beg to move,
That this House has considered competition in the UK energy market.
It is a pleasure to serve under your chairmanship for the first time, Mr Percy. Energy prices and the challenges facing the energy market—perhaps the failure of the energy market—are issues that have vexed consecutive Governments for many years. The challenges we face in tackling the behaviour of the big six energy companies were most recently illustrated by the debacle of the Age UK-E.ON energy tariff. Age UK offered its customers a tariff with E.ON—one of the big six companies—which was not the best deal on the market and cost them many hundreds of pounds more than they needed to pay. That is an example of the big six energy companies’ behaviour. I have a good impression of Age UK from my engagement with both the local organisation in Suffolk and the national charity, which campaigns for the needs of older people. That tariff is an example of one of the big six energy companies behaving poorly and not offering good value for money for customers.
An important review of the energy market will be published tomorrow, so this debate is timely. It gives us an opportunity to talk about the challenges we face in developing a sustainable energy market that serves customers and looks after the most vulnerable—people on fixed incomes, people in social housing, older people and people who are in fuel poverty.
The energy sector faces three sometimes conflicting pressures, which we often call the “energy trilemma”. First, since the liberalisation of the domestic gas and electricity markets at about the turn of the century, energy customers have grown accustomed to relatively cheap energy. More recently—particularly since the recession —many households have struggled with energy bills and the cost of heating their homes due to increases in energy prices.
Secondly, the UK’s future energy requirements are an increasingly pressing challenge. The Department of Energy and Climate Change—the Minister may talk about this later—estimates that electricity capacity in the UK will need to grow in the long term, as demand is likely to increase by between 30% and 100% by 2050.
Thirdly, and rightly, the UK committed to reducing its greenhouse gas emissions by at least 80% by 2050 under the Climate Change Act 2008. That Act, which set out steps towards the decarbonisation of the British economy, was underpinned by cross-party support. When it was enacted in 2008, the right hon. Member for Doncaster North (Edward Miliband) was the Energy Secretary, and the Prime Minister, who was then the leader of the Opposition, gave the support of Her Majesty’s Opposition to that important measure.
In short, energy must become low carbon while remaining affordable to consumers and attractive to investment and investors. That is the energy trilemma. It has perhaps been made slightly less challenging in recent months by the fall in the global oil price and the lower fuel costs for many customers. Certainly, the cost of kerosene—the fuel that many of my constituents use for home heating—is at a record low level.
Since 2008, Governments and the energy regulator, Ofgem, have sought to reduce the barriers to effective competitiveness in the gas and electricity markets, particularly for supplies to domestic customers. Up until now, the main aims of the regulatory interventions have been to ensure that the wholesale and retail gas and electricity markets are competitive. For retail consumers, the aim has been to make tariffs simpler, clearer and fairer and to reduce the complexity that previously dogged pricing in the energy market. The various interventions culminated in 2014 when Ofgem requested that the Competition and Markets Authority conduct an energy market investigation. Referring the matter to the CMA was intended to secure a once-and-for-all investigation as to whether there were further barriers to competition in the energy market, because the CMA had the more extensive powers with which to address the issue of big, long-term structural barriers.
In the course of the CMA investigation to date, the authority has published a large volume of evidence on its website, including more than 100 submissions from interested parties and transcripts of 30 hearings with industry participants and other important groups. In the provisional findings, which were published on 7 July 2015, the CMA suggested a range of adverse effects on competition in the energy market, as well as areas that did not give rise to such effects. The key provisional CMA findings were that a range of problems is hindering competition in the market, including the extent to which consumers are engaged in it and the shortcomings of the regulatory framework to support active consumer engagement.
The CMA also found that customers are not taking advantage of switching suppliers. Dual-fuel customers could save an average of £160 a year by switching to a cheaper deal, again highlighting behaviour of the big six of which we are too well aware. Furthermore, about 70% of customers are on the default standard variable tariff, despite the presence of generally cheaper fixed-rate deals.
The CMA outlined that regulatory interventions designed to simplify prices, such as the four-tariff rule, are not having the desired effect. A lack of transparency is hampering trust in the sector and, as I am sure that Members in the Chamber today know, a good example of that is the scandal exposed by the Select Committee on Energy and Climate Change in the previous Parliament, under its then Chair, Tim Yeo. The price comparison websites were only advertising deals that they were sponsored to advertise, so some of the very best deals were not available to the people using the websites. Every step of the way, there has been a lack of pricing transparency, even on the part of the price comparison websites. The history of the big six energy companies is far from one of benefiting the consumer.
Competition in the wholesale gas and electricity generation markets can work well—according to the CMA provisional report—but the presence of vertically integrated firms does not necessarily have a detrimental impact on competition.
Julian Knight (Solihull) (Con)
My hon. Friend is making an important contribution and I congratulate him on securing the debate. I understand about the failings in the aggregator and price comparison sites sector, which we need to be aware of, but competition in the energy market has made some progress. In 2010, 99% of the domestic market was shared by the big six, but we now have more than 30 providers and independent suppliers having 30% of households. Does he recognise that there has been progress, and that we just need more and at a quicker pace?
