Domestic Gas and Electricity (Tariff Cap) Bill
Monday 11th June 2018
(5 years, 10 months ago)
Grand CommitteeDomestic Gas and Electricity (Tariff Cap) Act 2018 View all Domestic Gas and Electricity (Tariff Cap) Act 2018 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 100-I(Rev) Revised marshalled list for Grand Committee (PDF, 88KB) - (8 Jun 2018)
The Deputy Chairman of Committees (The Countess of Mar) (CB)
My Lords, if there is a Division in the Chamber while we are sitting—an unlikely possibility—the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes. Members will need to vote in the Division Lobbies downstairs in the usual way.
Clause 1: Cap on standard variable and default rates
Amendment 1
Lord Grantchester
Lord Grantchester (Lab)
Good afternoon and welcome to Committee stage. Amendment 1 would ensure that the cap is introduced as soon as possible and proposes that, from the passing of the Bill, Ofgem should seek to bring in its provisions within five months. We all realise the importance that Ofgem attaches to the time it needs to get going with the provisions and the modifications to the licence conditions that need to be in place for this to happen.
The amendment would make sure that there is no drift in that process. It is very important for various reasons. First, fuel poverty is of great importance to an awful lot of people who struggle with their energy bills. The UK has the second-worst rate of excess winter deaths in Europe. Two-fifths of those aged over 65 surveyed by comparethemarket.com said that they would ration their energy use over the winter because of increasing costs.
The other aspect of which we must be cognisant is the change in energy use as British Summer Time comes to an end. First Utility’s analysis of energy usage data around daylight saving from the last three years revealed an average 18.7% rise in electricity use as we move from British Summer Time into Greenwich Mean Time. Cold weather payments are very effective for each seven-day period of very cold weather between 1 November and 31 March. We therefore place great emphasis on Ofgem maintaining the process and having all the necessary conditions in place for the Act to commence. I beg to move.
The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)
My Lords, I hope we shall make rapid progress on the Bill. I thank the noble Lord, Lord Grantchester, for moving his amendment so quickly. I shall just point out that it refers to,
“28 October 2018 or five months after this Act is passed (whichever is the sooner)”.
As it is already June and Royal Assent is unlikely to be before July, whatever happens, the amendment could mean only 28 October because five months from Royal Assent would obviously be after that date. However, I share the noble Lord’s desire to see the cap in place as soon as possible. Certainly, we would like to see it in place before the end of the year so that millions of families have protection for the worst of the winter.
The noble Lord referred to the fact that the nights start drawing in on 28 October. Actually, they start drawing in from the middle of this month, in a couple of weeks’ time, which is rather depressing. As he suggested, that means bills start climbing in those months. That is why we are pressing on with the legislation and I am grateful for the co-operation of all Members in getting this on the statute book as quickly as possible. We are aiming, subject to the will of Parliament, for the Bill to be passed before the Summer Recess.
The Bill already requires Ofgem to put the cap in place as soon as is practicable. Ofgem’s chief executive, Dermot Nolan, has committed to imposing the cap in the minimum timeframe that it can manage without risking the integrity of the process of consultation, notification and modification of supplier licences. Mr Nolan said as much in his evidence to the BEIS Select Committee.
Good progress has already been made. Ofgem has published a number of working papers setting out its emerging thinking. This culminated in a consultation on the design of the cap, which was published recently. The consultation sets out a clear timetable for implementation of the cap by December 2018. Ofgem will be ready, after the Bill is passed, to undertake the relevant statutory consultations and make the licence modifications that the Bill requires.
We appreciate the desire to hold Ofgem to a date by which the cap will have to be in place. However, the amendment potentially risks the integrity of the cap if it means that, to meet that date, Ofgem may have to radically speed up its design and consultation processes. Doing that would hugely increase the risk of a successful legal challenge—something that we will discuss later on—and that is likely to delay the implementation of the cap.
As I said, I agree with the noble Lord that the aim must be to get the price cap in place as early as possible before the cold weather arrives. However, there is nothing to be gained by making this a statutory deadline and it potentially creates new risks for the implementation of the cap. I hope that with that explanation the noble Lord will feel able to withdraw his amendment.
Lord Grantchester
I thank the Minister for his explanation of the timing behind the Bill. We certainly agree that the schedule is a very tight timetable for everything—all the consultations—to take place. However, we feel that the Bill has been very well flagged up to all the companies concerned and to Ofgem. I am sure it is making progress even now on what needs to be done to get the Bill enacted as soon as possible. I agree that, looking at the scheduling of the amendment with where we are now, 28 October would be the default. Nevertheless, we are keen that we keep a tight look, as we go through the Bill and when we come back for Report, at all the progress that has been made. With that in mind, I beg leave to withdrawn the amendment.
Lord Berkeley
“( ) the need to ensure that holders of supply licences communicate with domestic customers in appropriate formats about the different domestic supply contracts which are available, including any tariff cap which may apply.”
Lord Berkeley (Lab)
My Lords, in moving Amendment 2, I shall speak also to Amendment 9 in my name and comment on some of the other amendments in this group.
These amendments focus on communication, particularly with vulnerable people who cannot necessarily use electronic means or who have other special needs. It is important that there is an obligation on the authorities to communicate the tariff cap “in appropriate formats”, so that those who receive this information will able to choose the means by which it takes place. Amendment 9 requires the same provision of information,
“relating to different domestic supply contracts and tariff cap conditions”.
It is the same argument: people must have the information so that they are able to choose what tariffs to go for.
I received some information from a group called Keep Me Posted, which is a well-known and probably much-loved organisation. It is a coalition of leading charities, consumer organisations, trade unions and businesses, which campaigns to ensure that all service providers offer consumers the choice to receive a paper version of their bill. That is not in the amendment but it is something that I hope the Minister will consider. Independent research by a company called Opinion Research Services found that 81% of UK adults want to choose how they receive important information such as bills and statements. But, as we all know, some businesses are restricting access to paper bills and statements, and if customers do not have these, it is difficult for them to make an informed choice.
There was another study by London Economics in 2015 about managing money online—which is what we are really talking about—involving 2,399 consumers. Half of them were sent a mock bank statement and a notice of change by post; the other half were sent them electronically. The result was that 82% of those in receipt of a paper statement correctly recalled their balance, as opposed to a meagre 32% of those who received the electronic billing. That is a really strong argument, I suggest, for being able to choose the means of receiving this information in a way you can understand and then taking action.
It is good that the Government have required the banking sector to issue statements once a month and free of charge on what I think is called a “durable medium”—I would call it paper—or something more accessible, going back at least five years. This is good at a time when there is greater competition within the banking industry and some may wish to cut their costs in that way. I hope that the amendments in this group will provide some incentive to Ministers to find ways of ensuring that even the most disadvantaged, who cannot do electronics or may not be able to see well or who have another disability, can get the same information in an appropriate format so that they can make the choices which the Bill is clearly trying to achieve. I beg to move.
Amendment 3 (to Amendment 2)
Lord Lennie
Lord Lennie (Lab)
My Lords, this issue is especially relevant to the green challenger companies coming into the market, particularly those that have R&D interests. Suppliers must also be informed about tariff cap exemptions and it may be that these are being considered for green energy companies with R&D interests. That is not the same as saying that we have any sympathy for the possible gaming that could go on with green tariffs among the big six and other suppliers. They may just be billing companies that cite a certain percentage interest in the green market and then seek to have that applied to their exemption from the tariff cap when it comes into effect. That is not the purpose of the amendment; it should apply purely to the 90%-plus green provider and supplier companies. Obviously we take on board and support what has been said by my noble friend Lord Berkeley, but ask that this amendment also be considered. I beg to move.
Lord Henley
My Lords, these amendments are grouped and it is open to any noble Lord to speak to any of them as they wish. I would suggest that the noble Baroness speaks to her amendment.
Baroness Featherstone
I thank the noble Lord. This amendment is about the duty on energy companies to communicate properly with their customers. I raised concerns at Second Reading that there is a possibility that energy companies might not be totally up front and honest with customers about the circumstances surrounding the introduction and execution of an energy price cap. I am particularly concerned that some companies may not be up front about the facts: this is a temporary cap, ordered by Parliament, the level of which is set by Ofgem to protect consumers on standard and default tariffs from excessive charging. Companies must not seek to absolve themselves from blame for the fact that a cap is being introduced—an action that they have necessitated. Nor must they be able to play it off as some sort of benevolence introduced by them to help their customers. I am also concerned that companies might imply that the cap brings about the best deal for customers and indicates in some way that they need not shop around.
Communications from suppliers have not always been totally clear, but they need to be. The last thing we need in setting and executing the cap is for communications to confuse, entice or entrap customers into any false beliefs or misunderstandings. The amendment seeks to ensure that suppliers cannot use the setting of a cap as a marketing opportunity. Companies are very clever in their use of marketing language to seduce customers into perhaps believing that the cap is protecting them in more ways than it was created for. We should not provide any opportunity for suppliers to mislead consumers, accidentally or otherwise, into believing that the price cap is beneficial in any other way or being put in place for any purpose other than that for which it was intended; namely, that it is as a temporary cap until such time as circumstances dictate that it must be lifted. It must not allow the supplier to appear to be the instigator of the cap. Nor must the cap be called anything other than what it is: a temporary cap. I am concerned about the wording being used to describe the cap. A company might say that it is a beneficial cap or a protective cap, but there should not be anything to indicate a benefit in the name of the cap.
The amendment is very dictatorial, particularly for a Liberal. It states that the term used should be simply that it is a temporary cap and that, once it has been implemented, all companies should use that phrase in reference to it. There cannot then be any dodging around it. Since writing the amendment, I think it needs to go further and perhaps disallow any words around the name too so that suppliers cannot add adjectives to it. I am not sure how particular we can get on this, but I refer to words such as “beneficial” or “protective” temporary cap. It may seem picky and dictatorial, but my background pre-politics was in marketing and design, and it takes one to know one. Communications are hugely important. There can be no objection to calling it what it is: a temporary cap. In that way, no supplier will be able to use the name of the cap or its description inappropriately.
In the same vein, it should also be obligatory for suppliers to make it clear that the cap does not mean that the price under the cap will necessarily be the best price or the cheapest price. In any communications, suppliers must include clear and accessible information about switching energy suppliers.
Amendment 22 from us and Amendment 23 from Labour concern the provisions in the Bill surrounding the publication of information regarding variations in the cap. Clause 4 states that if the authority is thinking about modifying the price cap, it must notify holders of supply licences, but there is no requirement once a decision is made for companies to inform customers. These amendments put this requirement into the Bill.
Lastly in the group, Amendment 38 is in the name of my noble friend Lord Teverson, who cannot be here today. He wanted Ofgem to have powers to regulate the websites of energy suppliers and energy price comparison site operators. The purpose of that power would be to ensure that consumers are presented with objective information on immediate and future costs and matters of customer service sufficient to make informed decisions about energy supplier choice. I know he wanted a specific requirement for all such sites to list the immediate cost of energy to the consumer, together with, and in the same format, future costs when the initial contract term ends. This would protect consumers from being seduced by a good offer and a good price only to be shortly disappointed to find a huge hike when the first contract ends. He wanted a requirement also that, for each tariff, the terms under which price variations can be applied are clearly shown. However, much of that was out of scope, so Amendment 38 is a lesser version. It requires the authority to modify the supply licence conditions to ensure that the information presented on energy companies’ websites is “sufficiently objective” and to modify the Ofgem Confidence Code so that only price comparison websites that are similarly objective can be accredited by the code.
Lord Carlile of Berriew (CB)
My Lords, I want to speak, if I may, in favour of Amendment 23 in the name of the noble Lord, Lord Grantchester. At Second Reading, I referred briefly to my attempts to change tariff with my electricity and gas supplier. I think I described it as a parlour game on a computer system that did not always work. It seems to me that what we need to give the public is, first, clarity and, secondly, the capacity to compare one supplier with another.
Let me give two analogies, one good and one bad. The first occurred to me on Saturday when I was standing at a bus stop in central London alongside a hoarding advertising a new credit card deal. At the bottom of the advertisement, in big letters, it said, “Interest rate 57%”. On the face of it, that is quite a high interest rate, but the company has to advertise that interest rate so that it is really clear to the consumer. That is the sort of clarity we need. The bad analogy relates to train fares. Noble Lords who travel a great deal by train may, like me, go on to one of the internet sites that offer you the timetable and the train fares. With train fares there is absolutely no way of making a decent comparison between the different options available. Indeed, it is so complicated that, if you buy your ticket in Llandrindod Wells to go to Paddington, it may be a different price for precisely the same ticket if you buy it in Paddington to go to Llandrindod Wells.
If we are going to do this job now in the Bill, what is required is to ensure that consumers are able to make a proper comparison between the supplier they have and the alternative suppliers available. It does not mean that they will necessarily take the cheapest supplier. The noble Lord, Lord Lennie, made a point about green suppliers. Some of us might decide that we are prepared to pay a few pounds extra for the purposes of a better environment, but at the moment we have no way of knowing what sort of value green suppliers present. We have to go on to their website and take their word for it, which is not necessarily good enough. Amendment 23 at least makes a start in achieving those joint aims of clarity and the ability to compare.
Baroness Neville-Rolfe (Con)
My Lords, I join others in thanking the noble Lord, Lord Berkeley, for setting off a discussion on this important issue of communication with consumers on electricity prices and the cap. I was going to add to the discussion from my own experience as a householder in Wiltshire. I have had a letter from SSE which is meant to tell me simply how my electricity prices are increasing, what I could do and how I might be able to pay less. I have to say that it is very difficult to understand, so there is a problem outwith the legislation that we are putting through. It is also wrong to suggest that energy companies are always trying to dissemble. How well they do depends on satisfying the consumer and the better ones want to be able to say clearly what is happening.
If we were to add to the system a requirement to communicate about the tariff cap provision, it would make the sort of letter that I have already described yet more complicated. My own experience is that these things can be costly to business. When the minimum wage came in, I remember being telephoned by the business department—I was at Tesco at the time—to ask whether we could put the minimum wage on our payslips. Having talked to our ICT people, I discovered that it would cost us an extra £1 million to put the minimum wage on the payslip. It was therefore agreed that the minimum wage could be communicated in other things. I worry that if we in this Committee put down requirements, it could have a similarly escalating effect on costs.
