The Secretary of State for Business, Energy and Industrial Strategy (Greg Clark)
With your permission, Mr Speaker, I would like to make a statement to the House about the draft Energy Price Cap Bill, which we are publishing today.
Over the past 15 years, energy prices have risen by over 90% in real terms. Currently, most households in Great Britain are on tariffs that penalise rather than reward loyalty. In 2014, in response to widespread concern that competition in the retail energy markets was not serving customers’ best interests, the independent regulator Ofgem referred the market for investigation to the Competition and Markets Authority.
The CMA completed its investigation in 2016 and found that the retail energy market was not operating in a fully competitive way. It reported that customers of the big six pay an average of £1.4 billion a year more than they would in a truly competitive market. The CMA report said:
“Overall, our view is that the overarching feature of weak customer response gives suppliers a position of unilateral market power concerning their inactive customer base and that suppliers have the ability to exploit such a position through their pricing policies.”
Since the CMA findings, the big six energy suppliers have announced unjustified price increases in their poor value standard tariffs. Customers of the these firms have seen their energy bills increase by between 7% and 10% within the past 12 months, increases on prices the CMA had already concluded were too high.
The Government want the market to thrive, and we continue to promote competition as the best driver of value and service for customers. However, as my right hon. Friend the Prime Minister said last week, the Government are prepared to act when markets are not working for all consumers. The energy market is a clear example of this, as Ofgem itself said yesterday.
The energy market is on the cusp of a major change, in which smart meters will be offered to every household and business by the end of 2020. When fully rolled out, smart meters will make it easier for consumers to reduce their energy consumption and to access competitive deals. In the meantime, however, the CMA panel recommended a number of measures to improve competition and a temporary tariff cap for those with prepayment meters until smart meters are rolled out. As the CMA said:
“our remedies will take time to implement before they start to address the features that we have identified and, in turn, reduce the detriment to domestic customers arising from them.”
The CMA was in two minds over how widely interim protection should be applied. The panel’s minority opinion was that the temporary price cap should be extended to a wider group of consumers. In its words:
“They must be supplemented by a wider price control designed to give household customers adequate and timely protection from very high current levels of overcharging.”
The Government agree with that view, which is why I wrote to Ofgem in June to ask them what action they intended to take to safeguard customers on the poorest value tariffs. In response, Ofgem undertook to consult consumer groups to provide measures to protect vulnerable consumers.
We welcome Ofgem’s commitment yesterday to protect a further 1 million families, meaning over 5 million families will be protected from expensive standard variable tariffs for the first time; and we welcome Ofgem’s statement that suppliers must step up their efforts to get more of their customers currently on default tariffs on to better value deals. However, this does not address the scale of the detriment suffered by all consumers on expensive default tariffs and it still leaves 13 million families paying more than they would in a competitive market. These consumers are often on lower incomes, are elderly and are renters. I am determined that we will be on the side of all consumers and ensure that the market can become more effective. Our goal is to ensure a fair deal. The market is currently not delivering this, which is why the energy companies and Ofgem need to act. It is precisely for this reason that we are publishing this draft Bill today.
I have invited the Business, Energy and Industrial Strategy Committee to scrutinise the draft Bill, which provides for a price cap for domestic customers on standard variable tariffs and default tariffs. The cap will be temporary and will be set by the independent energy regulator, Ofgem. It will initially last until the end of 2020, with the potential to be extended by up to three years if needed.
The draft Bill will preserve the ability for the market to act competitively: there should be savings for customers on high-priced standard variable tariffs, but enough headroom to allow for effective competition and to give a reason for people to shop around. It is of the utmost importance that consumers are treated fairly and our priority must always be to act in their interests. The draft Bill would allow competition and innovation in tariffs between existing players and new entrants, but would ensure that the worst excesses of overcharging could not be visited on loyal and, in many cases, vulnerable consumers of energy companies. It would require Ofgem to impose the cap as soon as is practicable after legislation, but it does not stop companies acting sooner and they should do so.
To conclude, Mr Speaker, when £1.4 billion a year of detriment to British consumers is identified, following a thorough investigation, we have a duty to act. These measures are intended to safeguard the interests of consumers during the transition to a more competitive market. I commend this statement to the House.