Dr Poulter
There has been progress, but it has been among empowered consumers. The most vulnerable consumers—such as people on fixed incomes, pensioners and those who live in the poorest housing, are unemployed, have mental illness and people who are sometimes the least able to advocate for themselves—might not even have engaged with the internet, which plays an important part in supporting consumer choice. Such lack of engagement is not true of all older people, but it is of some. Such consumers have not been engaged in the energy market and we have a duty to look after them, in particular those who live in fuel poverty. In that respect, there is ongoing market failure, and that needs to change.
May I develop my earlier point, which is key? As I am sure my hon. Friend is aware, this was picked up in the recent Which? report. Despite the CMA investigation and its provisional findings of last year, the behaviour of the big six energy companies seems to remain unchanged, profoundly uncompetitive and certainly not in the best interests of vulnerable consumers. Ahead of the final conclusions of the CMA’s investigation into the energy market, which I hope and understand will be published tomorrow, the latest Which? research has revealed that the recent price cuts announced by the big six energy companies are dwarfed by the savings that customers could be making by switching to an alternative provider.
Customers on the standard tariffs of the big six providers save only £30 a year from the recently announced cuts, which is a 5% reduction for those on a standard single-fuel gas tariff and only a 2.6% reduction for those on a standard dual-fuel deal—the cuts applied only to gas, not to electricity. The same customers, however, would save a massive £400 a year if they were to switch to the cheapest dual-fuel deal on the market, or £260 a year for the cheapest gas-only tariff. Clearly, there are still problems with and concerns about the behaviour of the big six energy companies, in spite of the provisional CMA report.
That is why a number of not-for-profit energy collectives such as the Big Deal have sprung up to support consumers to get better energy deals. According to Government estimates—I am sure the Minister will correct me if I am wrong—only 12% of customers switch their gas provider, with seven in 10, or 71% of gas customers stuck on standard tariffs and nine in 10, or 88% of households still with the big six. The forthcoming energy inquiry must therefore make it easier for customers to engage with the energy market and to switch to a better deal.
Consumers include the most vulnerable people who live in our constituencies, in particular the elderly, pensioners and people who live in social housing and private rented accommodation—frequently in some of the worst and least energy-efficient accommodation. They are the poorest consumers, often living in fuel poverty, and they are paying the biggest price for the failure of the energy market.
David Mowat (Warrington South) (Con)
I do not want to be an apologist for the big six, but there is something about the subject that I always find intriguing. We have heard mention of “market failure”—another term for a cartel, frankly—but why have the big six not been able to turn their cartel into profits? Yesterday, npower announced the laying off of some 2,500 people and a loss of £100 million. Other members of the big six, according to the numbers, do not appear to be making massive profits either. Where does the money go?
Dr Poulter
I assume that the inflated energy tariffs are benefiting the shareholders in a number of those companies, because the companies are certainly not passing the reductions in their costs on to the consumer. If we want to restore trust in the energy market, they need to do so. Some of the most vulnerable consumers, the people least likely to switch, are losing out. Clearly there is exploitation in the big six market position, at the expense of vulnerable consumers.
David Mowat
My hon. Friend is of course right: we must have more switching—we are all behind that—and we must make the market work better. My point, however, is that shareholders do not appear to be benefiting. Npower lost £100 million in the UK, and others have not made a great deal of money out of the market. It would be useful for us to reconcile that—perhaps the three Front Benchers will help us later.
Dr Poulter
The Front Benchers can speculate why the benefits of the reductions in costs for the energy suppliers are not being passed on to consumers, because they are clearly not being. The money is going somewhere, but not to consumers’ pockets. If we genuinely want to have an energy market that has the trust of the public and protects those people who are perhaps not engaged with it effectively, something different needs to happen. The money is going somewhere, but not to the people to whom we want to see it going, and that is what a market mechanism is designed to do—to benefit the consumer.
Julian Knight
I was in conversation with Npower today, because it is a major employer in my constituency and I had concerns about the job losses that were announced. Npower told me that, in effect, the industry is running on a profit margin of about 4% to 5%; by comparison, Tesco and Sainsbury’s normally look at about double that figure. So a huge profit margin is not in place and perhaps where the disconnect—excuse the pun—comes in is in areas such as prepayment meters, where vulnerable groups are paying over the odds for their energy, compared with more everyday and active consumers.
Dr Poulter
My hon. Friend is right. Indeed, I have raised that point. You quite rightly kicked off the debate a little earlier than we had anticipated, Mr Percy, because the previous debate came to an early end, and in my opening remarks I alluded to exactly that point in relation to E.ON’s recent Age UK tariff, which was an uncompetitive deal compared with some provided by other big six energy providers—I give some of them credit in that respect. It was about £140 more expensive than the best big six deal at the time. That exploited the good will of Age UK and of its customers, who would have expected that Age UK would provide them with the best deal available, which it clearly was not. That has further damaged the reputation of the big six and how they can use their market position to the detriment of the customers they purport to serve.