I have looked at the impact assessment—noble Lords will remember that I am always passionate about the usefulness of impact assessments—but this one does not go into any detail. It just suggests that there are savings to consumers. If we were to add extra provisions on communication, we would need to consider the cost of that because it would then get passed through to the consumer. That cost will apply to the small, new entrants to the industry as well as to the bigger suppliers.
That leads me to one final thought. When we took through the Consumer Rights Bill, in which we were also concerned about communication to consumers, the department worked with the industry to produce special communication. That was then used across the retail industry to inform shops as to the new rights that were coming in for consumers. I wonder whether some of the concerns raised today could not be met by voluntary action within the industry, dedicated to improving clarity for consumers in this important area.
Lord Berkeley
The noble Baroness cited a figure for the cost for communication but in terms of the total cost to the businesses we are talking about, that figure must still be very small. Given the example that I quoted of the banks being required to provide paper statements for anybody who wanted them, surely it is more important that anybody should have access by whatever reasonable means to the information, even at the expense of them paying a little more on communication. The people who will suffer are those who cannot fiddle with their emails, even if they can get the information by email.
Baroness Neville-Rolfe
I can understand that. Clearly, there may well be a case for requiring some communication to be online and some on paper because some people cannot manage online. However, what I am saying is that this will involve changes in systems across however many energy suppliers there now are—I do not know whether it might be 40, 50 or 60—and there is a cost to that, which we have not looked at or costed. How that fits in with suppliers’ information systems can make a big difference. Clearly, the Bill is going ahead rather rapidly. I have seen no analysis of this angle of things, which is why I support these amendments this afternoon, at least in the form of probing amendments.
Lord Stevenson of Balmacara (Lab)
My Lords, three issues are being raised now. The last two speeches and the introduction were about communication and the points were well made, but we are probably all asking, “What is this all for?” We are missing a dog that has not barked, which, in its most recent form is, saving the presence of my noble friend Lord Whitty, Consumer Focus. Previous regimes have had national consumer councils and other bodies. There was an active and statutorily supported consumer interest that was also part of the process, from which the problems which we are now talking about seem to have emerged. We do not have that; we have a different structure in place and it is, perhaps, too soon to make judgments on it. However, an issue has been raised that should not be allowed to go away simply because the system does not currently encourage it. Like the noble Lord, Lord Carlile, I have also tried to change my rather complicated fuel arrangements. The house I am in has been brought together from three separate properties and I have three gas and three electricity suppliers. I recognise that this issue exists on the other side of the divide here. It is not simply a doubling: this is an exponential difficulty for those providers who are not able to cope with the issue. That is my problem, but it exemplifies the difficulty of trying to get information.
I have three points of concern. First, it is a problem that there is no statutory body to which you can go that will take this issue on and act on your behalf. Citizens Advice, for all its merits, is not that body and we miss Consumer Focus. Secondly, there is a case—even though there may be costs—for looking very critically at the information flow from the companies at the moment. They may well be trying their best; they may be saddled with statutory responsibilities, but the end product is more pages of more and more complicated, structured things that do not give you the information you require in a way that you can use. For most individuals looking to exercise the market power that consumers should have in this area, this would be a clear statement of the unit cost per kilowatt hour of energy consumed. We do not want a mixture of consumption and fixed costs and to then discover that there are all sorts of fixed costs that are never brought forward, such as network costs, smart meter costs and other things that exist below the line but are never provided in a sensible way. There is a direct issue of communication between the provider and the consumer.
My third point is raised in Amendment 38. The way in which the market has to operate in these rather asymmetric arrangements is for there to be comparison sites and other information providers, which we all tend to go to when we can. There is another problem here, which has not been touched on yet but which we must think about. To what extent are these truly independent? It has been said, by those who have given evidence to us, that many of the comparison sites are only there because they take a commission on the provision of information about the companies by which they are retained. I find it difficult to see how consumers are supposed to work out what is the best deal. This may not be limited to the energy area, but if it exists there then some action needs to be taken, whether by statute or regulation, to make sure that this is a proper aid to consumer choice, not an additional complication.
We were also looking for a way of getting an amendment in this area. I am impressed that the noble Baroness and the noble Lord, Lord Teverson—who cannot be with us—were able to find a form of words. It does not take the trick but it is certainly in the right field. I hope that when the Minister responds he will give the Committee some information about where we might take this issue. It is not dealt with properly in the Bill; it is effectively out of scope in terms of what the Bill currently does. Perhaps, with a little offline discussion, we can bring a bit more focus to it. That would be worth while.
Lord Henley
My Lords, before I respond to the amendments, I will assist my noble friend Lady Neville-Rolfe by answering one of her questions. We are now up to 70 suppliers. She talked about it possibly having got to the high 40s or 50s, but one should be grateful that the number is higher and rising.
Lord Stevenson of Balmacara
I am grateful to the noble Lord for that information. It would not be right to accept that figure at face value. It may well be 70, but there is a huge discrepancy in size and capacity in that number. We are talking about the big six and then a very large number of small companies with perhaps 1% or 2% of the market. It is not quite as has been said.
Lord Henley
I fully accept that, but the big six is six out of 70 companies. There are another 64, and that number is growing. It might be a small tail but it is good to know that those alternatives are available as suppliers.
I am grateful to the noble Lord, Lord Berkeley, for moving his amendment and to other noble Lords for speaking to theirs. The general message is that everyone is seeking more information and information of the right sort, which should be—I forget where the noble Lord was quoting from—on a durable medium. He took that to be paper, but it might be extended to vellum, if we remember our debates on other occasions about what Acts of Parliament ought to be printed on.
I am grateful to the noble Baroness, Lady Featherstone, for her amendment and her frank admission that, for a Liberal, she was being somewhat dictatorial. It is not unusual for Liberals to be somewhat dictatorial; in fact, I find them very prone to banning things and ordering us around, but that is the nature of the beast.
I am also grateful to the noble Lord, Lord Carlile, for mentioning his difficulties in trying to get information and change his supplier online. I also know how difficult that can be. One gets online and has problems, then that dreaded expression comes up: “Frequently asked questions”. One can always guarantee that the one question you want to ask will not be one of the frequently asked questions. I was grateful for the analogy he gave of the very good advertisement he saw for a credit card setting out interest rates of some 56%. I take it that he did not bother to take up such an offer. I will ignore what he said about train fares, only to say that I am grateful not to have to respond for the Department for Transport on this occasion. However, as someone who, like him, travels a great deal, I agree that fares can be difficult to follow.
It is very important that we make sure that energy companies not only are as transparent as possible with consumers but provide as much information as is necessary. I am happy to report that Ofgem’s standard licence conditions require—they are dictatorial, you see—suppliers to communicate information about cheaper tariffs to a customer with a “Could you pay less?” label on the first page of bills and statements of account. It is a requirement that the information on cheaper tariffs is included, along with a message saying, “Remember, it might be worth thinking about switching your tariff or supplier”. That required information includes details of the estimated savings that could be achieved by switching to a cheaper tariff.
As I made clear, customers can also continue to specify whether they wish to receive this information electronically or in a hard copy. I noted the percentages given by the noble Lord, Lord Berkeley, on how much people know what is happening in their bank accounts, whether they receive information on paper or online. The simple fact is that a great many people wish to receive this information online. We do not want to prevent that, but Ofgem is imposing a condition that customers must be offered the right choice. Ofgem is also leading a programme of work across industry, including detailed trials of different problems to engage people. Early information from these trials suggests that they can be effective at improving switching rates, however difficult some noble Lords might find that to achieve.
The Government are also working to improve consumer engagement. We provided a little over £1 million in funding for the Big Energy Saving Network and the Big Energy Saving Week last winter. We are also progressing midata in the domestic retail energy market. Midata is the method of electronically transferring customers’ data from a company system to a third party, such as a price comparison website, and should open the door to innovative third-party switching services.
The Government take transparency and ensuring that customers have the information available to switch very seriously, so although I agree with the spirit of these amendments, the processes and policies are in place for consumers to have the appropriate information that they need. It is also worth remembering the warnings that my noble friend Lady Neville-Rolfe gave about trying to insist on too much. Perhaps we should bear in mind the acronym KISS: keep it simple, stupid. There is a limit to the amount of information that should be provided and what is provided should be kept simple. I hope that with that explanation—
Baroness Featherstone
Has the Minister considered my argument about controlling how the cap might be referred to—perhaps as the “temporary cap”? That goes to the heart of the matter.
Lord Henley
I am more than happy to look at that and I hope Ofgem will note what the noble Baroness has said in Committee. It might be that it would want to change the advice it offers to suppliers about what they do. It is important we make sure that the right information is provided in the right format—I think we are all agreed on that—and that, as I said, it is kept simple.
Lord Carlile of Berriew
Can the Minister help us to understand why he referred to midata? The midata vision of consumer empowerment, as it was called at the time, has been in existence since November 2011. What will the midata vision provide to help consumers following the enactment of this Bill? What specifics will the consumer be able to use?
Lord Henley
What it will do, as I thought I had made clear, is make it easier to open the door to innovative third-party switching devices, such as the devices I referred to, I think, during the debate on the Smart Meters Bill. These will allow the consumer to find himself automatically shifted from one supplier to another if he says, “I always want the cheapest tariff”, or, “I always want the greenest tariff”. Such things are being developed and midata will help towards that.
Baroness Neville-Rolfe
I now understand why the letter I received is so difficult to understand. It reflects the provisions that the Minister has explained that Ofcom has imposed about having to show how you could pay less even if you cannot in fact pay less, which is the situation in my letter. That leads me to make a small request. It would be great if the Minister were able, between now and Report, to look at how communication is actually decided in the Ofcom area. Is there proper communication with consumers who might be recipients of these letters? We tend to be policy-driven rather than customer-driven, and I heartily endorse what the Minister said about keeping it simple. Talking to consumers about what they are going to be sent might be very helpful.
Lord Henley
I am more than happy to consider that and to write to my noble friend so that we can perhaps consider this again on Report. As I was saying in winding up, we all have the same desire: we want to make sure that the consumer has the right information to make the appropriate decisions that they wish to make. With that in mind, we hope that Ofgem—not Ofcom—will continue to develop its work in that field.
Lord Lennie
Before this comes to an end, would the noble Lord repeat what he said about midata having the ability to steer customers to the cheapest tariff available to them in association with smart meters? When does the noble Lord think this will become available? This is quite revolutionary. It is exactly what is needed, and it was suggested in the Smart Meters Bill, if the noble Lord recalls, that the smart meter could provide that kind of information. Is that how it would be communicated—through a smart meter—or directly to customers?
Lord Henley
Midata is a method of electronically transferring customers’ data from a company system to a third party, such as a price comparison website. I was saying that that could lead to innovative third-party switching devices. I think I might have said at Second Reading of the Smart Meters Bill that some apps were already available that could do that for an individual. Therefore, the noble Lord, Lord Lennie, could sign up to something that said, “Always shift me to whatever is the cheapest tariff”. I cannot remember the name of the one already in existence. The noble Lord might then find that two or three times a year he was changing supplier without knowing it, always going to a cheaper one. It might be that the noble Lord, being very virtuous, wanted a greener one or something else, and other such things could be arranged. I hope that is what midata will help the noble Lord and others to do.
Lord Young of Norwood Green (Lab)
I hesitate to enter the debate because I do not want to prolong it. My understanding of the current generation of smart meters is that that is their problem: you cannot simply switch to any other provider because they do not yet have the technology to enable you to do that. The next generation will. That is my information and I have not yet heard anything to refute that. I have been talking to energy companies and to people who are heavily involved who say, “I am not signing up to this generation of smart meters”, because they cannot switch you to the complete range of suppliers. They do not yet have that flexibility.
Lord Henley
The noble Lord is absolutely right about the SMETS 2 meters. I will write to him about SMETS 1 meters and it might be that he is correct about that. I was only mentioning that as an advantage that will be available in the future to customers.
Lord Berkeley
I am grateful to the Minister for his response to my amendment. I think I detected a cautious welcome to be followed by, “It’s not really necessary because it’s all in the Bill anyway”. I was slightly concerned about the comments he made in response to the noble Baroness, Lady Neville-Rolfe, about the cost of communicating other than by email. It would be good to have some evidence of that cost but I shall reflect, with others, on what he said and we may come back with something different or better on Report. Perhaps if the noble Lord was happy to meet beforehand, that might be useful too. On that basis, I beg leave to withdraw the amendment.
“( ) the need to ensure that adequate protection exists for vulnerable domestic customers, including ensuring those customers who currently benefit under a cap imposed by the Authority on rates or amounts charged for, or in relation to, the supply of gas or electricity because they appear to the Authority to be vulnerable, retain those benefits.”
Lord Stevenson of Balmacara
There is no plot, my Lords. We are not trying to keep my noble friend Lord Grantchester away from the Dispatch Box but we find it more equitable to share the responsibility, so we are popping up as need demands. I am sure he will return to his commanding position as leader on the Bill very shortly.
It seems odd to have got to the third group of our amendments to find an amendment that, while ostensibly about the various types of cap that are envisaged in play, actually asks a rather deeper question. What is the Government’s intention behind the Bill and what is behind their intention to have Ofgem, as authority, introduce this within a reasonable time after the passing of the Bill? Is it to help vulnerable customers? Is it to help with fuel poverty? Both issues have been raised already in this debate. Or is it more focused on the market and its efficiency and is therefore unrelated to some of the issues we have already touched on, in terms of how people react to the provision of caps?
This issue was raised in the other place in Committee and on Report. What the Government were going to do about this was left open. At the heart of this amendment is a suggestion that the Government need to step up to the plate and tell us where they want to go on this. The discussion that took place in Committee in the other place on 30 April raised the points I shall make, at a superficial level. At the end, the Minister offered some assurances in summing up, but he did not bring forward amendments at later stages. Your Lordships’ House has not yet seen any from the Government.