Rebecca Long Bailey (Salford and Eccles) (Lab)
I thank the Secretary of State for advance sight of his statement.
Just two years ago, the then Prime Minister criticised Labour’s energy price cap policy, saying we wanted to live in a Marxist universe. Well, we certainly are in strange political times, that’s for sure. It has taken an extraordinary amount of time to get to this stage and enormous pressure from the shadow Front-Bench team and hon. Members on both sides of the House. It is impossible, however, for the price cap to protect families this coming winter. Ofgem has indicated it would take about five months after the Bill’s Royal Assent for the regulator to enact a price cap. Owing to the Government’s dithering, the 4 million households in fuel poverty, almost 1 million of which include a disabled person, will now face another winter of cold homes or astronomical bills. Will the Secretary of State explain why it has taken so long? Labour has been consistently calling for action and clarity on the Government’s position since the election and for a price cap for several years, but even today several issues require further clarification.
First, will the Secretary of State confirm why the draft Bill, which I have just perused, does not provide any direction from him on his preferred cap parameters but instead passes the ball to Ofgem? Will it be a relative cap or an absolute cap? Will he direct Ofgem to implement a different cap if he is not content with the one it proposes following the review? Secondly, will he confirm how long he anticipates the Bill’s passage taking and whether he will take any ancillary measures to expedite the usual scrutiny process?
Thirdly, reports this morning stated that the cap would apply to 12 million households, but the Bill is not clear on the cap parameters, as I have said, and leaves much to the discretion of Ofgem. Will the Secretary of State confirm, then, why the Government have seemingly rowed back from the commitment to knock £100 off the bills of 17 million households? Surely this should be explicit in the Bill or ancillary directions to Ofgem.
Fourthly, the Secretary of State is no doubt aware that Labour would introduce an immediate emergency price cap to ensure that the average household bill remains below £1,000 a year, which would save the average big six customers £142 a year. Had the cap been in place since 2010, the average customer would have saved more than £1,000 on their bills by now. Does he anticipate, in all this ambiguity, that the final cap will go anywhere near Labour’s proposals? If not, by how much does he expect bills to be reduced, if at all?
Finally, we are discussing the need for an energy price cap in the first place only because our energy market is fundamentally broken—even the Prime Minister acknowledges that. Labour understands that the price cap is only a temporary fix and so would radically reform the market by, among other measures, creating a publicly owned, locally accountable energy supply company in every region and ensuring greater transparency and fairness in the pricing structures of the supply and wholesale energy market. Does the Secretary of State accept that a price cap, although welcome, is only a sticking plaster and that radical reform of the market is necessary?
If so, how and when does the Secretary of State propose to reform the energy market and will he direct Ofgem to do it, rather than simply calling for a review, as the draft Bill suggests? Or have we got to wait until 2020 and the outcome of such a review before we see any real action? I hope that we do see action before 2020 because the cap is only guaranteed for the next two winters. Homes and businesses up and down Britain face a bleak winter and—it seems—further ambiguity and uncertainly regarding the Government’s position on the price cap mechanism and the wider reforms our energy market desperately needs.
Greg Clark
If one thing would be disastrous for consumers, taxpayers and business confidence in this country, it would be the hon. Lady and her Front-Bench colleagues’ proposal for nationalised energy companies. It is not even clear how it would be paid for, but there are only three ways: taxing more, borrowing more, or expropriating assets. If that is about achieving the confidence of British business, she has a long way to go.
The hon. Lady asked about the action being taken and the required pace. I remind her that in 13 years of Labour Government not a single protection was put in place for consumers. It was the Conservative-led Government who commissioned the Competition and Markets Authority report—something that the right hon. Member for Doncaster North (Edward Miliband), when he had the opportunity, signally failed to do—as a result of which 4 million consumers will benefit this winter from a cap on prepayment meter tariffs, which again is something the previous Labour Government failed to do in their 13 years in office.