Julian Knight
My point related more to prepayment meters, which are topped up at shops or other retailers, but people find that they go into emergency credit and end up paying far more for their energy. My hon. Friend is making some valuable points, but I wonder whether there is an acute difficulty only in small areas of the market, with overall profit margins being relatively low.
Dr Poulter
My hon. Friend is right to make that point about pre-payment meters. In that situation we are often dealing with some of the poorest energy consumers who can least afford to pay, but who pay a lot more for their energy as a result of those meters. I am sure the Minister will want to comment on that. Citizens Advice gave evidence to the Energy and Climate Change Committee on the importance of protecting vulnerable consumers and ensuring that they are not left behind by an energy market that benefits more informed, internet-savvy consumers. We need to protect those who by dint of social circumstance—they may not be very well off, or they may be in difficult circumstances—may not have the same opportunities as others to choose where they live. They may have to deal with pre-payment meters, which I am sure none of us would choose for ourselves. There is clearly a role for the Government in looking at how to protect vulnerable consumer groups.
Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)
The hon. Gentleman is making a fantastic speech. People on prepayment meters are the disguised self-disconnectors, which is a bad news story for those individuals but also for the country and for companies. That must be addressed, as the hon. Member for Solihull (Julian Knight) said.
Dr Poulter
I completely agree with the Chair of the Energy and Climate Change Committee; that is a good point well made. I hope we will have the opportunity to do that either through legislation or through cross-departmental work. This is an issue not just for the Department of Energy and Climate Change but for the Department for Communities and Local Government, which can implement much energy legislation that affects homes in the private rented sector. I am sure the Minister will want to take the issues forward with Ministers from that Department in some cross-Government working, because it is important that the energy market benefits the most vulnerable people in our constituencies.
Despite the CMA’s investigation and its provisional findings last year, the behaviour of the big six energy companies seems to remain broadly unchanged, profoundly uncompetitive and, as I outlined, certainly not in the interests of some of our most vulnerable constituents. Ahead of the conclusion of the CMA’s investigation into the energy market, numerous measures have been put in place that have not been in consumers’ best interests. I am aware that other Members wish to speak, so I will try to bring my remarks to a conclusion fairly soon, but it is worth highlighting where that review is and where it may lead us.
The CMA’s provisional findings were a clear indictment of a market that in my view—this is not without a good amount of evidence—is failing consumers. They showed that energy suppliers were exploiting their unilateral market power to price tariffs above a level that could be justified by the costs at which they were buying energy. In the Which? annual energy supplier satisfaction survey, three of the big six suppliers failed to meet the overall average customer satisfaction score of 53%, and npower had the lowest score for the sixth year running, at 41%. I am sorry to highlight that to my hon. Friend the Member for Solihull (Julian Knight), given the point he made.
Ofgem’s latest complaints figures show that the big six received an eye-watering 5 million customer complaints last year. I am sure hon. Members agree that such flaws in the energy market demonstrate the need for radical reform and change. There is also concern about the level of detail that the CMA has provided to date on its potential remedies, which is seen as lacking. I hope that we will get clarity on that tomorrow when its final report is published. There may be merit in the safeguard tariff proposal, but not enough thought has been given to how it will interact with proposals to get more people switching.
Crucially, the CMA appears to have given little or no thought to the steps that will engage people in the energy market, particularly after the failure of Ofgem’s retail market review. At a time when people should be saving as much as £400 by switching from a big six standard tariff to one of the smaller suppliers’ cheapest tariffs, a rise in switching of just 15% is a drop in the ocean. That raises big questions about what can be done to get people to switch and save, and the CMA needs to deliver clear answers.
David Mowat
My hon. Friend mentioned npower, which got a very low customer satisfaction score, has lost 200,000 customers, I believe, and is having to make something like 2,000 to 2,500 people redundant. In that respect at least, there is an argument that the market is working.
Dr Poulter
The market may be reflecting the damage to npower’s reputation, with some loss of jobs. None of us would like to see job losses in our constituencies, but clearly there are lessons for npower to learn. However, it is only one of the big six energy companies. As a group, their behaviour has consistently been not customer-focused, as the Which? survey bears out, and they have not made improved energy tariffs available to customers, particularly vulnerable customers. I do not believe that that is a good or healthy market, which is why Ofgem referred the issue to the CMA in the first place.
Crucially, the CMA appears to have given little or no thought to how we can engage people in the energy market. There are sticky customers—vulnerable customers, older people and those in the private rented sector—who do not engage, and we need to see that change.
In their draft legislation, the Government are looking at developing greater price visibility, compelling offers and quicker switching. Those ideas have a lot of merit and will encourage greater engagement in the market by some, but I am not sure all, customers. There is a compelling case for the CMA inquiry ensuring that the presentation of pricing is more engaging for customers. In particular, the switching process needs to be improved— both the time limit and how it works. The Government are looking at that in the draft legislation, which is welcome. We know that customers will switch, but the challenge is getting them more engaged in the market.