At heart, there is common ground that it would be a perverse outcome of this price-cap Bill if low-income and vulnerable consumers currently protected by the safeguard tariff had their energy bills increased as a direct result of the introduction of measures in it. We are clearly looking for some certainty about this. Perhaps, when they are designing the wider cap, the Government could highlight that existing provisions require Ofgem to have due regard to low-income and vulnerable customers who are already protected by the safeguard tariff. I echo the points made by the noble Baroness, Lady Featherstone, about this new cap needing a name; otherwise, we shall get into trouble over what we are talking about. There are, of course, other measures in place. There is a warm homes discount, which may be extended. To what extent does that interpose itself in relation to the cap in the Bill? There are measures to protect those who pay cash through prepaid meters in their homes. Where do they stand in relation to it?
To answer my original question, the Government see this more as a market-mechanism Bill than as anything to do with consumers, whether they are vulnerable, disabled, or fall into another category under existing measures. I think that is a mistake. A case was made in our first discussion this afternoon for making sure that we do not see the return of cold homes and the impact that illnesses have on the wider economy if people are not able to fund and maintain a warm and watertight home. However, the problem that needs to be solved for that to happen is not within the Bill but is raised by it. The current market allows for things to happen that are clearly inimical to consumer interests. We see a widespread use of what is called “tease and squeeze”. This is a technical term, which Hansard will want to look up. It is not found in any legal text but describes perfectly what happens to most customers of the big six and less so to those of the other 64 companies that make up the energy supply market, but it is still present. As was raised at Second Reading, it involves, in essence, the availability of extremely discounted initial tariffs to which people can switch, followed by a quick change to a much higher one, which is never really disclosed in any detail and does not appear on many price comparison sites. When you are signed up, you are squeezed. You are teased first with a chance to cut your energy bills quickly by moving to a wonderful new company that has sprung up. Within a year, however, you find that you are on a much higher tariff. If you pay by direct debit, as many people do, you may not notice that until the letter—probably not an email—arrives saying that you have suddenly built up huge arrears and have to pay them a large sum of money. I am not in any sense implying that any illegality or malpractice is going on in the marketplace, but it is certainly not in the consumer’s interest to have this tease and squeeze arrangement operating at will in a situation where the information flows are asymmetric and difficult to read and where the consumers themselves are not able to use effective mechanisms such as price comparison sites to identify exactly what their costs will be, both when they switch and, much more importantly, later.
Many noble Lords may have been approached by companies and others who have an interest in this area. It seems to attract a large number of people who have views on how this issue should go forward. Noble Lords will have been told that one of the major problems affecting it is that when you try to work out the actual costs of the deals that are available, and what they would mean to a consumer who is paying, the information is so opaque and difficult that people end up frustrated and unable to see it. They certainly do not get the most important information, which is the long-run cost that they are entering into.
Arguing back from where I had got to, if the Bill is primarily about improving the market, surely what we should be focusing on, given what I have been describing, is a better series of powers and regulations held by Ofgem to clean it up. We should ban “tease and squeeze” and make sure that consumers are offered clear and unequivocal information about what they are signing up to—now, a year down the line and further down the line, subject always to cost. We have to get behind the idea that this is in some sense a market, but to say that 70 companies compete openly and fairly for the consumer’s interest does not describe effectively what is happening. A group of small companies has been set up which are primarily concerned with issuing bits of paper called bills and getting money out of people. They do not have the sort of competitive marketing operations that we would expect in a fully fledged and operating market; I think the Government accept that. The Bill is only one very small part of what must happen next, which is a clean-up of the whole operation.
We know that this is one part of that. It was probably a politically inspired decision to try to get some locus in this area, which was very much the opposition parties’ game before the last election. Nevertheless, that will work only if some serious effort is put behind the arguments by bringing forward proposals that people will listen to and act on. If, as we have heard, the main measure behind this provision is the smart meters programme, the Government are putting their money on the wrong horse. From all the information we have—we will probably have the advice of the NAO in three or four months’ time—this programme does not seem to be delivering on the aspirations the Government had for it. If that does not work and the information in the home is not available to consumers at the point of consumption, we will not have an effective, intelligence-led approach to how we may look at our bills and try to make sensible decisions about their cost.
That was a bit of a rant to get the Committee into this debate. The issue behind this amendment is whether we should look more carefully at the issues that have arisen from the ideas already in play to protect vulnerable consumers, while ensuring that they are not affected by the introduction of this price-capping Bill and that as a result consumers benefit, the market is cleaned up and the Government get what they deserve in trying to ensure that people have a fair and open market that works well for all concerned. I beg to move.
Baroness Featherstone
My Lords, the purpose of Amendment 12 continues that theme. It would ensure that wherever there is a vulnerable person, whichever supplier they are with and whatever tariff they are on, the Government would empower Ofgem to deliver the lowest tariff—the tariff for vulnerable people. It would also ensure that that lower tariff is not deleteriously affected by the Bill in any way whatever, and that there can and would be no unintended consequences that result in vulnerable people paying more. The Government need to clarify for the record that the introduction of the price cap does not, and must not, allow for Ofgem to remove or fail to extend the current safeguard tariff for low-income or vulnerable households. It would be helpful if the Minister could lay out how this will not and could not be the case, and demonstrate beyond doubt how the two caps—the one already in place for vulnerable people and the new energy price cap being introduced—can operate at the same time, without causing detriment to anyone eligible for a lower tariff for reasons of low income or vulnerability.
Amendments 27 and 31 relate to Clause 7, which we will debate later. It says that Ofgem,
“must carry out a review into whether conditions are in place for effective competition”—
to include, among other things, consideration of the rollout of smart meters—and must recommend whether the cap should be extended or lifted. Then, after considering the review, the Secretary of State must publish a statement on whether the cap should be lifted or extended. Amendment 27 requires Ofgem to take into account,
“the level of protection in place for disabled domestic customers”,
at that time as part of that review process. Amendment 31 requires the Secretary of State to,
“have regard to the level of protection in place for disabled domestic customers”,
as part of the statement setting out whether the cap should be extended or lifted.
Lord Whitty (Lab)
My Lords, I apologise for not being here for the previous debate. Clearly, there are crossovers between that group of amendments and this one. I declare an interest in that I have been appointed chair of the commission on vulnerability set up by Energy UK. We have not started our work yet so I am not pre-empting that and I am not speaking on behalf of the commission. But it has caused me to look at the complexity of the vulnerability of consumers in this sector and how that is compounded by the difficulty that people experience in getting around to switching, despite the emphasis on switching in public policy, and the attempts—legislatively and by the regulator—to encourage people to find a better tariff.
The fact of the matter is that while we have had a significant increase in the competition at one end, the competition between and within companies to attract and retain vulnerable groups in their own best interests has not ended up being very effective. I am sure we all know of groups in our own community which have had grave difficulty, either by being stuck on a tariff or by attempting to change their tariff, with consequences that were detrimental or at least incomprehensible to them. That remains the position.
When we are talking about vulnerability, we need to recognise that not all of that is obvious. It is not just the elderly, or physically or mentally disabled people, who are vulnerable. It is also people on small incomes, particularly those on irregular incomes, who fail to pay at some point and suddenly become vulnerable because they build up debt and get into the company’s bad books.
The industry is well aware of all this. Indeed, in some ways, it has attempted to address it, but it has not come through. This top-down approach of a cap, which may be necessary at the moment to drive future competition will not help the differential impact on the more vulnerable members of our society. If it does, it will do so inadvertently. That is the not the central theme of this approach. The issue has to be explained to people in a way that does not make life more complicated and that will enable them, at least to a degree, to be more proactive in switching to a lower tariff.
Communication between energy companies and their consumers is therefore vital. The increase in competition through the number of companies in the field has not necessarily led to a dramatic change in this situation. It is important that not just the big six but all companies in the sector take steps to ensure that they take this into account after we have legislated for the cap to address the interests of different groups of vulnerable people. We will return to this issue—amendments have been tabled on it at various points in the Bill—but unless we somehow crack this and make it clear that the cap must address issues of vulnerability at the same time, the social problems that are the outcome of the current dysfunctional and inadequately competitive market will simply continue.
For a number of these groups of people, although I am in favour of smart meters, I do not think that the smart meters rollout will occur in the timescale to match what is in the Bill for a cap. Also, many of those groups will be the last to benefit easily from the information and techniques that smart meters ought to give to consumers. The benefit will be to those who have already made the switch and, quite rightly, stimulated a new market, but they are not necessarily the most vulnerable in the market—in most cases they are quite the opposite. Unless we cater for all aspects of this market, with central objectives improving the position of those various groups of vulnerable consumers, we as legislators, and Ofgem as the regulator, will have failed.
Lord Henley
I thank noble Lords for what they said on these various amendments. I hope to set out what we are doing to protect the more vulnerable and disabled consumers in due course, but I will start by dealing with the point made by the noble Lord, Lord Stevenson, about what is referred to as “tease and squeeze”. We believe that the best way to end this practice is the detailed work that Ofgem is undertaking to test better ways to secure customer engagement and make switching quicker and more reliable, as well as many other programmes to make the market work better. Recent changes mean that suppliers can make their default tariff a fixed-rate deal rather than a variable-rate tariff; many have done so.
The amendments would require Ofgem to have specific regard to vulnerable and disabled consumers when setting the level of the cap, but they are unnecessary because Clause 1(6) already places a duty on Ofgem,
“to protect existing and future domestic customers who pay standard variable and default rates”.
That of course includes vulnerable and disabled customers. Further, the amendments tabled by the noble Baroness, Lady Featherstone, to Clause 7 would require Ofgem and the Secretary of State to consider whether effective competition is in place in the domestic energy supply market as a whole, and again this will include effective competition for all domestic consumers, including vulnerable and disabled customers.
As noble Lords will be aware, in addition to the duty imposed on Ofgem by the Bill to protect all existing and future domestic customers on SVTs and default tariffs, the gas and electricity Acts place a duty on Ofgem to protect the interests of existing and future consumers. In carrying out this duty, Ofgem should have regard to the interests of individuals who are chronically sick, disabled or of pensionable age on low incomes, and those residing in rural areas. With the protections for SVT and default tariff customers in this Bill and the specific duties in existing legislation for vulnerable people, there is no need to place additional duties on Ofgem to protect the interests of those consumers.
Ofgem and the Government are taking a number of steps to support vulnerable consumers. For instance, Ofgem has extended the prepayment meter cap to around 1 million vulnerable consumers in receipt of the warm home discount, mentioned by the noble Lord, Lord Stevenson. The Government have laid regulations that, among other things, will enable data sharing between government bodies such as the Department for Work and Pensions and energy suppliers for the purpose of fuel poverty, including safeguard tariffs. Clause 3 of this Bill enables Ofgem not to apply the market-wide price cap to customers who benefit from another cap by reason of them being or appearing to be vulnerable.
I believe that these amendments broadly repeat the provision which is already set out in the Bill so they are an unnecessary duplication, but it is worth me going through some of the existing government support for vulnerable consumers. There is the payment of £140 a year to 2 million low-income households through the warm home discount scheme, along with £100 to £300 a year for all pensioner households through winter fuel payments. Some £25 a week is available to low-income and vulnerable households during a cold snap through cold weather payments. There is also the priority services register, which is a free service provided by suppliers for people of pensionable age, those who are sick or have a chronic medical condition, and those in vulnerable situations. That register includes priority support in an emergency by, for example, providing alternative heating and cooking facilities in the event of a supply interruption.
I thank the noble Lord for moving his amendment and I am grateful to the noble Lord, Lord Whitty, for his intervention. I note that the commission he is to chair has been set up by Energy UK and we look forward to seeing its work in due course. However, I believe that the Government are taking appropriate action, including through this Bill, which is all about making the market work properly, to protect consumers from paying too much for their energy. The amendment would therefore be an unnecessary duplication and I hope that the noble Lord will feel able to withdraw it.
Lord Stevenson of Balmacara
I thank all those who have joined me in this debate, in particular the noble Baroness and my noble friend Lord Whitty. I am grateful to the Minister for going through the issues and I will read his words in Hansard to make sure they cover the points I have made. However, it might be helpful to him if I lay down a specific list of the issues that we need to resolve, and perhaps a letter from him would make absolutely clear what is being said on these points. He said that the Government have laid the SI that is necessary for data sharing, which I think is the precursor to extending the safeguarded tariff. I had not spotted that myself, but if it is true and it could be confirmed, that would be great. Does that therefore mean that the extensions to the safeguard tariff will be available to coincide with the introduction of the Bill? If it is likely that the cap will be introduced by the end of the year—it is unlikely to be before that —can we be assured that the extensions to the safeguard tariff will also be brought in at that time?
Lord Henley
I am not sure that I can give an absolute assurance on that now but I will certainly make sure it is in the letter that the noble Lord has requested from me.
Lord Stevenson of Balmacara
I am not looking for an immediate answer but I am trying to make sure that we are not missing anything out. I think the winter fuel payment and the cold weather payment are in different statutes and I cannot see them being affected by this but, again, confirmation that they will not be affected by anything in the Bill would be helpful.
I declare an interest that I am on the priority services register, being of that age. I am looking to see if anyone else is nodding. It was a rather scary moment when someone rang and asked, “Do you want to go on the register, you poor, shivering old person living alone in your house?”—which was certainly not how I felt at the time. But it actually turned out to be quite nice because when there was—inevitably—a power cut within the next couple of weeks, someone rang up and said, “There is a power cut”. I said, “I know that”. They said, “But you are on our register, we have to tell you”. There were various other things I could bore your Lordships with but it was quite amusing.
I have the same question about the warm home discount: will that fit into the way the Bill is being brought in and can we be assured that it will continue and will not be affected?
In summary, I think all the speakers were interested in getting an unambiguous overarching statement from the Minister that the safeguard tariff will not be withdrawn prematurely and will be extended to fit in with the recommendations. If we could get that, I would be very grateful. I beg leave to withdraw the amendment.