Since taking on this role, I have been absolutely clear, on the basis of the CMA’s assessment, that we require nothing less than the eradication of that detriment of £1.4 billion, which is why, in response to my requirements, Ofgem has announced that a further 1 million will be protected this winter, with a further 2 million to follow. I have been clear, however, that that is not comprehensive enough, and it is because I am not satisfied that we are introducing the Bill. We published it and submitted it to the Business, Energy and Industrial Strategy Committee, which I hope will give it urgent pre-legislative scrutiny so that we can reflect what I think is a broad consensus in the House that the objectives should be an energy market that works for all and, before that, protection for the consumers currently suffering the detriment identified. I hope that there will be a consensus around that so that we can proceed with the Bill.
As I said in my statement, however, it is open now to energy companies to move people off the standard variable tariffs identified as overcharging customers. Indeed, Ofgem has made it clear that it expects them to do so. They should do so now and not wait for the Bill.
John Penrose (Weston-super-Mare) (Con)
I congratulate my right hon. Friend on embracing the huge cross-party consensus on protecting 17 million households from rip-off energy bills. This is a good day. It is great that we can now move on to discuss how, rather than if, we make it happen. In the spirit of consensus, will he listen to the widespread concerns that an absolute cap would throttle competition, be out of date as soon as the wholesale price of gas changed and mean energy companies spending more time lunching their regulator than delighting their customers, whereas a relative cap would preserve competition, make the customer king and provide far wider consumer choice?
Greg Clark
I pay tribute to my hon. Friend’s personal energy in this matter. He has been assiduous and tenacious in pursuing consumers’ welfare. The reason for publishing the Bill for pre-legislative scrutiny was to build the consensus that I know he will participate in. Our proposal is for an absolute cap—to ensure a clear limit on what can be charged—but I know he has thoughtful views that he will want to convey during the scrutiny process.
Alan Brown (Kilmarnock and Loudoun) (SNP)
I thank the Secretary of State for early sight of the statement and pay tribute to the hon. Member for Weston-super-Mare (John Penrose), the right hon. Member for Don Valley (Caroline Flint) and my hon. Friend the Member for North Ayrshire and Arran (Patricia Gibson) for the cross-party way in which they have brought this to the House. I am sure that that is what has forced Government action.
With 18 million customers on default tariffs, today’s announcement is a welcome step forward. I hope that those customers get the benefit of the savings that have been talked about. We need to make sure, however, that there is not too much equalisation or coalescing of pricing around the cap and that customer service is not affected as a consequence of companies trying to find other ways to save money. As the Secretary of State rightly said, standard variable tariffs themselves are a problem. How will the Government guarantee that people are moved off them once and for all?
The end supplier is only a small component of energy bills. What steps will the Government take to review the profits that the distant network operators make? They make up a huge cost in energy bills. Government energy policy also impacts on energy bills. I refer the Secretary of State to the Hinkley project and the fact that future auctions have been announced but onshore wind cannot bid. To keep energy prices down, clearly we must have the most cost-effective energy generation policies in place, so it must be allowed to bid in the electricity generation market. In Scotland, the First Minister has announced that a public sector supplier will be set up and allowed to bid in the markets. Does the Secretary of State welcome that and is it something that the UK Government will follow? Energy efficiency is also a key component. The Scottish Government are committed to a warm homes Bill. Will the UK Government do likewise?
Greg Clark
I hope that the hon. Gentleman will be able to stay for the statement by my hon. Friend the Minister for Climate Change and Industry.
Greg Clark
He says that he will. I hope he will give a warm welcome to the proposals in the clean growth strategy, which will include something that many of his colleagues in Scotland, from all parties, have pressed for, which is the remote islands being entitled to bid in renewables auctions. I hope he will welcome that and, indeed, our leadership in renewables, not only in deployment—we are the world’s leader in offshore wind—but in the jobs being created around the United Kingdom in the supply chain.
When it comes to the proposals in the retail market that we have set out, I can confirm that it is absolutely the Government’s intention and requirement that competition should be preserved—indeed, extended—in this market. The Competition and Markets Authority said there was not enough of it at the moment. That is why part of its panel said that interim measures were needed while that competition comes in. That is important, and the requirement of the draft Bill is that Ofgem should take steps to ensure choice and vigorous competition as part of that.
Robert Halfon (Harlow) (Con)
I welcome the changes that my right hon. Friend has made today. I have mentioned this to him before, but can he look seriously at the issue of energy companies charging people a lot more money for their domestic energy bills if they do not pay by direct debit and instead pay by cheque or through their bank or post office? It seems outrageous that these customers have to pay a lot more when they are doing the right thing and paying on time, but not by direct debit.