Today’s energy market is failing customers. Millions of people, many of whom are vulnerable and living on fixed incomes, are being punished for loyalty to their energy supplier, paying hundreds of pounds more for their energy than they should. The big six are using that money to hook in new customers with loss-leading tariffs, which is a cynical and poor way to treat customers that destroys market competition at customers’ expense. That is one of the key reasons why the big six retain their market position. The situation is worsened by too many complex rules and regulations and a lack of pricing transparency.
The CMA has a unique opportunity to deliver a new regulatory model based on simplicity and common sense, underpinned by clear, strong and practical principles that protect vulnerable customers and those on fixed incomes. In a refreshed energy market, with the energy companies showing genuine corporate responsibility, there is an opportunity to put customers at the centre of a market that is meant to serve them. Those who profit from exploiting their customers should have no choice but to change or face much more stringent financial and other penalties from regulators.
I would like to see three changes to the energy market coming from the CMA review, and I would be grateful for the Minister’s comments on them. We need to see fair pricing—energy suppliers’ prices should reflect underlying costs, and suppliers should be stopped from overcharging loyal customers or running loss-leading tariffs that damage competition and drive smaller suppliers out of the market. Regulations should be based on clear principles, with the priority being to avoid customer harm and to protect vulnerable customers and those on fixed and lower incomes, particularly those in fuel poverty. That leads to the key third principle of energy market reform: we must protect the vulnerable. We need a regulated, annually set social tariff that stops the most vulnerable customers and those in fuel poverty being exploited by the big six.
If we do not achieve those things, the energy market will become a contradiction in terms. Consumers, particularly the most vulnerable, deserve better. I look forward to hearing from my hon. Friend the Minister.
Chris Stephens (Glasgow South West) (SNP)
It is a pleasure to serve under your chairmanship, Mr Percy. I have a sore throat, so you will be pleased to hear that I will not be shouting.
I want to touch briefly on the effects of the energy market in Glasgow. As the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) said, it is easy to fall into the trap of assuming that everyone is online and knows which price comparison site is which. For the savvy and connected, it can be relatively easy to shop around, but in Glasgow, where half our residents have a home internet connection, the continued focus on online opportunities excludes hundreds of thousands of citizens.
Poverty prevents many people from getting online, which in turn prevents them from shopping around and deepens the fuel poverty that they might seek to address. That block on the capacity of the financially and socially excluded reduces incentives for the big six to compete. Why compete for business from those customers when they are heavily handicapped in their choices, due to both the information available to them and the means by which they are able to choose?
There is no incentive for the energy companies to compete in the prepayment market; there is no market to speak of. Hundreds of thousands of customers who have moved into properties with prepayment meters are left with a choice of paying through the nose for their card meter or paying through the nose to get the meter replaced if they pass a credit check.
One constituent of mine was chased by one of the big six for an energy debt accrued on the prepayment meter in his flat. Given that he had moved in while the meter was in situ, there was no possible way for him to have run up a debt. Nevertheless, it was only when my office intervened that sense prevailed. How many other cases like that are out there, with debt recovery agencies chasing innocent victims for non-existent debts run up on a non-existent meter using non-existent energy?
Another constituent—a pensioner on a fixed income—attended my surgery to talk about his electricity costs. His last quarterly bill showed that three quarters of his spending was on standing charges. Although I understand that energy companies need to ensure that the maintenance of infrastructure is funded properly, it surely cannot be beyond their ken to ensure that vulnerable and poor customers such as my constituent do not find themselves afraid to turn the heating on for fear that their next bill will be unpayable.
Comparing costs per unit, per day and per month is just part of the problem. Qualification for the warm home discount scheme, for example, varies from company to company, with some enrolling only those mandated by the scheme and others extending entitlement to recipients of qualifying benefits. Navigating that minefield and finding the company that offers the best terms requires time, patience and, again, an internet connection. One hundred and forty pounds off the electricity bill may not seem a huge amount, but to someone on a means-tested benefit it is invaluable.
Competition in the energy market is not simply about who sells the cheapest kilowatt-hours or who gives the biggest discount on direct debit. A proper market serving the wider population requires that population to have equal access to information, so that they can make informed decisions. Sadly, the number of people still falling into fuel poverty means that far from the situation improving, it has in fact worsened over recent years.
Philip Boswell (Coatbridge, Chryston and Bellshill) (SNP)
It is a pleasure to speak under your chairmanship, Mr Percy. I would first like to thank the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) for securing this debate on such an important issue. His excellent speech covered all the key issues—the dominance of the big six, the lack of trust and transparency, loyalty to and by customers, fuel poverty and, of course, competition. I am delighted to see the general alignment across all parties on this subject, and I look to the Minister and the Government to address the serious issues raised.