Lord Mackay of Clashfern
“(8) Subject to subsections (9) to (12), sections 11C to 11H of the Electricity Act 1989 and sections 23B to 23G of the Gas Act 1986 apply to modifications of the standard supply licence conditions made under this section.(9) Any appeal against modifications to the standard supply licence conditions made pursuant to this section—(a) may not challenge the decision to impose a price control in principle; but(b) subject to paragraph (a), may relate to—(i) the principles applied in setting the tariff cap conditions in question,(ii) the methods applied or calculations used or data used in setting the tariff cap conditions, or(iii) what the provisions contained in the tariff cap conditions should or should not be (including at what level the tariff cap control should or should not be set).(10) The decision of the Authority to modify the standard supply licence conditions to include tariff cap conditions is to have full effect pending the determination by the Competition and Markets Authority (CMA) of any appeal.(11) Paragraph 2 of Schedule 5A to the Electricity Act 1989 and paragraph 2 of Schedule 4A to the Gas Act 1986 do not apply to modifications of the standard supply licence conditions made under this section.(12) Notwithstanding section 11G(1) of the Electricity Act 1989 and section 23F(1) of the Gas Act 1986, the CMA must determine an appeal against modifications of the standard supply licence conditions made under this section within the period of 4 months beginning with the day on which it accepts the appeal.”
Lord Mackay of Clashfern (Con)
My Lords, I want to raise a very specific point about the possibility of an appeal against the decision to fix the tariff at a particular level. I declare an interest: I have a minute shareholding in Centrica, which I think is a residue of Mr Therm, and of course we are all participants in the market in that we get gas and/or electricity.
The question that the amendment addresses is whether there should be a statutory form of appeal against the level at which the tariff is set by the authority. I think it is agreed that some kind of judicial challenge is available. Judicial review is said to be the challenge. It is interesting to see how the Select Committee approached that. I do not think it was a fundamental or central point of the committee’s consideration. It asked something like 500 questions, of which four were about the appeal provision. The committee’s main interest in appeal was to prevent delay in bringing in the tariff. I can see the very cogent reason for that. We want the tariff to come in as soon as practicable. If it is to be valuable, it certainly must come in in time for the next winter.
I will show that what I am proposing is a good deal better from that point of view than what the committee thought. The committee seemed to have been concerned mainly that there would be no effective legal challenge of the judgment. In a way, I am rather sad about that because it rather suggests that legal challenge does damage to a decision. My belief is that the aim of legal challenge is to improve a decision; if necessary, to make it fairer than it is already. I need not elaborate on that, because both the Government and those noble Lords who support this amendment agree that a judicial challenge of some kind is available.
I will go through our amendment in a little detail, to show what we are trying to do. First, the sections referred to are a code which allows for appeals in the particular situation of modifications of the licence conditions. That is a general code, introduced by the words:
“An appeal lies to the CMA against a decision by the authority to proceed with a modification of a condition of a licence under Section 23”.
Of course, that includes price variation and that is clear from Section 23E, where a price control decision is effectively mentioned. The committee said that judicial review was a reasonable way of challenging a price control. If that is the point of view of the Government—and of preceding Governments, many of whom contributed to this code—it is strange that they have a code for price control at all. This is quite an elaborate code, with provision for rules and all that kind of thing, and with the CMA experts—who know something about this area—dealing with the matter.
The Government appear to be questioning the idea of an appeal on this level, on the ground that it might cause delay. The amendment seeks to deal with all these things. It makes it clear that there is no question of attacking the principle of the cap. That is a political decision to be made by Parliament and, therefore, the appeal decision may not challenge that point. However, it may challenge the principles applied in setting the tariff up. As I pointed out at Second Reading—I shall not repeat myself—it is quite a difficult decision. The conditions the authority has to satisfy in reaching a decision are quite difficult. I can see that there is certainly room for a difference of opinion on exactly what emphasis there should be on these various matters.
The Government made a point about the possibility of delay and that question concerned the Select Committee. The amendment deals with that by proposing new subsection (11), which takes out the power in the existing code to set aside a price control decision until a decision is taken by the CMA. To make it thicker, proposed new subsection (10) says:
“The decision of the Authority to modify the standard supply licence conditions to include tariff cap conditions is to have full effect pending the determination by the Competition and Markets Authority (CMA) of any appeal”.
There is, therefore, absolutely no question of any delay in this procedural matter. Of course, if it was successful, it might have an effect in respect of settling matters afterwards, but the tariff will come in on the date when the authority decides that it should.
We have thought about the possibility of delay in relation to the decision-making of the authority. The authority has the usual limit of six months. In view of the urgency of this matter, although it is not absolutely vital, we have suggested four months for the authority’s decision. These are perfectly simple matters, I think, and they answer all the Government’s objections to this form of appeal.
The noble Lord, Lord Grantchester, has tabled an amendment on costs. Perhaps your Lordships know already that there is a provision about costs in the scheme under the existing Act, and it may be that some modification of that is required. The other point that comes out very forcefully from his amendment is that appeals are made not just by the licence holders. The appeal is there also for the consumer. When you look at the conditions, you see that there is certainly a possibility that the tariff might be too high. I am not saying for a minute that the authority will not do its best to get the right tariff—I am assuming that it will—but appeals are perhaps intended to review that kind of decision. Therefore, it is vital that the consumer representative, which is the citizens advice bureau, Citizens Advice Scotland or a combination of both, has the right of appeal.
I do not think there is any possible answer to this as against judicial review. Apart from anything else, judicial review is not a very technical type of review, in the sense that the judges are extremely skilful and talented but not many have a detailed knowledge of the gas and electricity industry. That is part of the scope of an appeal, as is set down under the statute: that the appellate authority is already equipped with the kind of expertise that is needed to decide this question. The Government kindly wrote me a very full letter saying that, in a judicial review, the judge could appoint assessors. As you can imagine, I am rather aware of that. However, it tends to show exactly what I am saying: that you should have an appeal that is supported by the relevant expertise. The very need for an assessor, which is suggested as a possibility—although I concede that the judge might not require it—goes a certain distance in that direction. That the Government have said it shows that this is an extremely useful and appropriate form of appeal.
We put the four-month period in to make sure that everything is looked at. I do not necessarily say that it is absolutely essential, and it may be that a correct decision is worth more than a hurried one. Still, we are showing our certain desire to have this disposed of as soon as possible. For that reason, in my submission to your Lordships, this amendment is eminently reasonable and one for which the Government so far have produced no reasoned alternative. I beg to move my amendment.
Amendment 6 (to Amendment 5)
“(13) The cost of an appeal initiated by a statutory consumer advocate for energy consumers must be met by the Exchequer.”
Lord Stevenson of Balmacara
My Lords, I can be very brief, because this amendment tabled in the name of my noble friend Lord Grantchester has already been argued for very persuasively by the proposer of the original amendment and I have nothing to add to that.
The noble and learned Lord makes the point that there are two or three bodies on which there is an expectation that they will look after the consumer interest in matters affecting energy, and one key issue will be the pricing of any cap. An appeal has to be available to them because that decision involves judgment being exercised throughout as many imponderable questions need to be looked at for the authority to arrive at the decision. When we asked about this, Citizens Advice said that it is nervous about the fact that very often these appeals were done with a lack of equality of arms, in that senior counsel are often briefed and brought in by the companies and, therefore, to be able to argue the case persuasively it feels it also has to take counsel. That is expensive, costing perhaps more than it is able to afford. Therefore, the question of cost has arisen. I think the noble and learned Lord, Lord Mackay, made the point so I do not need to emphasise that there is an issue here. If the Government could find a way for these costs to be met, it would obviously be better—we would not need to amend anything—but the amendment needs to stay there to make a point. I beg to move.
Lord Carlile of Berriew
My Lords, I support the amendment in the name of the noble and learned Lord, Lord Mackay; indeed, I put my name to it. I declare two rather different but relevant interests. I spent eight years as a chairman of the Competition Appeal Tribunal, sitting with experts and expert witnesses, analysing the interstices of whichever competition issues were placed before us and being enabled to reach judgments that were carefully considered, although dealt with at extraordinary speed—much more speedily than many High Court cases. For a number of years, I also sat as a deputy High Court judge, dealing mainly with judicial review. In that role, I deferred at once to the much greater experience of the noble and learned Lord, Lord Brown, who was the king of judicial review in his time. Nevertheless, in my years in that role I was able to see the difference between the discipline of judicial review and the competition, evidence-based discipline.
As I listened to the noble and learned Lord, Lord Mackay of Clashfern, I had a horrible feeling—or perhaps a pleasant one, I am not sure—of déjà vu. Way back in the last century I used to appear as junior counsel in a fair number of cases in the Court of Appeal. I was often led by very distinguished leading counsel, though none more so than the noble and learned Lord. Indeed, three of them aside from me ended up as Members of your Lordships’ House so I look back on those days with pleasure. One of the most terrifying things that used to happen in those days was that if you were appearing as junior counsel in the Court of Appeal, when your distinguished leader had finished, the judge in the chair uttered words that I think were, “Do you follow, Mr Carlile?” They were uttered in a tone that included, “If you dare, don’t you dare and I’ll murder you if you dare”, at least intellectually. So, one followed rarely; I follow the noble and learned Lord, Lord Mackay, with great trepidation. I will be very brief because I feel like his junior on this occasion. I will not go through the substantive points that he made, which he did with his usual extraordinary cogency. I agree with every word that he said. These arguments were rehearsed at Second Reading by all of us who spoke—the noble and learned Lord, me, the noble Lord, Lord Hunt, and others. I just want to provide a couple of headlines, as it were.
What kind of appeal do we want to give? Do we want to give one that allows the decision to be corrected if it is plain wrong or do we want to allow an appeal that only allows the decision to be corrected, even if it is wrong, if it is perverse and no reasonable authority would have reached it? For the latter option is the judicial review test. We should aim for what Amendment 5 suggests: that within time limits and the other restrictions described by the noble and learned Lord, Lord Mackay, the answer can be corrected quite simply if it is incorrect. That is what the public expect and that is what this amendment provides.
Lord Hunt of Wirral (Con)
My Lords, I rise to support my noble and learned friend Lord Mackay of Clashfern in his amendment, and in doing so I declare my interests as set out in the register, in particular as a partner in the global commercial law firm, DAC Beachcroft LLP. As the noble Lord, Lord Carlile, has pointed out—we enjoyed his journey through history— this amendment will ensure that the Bill meets the Government’s ambition to have a cap in default-rate energy tariffs in place by the winter while also ensuring that the correct scrutiny of such a major intervention in the energy market will be in place; namely, the CMA being able to review and improve the methodology if an appeal is brought.
I want to put forward three core reasons why the Bill in its current form does not provide appropriate scrutiny. First, setting a price cap that maintains competition and innovation will be extremely difficult. Competition is improving and a range of important policy costs such as the smart meter rollout and subsidies for renewable and vulnerable policies are included in energy bills. There are material risks to consumers if the methodology is not correct, and I welcome the amendment proposed to Amendment 5. The CMA clearly possesses the necessary expertise to hear an appeal on the cap, and there is no better source in support of that than the Government themselves. I shall quote from their recent Green Paper, Modernising Consumer Markets:
“We have an independent expert competition body, the Competition and Markets Authority (CMA), to promote competition in the interests of consumers and business across the economy … The work of the CMA from 2014-2017 is expected to achieve benefits to consumers well in excess of £3 billion”.
I agree with this endorsement and I believe that appeal rights to the CMA will provide a reassurance to consumers and the industry alike.
Secondly, removing the right of appeal to the CMA from the provisions of this Bill would undermine the established approach which has been in place since privatisation. Some noble Lords may remember that as a junior Minister I took through the Gas Bill in 1985 and I still bear the scars, particularly on setting up a system of regulation which at the time was quite innovative. Since privatisation there has been an approach that underpins investor and consumer confidence. Moreover, the CMA already has a track record of improving regulatory decisions. In 2016 it set out that Ofgem’s previous attempts to regulate retail tariffs in its retail market review had damaged competition and should be removed, while in 2015 the CMA heard an appeal, supported by Citizens Advice, on the level of the energy network price control. It found that Ofgem had made an error and £105 million was returned to consumers.
Thirdly, the Government have suggested that the courts, through judicial review, would be better placed to hear an appeal. I do not agree with that. JR is concerned only with the process for making a decision, not the substance. The CMA is a specialist competition body that is designed to look at these issues. It has teams of experts within the organisation and the Government announced in the Budget last year around £3 million-worth of funding to ensure that the CMA could continue to support competition and consumers. This makes the CMA better qualified and resourced than the courts to review a price control. I hope that noble Lords will understand that those are three very clear reasons in support of my noble and learned friend’s amendment.
Perhaps I may anticipate, if I dare, what the Minister may say. Looking at his initial response at Second Reading, I recall his main concern was delay. As my noble and learned friend explained, the amendment explicitly rules out the potential for a CMA appeal to delay or block the introduction of a price control. Delay is not usual anyway. In the past 11 price control decisions the CMA has not caused a delay and the amendment would now make that impossible.
My noble friend also may say we have concerns that a right of appeal could be used by certain of the major players to frustrate a price control. We know, however, that delay will not be possible via the amendment and the energy sector overwhelmingly supports CMA appeal rights, as do investors in the utilities sector. Furthermore, consumer groups would be able to exercise the right of appeal.
Thirdly, in the Official Report at col. 1018, if I recall, the Minister raised the fact that the Select Committee had considered the matter and recommended judicial review as an appropriate route of appeal. I believe there is a capability question here. However, I would also point out that judicial reviews actually take longer to resolve than CMA appeals—9.7 months versus 8.8 months. That is a comparison since the year 2000. As my noble and learned friend pointed out, the amendment would commit the CMA to resolve a case in four months. We rest our case.
Lord Brown of Eaton-under-Heywood (CB)
My Lords, I regret I took no part in Second Reading. Indeed, I ought to say at the outset that I defer to no one in my claim to the profoundest possible ignorance about this area of the law and all the technical know-how that underpins it. As my noble friend Lord Carlile says, over the years I have had considerable experience of judicial review. My object is to support and echo rather than add substantively to the arguments already canvassed ably by all of the Lords who have spoken at Second Reading and again today. There are threefold basic advantages, which strike me as perfectly obvious, between the appeal sought in the amendment and judicial review, which, obviously, but for the amendment, would be the fall-back position of anybody wishing to challenge the authority’s decision.
First, there is the question of the expertise of the tribunal in question. As the noble and learned Lord, Lord Mackay, said, judicial review judges have no more expertise in this area than I myself have already recognised I lack. In fact, the criteria by which this judgment falls to be made are, as set out in the statute, highly problematic and not obviously soluble by judges as opposed to an expert custom-built tribunal already in place to take appeals.
