Domestic Gas and Electricity (Tariff Cap) Bill

Baroness Kennedy of Cradley Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 11th June 2018 Grand Committee

[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.

Domestic Gas and Electricity (Tariff Cap) Bill

Baroness Kennedy of Cradley Excerpts

Report stage (Hansard): House of Lords
Wednesday 27th June 2018 Lords Chamber

[Lord Redesdale (LD)]

My Lords, while I understand where the amendment is coming from, it is not one I can support. The problem is that while we are asking the authority, Ofgem, to set a maximum price, we are now also specifying that there must be a minimum price. It would then be almost impossible for the authority to have a competitive marketplace to operate with.

The second problem inherent in this—a problem with the whole Bill—is that, while I understand the problems the bigger companies have because they do not have some of the obligations of the small companies, it will be an issue for Ofgem to try to work out where the cap will be in the first place. That will cause problems. We are also in a period where wholesale prices are rising. Therefore, there might be a slight problem if the companies, for different financial reasons, have to raise their prices. Would Ofgem then have to set a date at which all the companies raise their prices at the same time so that they do not break the cap? At that date, would it also then say that the minimum price has to be raised at the same rate?

I understand the idea that vulnerable customers should be protected. However, we are ending up with a marketplace in which there will be one default tariff that every single supplier will have to put forward. If there is a vote, I will vote against this, which is very much against my views—obviously my Front Bench will have a different view on this. This, however, is an area where what we want to happen and the reality on the ground vary substantially.

I should also declare an interest as the CEO of the Energy Managers Association. We represent all energy managers. It is rather unfortunate that while we are looking to protect vulnerable customers, we are not doing the same to protect SMEs and micro-businesses. There is an enormous amount of bad practice in the industry, with TPIs that have no code of practice, and Ofgem failing to enforce or even to have the power to protect SMEs in this marketplace. We are looking at protecting one sector of the marketplace while non-domestic customers will be hammered under bad practice. I raise this as this is the tail end of the Bill, although I spoke at Second Reading. I hope the Government can bring forward a Bill further down the line to regulate the whole third party, intermediary and energy broker marketplace for the non-domestic, but obviously it might be beyond the Minister’s ability to bring that forward.

[Baroness Kennedy of Cradley (Lab)]

My Lords, I wish to speak in favour of Amendment 11, in the name of my noble friend Lord Grantchester. Millions of people who stay with the same energy supplier are being overcharged, ripped off and paying hundreds of pounds more for the same gas and electricity because they are cross-subsidising deals for new customers. There are recent examples of companies charging new customers as little as £800 a year and existing customers more than £1,200 for exactly the same product. In this way, the energy market is not harnessing competition to bring about low prices for all customers, because suppliers are able to exploit and overcharge their existing customer base to subsidise time-limited, often loss-leading, tariffs designed to scoop up new customers. This “tease and squeeze” behaviour is becoming the standard business model for some energy companies and it means that the most reliable customers face a hefty loyalty penalty.

While the Bill marks an important first step in protecting customers from the worst excesses of this failing market, it is clear that political consensus is emerging that, until the cause of this detriment is addressed, it will be only a sticking plaster. It is also clear that there is growing support for a relative price cap as the only way truly to reform the market and harness competition to the benefit, and not the detriment, of customers. Indeed, the tease and squeeze dynamic will become only more pressing as society becomes more digital and customers more distant from the point of sale in consumer markets. As well as accepting this amendment, I ask the Government to meet those experts calling for a relative price cap to find a way truly to address the tease and squeeze dynamic in energy and build a regulatory structure that will be fit for purpose for all consumer markets.

It would be a wasted opportunity to allow this legislation to pass without also addressing the cause of the loyalty penalty, which is why I support Amendment 11, to bring in a relative price cap. Such a cap would force energy companies to link their teaser rates to their underlying default tariff. The Government’s solution is to encourage switching, but if 100% of customers switched every year, administration costs would go up and undoubtedly be passed on to the customer. Where is the incentive for companies to build quality relationships with their customers when they know that they will leave them in 12 months’ time?

In well-functioning consumer markets, such as groceries, loyal customers get low prices even when they do not switch, because new customers are offered the same price as loyal ones. Switching may have increased, but a recent YouGov poll found that 33% of people did not feel that they knew enough to select the right tariff or supplier for them. Data from the energy regulator, Ofgem, reveal that an even higher percentage of people, 42%, are not confident comparing the different energy deals available.

Only a relative price cap will bring an end to exploitative overcharging once and for all. It will 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. Introducing a fairness mechanism into the UK energy market is long overdue and will benefit everyone, from those who buy energy to the suppliers who are forced to improve efficiencies to compete. A relative price cap is a good idea for everyone. I hope that the Government will support the amendment and agree to meet those in the energy market who are confident about the benefits to consumers of a relative price cap.