The UK energy market is, without question, dominated by the big six suppliers. That market structure is detrimental to energy customers because companies within such structures are, by nature, subject to far less competition than those in competitive markets, and competition is key to keeping prices down. Ofgem itself has acknowledged that while there was no evidence that the big six were operating as a cartel—something that the hon. Member for Warrington South (David Mowat) spoke of—there was a possibility of tacit co-ordination between them.
Last summer, the Competition and Markets Authority found a range of problems hindering competition in the market. Two key factors were a lack of transparency and trust in the energy sector, as well as the fact that customers were not switching suppliers, which many Members have touched on. It is easy to see why many do not trust the energy sector. While energy companies have seen record profits, customers have seen their energy bills become even more expensive.
Between 2009 and 2012, during a global recession that saw millions struggle to find a stable income and keep food on the table and a roof over their families’ heads, retail profits of energy companies increased from £233 million to £1.1 billion. Ofgem has found no clear evidence that that increase in profits was due to increased efficiency by suppliers, meaning that the unprecedented growth in profits during a global recession could only be a result of charging customers more. Let us be clear: profit in itself is not a dirty word—it is vital to business and the economy. It is, however, the levels of profit that raise concern in this decade of austerity.
The CMA found last year that energy consumers were being collectively overcharged by £1.2 billion per year. Meanwhile, ScottishPower quadrupled its profits from £27 million to £114 million, and British Gas saw its profits rise 99% between 2014 and 2015—notably, at the same time as its parent company Centrica planned to cut 4,000 jobs. Just this week, npower announced it would cut 2,400 jobs, as has been well covered in this debate.
Even after the most recent overcharging scandal, energy suppliers are still overcharging customers. In January, Ofgem found that despite wholesale costs—costs that make up half of a customer’s energy bill—falling by nearly one third over the past year, that decrease in cost has not been passed along to customers. How can we possibly expect consumers to trust these energy companies when they so regularly take advantage of customers to bolster their own profits?
Coupled with that lack of trust is a lack of transparency by energy companies in terms of the tariffs they are selling to customers. A huge number of tariffs are available, the abundance of which makes switching suppliers and choosing a new tariff complex and confusing. Moreover, the related benefits and charges of the tariffs available, such as introductory offers and exit fees, are presented in a variety of ways, making the options available even more difficult to understand.
While online comparison websites are a welcome tool for consumers to help navigate the complexity of the various tariffs available to them, the variety of tariff structures available means that even using those websites does not guarantee that a customer will select the cheapest tariff or instil confidence in the customer in their decision to switch suppliers. Moreover, as my hon. Friend the Member for Glasgow South West (Chris Stephens) said, the most vulnerable in society are often unable to utilise those online resources. That combined lack of trust and lack of transparency makes customers hesitant to switch. In turn, it gives incumbency advantages to suppliers, which is a politically correct way of saying that suppliers systematically overcharge and exploit their existing long-term customers.
Turning to fuel poverty, in any debate on the energy market, it would be remiss of me to fail to acknowledge the real-life impact on consumers of the fact that the energy market, at present, does not work in their best interests. That impact is most evident in the prevalence of fuel poverty among the most vulnerable in society. My hon. Friend spoke articulately—if somewhat quietly—about the very serious issues of high tariffs for those in fuel poverty and the lack of opportunity to switch, telling us distressing real-life stories of how vulnerable and not well-off customers suffer most under the present system.
In the last 10 years, under energy market regulation dictated from Westminster by successive new Labour and Tory Governments, the number of households living in fuel poverty in Scotland has risen by 10% to 40% of households—let me say that again: 40% of households in Scotland are living in fuel poverty. Fuel poverty means more than simply not being able to keep the heating on. Fuel poverty has been found to cause mental health problems in adolescents, as well as respiratory problems in children. It affects the educational attainment and the emotional wellbeing of children and means that household income, which could otherwise be used to purchase healthy, nutritious food, goes on paying energy bills.
The combination of mental and physical health problems, poor diet, emotional turmoil and diminished educational attainment caused by fuel poverty is a recipe for condemning people to the cycle of poverty. To me, and clearly to most Members speaking today, that is completely unacceptable. Why should so many suffer while energy companies systematically continue to overcharge customers and take advantage of the market failures in the energy market that this Tory Government continue to fail to address?
After considering the many contributions made by hon. Members, it is clear to me what needs to be done to address the critical issue of the UK energy market’s failure to benefit consumers. First and foremost, the systematic overcharging of customers must end, and the cost of energy bills must be reduced. The fact that this overcharging is so common is a clear indicator that the regulatory structure is not working at present.
More needs to be done to make switching suppliers easier. If customers had the confidence to switch suppliers, competition in the market would increase and, in turn, hopefully help to push down prices. That means addressing the two underlying reasons why customers are not switching suppliers—the lack of trust in the industry and the lack of clarity and transparency surrounding the different tariffs available to customers.