Secondly, there is the focus of challenge. As has been said, judicial review focuses essentially on the process by which the decision was arrived at. There is not a substantive challenge to the merits. As the noble Lord, Lord Carlile, said, only perversity could allow a judicial review challenge on the substantive merits basis. That is not a likely or fruitful way ahead here.
Thirdly—this links with the second point—there is the form of relief. If you succeed on a judicial review challenge in this circumstance, you set aside the decision under challenge but remit the matter back to the body so that it can, without the deficiencies of the process that you have identified, or on a non-perverse basis, reach a different decision. It is not open to the judicial review court to say, “Well, this is plainly a wrong process. They didn’t take account of this, that or the other consideration. So we will impose instead a different cap”. That is not open to it so you simply have a further decision, with, again, all the problems and delays that that would bring in its wake.
Finally, on Amendment 6, I observe only that costs can be a useful sanction and it really should be left to the CMA itself—assuming there is to be a provision for an appeal to the CMA—to decide whether in the particular circumstances it can be empowered to provide, as the amendment would, that the costs should be borne by the Exchequer, but that should not necessarily be the outcome. There may be circumstances which make that inappropriate.
Baroness Featherstone
I have no legal training—which may be painfully obvious to the Committee—nor much experience of the consumer world, but I have listened to the arguments, which have been well made. There is not a point left in my speech that would not be repetitious. I am intrigued to understand what on earth the Minister is going to say in reply. In my view, these arguments are unarguable.
Lord Young of Norwood Green
My Lords, there is no danger of my repeating what I said at Second Reading because unfortunately I missed the cut and was too late to make a contribution. I do not want to repeat what has been said by the noble and learned Lords. I am trying to think of the collective noun for a group of such distinguished legal experts. I am not sure “a clutch” does them justice—if your Lordships will pardon the pun.
Lord Carlile of Berriew
Would the noble Lord accept “a brief”? But that depends on him paying the fees.
Lord Young of Norwood Green
That is a given! I will not go through the arguments again. I concur with them. The case has been made and I hope the Minister is listening. I, too, look forward to his alternative response—or perhaps there has been an epiphany and he will accept the validity of the arguments that have been so ably put.
I want to make a few points that have not been made. It is important to understand the context within which price caps are going to be set. A number of times in the debate reference has been made to the introduction of smart meters. That is not going to happen by chance, it is going to happen because the major suppliers have been told that they have to be introduced. The cost is not insignificant: 50 million smart meters will need to be installed at a cost of something like £7 billion. There is a long way to go: only about 12% of the smart meter installation has been completed.
An independent analysis by an energy sector expert points out:
“An energy price cap that pushes the industry as a whole to break-even or losses has significant implications on the smart meter roll-out programme”,
and that it is,
“absolutely essential to secure the cost-effective deployment of electric vehicles in addition to enabling the reduction of switching times to 24 hours”.
That will be one of the benefits of the smart meter rollout. If we want to encourage electric vehicles—which we do, as we know—smart meters need to be a key part of that.
I was also interested to see that the report talked about the incentives to switch. It said:
“The cap is intended to be set at a level that provides customers incentives to switch. When the CMA surveyed customers to understand the level of savings from switching that would encourage them to switch, it found that the median amount of savings”,
for customers was £120. It went on:
“At savings of £50, only 7% of customers were interested in switching … The survey did not find any meaningful variation in the level of savings required by different demographic groups”.
That is a really interesting bit of analysis, ironically by the Competition and Markets Authority.
I will go on to what we expect from our major energy suppliers, which are vital to the UK economy and the day-to-day lives of British citizens. They account for something like 2.3% of gross domestic product and £100 billion of investment has been earmarked to 2020-21 to ensure that the lights stay on and customers have reliable, affordable and low-carbon energy. There are 600,000 people employed in the sector—even more, if you include indirect jobs—and it is at the forefront of essential new technology, as I have said, such as the smart meter rollout. That will facilitate the rollout of electric vehicles, which will be a £200 billion global market in 2019.
Energy companies are at the forefront of training apprentices. For example, Centrica has six training academies, employs 27,000 people in the UK and has trained 1,000 apprentices a year in recent years, including 2,500 smart apprentices. These are no mean considerations and they do not just happen. I hope there is recognition of this. Energy companies supply households with their gas and electricity, and the market is more open and competitive than it has ever been. Some of this statistical evidence is interesting. We have had an argument about suppliers but the fact is that there are more suppliers than before. I do not disagree with my noble friend about concentration but there has been significant switching. Nearly 400,000 customers switched during January 2018, a 14% increase on the same period last year, while 5.5 million customers—one in six—switched supplier in 2017. Awareness of the ability to switch is high; I have already given the Committee that information. It is interesting that in the BEIS tracker polling, public concern about energy bills does not rank higher than it does about other household bills.
I want to make my position clear. I am not in hock to the energy companies—I will finish in a minute—and I am in favour of a price cap, but it has to be administered in a way that takes cognisance of the role that energy companies play. It also has to be done in an appropriate way. Unfortunately, my quote from the Green Paper was anticipated by the noble Lord, Lord Hunt, so I will not go through that again but I believe that the evidence to support this amendment is overwhelming and, on those grounds, I support him.
Lord Henley
My Lords, the noble Lord, Lord Carlile, spoke of his trepidation in following my noble and learned friend Lord Mackay of Clashfern. That is as nothing compared to the trepidation that I feel in following my noble and learned friend, the noble and learned Lord, Lord Brown of Eaton-under-Haywood, with all his expertise in judicial review, my noble friend Lord Hunt of Wirral, at whose feet I sat many years ago at the Department for Employment, with his great legal knowledge, the noble Lord, Lord Carlile, himself and all the others who have spoken.
I am also grateful to my noble and learned friend Lord Mackay for mentioning that my right honourable friend Claire Perry had written to him at some length on this matter to set out the details. I will probably have to set out similar arguments, which I hope he will listen to. However, having listened carefully to the debate and to the concerns raised by all, I think we may have to have further discussions on this in due course.
Just before I come to the substance of the matter, I ought to make a brief point to my noble and learned friend. I believe that his amendment does not quite work. I advise that we would probably need to import all the CMA appeal provisions if we took up his amendments from the gas and electricity Acts and adjusted them so that they applied to Ofgem’s decisions under the Bill. It could add something of the order of 12 new clauses and a schedule to the Bill. Any amendment could also place a new duty on the CMA; I think the noble Lord’s amendment would also require the CMA to consider conducting a review under a compressed timetable. In the light of that, I would certainly want to seek the CMA’s view on those points; obviously, we will let your Lordships know the outcome of that.
I will come to the amendment because it is important that we deal with the arguments, as my right honourable friend did in her letter to my noble and learned friend. This amendment gives us an opportunity to consider the idea a little further than we did at Second Reading. As I mentioned—I will mention it again during the course of the Committee—the Bill is a temporary and targeted measure to protect consumers from excessive energy prices until the conditions for effective competition are in place. It is important not to lose sight of this fact, nor of the 1.4 billion consumer detriment figure that was established by the CMA in its 2016 investigation into the energy market when considering the route of challenge for suppliers.
For temporary and targeted interventions such as this price cap, the CMA, as an appellate body, is not a “well-established right”, as has been suggested by some stakeholders. In fact, CMA appeals usually exist only for permanent, if periodically updated, price control regimes. The Bill does not replicate an existing price control regime, setting allowed revenues for entire businesses. It is, as I said, a targeted and temporary intervention to deal with a specific problem in part of the market. In fact, we are unaware of any temporary price-related interventions that have included the right to appeal to the CMA. There are also other examples of price interventions by regulators that do not include a CMA appeal right, such as the payday loan interest rate cap introduced by the Financial Conduct Authority in 2015.
Some stakeholders have sought to emphasise the differences between the FCA’s measure and the one we are considering here today. I suggest that these measures are not so different at all. Both measures are direct, targeted interventions operating in the retail end of their respective sectors; both originate from the sovereign will of Parliament via primary legislation; and both have the same express intent to protect consumers from exploitation. Like Ofgem, the FCA also has discretion in the setting of the cap and, as Ofgem has started to do, it carried out its own consultation weighing a list of concerns it should have regard to in a similar vein to the conditions set out in Clause 1(6).
Obviously, decisions relating to the prepayment meter cap are subject to challenge by way of judicial review. Therefore, there is precedent for a direct, price-related measure stemming from the will of Parliament to protect consumers that does not have a CMA appeal right. What is wrong, dare I ask, with judicial review? It provides a sufficient means of challenge to ensure the provision of a fair and public hearing within a reasonable time by an independent and impartial body established by law.
Again, the noble and learned Lord, Lord Brown, and others have made the point that judicial review is focused on process. A judicial review will consider the lawfulness of a decision, but there is also scope for the court to consider issues around the proportionality of any decision. They rule on many highly complex cases each year, so I am afraid I do not agree with the argument that in this area alone the issues are so complex that the courts simply would not be able to cope. The price cap is for Ofgem to determine in accordance with its duties and the court would not need any particular expertise to review that. As was made clear by my right honourable friend in her letter, if it did need particular expertise, which would be rare, it could still sit with assessors.
Lord Young of Norwood Green
The Minister said that the route of an appeal to the CMA could be abused by the major suppliers. What would prevent them seeking a judicial review at that point? What is the difference?
Lord Henley
My Lords, as I made clear, they would be using the CMA to delay this process, and we do not think that that would be right. I do not think that that would be the case with judicial review, but, as I said, I am more than happy to discuss these matters later. We have set out our position here and in the letter that my right honourable friend sent to my noble and learned friend.
Lord Stevenson of Balmacara
I am sorry to interrupt but the procedure is for me to respond first. I thank the Minister for his response, although I think the arguments were won fairly and squarely by those who proposed the original amendment. I hope that there was support around the table for the additionality of the consumer statutory representatives. The point is made that they are funded to be consumer statutory representatives—that is true. It is not true that they are funded adequately to carry out all the functions that could apply if this additional responsibility were placed on them. It would be a perverse outcome for the Government to rely on existing funding and not supplement it if a large number of people suffered badly as a result of a benefit that was supposed to come to them but which was not done properly and needed to be appealed, and the appellant was not able to fund their appeal.
I think we will have further discussions on this issue. I make it clear that we are minded to support the noble and learned Lord’s amendment. As such, we would like to be part of that discussion and debate when it comes. In the interim, I beg leave to withdraw our amendment.
Lord Mackay of Clashfern
My Lords, I find it difficult to know exactly what the basis is on which the Government now stand in relation to this. I would be extremely happy to have further discussion involving as many of us here as would wish to take part. I am sure that the Government would welcome that.
The situation is that an appeal under these provisions requires the permission of the CMA. The idea that some tariff licence holders would try to exploit this in some way is well met by the procedures that are laid down in this scheme. My noble friend began with the rather frightening suggestion that I needed to add something like 12 clauses to the Bill. It may be wrong, but subsection (8) of our proposed new clause states that:
“Subject to subsections (9) to (12), sections 11C to 11H of the Electricity Act 1989 and sections 23B to 23G of the Gas Act 1986”—
my noble friend’s production, with modifications, of course—
“apply to modifications of the standard supply licence conditions made under this section”.
That seems to put all the conditions in the tariff arrangement into the Bill for the purposes of dealing with the tariff. I cannot understand what more is required. I am in favour not of prolixity but rather of trying to be brief. That seems to me to do it briefly.
The whole procedure is involved. The only thing we are doing is modifying the procedure to take account of the concerns that the Government have expressed about delay and the power that the CMA has to postpone the coming into effect of the tariff under appeal. That is what we have tried to deal with, to resolve the issues that seemed to concern the Government in the letter that the Minister kindly sent me a little time ago.
I am extremely happy, as I said, to be involved in any discussions about this. At the moment, I find it very hard to see why the Government should want to have judicial review more than this, because some people think that exploitation can happen under judicial review. I remember some time ago reading out a passage from a colleague’s book about this and his experience of judicial review in relation to his education policy. I am not saying whether that is right or wrong, but I am saying that this procedure we are proposing is as protected against any kind of exploitation as it could be, because the permission of the authority is required and it will be very astute to know if it is just exploitation for the sake of some big member of the licence holders group. So I do not honestly think that that is a very serious objection.
As I said at the outset, I do not think the Select Committee was really concerned about anything except the delay that it thought would be involved in any kind of procedure. It would apply to judicial review—indeed, probably more than any other—because I doubt it would be right to try to remove the power of the judge to suspend the thing if he thought that that was required, whereas we expressly remove the statutory power of the CMA to put that in.
I think we have answered, as best we can, every possible concern that the Government have, so I would be glad to explore this—I was just about to say “exploit this”—at a meeting between now and Report. I am very keen that we should get ahead with this. We do not want to delay the passage of the Bill through this House, not at all—the sooner it gets through, the better, and the sooner the cap is in place the better, if it is going to be worth while.
Lord Grantchester
Lord Grantchester
My Lords, in moving Amendment 8, I shall speak also to Amendments 10 and 11.
Clause 2 on tariff cap conditions lays out a number of criteria or necessary provisions the cap conditions need to satisfy. For example, Clause 2(1)(b) specifies that the conditions,
“must set out how the cap is to be calculated”,
and Clause 2(1)(c) specifies that they,
“may make provision specifying how a standard variable or default rate is to be identified”.
While we recognise that tariff cap conditions confer functions on Ofgem to undertake, nevertheless the amendment probes whether Ofgem could be given too wide a power under this clause to undertake further activity. Are there any functions the Minister may be able to foresee that may be necessary and could be enabled by this catch-all provision? If there are further functions that Ofgem may wish to initiate, can he confirm that these would need to follow the procedures already set out in the Bill?
Amendments 10 and 11 are also probing amendments. While we recognise that there must be a level playing field in the electricity market, there are some companies, certainly recognised green supply companies, that only provide alternative energy and often have only one tariff. The Bill is targeted at the SVT or default tariffs of the majority of companies, such as the big six, that have an array of tariffs from which a wide variety of prices can result. Clause 3 specifically relates to exemptions from the cap and the amendment allows green companies, rather than their tariffs, to be exempt. It could be interpreted that green suppliers may be unintentionally penalised, as they could incur additional material costs, such as contracting generators, policy work and research and development, that cannot be directly attributable to a single tariff. Has any consideration been given to a company-level exemption to ensure the survival and continuation of additional green energy projects and investments? Could tariff conditions make different conditions for these suppliers and exempt a supply from the cap’s application? I beg to move.