Greg Clark
I am grateful to my right hon. Friend, who is always a doughty champion of consumers. It is right in a competitive market that decisions should be taken by the companies, but it is clear from the proposals that we have made that we expect responsibility to be exercised and that unfair advantage should not be taken, especially not of vulnerable consumers who are not as able to switch, for example—this may apply to payment methods, in the way that he described. That is absolutely part of the duty of the regulator to look after consumers.
Perhaps I could take this opportunity to reply to the point, which I did not respond to, that the hon. Member for Kilmarnock and Loudoun (Alan Brown) raised about the other costs on consumer bills. We have commissioned a review by the energy expert Professor Dieter Helm that will be inquiring into just such things and reporting shortly.
Edward Miliband (Doncaster North) (Lab)
Given that this policy was once described from the Dispatch Box as “a con”, “a joke”, “disastrous” and “living in a Marxist universe”, it would be churlish not to welcome the Secretary of State’s conversion to it today. Well done. He is very welcome to the party. However, I still think his voyage into the Marxist universe is a bit slow, if I can put it that way, because this is a draft Bill. It is four months since the general election. He said that there would be help this winter. He could have chosen to fast-track this measure with the Opposition Front Bench and get the help in now. Why so slow? Why not do it now?
Greg Clark
I certainly have not joined the Marxist universe that the right hon. Gentleman inaugurated and that has been taken up with such enthusiasm by those on the current Labour Front Bench. The problem with the proposal that he put forward—one of many problems—was that it would have frozen energy prices when prices in the wholesale market fell, so consumers would have been paying more. That is a good reason why we should act with the grain of the market rather than imposing a policy that would have been disastrous for consumers.
It is important that Ofgem has the powers and it is exercising some of them. I have been clear and candid with the House that I do not think it goes far enough, so through this Bill we would require that. We are putting that forward with immediate effect for pre-legislative scrutiny. It is important that we establish that it has the support of the House and then Ofgem can act on that, but it has been clear in its statement that, as the Bill is scrutinised, it will prepare and consult on the implementation requirements so that no time is lost.
Stephen Kerr (Stirling) (Con)
I welcome the statement. Does my right hon. Friend agree with me and many of my constituents in Stirling, who are currently paying too much for their energy bills, that a fully functioning competitive market is the best long-term driver for value for customers? Will he also say when smart meters will become universal? By that I mean not supplier-specific, which I consider to be anti-competitive.
Greg Clark
My hon. Friend makes an excellent point. He is absolutely right that a fully competitive market is what we want and what we will achieve. The essence of the problem for people on standard variable tariffs is that the energy companies have more information about the habits and behaviour of consumers than is available to their competitors. They therefore know which consumers will never respond, no matter how swingeing a price increase is, but other competitors do not have access to that information to address the imbalance. That is why smart meters are being rolled out. They are moving forward from the first generation, so that they are fully rich in the information available, and that is part of the roll-out that is taking place now.
Sir Edward Davey (Kingston and Surbiton) (LD)
Did the Secretary of State receive any of the advice that I did in his position that an energy price cap such as that which he is proposing could mean higher bills for the most vulnerable consumers, as seven of the eight members of the Competition and Markets Authority also feared? Will he confirm that without a cap we have seen a dramatic expansion of competition, switching numbers soaring and a sustained reduction in the number of consumers on variable tariffs? Is not the real reason he has gone for this temporary and timid price cap that he does not really believe in it?
Greg Clark
No. I have been determined from the outset to eradicate the abuse that the CMA has identified. It seems to me that if £1.4 billion of abuse has been identified, it is essential that that is eradicated. This problem is specific to modern markets—without the smart meters that will provide some relief from that—which is why it is important to provide interim measures, as the minority report of the CMA said. It is right to act on that. Everyone agrees—no one thinks that the market is fully competitive. The CMA in its majority report identified that the market was not functioning in a fully competitive way, and Ofgem said as much yesterday. As far as switching goes, in the last year only 16% of consumers switched, so 84% of the population did not. Until competition is fully established, it seems to me that people in that category deserve the Government to be on their side to ensure that they cannot be ripped off.