Finally, the growth of green energy provides a potential competitor to the big six energy providers, creating huge scope to help to push down prices for customers. However, barriers to entry and expansion remain for energy providers. Proactive steps must be taken to ensure that this growing sector, which provides energy that is both renewable and potentially cheaper than traditional sources, is able to compete against the dominance of the big six.
Dr Alan Whitehead (Southampton, Test) (Lab)
I congratulate the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) on securing the debate, which is so timely, given that it is within 14 hours of the Competition and Markets Authority’s report on its findings coming out. Unfortunately, it is taking place 14 hours before the findings come out, but it is pretty closely targeted on the important development that we are about to witness. For this afternoon’s debate, we have the CMA’s provisional findings, which I guess will inform the report that will come out shortly. The hon. Gentleman directed his very thoughtful points about the whole question of competition in the energy market to a number of those.
This is a conundrum with many layers—exactly how competition works, how it can best work, how it can be better enhanced and how it can work for those customers who could benefit most from better competitive arrangements in the energy market. In many instances, those customers appear at present to be stuck in a non-competitive mode with energy companies. Energy companies almost regard those sticky customers as assets that they can use to make additional resources, as the hon. Gentleman mentioned, with which they can finance special offers and various other things, which, to some extent, rely on the knowledge that those sticky customers will remain with the company—perhaps that is part of the conundrum—apparently very much against their better economic interests and despite longer term concerns. I will perhaps return to that thought in a moment.
The hon. Gentleman also made the very important point that we are discussing one part of that energy trilemma, in that we have embarked on—and I hope we will continue to be solidly embarked on—a process of decarbonisation of our energy system. Clearly, that has to be achieved, but under the circumstances of two additional imperatives: first, that there should be security of supply, among other things to make sure that the lights stay on, which is perhaps a rather important part of the customer experience of electricity prices and the market; and secondly, that prices should be fair, reasonable and equitable, as far as customers are concerned.
I am not sure that it would too far outside this debate just to reflect on the first part of that energy trilemma. I gently ask whether the Minister has any sort of plan B in the light of the difficulties that we are having with capacity, the recent reports concerning the possible development of Hinkley Point C power station and the apparent inability of the capacity market as it stands to develop any contracts for new long-term building, particularly of gas-fired power stations. Does she wish to share any thoughts with us on how that particular leg of the trilemma might best be supported over the next period? That seems relevant to the other two legs, and particularly to the leg that we are discussing this afternoon.
As for the question of how prices can be as fair and competitive as possible to customers, we need perhaps refer to what is happening with the CMA. It was interesting last summer to see the CMA’s report on provisional remedies. As the hon. Member for Central Suffolk and North Ipswich outlined, it concluded that a number of features of the market gave rise to the finding of an AEC—an “adverse effect on competition”. The report stated that that arose through
“weak customer response, which, in turn, gives suppliers a position of unilateral market power concerning their inactive customer base”,
which they are able to exploit through their pricing policies or otherwise. That refers particularly to sticky customers, but I was slightly surprised at the brief consideration that the CMA’s interim report gave to a number of other factors that seemed to contribute to that, such as vertical integration in energy companies. That may not have a direct impact on competition, but it may have an indirect impact for a variety of complex reasons that may have a hand in the process.
Perhaps part of the answer to the conundrum that has been presented in this Chamber this afternoon about where the money goes when energy companies are apparently posting substantial losses is a better understanding of how vertical integration works. It is not just within the UK power generation and retail market. It has been suggested that companies that buy and sell to themselves create an opportunity to shift sums around considerably.
There is increasing vertical integration outside the UK. Some companies are reporting what is happening in the UK, but also in the context of what is happening outside the UK, such as company structures. The extent to which those companies are able to post profits or losses in particular countries in which they are working does not necessarily reflect entirely what is going on across the board in other countries of operation. That should be examined at least.
David Mowat
I am interested in the hon. Gentleman’s comments about vertical integration, because the interim report looked at that and theory of harm 3a and 3b. My reading of it was that the CMA did not regard vertical integration as a major issue. I looked at it quite carefully.
On the point about moving profits around, which is the issue regarding vertical integration, the share price of Centrica, the owners of British Gas and the biggest player in all this, has gone down by around 40% in the last five or six years. I have no truck with these oil companies and big players, but if they are running a cartel, it is one of the worst I have ever seen.
Dr Whitehead
The hon. Gentleman makes an important point. This issue is like an onion. It has many layers that must be unpeeled before anyone can get anywhere need the essence of it. Part of the process is that some companies are losing customers with insurgent companies coming into the market, and some are setting up good companies and bad companies to bifurcate the process of where their investments go and where their profit centres are. That clouds the picture. Obviously, there is the effect of energy prices, particularly who has bought what, where and when, and what those prices now mean in terms of strategies that took place two, three or four years down the line.
David Mowat
People can move profits around and have good companies and bad companies. What I am saying is that Centrica, which owns British Gas, has somehow turned the cartel that it is apparently operating —we will find out tomorrow so we are speculating—into a 40% reduction in its share price in the last five years. That is not a good performance in running a cartel.