Lord Henley
My Lords, I am grateful to the noble Lord for explaining that his Amendments 8, 10 and 11 are probing amendments. I hope I can answer the points he raised.
Clause 2(1)(e) is a technical provision which allows Ofgem to give itself the power to do things through the licence conditions for the tariff cap. Amendment 8 would remove that ability for Ofgem to confer functions on itself when putting in place tariff cap conditions. The provision could be used, for example, to give Ofgem a discretion to decide what information to request from suppliers to inform its decisions on the design of the price cap. The subsection is designed to provide Ofgem with the requisite flexibility for the specific purpose of designing and implementing the price cap. It is not a green light for the regulator to self-design new functions in unrelated areas. As such, I believe it is a sensible and necessary provision that will cease to have effect when the price cap ceases to apply in 2020, or later if it is so extended.
Amendments 10 and 11 appear to be designed to enable Ofgem to exempt particular suppliers from the price cap or set the cap differently for different suppliers. The Government’s aim is that the price cap will apply across the whole of the market. Its impact will depend on the level of each supplier’s standard variable or default tariff and how many customers are on such tariffs. The Government’s aim is to protect consumers from high prices until the conditions for effective competition are in place. Clause 3 enables certain tariffs to be exempt from the price cap, such as green tariffs or tariffs for vulnerable customers who benefit from a different cap, as I mentioned earlier. I do not understand why it would be necessary or helpful for particular suppliers to be treated differently, and I fear that such a situation might create the risk of the cap being gamed.
I hope those explanations are helpful and useful for the noble Lord and that he will feel able to withdraw his amendment.
Lord Grantchester
I thank the Minister for his explanation of these essentially technical clauses. I recognise that we must be careful that companies do not game the market. Nevertheless, we were probing the relationship with the exemptions in Clause 3 and whether there was some way in which we could be helpful to the alternative energy market for the necessary changes that need to be brought about for power supplies, which have meant that these have had to be grant-aided when brought in to be able to be competitive in the marketplace. I understand the thoughts behind the Minister’s reply. At this stage, I beg leave to withdraw the amendment.
Baroness Featherstone
“( ) Tariff cap conditions do not apply in relation to any supply of electricity by a holder of a supply licence who, in relation to the supply, has complied with—(a) Condition 21D.4(a) of the standard electricity supply licence conditions (obligation to ensure that claimed environmental benefits are a result of customers choosing to purchase the tariff), or(b) an obligation that is a replacement for the obligation imposed by Condition 21D.4(a).”
Baroness Featherstone
My Lords, one of the concerns that I raised at Second Reading is that there is no requirement for the authority to exempt from the cap those who wish to pursue a more environmental tariff. Under Clause 3(2) the authority may exempt such customers but there is no obligation to do so. There was such an obligation in the draft Bill, and with Amendment 13 we would reinsert the wording that was used then into this version of the Bill. The BEIS Select Committee was worried that the wording was too ambiguous and would allow companies with tariffs that were not environmental to use it as a loophole to escape the cap. We have tabled this probing amendment to ask the Government why more has not been done to get this into the Bill. Clause 3 enables Ofgem to exempt green tariffs from a cap if a customer makes the choice to move to a tariff that provides energy from renewable sources only—but with no clear timetable for introducing those exemptions.
Earlier this year, the Government stated that they would seek an exemption for green energy tariffs from the price cap. They said that if the power was from a renewable source only, it would be exempt from the cap, but Ofgem is not required to consult on this before the cap is implemented. If this is not amended, there will be a chilling effect on what is still a nascent but vital industry. Taking the Government at their word, encouraging consumers to stay green or to go green should be built into the introduction of the cap from day one.
In March this year, Ofgem published an update on its plans for the price cap. At that point, it said that it was planning to issue a series of working papers on a whole range of aspects of the cap ahead of a policy consultation. One such paper was to be called “Our views on an exemption for tariffs which may support the production of renewable gas and electricity”. It issued a series of working papers, none of which related to that exemption. If we cannot get this in the Bill, the cap when instituted will not include that green exemption. I look forward to hearing what the Minister says about how the Government might amend the Bill to ensure that consumers who choose to buy clean energy are not disadvantaged. I beg to move.
Lord Stevenson of Balmacara
My Lords, I support the amendment of the noble Baroness, Lady Featherstone. The amendments in this group are variations on the same theme, which is the question of how one can find in the Bill the right balance between the wish to encourage the drive towards reduced carbon and no-carbon generation of power as far as possible and, at the same time, trying to get out of what appears to be a cul-de-sac in which the more we propose exemptions from the tariff for those who exercise clear preferences for green supply and carbon-free generation, the more they will not feel the benefit from measures that are meant to reduce the cost of the electricity and power that they consume. I do not know what the right balance for that is, so this is a probing amendment.
Our solution—we are not wedded to it but I would be interested to hear the Government’s observations on it—is that a situation where a consumer has clearly and unambiguously signified their intention to always select energy provided from wind or other renewable sources might provide a break point in which one could exercise discretion on whether they obtained the benefit of the cap. That seems to play to my earlier concern that this would prioritise people who used carbon-based energy sources as the only ones to benefit from the cap and would therefore reduce their costs.
I am not entirely clear which way we should go on this. It seems unreasonable to take an extreme position one way or the other, but that seems the only way to find an equitable solution. I look forward to hearing the Minister’s response.
Baroness Vere of Norbiton (Con)
My Lords, I will address the proposed amendments to Clause 3 from the noble Baroness, Lady Featherstone, regarding arrangements for exemptions from the price cap.
On Amendments 13 and 14, the Government are clear that it is right for Ofgem, as the expert regulator, to look at an exemption from the cap for green standard variable tariffs, remembering that fixed-term green tariffs are not covered by the cap. The Bill requires Ofgem to consult on an exemption and, if it decides to put an exemption in place, it must be for tariffs that are chosen by consumers and which support the production of gas and the generation of electricity from renewable sources.
The Government do not wish to prejudge the outcome of Ofgem’s consultation. We are very much aware of the arguments around having an exemption but are also aware that, as with any exemption, there may be a risk of gaming—or greenwashing, as it is sometimes known. This is a complex area and we should not make any judgments or decisions until Ofgem has undertaken its consultation and examined the approaches to an exemption.
The Government note that many fixed-term green tariffs that support renewable energy generation are already available on the market. These offer consumers considerable savings compared with non-green SVT tariffs. Some new entrants to the market also expect to deliver green standard variable tariffs at levels below where they expect Ofgem to set the price cap. Fixed-term green tariffs would still be available in the event that the regulator chooses not to exempt green SVTs from the price cap. In view of this explanation, I feel that Amendments 13 and 14 are unnecessary.
Amendment 15 concerns vulnerable consumers. As has been noted in relation to earlier amendments, Ofgem will keep the safeguard tariff in place for warm home discount recipients if it offers a higher level of protection than the market-wide price cap under the Bill.
Amendments 16 and 17 are in the name of the noble Lord, Lord Grantchester. Amendment 16 creates a situation whereby, if Ofgem decides that actively chosen green tariffs that support the production of renewable energy should be exempt, all consumers on such tariffs would need to opt in to this exemption; otherwise, the cap would still apply. There may be unintended consequences from this approach. If Ofgem does decide to exempt green tariffs and yet only a small proportion of consumers opt in to the exemption—for whatever reason—these suppliers could find that their tariffs become financially unsustainable. Such a situation could counteract the aim of encouraging and maintaining investment in renewable energy, while also limiting the choice of green tariffs available to consumers. The Government are therefore not convinced that an opt-in clause would be helpful.
On Amendment 17, I remind noble Lords that Ofgem published its policy consultation on 25 May and it remains open for submissions. The consultation contains a section on the green tariff exemption. Ofgem is engaging widely on the consultation, including through workshops with suppliers and consumer groups. As such, the amendment comes somewhat after the fact, and so I believe it is not necessary.
Finally, Amendments 18 and 19 are also in the name of the noble Lord, Lord Grantchester. I agree with the thrust of Amendment 18. As I have said, Ofgem’s policy consultation is already under way. In Appendix 13 of the consultation, Ofgem sets out the proposed criteria by which it may consider green tariffs to be exempt. One is that the green tariffs,
“provide support for renewables, materially beyond support provided through subsidies, obligations or other mandatory mechanisms”.
On Amendment 19, the Bill requires Ofgem to complete the consultation so that the licence modifications giving effect to the price cap include the exemption. Of course, this is subject to Ofgem deciding to put the exemption in place following the consultation. As setting a price cap and determining a robust exemption—subject to the outcome of the consultation—clearly involve a lot of work, the Bill provides a little flexibility in the event that this is not possible. Nevertheless, it still requires Ofgem to put in place any exemption as soon as practicable following the modifications putting in place the cap taking effect. Consequently, the Government do not see the need to include Amendments 18 and 19 in the Bill, and I hope the noble Lord will feel able to not move them.
Lord Stevenson of Balmacara
I am sorry to interrupt: perhaps I might check two things with the Minister. I think we agree that there is an issue here that is very difficult to bottom out and therefore the consultation process is obviously helpful in that. What I was trying to get across, although perhaps I failed—I think the noble Baroness, Lady Featherstone, made the same point—is that given that we are in a consultation process, where does this all lie in relation to the Bill? Are the Government really saying that actually this is too difficult to deal with in the Bill and it is being passed to Ofcom to make whatever decision it can make in the light of the consultation?
I am not saying that that is wrong. I just ask the Minister to accept my earlier argument that this was actually rather a difficult principle and perhaps should be in primary legislation; otherwise, there is a question of gaming and other things. The point of principle was whether we should give priority to the encouragement that would flow to smaller, greener energy producers, which would not have their income reduced because they were carved out of the new tariff, at the expense of green-minded ordinary citizens who want to get their supply from green sources but are poor, vulnerable, disabled or fall into the category of needing support but find themselves removed from that support system because they are prioritising green energy. That does not seem fair. I wonder whether we should think very carefully about whether it is right to simply pass this to Ofgem to do on the basis of the consultation or whether we should take a decision within the Bill itself.
Baroness Vere of Norbiton
I thank the noble Lord for his questions. I would like to come back to the second question in due course because I did not quite follow the tension he identified between different types of consumers and whether they would be caught by the exemption and so on. I think there is an opportunity for us to meet again after this to discuss the green tariff exemption specifically.
On the first issue, the consultation, it is the Government’s intention to put an exemption in place for appropriate green tariffs, but the issue, as was brought out in previous discussions on the Bill, is that sometimes what is green is not green and the whole area can actually be very grey. We must not get ourselves into a situation where the real green tariffs are losing out. I am happy to have conversations in future.
Baroness Featherstone
I listened carefully to what the Minister said. It is very complex. There is still the kernel of an issue here, so I will read Hansard and consider what the Minister said. At the moment, I am uneasy that we have not bottomed out the issue that needs to be defined in the Bill to give the Government and the opposition parties surety that we have not, by accident or by design, done something to ace out what we are trying to value in all this. I beg leave to withdraw the amendment.
Baroness Featherstone
“Review of the context surrounding the introduction of the tariff cap conditions
(1) The Secretary of State must carry out a review of the context surrounding the introduction of the tariff cap conditions.(2) The review must make reference to—(a) the circumstances that necessitated a cap on energy prices being introduced;(b) whether or not the circumstances referenced in paragraph (a) could have been prevented by earlier intervention; and(c) what steps the Government can take to prevent a cap being necessary in the future.(3) The Secretary of State must lay a report of the assessment before both Houses of Parliament within one year of the passing of this Act.”
Baroness Featherstone
This amendment is about context and the prevention of any repetition of a need for a cap. It is again a probing amendment to get the Government to talk about advancing their thinking on how not to allow a broken energy market to arise again. A cap should never be necessary. It is not a good answer but an answer. Everyone agrees that competition and a properly working market should be the effective way to do this. This amendment suggests that a review needs to be carried out to understand the circumstances that necessitated the introduction of the cap. Could the circumstances that heralded that necessity have been avoided had action been taken earlier? Were there warning signs? I would say that there were. With more consumers switching and more competition, I hope we will not be in that situation again, but the big six still have around 80% of the market. Was that a contributing factor? Of course it was. How is it that prices became so high? What measures might be introduced at an earlier and more expedient point to prevent a recurrence? What are the Government going to do to monitor what companies say to customers?
I raised another issue at Second Reading. Recently, some of the large energy suppliers raised their prices. I questioned the rise and the answer I got was that wholesale energy costs were rising and therefore prices had to rise. Shortly after that, E.ON’s profits rose by 41%, which was so far beyond any rise in the cost of wholesale energy that it made one wonder whether there really was cause and effect and whether rising energy costs were the sole arbiter of the rise in price. That is something the Government need to look into. If we do not examine, review and contextualise what brought us to having to introduce a cap to protect people on standard variable and default tariffs, how can we be sure it will not happen again? I look forward to the Minister’s answer about what the Government will put in place to ensure that that never happens again.
Lord Grantchester
I shall speak to Amendments 21 and 24, which are in my name. Under Clause 4, Ofgem must undertake various actions by way of notice of proposed modifications, including giving notice that it proposes to make modifications. Amendment 21 specifies that Ofgem must provide reasons in a narrative that explains why it is making modifications—ideally, an assessment of why modifications are being proposed.
We all recognise that energy bills soared 20% between 2007 and 2013 and that the average household pays around £300 more today than it might otherwise do in a more competitive market. However, in the interests of transparency it is imperative that Ofgem outlines its reasons for setting the price cap at any given level for the benefit of suppliers and customers alike. That would help set parameters when undertaking later reviews and assist greater scrutiny.
Amendment 24 has been proposed following the debate last week in your Lordships’ House on the European Union Committee’s report Brexit: energy security. In its report the committee portrayed how the UK and the EU are already increasingly interconnected on energy. Already, high levels of gas are being piped from Norway and over 5% of electricity demand is being met from the EU, with estimates that this source of electricity supply is likely to increase to over 25%. At present the UK is a member of the internal energy market and the committee’s report underlines the risk should the UK not remain within the IEM. From evidence received, it is universally argued that the UK could be more vulnerable to supply shortages or challenges, making supply less efficient, with the result that retail prices to consumers could rise. Amendment 24 specifies that the consequences of Brexit must become part of the review of the market and the application of the cap.