Rebecca Pow (Taunton Deane) (Con)
I congratulate the Government on putting the consumer first. It is a shocking revelation that £1.4 billion is being overpaid by consumers on their bills, so I welcome the fact that the Government are taking this seriously. Many of those customers are in Taunton Deane and many are the most loyal customers. Does my right hon. Friend agree that the only way to deliver best value for those people is through a truly competitive market and that nationalisation would certainly not be the answer?
Greg Clark
I agree with my hon. Friend. Many consumers who are loyal to a supplier, often for many years, assume not that they will get the best deal, but that a trusted brand will respect their loyalty and not abuse it. However, as the CMA has pointed out, that is not the case, and I think it is important that the issue is addressed before competition is fully established. As Ofgem said yesterday, highly priced, poor-value standard variable tariffs have had their day, and the energy companies should act to move customers away from them.
Caroline Flint (Don Valley) (Lab)
Much of what I am hearing is music to my ears, and I welcome the fantastic cross-party support. The draft Bill, however, is a vindication of Labour’s warnings since the data became available in 2011 that customers were being ripped off by the big six energy companies.
The Secretary of State has finally accepted that customers were overcharged by £1.4 billion between 2012 and 2015, but will he admit that what he is proposing today will not help the many millions of customers who will need help this winter? Why does he not stop wasting time? Why does he not use the extensive powers that the Labour Government gave him in the Energy Act 2010, under which he could bring an order to the House to cap prices right now? The dithering must stop. We have had the debate. Price caps already exist for those with prepayment meters and those receiving the warm home discount, and the Secretary of State should do this for everyone else now.
Greg Clark
I welcome the support from the cross-party group of which the right hon. Lady has been part, along with my hon. Friends. However, while she talks about the data being available, she seems to have forgotten that her party was in government for 13 years. It was this Government who exposed the degree of overcharging and it is this Government who are acting on it, so it is this Government who are standing up for consumers.
The right hon. Lady asked about relief this winter. As I have said, I welcome the extra relief, although I think that Ofgem should go further. It has said that it expects energy companies to move customers off the standard variable tariffs, but we are acting to ensure that that is backed up by an instruction and a requirement.
The use of the legislation mentioned by the right hon. Lady—I have of course examined it and taken advice—would have the consequence of increasing other prices, rather than capping the overall price, which is why the backstop power in the draft Bill is necessary.
Sir Desmond Swayne
I want to escape this Marxist universe. We cap university fees and, lo and behold, all the universities charge the maximum. Can the Secretary of State persuade me that electricity will be any different?
Greg Clark
As my right hon. Friend will know, there is a vigorous competitive market for deals that are available through a great many new entrants, and we want to expand that market. The CMA has established that at present there is insufficient competition in the standard variable tariffs. Our aim is to expand the competitive part of the market and in the meantime provide some protection for those who are paying too much on those tariffs.
Albert Owen (Ynys Môn) (Lab)
I welcome the Government’s intervention on the road to Marxism. I think that—apart from one—we are all Marxists now. I want to make a serious point, but I have been banging on about this for a long time, and I have been accused of lots of things, which is why I make that statement.
Speaking as a member of the Business, Energy and Industrial Strategy Committee, I think it is realistic to assume that the pre-legislative scrutiny will take some time. When does the Secretary of State expect the Bill to receive Royal Assent? Will that happen at the earliest opportunity, so that we can help the vulnerable people who are being ripped off? On the issue of competition, the Secretary of State mentioned a review. The energy companies said recently that the price hikes were due to transmission costs. Can we look into the uncompetitive nature of this broken energy market?
Greg Clark
As I said earlier, that is being considered as a separate exercise.
The hon. Gentleman referred to pre-legislative scrutiny by the Select Committee. I think that that is necessary so that we can establish a consensus and allow the technical scrutiny that is needed, so that once the Bill has passed that scrutiny and been introduced to the House, it can proceed with the strongest possible consensus.
Dr Julian Lewis
Given the time that will elapse before the cap is introduced, is there a danger that the energy companies will raise prices as much as possible in the hope of influencing the level at which the cap will be set? What will the Government do to prevent such a tactic from succeeding?