Dr Whitehead
Indeed. As the hon. Gentleman underlines, that may be a factor of other processes at work in those companies and what investors think is their long-term security and future in the light of rapidly changing energy conditions. A whole series of factors is at work, and I hope that, in the report that the CMA will publish tomorrow, it has paid due attention to the complexity of those factors. I fear that some of that complexity was not fully reflected in its initial proposals.
A second complexity is transparency: who is buying what at what point round the curve, how companies are hedging their trading processes and whether they are trading with themselves and hedging advantageously compared with other companies down the line. One might argue that that is good practice or bad practice, but we do not know that because the market is not transparent at the moment.
Andrew Percy (in the Chair)
Order. The hon. Gentleman should have had five minutes, although he is within his rights to take more as we have more time, but he will shortly have been speaking for 13 minutes, which will leave a similar time for the Minister. It would be courteous if he concluded shortly so that the Minister may have the appropriate time.
Dr Whitehead
I thank you for your guidance, Mr Percy. I fear I was somewhat swayed by expert fellow Members in the Chamber into going down paths that took me longer to explain and which I might otherwise not have been involved in. I, too, want to hear what the Minister has to say and I will conclude as soon as possible.
All I want to say further concerns the central issue that the hon. Member for Central Suffolk and North Ipswich raised. Why is it that 70% of the big six energy companies’ customers stick with those companies through thick and thin, regardless of what opportunities are thrown at them to switch? Some of the remedies that are likely to arise tomorrow may not address that issue as closely as they should. The idea of putting people on a temporary safeguard tariff while continuing to bombard them with suggestions that they switch works only when the latter process also works. If it continues not to work, those people move further from the market rather than closer to it.
Remedies that look at what people do—
Andrew Percy (in the Chair)
Order. The hon. Gentleman has had substantially longer than the Minister will have, which is a discourtesy to her. Although it is in order for him to speak for longer than the allotted time, will he draw to a close within seconds and give the Minister the courtesy of responding?
Dr Whitehead
Indeed, Mr Percy.
What those people do should be a matter for considerable further examination and possible additional remedies. I hope that at the very least the CMA has provided in its report some additional arrangements that will work.
The Minister of State, Department of Energy and Climate Change (Andrea Leadsom)
I congratulate my hon. Friend the Member for Central Suffolk and North Ipswich (Dr Poulter) on securing this debate within such a short time of the CMA report coming out.
I want to reiterate that my Department puts consumers at the heart of everything we do. We are determined to be genuine consumer champions. Hon. Members will know that our priorities are to ensure that we have secure supply of energy and that we decarbonise at the very lowest cost to consumers. I remind hon. Members that we are determined to focus available support on the fuel-poor.
My hon. Friend was right to mention the appalling story of E.ON and Age UK selling poor deals to pensioners and it is right that Ofgem is looking carefully at that. He also mentioned the scandal during the last Parliament of price comparison websites not giving the best prices. That has been addressed in amendments to the voluntary code, but he was right to highlight that some of these issues are extremely serious and that we must always take steps to prevent them. I want to use this opportunity to reiterate to any energy companies listening to the debate that when wholesale prices go down, the Government expect them to pass those reductions directly to their customers.
The CMA, as hon. Members know, published its provisional findings last July. It is very clear that it found that retail competition is not working. It found that a lack of competition means that about 70% of households remain on their supplier’s most expensive energy tariff, despite the savings that they could make by moving to someone else. In fact, by switching from a standard tariff to the best fixed direct debit deal on the market, many people could save about £200 and some could save more, so again I will take this opportunity to say to anyone listening out there: please do shop around; it is really worth doing.
However, there is some good news to report. We have been working hard with Ofgem to improve competition, and the work is beginning to bear fruit. We now have 31 independent suppliers competing with the big six in the domestic retail market. That is up from just seven small suppliers in 2010. The independent suppliers are making inroads into the market share of the big six. They now have almost 15% of the dual fuel market; that is up from less than 1% in 2010. The Government have worked with the industry and Ofgem to halve the time that switching supplier takes from five weeks to 17 days. An increasing number of households are switching supplier. Ofgem recently reported a four-year high in the number of energy account switches; 6.1 million energy account switches took place last year. That is increasing competitive pressure on the big six, and prices are falling. We saw the price of the cheapest one-year fixed tariffs fall by more than £100 during 2015, and prices are continuing to fall. That is good news for consumers who shop around and switch tariffs and supplier.
Matthew Pennycook (Greenwich and Woolwich) (Lab)
Will the Minister give way?
Andrea Leadsom
I will not give way at the moment. I want to get through part of my speech, as it has already been severely curtailed.
It is a massive challenge to inject the sort of competition that we are seeing for fixed tariffs into the standard variable tariff segment of the market. That is the default tariff that most people are on. Despite the good news that all of the big six have announced price cuts to their standard variable tariffs this year, we want to see much more effort.