In the Government’s response to the Select Committee, they failed to address this point while being pressed to undertake an assessment of the consequences of the UK leaving the IEM. How do the Government propose that Ofgem should assess the situation in its review? The effect should be recognised for the application of the cap and, hence, included in the Bill.
Baroness Vere of Norbiton
My Lords, I will speak to Amendments 20, 21 and 24, which relate to the reasons for this cap and the details of its implementation.
The noble Baroness, Lady Featherstone, proposes a review of the energy market, in particular setting out the reasons for the cap, whether it could have been avoided and how a price cap can be avoided in the future. The Bill follows on from an extensive two-year investigation undertaken by the Competition and Markets Authority. This reported that there was, in effect, a two-tier market, with good value tariffs for those who engage in switching suppliers but for those who do not, the market was uncompetitive and these consumers were being charged an unjustifiably high price for their basic energy needs.
The CMA also found that the significant market share of the largest energy companies and the use of the standard variable tariffs had led to a situation where customers, including some of the most vulnerable in society, are simply paying too much, They are also paying for the inefficiencies of the larger companies to the tune of around £1.4 billion a year. The noble Baroness, Lady Featherstone, mentioned E.ON and its 41%. I was not quite sure what she was referring to and whether that was a return on capital. A profit increase of 41% would depend on its starting and end points; it is not hugely relevant, depending on the leverage of the company. Potentially, we should look at its return on capital, which is far more instructive.
It was as a result of this very detailed, two-year report that the Government and Ofgem undertook to protect those on the poorest-value tariffs on a temporary basis until the conditions for effective competition are established. In addition, Ofgem is actively considering the future of the energy retail market. This work is looking at barriers to innovation and whether the current market model needs to be reformed. Another review at this stage would simply tell us what we already know and take resources away from the vital work being carried out to support the necessary reforms of the market.
On Amendment 21 proposed by the noble Lord, Lord Grantchester, I am sure he is aware that, as part of the licence modification process, Ofgem will be required to state that it proposes to make the modifications and their effect. Subject to the will of Parliament, it is clear that this action is going to take place; indeed, suppliers and other interested parties are actively involved in the consultation being conducted by Ofgem. The amendment is therefore not necessary.
The noble Lord’s Amendment 24 relates to those matters which Ofgem should consider during its review of the level of the cap, which must take place at least once every six months. It is incredibly important that Ofgem, as the industry regulator, be allowed to consider what it feels matters the most. He may be pleased to learn that Ofgem has published a consultation paper which sets out the matters it proposes to review when considering the level of the cap. That will of course include wholesale prices and many of the factors raised in the debate of last week, which he mentioned. Hence, the amendment is unnecessary at this stage.
I hope that the noble Baroness and noble Lord are content with my explanations and will be willing to withdraw or not move their amendments.
Baroness Featherstone
I thank the Minister for her response. I understand that the Bill puts in place an examination of the conditions for effective competition, as an answer for not having a cap, but I am trying to go a little deeper. I want to avert the idea that a cap can become a mechanism whenever the market is dysfunctional. It is not the answer and we therefore have to go deeper. On the basis that I will consider what the Minister has said, I am happy to withdraw my amendment.
Lord Lennie
“( ) The Secretary of State must within six months of the passing of this Act publish a statement outlining the criteria that are to be used by the Authority in the review to assess whether conditions are in place for effective competition for domestic supply contracts.”
Lord Lennie
My Lords, the history of the electricity market has not been an unbridled success. That is why we are here. We want to ensure with these amendments that Ofgem has the right steer and takes account of the right criteria in determining whether market conditions truly apply. I take the point made by the noble Baroness, Lady Featherstone, that we do not want there to be a permanent cap on tariffs, but the tariff is likely to last longer than is currently scheduled.
I recently had some experience of Ofgem. It contacted me after Second Reading to say that it disagreed with me, which was not surprising, and asked whether I would like to meet and talk about it. I said yes and left a message to say where I was, but I have heard nothing since. If your Lordships have any influence on Ofgem, please use it, because I am still available for discussion should it wish to have it.
What comparable or appropriate market conditions should be in place? We met some of the smaller supply companies. They talked about supermarkets being almost perfect markets: you have choice ranging from price reducers to quality suppliers with everything in between, with the consumer able to shop around and choose where he or she wants to spend whatever amount of money on whatever product. That is true to a degree, except that the likelihood is that you will go to your local producer or supplier.
The comparison to the market for electricity is remote. The market conditions for electricity are that you have monopoly suppliers who supply your energy at a cost that they determine. They supply it at a price to attract the customer—we have heard this before—and then bump up the price once they have you and hope that you do not notice, because you are online, you pay by direct debit and you do not receive communications about that. And so it goes on.
Lord Henley
I am sorry that the noble Lord, Lord Lennie, is having problems getting to meet Ofgem, but I am sure that it is an assiduous reader of our debates and will have noted what he said. In case it is not, I will pass on his message to Ofgem to say that he would be grateful to have that meeting—obviously, I want to be as helpful as possible.
That may assist our discussion on Amendments 25, 26 and 28, which would amend Clause 7 to include matters that Ofgem must have regard to when carrying out its review of the conditions for effective competition. As the noble Lord is aware, the Bill purposely does not define what the conditions for effective competition should be, although, as a major government programme, it requires Ofgem to consider the progress that has been made in rolling out smart meters.
It is right that Ofgem considers the market as it evolves over the next few years. Setting out now in the Bill the factors that it must consider would not be helpful. The BEIS Select Committee agreed with that approach in its report, which states:
“We believe that setting a definition of ‘the conditions for effective competition’ before setting the cap could create incentives for suppliers to game the system or treat the cap as a box-checking exercise rather than going above and beyond their obligations. It would also risk creating unnecessary opportunities for legal challenges”.
The factors set out in the noble Lord’s amendment appear to be broadly sensible. But this is a job that is best left to the regulator and is something that has to be considered in the light of the market as it is at the point that it is being reviewed, not now. Obviously we will have to consider that on different occasions if we have to extend the Bill. I do not see how binding Ofgem to a set of factors would be helpful.
As I made clear earlier and as my noble friend has made clear, Ofgem recently published a paper on the setting of the cap, which is out for consultation at the moment. It includes a consideration of the factors that indicate that the conditions for effective competition are in place and the extensive programme of work aimed at making it easier for customers to engage in the market and encourage them to switch suppliers. Ofgem also set out in its annual report on the state of the energy market an assessment of issues such as barriers to market entry or exit, the level of competition between firms, and the range and quality of service offerings. In its work on future supply market arrangements, it is assessing whether more fundamental changes to the structure of the retail energy market may be needed to allow disengaged consumers to get a good deal. Ofgem has said that it will need to assess which, if any, of these it considers to be crucial to lifting the cap.
Ofgem has said in its consultation paper that it expects to keep these factors under review as the market develops and that it will report on progress in creating the conditions for effective competition, alongside its annual reports on the energy market. It has also said that in order to recommend that the cap should not be extended for another year, it would expect to see sustained progress that would allow it to be confident that currently disengaged consumers could gain a reasonable deal from the energy market without price protection.
I hope that the noble Lord will accept that his amendment is possibly overly prescriptive. Ofgem will consider what is relevant and necessary at the time. I hope, therefore, he will be able to withdraw his amendment. I repeat what I said earlier: I hope he manages to have his meeting with Ofgem and, if he has any problems, he should get in touch with my office.
Lord Lennie
I am grateful to the Minister for his offer of support for my meeting with Ofgem. I am sure it will happen soon—I am sure Ofgem has ears and eyes and can read, so I expect a call fairly soon. I am also grateful that he welcomed the suggestions we have laid out in the amendment and finds them useful as a steer that Ofgem may choose to use. I am not sure that they are the be all and end all, but it is a range of suggestions. I will certainly read the consultation paper Ofgem has put out and respond to it. In the meantime, I am happy to beg leave to withdraw the amendment.
Baroness Neville-Rolfe
Baroness Neville-Rolfe
My Lords, in moving Amendment 29 I will speak to linked Amendments 30 and 34. I should perhaps express my regret that I arrived too late to speak at Second Reading as a consequence of other commitments.
The purpose of these amendments is to make it more difficult to extend the duration of a price cap and to ensure that it is temporary, if I may pick up the useful word used by the noble Baroness, Lady Featherstone, in her amendment to Clause 2. As the helpful notes on the Bill say in paragraph 15:
“The cap applies until the end of 2020 but it may be extended, for a year on up to three occasions, if the conditions for effective competition in the market for supply contracts are not in place”.
The basic point is that I am unconvinced of the merits of price caps. Setting prices at a low level may seem superficially attractive but experience in many jurisdictions shows the problems that they create. For example, in California in 2001 retail prices were capped at levels that ended up being below the wholesale cost of energy. As a result, retailers found themselves $20 billion in debt and one of them went bankrupt. The state then had to step in. Price caps are against most economic theory and have unintended consequences, as we have discussed, so there is no need for me to labour the point.
If I may, though, I will share one personal experience of price regulation somewhat akin to what we are now discussing. As a junior civil servant, I was responsible for the milk costing system, administered with the help of a leading accountancy firm. In effect, we were responsible for setting the permitted retail price of milk. Unfortunately, a member of the departmental team unwisely agreed that a visit to an international dairy conference in Miami was a legitimate expense. As a result, everyone paid more for their milk. This was an early lesson in why it is better to avoid government interference in pricing.
Still, we are where we are and we need to improve the Bill. I believe it would be much better if the cap ended in 2020 and that, as drafted, it is far too easy for the Government to extend it. Indeed, there seems to be almost no prospect of ending it before 2023. Yet the Minister, Claire Perry, said in Committee in the Commons that there was,
“strong consensus in the Committee”,
that the cap should be temporary and that a proposal under discussion to extend it further,
“creates disincentives and uncertainty in a market where we have to have certainty to generate investment”.—[Official Report, Commons, Domestic Gas and Electricity (Tariff Cap) Bill Committee, 15/3/18; cols. 86-88.]
I would add that price caps where the case for a cap is strongest—for those 4 million households with prepayment meters, and for a million vulnerable consumers—have already been introduced by Ofgem. I ask the Minister to update us on the impact of those before the Bill leaves Committee. The noble Lord, Lord Whitty, made some powerful points about those very consumers and the complications of dealing with them. I hope his commission will come up with some simple innovative ideas that we can all support.
I heartily dislike needless regulation. I would like the Government to come back to Parliament and seek primary legislation if they want to extend these temporary controls beyond 2020. Clause 8 makes it far too easy to extend them, and my amendments would return this power to Parliament. I know from my wide experience of government as a civil servant, from working in business and as a Business Minister that getting rid of regulation is always a low priority in the modern world. This hurts competitiveness and is bad for our economy. I very much welcome the use of a sunset clause but it should be just that. As for the detail of what is proposed, my Amendments 29, 30 and 34 would remove the possibility of extending the cap by deleting most of Clause 8 and making related amendments to the review procedure in Clause 7.
I have to accept that there is a political dimension to the proposed price cap, and I know the Minister will have to support the Bill in the round. However, I would ask him to go away and think about whether we should really extend the cap beyond 2020 without primary legislation—that is, another Bill—and the process of review that always precedes such legislation. I beg to move.
Lord Stevenson of Balmacara
My Lords, this is a somewhat complicated group of amendments because within it are points of view that are mutually contradictory and indeed on which we hold contradictory positions. So we are not going to agree on this, and I look forward to hearing the Minister trying to weave a way through that does not upset one side or the other too much. He does not normally care too much about whether he does that, but that is for another time.
Our amendments are probably based on the assumption that the rather high aspirations that you can read into the Bill in terms of how it might reform and change the basic market for electricity and gas supply will be achieved, and takes the sanguine view that they are not going to be achieved in time for the cap to be reduced at the appropriate time. If that is the case, it also has the benefit of making sure that vulnerable consumers are not caught by the other schemes referred to by the noble Baroness, Lady Neville-Rolfe, which we discussed earlier. They would continue to operate and we would take that to be a good thing, but as we have discovered, that is of course not the primary purpose of this Bill.
Baroness Featherstone
I am somewhat in sympathy with the noble Baroness, Lady Neville-Rolfe, on ending the scheme in 2020. She also raised the issue of the political element. With an election in 2022, if not before, I would not want to see a race on who could cap the most as a part of political manifestos. What the energy market needs is a real resolution.
Lord Henley
My Lords, I hope that I can deal with this group of amendments in the two, three or four-dimensional manner that the noble Lord, Lord Stevenson, has asked me to. Given that my noble friend Lady Neville-Rolfe moved the first amendment, I should say that, like her, generally speaking the Government are not convinced about price caps. We have our doubts and we made it clear at Second Reading that we do not like to go down this route and we said that it had to be temporary, albeit with an ability to extend the cap for a short while, year by year, but no more than that.
The aim of my noble friend’s amendment is to end it in 2020. The noble Baroness, Lady Featherstone, also has some sympathy with that, as she returns her party to classic, 19th-century liberalism—a wonderful development. We believe that it should be a temporary measure and that 2020 is the right time to end it, with the ability to extend it to a final, absolute sunset in 2023. I do not think that removing the possibility of extending would provide consumers with protection if the conditions for effective competition were not in place at the same time. As I said, we prefer to do it that way. I rather dread the thought of further primary legislation each year if we wanted to extend it or do it for another year. We have already had that with other Bills.
My noble friend asked if I could report a little on the prepayment meter cap and the effect it has had. The evidence seems to be that, since the cap, prices have come down to below it. There has been some bunching of prices, but there is competition below the cap in the prepayment market. That shows that these things can occasionally work. However, as I said to my noble friend, philosophically we do not like the idea of caps. I rather agree with her.