Greg Clark
Ofgem has powers, and that is one of the reasons why it is responsible for setting the cap. The prices must reflect the actual costs, and extensive powers are available to Ofgem to prevent that kind of abuse.
Diana Johnson (Kingston upon Hull North) (Lab)
Can the Secretary of State confirm that the Bill will shave £100 from the energy bills of 17 million households, as promised by the Prime Minister?
Greg Clark
Yes. The detriment identified by the CMA was that people on standard variable tariffs were paying too much. It will be for Ofgem to determine what the level should be, but I have made it clear that I expect the whole of that detriment to be removed.
Robert Jenrick (Newark) (Con)
There are still some people who believe in free markets. It is a lonely life, but I try to bear it with good grace.
I am naturally suspicious of caps, especially when they are introduced by a Conservative Government. Following the question asked by my right hon. Friend the Member for New Forest West (Sir Desmond Swayne), can the Secretary of State reassure me that the energy companies will not simply bunch up all the prices around the cap and that what little competition—imperfect competition—we see in the energy market today will not be further eroded so that more customers are put off from switching in the complacent, mistaken belief that they will get the best price, thanks to Government intervention?
Greg Clark
It is possible—and it is the practice—that companies, large and small, on the basis of their purchases in the wholesale market, can make offers to consumers in the competitive side of the market. Nothing will change that. Companies can offer attractive deals and have the same prospects—in fact, growing prospects, as we roll out smart meters—of access to customers who are engaged with the market.
John Grogan (Keighley) (Lab)
The Secretary of State has placed some emphasis on the roll-out of smart meters by 2020. How does he react to the figures published in The Daily Telegraph over the summer revealing that in the case of some companies, fewer than one in five consumers were accepting the offer of a smart meter?
Greg Clark
I do not recognise that figure. It is a fact that smart meters are being offered to every household in the country, and I think it is important that as they are rolled out, their benefits—not least the ability to secure lower prices—are made very clear to people.
Amanda Milling (Cannock Chase) (Con)
I welcome my right hon. Friend’s statement and the recognition that there are issues with the energy market, but consumer apathy is the real problem. Does he agree that more needs to be done to encourage people to switch, and to make switching easier?
Greg Clark
My hon. Friend makes a good point. One of Ofgem’s responsibilities is to stop the erection of barriers to switching. It seems to me, however, that it is not unreasonable for consumers to expect to be able to trust a particular brand—a particular supplier—rather than having to change their arrangements frequently, and to be confident that they will not suffer a huge penalty as a result.
Jim Shannon (Strangford) (DUP)
I thank the Secretary of State for his statement. I am not a Marxist, but everyone in the Chamber must see that this is common sense.
When the energy price cap comes into effect, what safeguards will be introduced to ensure that the big six do not switch customers to a tariff that is, in effect, a standard variable tariff under a different name?
Greg Clark
The hon. Gentleman makes an excellent point, and he will see when he looks at the Bill that there is precisely a requirement that these abusive standard variable tariffs cannot be replaced by something with just a different name.
Andrew Bowie (West Aberdeenshire and Kincardine) (Con)
I know that the people of West Aberdeenshire and Kincardine—possibly, dare I say it, even more than those of Taunton Deane—will welcome my right hon. Friend’s commitment today to a thriving and competitive energy market, so will he confirm that nationalising the energy companies has, unlike the Labour party’s position, never been a consideration for this Government?
Greg Clark
I very happily confirm that. Not only would that be a disastrous signal to business throughout the United Kingdom but, as has been evidenced during the election campaign, it would leave a gaping black hole in the public finances, and we have had no explanation whatever about how that would be paid for.
Mr William Wragg (Hazel Grove) (Con)
I hope that there is no state monopoly on Marxist metaphors. If I may paraphrase Trotsky, the ends we agree on; it is the means of getting there. In welcoming the draft Bill and urging consideration of a relative cap, will my right hon. Friend reaffirm that competition within the energy market remains crucial for consumer choice and keeping bills down?
Greg Clark
I will indeed, and that is why the proposal, in line with the recommendation of the minority report of the Competition and Markets Authority, is a temporary price cap during the period in which competition is extended. We agree very strongly that the best way for markets to serve consumers, bring down costs and promote innovation is to have vigorous competition, and that is at the heart of the obligation and the duty on the regulator.