The Government, too, must do more, so we are working with Ofgem and the industry to move to 24-hour switching and we are continuing with our Power to Switch campaign. In just one month of the Government-funded Power to Switch campaign last year, more than £38 million was saved by 130,000 households switching energy supplier. Of course, we have already committed to acting urgently on the CMA recommendations that we expect to see tomorrow.
Matthew Pennycook
Does the Minister think that there is any merit in looking at what more Ofgem can do to help new entrants better to understand the regulatory environment, as Ofcom does, I think, with the telecommunications sector?
Andrea Leadsom
Yes, the hon. Gentleman makes a good point. It is something that Ofgem is very aware of, but I will certainly take that point away and look at it again.
I want to address the point made by the hon. Member for Glasgow South West (Chris Stephens). He is absolutely right to say that prepayment meter customers are particularly ill served by competition. That has been picked up by the CMA. It is true to say that those customers have far less choice of tariffs. We had a very good debate about that quite recently in the main Chamber. However, we are beginning to see some improvement in competition, with some suppliers offering smart prepay tariffs. We are working with Ofgem to remove the barriers that those customers face in switching supplier. For example, Ofgem is working with suppliers to help customers who are on prepayment meters and in debt to switch supplier for a better tariff. The hon. Gentleman raised a very important point.
We are also starting to see some improvement in customer service. The latest Ofgem data showed that the six major suppliers received 1.5 million fewer customer complaints in 2015 compared with 2014, but with a total of just under 5 million complaints, they still have a long way to go. We are therefore working with Ofgem and the energy ombudsman to identify and then fix systemic issues to stamp out poor customer service. Ofgem carried out a review of the role of the ombudsman last year and recommended that it should carefully analyse the specific complaints and use that information to reduce the underlying causes of complaints. That work is ongoing and will be very important.
As well as working to improve competition, the Government have a range of programmes to help vulnerable and low-income consumers with their energy bills. We are supporting 2 million customers a year with the warm home discount. We have increased the level of the discount, and in 2014-15 more than 1.4 million of the poorest pensioners received £140 off their electricity bill, with more than 1.3 million of them receiving the discount automatically. We have confirmed that the warm home discount will be extended until 2020-21 at the current level of £320 million a year, and we will be consulting on proposals for 2016-17 shortly. It is the case that 600,000 low-income and vulnerable households, including families, also benefit from £140 off their bill. Altogether, a total of £1.1 billion of direct assistance has been provided to low-income and fuel-poor households since the scheme began.
The winter fuel payment, which went to about 12.5 million older people in 9 million households last winter, is a significant amount of help towards higher fuel bills in the winter, with households getting between £200 and £300.
Also, and vitally, the cold weather payment, which is paid to vulnerable people during periods of very cold weather, has been permanently increased to £25. Last winter, more than 400,000 payments were made, during the very coldest weeks of the year, at an estimated cost of £10.6 million.
A reformed domestic supplier obligation from April 2017 will improve the energy efficiency of well over 200,000 homes a year to deliver on our commitment to help 1 million more homes in this Parliament.
In response to the hon. Member for Coatbridge, Chryston and Bellshill (Philip Boswell) on fuel-poor households in Scotland, he will know that fuel poverty is a devolved issue. However, some of our schemes to help tackle fuel poverty are GB-wide. That includes the energy company obligation. The hon. Gentleman will be aware that with 35.3 households per 1,000 homes treated, Scotland receives the greatest share of ECO, followed by England, with 25.4 households per 1,000 homes and Wales with 21.9.
As well as supporting low-income and vulnerable consumers directly with their energy bills, we fund the big energy saving network. Again, I think that this addresses the point made by the hon. Member for Glasgow South West about the need particularly to help the extra vulnerable and the fuel-poor. Face-to-face help and advice through trusted organisations is one of the most effective ways to help vulnerable consumers to engage with the energy market. The big energy saving network reached more than 90,000 people in 2013-14 and about 130,000 in 2014-15, and we are well on track to reach a further 100,000 this winter. The programme has helped some of the hardest consumers to reach, with above average percentages of those with a disability, off the gas grid or without internet access—issues that a number of hon. Members pointed out—and about half of participants, 51%, have reported that they now spend less on heating their home as a direct result of being helped through the network.
My hon. Friend the Member for Central Suffolk and North Ipswich has made very good points, as have other hon. Members. This has been a lively and thoughtful debate, and we have covered a lot of ground. We already have work in train: rolling out smart meters, moving to next-day switching and continuing to help vulnerable and low-income households with their energy bills. We are committed to acting on the CMA’s recommendations. I therefore hope that my hon. Friend and others will leave the debate reassured that the Government are determined to make the energy market work in the interests of all consumers.
Dr Poulter
I thank the Minister, both other Front Benchers and all other hon. Members for their contributions. This has been a very productive debate, and we look forward to hearing tomorrow about the CMA’s findings, which I hope will benefit consumers.
Question put and agreed to.
Resolved,
That this House has considered competition in the UK energy market.