I turn to the other amendments in the group. The noble Lord, Lord Stevenson, spoke to Amendment 32, the purpose of which appears to be to create a firm link between the price cap’s removal and the completion of the rollout of smart meters. It seems to suggest that the cap can be extended in circumstances where the smart meters programme has been completed, but the conditions for effective competition are not in place. The rollout of smart meters is but one of many possible indicators that define a competitive market. There will be other indicators of the conditions for effective competition. Ofgem’s consultation points towards other factors that might indicate that the conditions for effective competition are in place, including ways of improving customer engagement and increasing switching. I am sure that the amendment aims to be helpful, but I believe it is simpler and safer to leave it to Ofgem to assess the conditions for effective competition, rather than put provisions on the face of the Bill that would link statements about the future of the price cap to particular programmes.
The noble Lord also spoke to Amendments 33 and 35. The Government would not wish to see an inversion of this Bill’s policy intention by removing the price cap’s sunset clause. I repeat that we have no intention of delivering an indefinite price cap. As I have made clear on a number of occasions, this is a targeted and temporary intervention until the conditions for effective competition are in place. I think that is why the Bill achieved broad, cross-party consensus in another place and was endorsed by the BEIS Select Committee. Amendment 35 would also increase the risk of transforming this temporary measure into a permanent feature of the retail energy market. Again, we do not believe that that would be appropriate.
Finally, I turn to Amendment 37, which is a probing amendment seeking to understand the purpose of Clause 9. Clause 9 empowers Ofgem to modify the standard supply licence conditions following the removal or cessation of the tariff cap as specified under Clause 8. The clause allows Ofgem to modify the standard supply licence conditions as it considers necessary or expedient, but with the requirement that Ofgem publishes the modifications to alert all stakeholders as to the impact of the modifications. The publication of the Secretary of State’s decision will alert stakeholders to the cap coming to an end. This provision would enable the licence conditions to be tidied up to reflect the cap being lifted. Otherwise, they would remain in the licence but would be redundant.
We have been clear that the price cap is a necessary intervention in the market, but one that should only remain until the conditions for effective competition are in place. The decision on extending or removing the cap will be made in the light of the report and recommendation from the expert regulator. The Government are not prepared to enable this price cap to be a permanent feature as it could risk distorting the market, but noble Lords will wish to note that Ofgem has enduring powers to protect consumers and specific duties regarding vulnerable consumers. Indeed, Ofgem has indicated that it may be necessary to have in place price protection for a narrower set of consumers once the price cap under this Bill has ceased to be in place.
I hope I have provided the appropriate assurances. Though the amendments are coming from rather different directions, I hope first of all that my noble friend will withdraw her amendment with the assurance I have given and, secondly, that the noble Lord, Lord Stevenson, will not feel it necessary to move his amendments.
Baroness Neville-Rolfe
I thank my noble friend for his philosophical reassurance. Certainly, I would not want to add a link to smart meters because, as he said, it is only one factor that we will need to take into account. The extension power in Clause 8 gives the Executive too much power and I ask the Minister to give the matter further thought before Report, but I withdraw my amendment with great pleasure.
“Ongoing relative tariff differential
(1) The Secretary of State must, during the term of the tariff cap conditions being in place, develop, ready for implementation, a relative tariff differential. (2) A relative tariff differential is a requirement on supply licence holders that the difference between the cheapest advertised rate and the most expensive standard variable or default rate shall be no more than a specified proportion of the cheapest advertised rate.(3) The Authority will be responsible for setting the proportion referred to in subsection (2).(4) The relative tariff differential shall take effect on the termination of the tariff cap conditions.”
Lord Stevenson of Balmacara
My Lords, we have reached the last group, which is composed of two amendments on roughly the same area. I will not speak to Amendment 36A, tabled by my noble friend Lady Kennedy of Cradley, but I am looking forward to what she has to say. I might come back at the end of that.
The Minister said in concluding on what I thought to be my rather wonderful Amendment 32, which found no favour, that smart meters are only one of the many ways one could judge whether the market for an electricity supplier was working well. What he was really saying was that switching was the real test and that meters were a means to that. But Christmas comes more than once a year when you are talking about Bills of this nature. We want to offer him another Christmas present, Amendment 36, which will give him all that he wants about the effective market and more. We urge him, even at this later hour and towards the end of a gruelling day that he has had to endure, to look very carefully at this.
The answer to most of the problems in the electricity market, certainly from a consumer point of view, comes down to this tease and squeeze. Amendment 36 takes the trick of eliminating that, because if you impose a relative cap—we would argue that that should be done after the absolute cap has finished, but my noble friend will argue a different approach—then the present arrangements under which companies can entice you to switch with an attractive offer made for the first year, or possibly less, of the time that you move to their mode of operating, billing and consumer care would mean that they could not then squeeze you once you have passed that initial period. If there is a chance that Ofgem can limit the differential between the highest and lowest prices charged by each supplier after the absolute cap ends, we will have emerged to a point where there will not be the incredible unfairness and problems that there are in the current market. We could therefore move away from the temporary cap with confidence.
I urge the Minister to think very carefully about this because it does supply for taking out this egregious behaviour and it would find a lot of support around the industry. I beg to move.
Baroness Kennedy of Cradley (Lab)
My Lords, I shall speak to my Amendment 36A. I am very grateful to the noble Lord, Lord Teverson, for putting his name to it.
The discussions around the Bill have touched on the loyalty penalty and the tease-and-squeeze tactics mentioned by my noble friend Lord Stevenson of Balmacara, which are the root cause. In good consumer markets, competition drives down prices to deliver good outcomes for all customers—even those who shop around only every once in a while—because new customers see the same prices as loyal customers. In bad consumer markets, competition pits a small minority of highly engaged customers against the vast majority of those who, quite reasonably, engage only occasionally. These loyal customers cross-subsidise deals for a tiny minority of new customers for the first year of their deals. We know that those who can least afford it are disproportionately losing out under this broken market. To put it another way, our poorest citizens are subsidising the better-off in society. Currently, this loyalty penalty runs to hundreds of pounds per year being overpaid by millions of people to companies that exploit them. It is good that the absolute price cap will set an upper limit on the effects of this detriment, but it will still allow the behaviour to continue. It would be a wasted opportunity to allow this legislation to pass without also addressing the cause of the loyalty penalty.
Amendments 36 and 36A propose a relative price cap: a limit between a supplier’s cheapest tariff and its most expensive. In moving Amendment 36, my noble friend Lord Stevenson of Balmacara set out the arguments for a relative price cap. I want to add my support to this for two reasons. The first is fairness. We must bring an end to the grotesque idea that markets must necessarily punish those customers who do not relentlessly police them. Britain’s consumer regulations are some of the best in the world. They embody the principles of transparency and fair play to ensure that customers operate on a level playing field with corporations, so that our citizens can use their collective consumer power to get a better deal for everyone. That means that shopkeepers who short-change us, or manufacturers that mislabel their products, can be brought to justice.
However, in this area, our regulations simply fail, and they fail our most vulnerable citizens the hardest. They must be updated for the modern era. We must send a signal to markets—and the companies that seek to operate within them—that a “divide and conquer” or “tease and squeeze” approach to customers is not acceptable. Our hard-working citizens deserve to buy a product from a retailer without having the price hiked up when they are not looking. We must banish the principle of tease and squeeze.
Secondly, the role of legislation should be to bring lasting, meaningful reform that addresses the root cause of the problems facing our society. The loyalty penalty is a self-perpetuating dynamic. Efficient suppliers who want to offer good-value prices to their customers and not inflict tease-and-squeeze deals on them are disadvantaged in a market in which competition is purely driven by their position on a price comparison website. We have already seen this happen with some of the early challenger suppliers, which have started to ape the behaviour of the big six so that they can succeed in the market. Unless we break this cycle, the market will continue to be dysfunctional. The absolute cap will partially mask the symptoms for a couple of years, but the core detriment will continue and return with full force once the cap is lifted.
Introducing a limit on the gap between a supplier’s cheapest tariff and its most expensive will force companies to compete equally for new customers and loyal customers. This will reveal once and for all which companies are genuinely driving costs down and which companies are masking the real cost all along through pricing trickery. Some well-meaning people have warned that a relative price cap could lead to the big six removing their cheapest deals from the market, but we know that these so-called cheap deals are anything but, as 95% of people will roll on to an expensive tariff at the end of their first year, and end up paying more overall. Losing these deceptive deals would be good riddance to bad rubbish.
What is more, once we make pricing transparent, we will unleash the forces of the dozens of newer, more efficient suppliers. Once they are able to compete on a level playing field, customers will see a daily price war for their custom, as we see for groceries. By cleaning up energy pricing, customers who switch can be confident of getting a cheaper supplier, not one that is simply dangling misleading offers. Switching will be worthwhile, instead of being a merry-go-round, and we will restore consumer trust in a market that currently does not deserve it.
In moving Amendment 36, my noble friend Lord Stevenson of Balmacara has already proposed that a relative price cap should be implemented after the price cap, but why wait to introduce meaningful reform to a market that has already been failing customers for two decades? If something is worth doing, it is worth doing now. What is more, we are going to see a full-scale rollout of smart meters in the next two years. That gives us an imminent deadline to clean up pricing and restore trust in the market. Otherwise, we face a real danger that people will reject the opportunities that smart energy can provide.
Amendment 36A proposes that the relative price cap should be introduced immediately, alongside the absolute price cap, and be ongoing. Amendment 36 will therefore give customers the choice to stay where they are without fear of being exploited and remove the need to hunt every year for a fair price. It could be a step towards reducing the number of tariffs on the market, making buying energy even simpler for customers. Introducing a fair mechanism into the UK energy market is long overdue and benefits everyone, from those who buy energy to their suppliers, who are forced to improve their efficiencies to compete. That is why a relative price cap is a good idea for everyone and why it should be implemented at the same time as the absolute cap and be ongoing. I hope the Minister will see the benefits in both these amendments.
Baroness Neville-Rolfe
Noble Lords will know that I am not in favour of extending the cap, in whatever way. However, I am interested to hear about the relative tariff differential and would like to understand further how that works. I think the proposal here is that it should be imposed as well as a cap—it seems to me that that gives you a double regulation and I am not convinced that that is necessary. It would, however, be good to understand—the Minister may well be able to comment on this—what the advantages are of a relative cap in relation to the end I think we all seek, which is a more competitive market.
The noble Baroness mentioned retailers. As I was a retailer, I know that 19% to 20% of customers changing their supplier annually is quite a high figure, but the key point is that the underlying dynamics in the market are encouraging players to reduce prices and to innovate. That is what we want to see in energy. It would be good to hear from the Minister how he sees that happening in a situation where we have a cap, whatever its nature.
Lord Henley
I welcome the noble Baroness, Lady Kennedy of Cradley, to our discussions. Amendments 36 and 36A are broadly similar in asking the Secretary of State to develop an ongoing relative tariff differential. However, Amendment 36 says:
“The relative tariff differential shall take effect on the termination of the tariff cap conditions”,
while Amendment 36A, in the name of the noble Baroness, Lady Kennedy, to which a Liberal, the noble Lord, Lord Teverson, has joined his name—it must have good free-market credentials—says:
“The relative tariff differential is to take effect on the commencement of the tariff cap conditions and to be ongoing after the tariff cap conditions cease”.
They are broadly similar but would come into effect at different times. They would cap the most expensive advertised variable and default rate tariffs as a proportion of the cheapest, and Ofgem would set the differential.
There may be a need for further protections once the cap has ended, particularly for vulnerable consumers. Ofgem has indicated as much and has enduring powers to operate protections but I do not think it would be sensible to seek to determine the precise form that any protection takes, if it is needed at all. The energy market is likely to change significantly between now and then. Smart meters are just one part of that. The new clause inserted by these amendments would seem to introduce an indefinite relative price cap. It is not the intention of the Bill or the Government to put in place such a permanent cap.
We have come back again to tease and squeeze, which the noble Lord mentioned earlier. I briefly responded to that. I appreciate that the aim is to get rid of the practice of tease and squeeze. However, there is the risk that under the amendments suppliers would raise their least expensive standard variable and default tariffs, rather than decrease their most expensive. That is the Government’s fundamental concern about any kind of relative price cap. The Government and others, including the BEIS Select Committee, believe that a relative price cap would not work. I do not see how the outcome of a relative price cap would be any different, whether it was in place alongside an absolute cap or after the absolute price cap had been removed. A relative cap as a permanent feature of the market risks undoing the work of the temporary absolute cap.
The best way of ending the practice of tease and squeeze will be the detailed work, as I said, that Ofgem is undertaking to test better ways to secure customer engagement; the work to make switching quicker and more reliable; and the many other programmes to make the market work better. Recent changes mean suppliers can now make their default tariff a fixed-rate rather than a variable-rate deal, and many have done so. The Government believe that better engagement and better switching that leads to more effective competition is a proportionate and sustainable solution, rather than concurrent and permanent relative price caps. I hope that my explanations will satisfy noble Lords and my noble friend. I hope, therefore, that the noble Lord will feel able to withdraw his amendment.
Lord Stevenson of Balmacara
I am grateful to the Minister for his response. I also pay tribute to my noble friend Lady Kennedy for a powerful speech, trying to root the approach we are taking in a much deeper analysis—a richer and more enduring issue about what is going on in the marketplace as far as consumers are concerned, which is a theme we have developed throughout the Committee.
We would all be much happier with the Government’s approach if we could see real evidence that things were changing in the market. The thing that gives the lie to a lot of what the Government’s position is based on is that, for many years now, we have all seen the appalling behaviour on the part of semi-monopolies, operating virtually as they will against a regulator which does not have the powers. The Minister said that Ofgem had enduring powers. If it has them, why has it not acted before now to get rid of some of these appalling behaviours such as tease and squeeze, which has been so disruptive, and making super-profits out of a natural monopoly? I thought the whole point about regulatory structures was to prevent that. Therefore, I do not think the action has lived up to the rhetoric.
My noble friend said that she thought it was time to say good riddance to the bad rubbish we are being served up by these committees. The judgment we have to make is whether we are prepared to wait and see whether the latest round of the approach taken by the Government will have any effect at all. If, indeed, it has an effect, will it be in time? I have my doubts about that. We are relying on smart meters and customers, who may be in significant numbers in relative terms, but if it is all the same people switching regularly and 80% of people are not switching—and those 80% are the sort one would expect to get the message and switch—then the market is broken. If it is broken, it will need much more serious measures than we have currently to see how it may be taken forward. We will think carefully about this but may want to come back to it on Report. In the interim, I beg leave to withdraw the amendment.