Energy Bill [HL]

Debate between Earl Cathcart and Lord Teverson

Wednesday 2nd March 2011 Lords Chamber

[Lord Teverson]

My Lords, earlier I forgot to confess that I am an Essex person. As I live in Cornwall, and have done for some time, I am often referred to as “Mr Treverson”; I am actually Teverson, which is a Danish or Anglian name, so perhaps I could join the Essex fraternity from at least three of the Benches—I suppose, that is something. However, that is not what I want to discuss now, although this affects Cornwall as much as it does Essex, as they both have very diverse populations.

I thank my noble friend Lord Cathcart for his work on reverse block tariffs. We intend to change around this perverse incentive to consume more energy by moving around energy pricing and energy tariffs, so that you are effectively penalised, or at least you are not financially advantaged, if you consume more rather than less. However, I confess that it has been very difficult to put this amendment together, in Grand Committee and in its amended form here, so that it precisely defines what is needed. If your Lordships were absolutely convinced by my arguments and decided, even if I withdrew it, to vote on it after all, I would really question your sanity as regards making the amendment work. The spirit is good, but the practicalities are difficult.

I welcome the very positive reaction from the Government and the Minister in this area. I am convinced that to get this right will take longer. I am also convinced that its rightful place would be in the energy market reform area, on which I know the Government intend to bring forward further legislation. I would be very content if the Minister were able to give me some comfort that it would be better positioned within that legislative framework. Having tried to describe how this should work, I do not underestimate that it will probably take most of the good public servants of DECC at least two years to work out how this should work. It is an important and worthy goal and I hope that my noble friend will be able to give me some comfort in that direction. I beg to move.

[Earl Cathcart]

My Lords, I apologise to the House because in my enthusiasm to speak to Amendment 6, I forgot to declare my interest which is as a landlord in the private rental sector. I do not think my interest influenced what I said on that amendment.

I shall not repeat the arguments that I made at Second Reading or in Committee, but it is generally accepted that three things make up fuel poverty: household income, energy prices and energy efficiency. This Bill will deal with energy efficiency and this amendment asks the Minister to review energy prices. I am also grateful to my noble friend for saying in Committee that the Government will carry out a full-scale review of fuel poverty and its implications. I know that a review into the way in which energy companies charge will not be popular with everyone, not least the energy companies, but the way in which they currently charge is a win-win situation for them. What manufacturing company in the real world would not like to charge a huge price for the first number of units sold so that they can recover their fixed costs and then a lower price for subsequent units so that they can recover their variable costs, thus guaranteeing themselves a profit?

The amendment moved by my noble friend Lord Teverson suggests that the energy companies, together with consumer groups, should be involved in the review. I hope that they will examine whether there is a better way of coming up with a pricing tariff. The amendment also says that a new tariff scheme will be revenue neutral for energy companies, so it is not intended that they will lose revenue. It will be revenue neutral to them.

If we want to do something about poverty—fuel poverty in particular—we must look at all the options and a review on setting tariffs is a welcome start. Energy prices will continue to increase. There are already 6.5 million households in fuel poverty. A quarter of households live in fuel poverty, 50 per cent being pensioners. That is not something to be proud of. The least we can do is review how energy is charged for.

Energy Bill [HL]

Debate between Earl Cathcart and Lord Teverson

Monday 31st January 2011 Grand Committee

[Lord Teverson]

My Lords, there are many strange things about electricity bills. This amendment caused me to look at mine more carefully. There are four pages of information, which normally I fail to look at—and most of the time when I need to look at it I find it too complex and I understand it less after I have read it than I did before I read it. On tariffs, the first tranche of units used by a normal consumer is at a significantly higher level of charge than the ensuing tranche. Some consumers may have even more divisions, but I have two and, as it is for most people, the first units used are far more expensive. On 23 December 2010, my first units were 20.1p each and the next units after I had finished those were a quarter less at 14.55p. I do not know whether that completely replicates what other people have, but it seems fairly representative.

We have two issues affected by tariffs generally. When I learnt economics as a corporate economist, we learnt that on the whole when prices were high you demanded less and that when they were less you demanded more. That was a demand curve, in which I am sure all noble Lords are well versed.

We are really trying to do two things in the Bill. One is to reduce the amount of electricity and energy used in the nation, thereby reducing carbon emissions. The other is to reduce fuel poverty by investment in making houses, dwellings and business premises more energy efficient. Yet these types of tariff—higher at the beginning and less at the end—mean that the market signals that we are trying to do exactly the opposite. That is why I have tabled my amendment in this way. I will be interested to know whether the Minister criticises the way in which it is written, as the noble Lord, Lord O’Neill, seems to think he might.

I would like to probe this area particularly. There should be a better way of doing this, which is what my amendment attempts. First, it says that things should be the other way round, so that there is an incentive to keep energy consumption relatively low and that those normal consumers who suffer fuel poverty are charged less. Having tried to table a suitable amendment, I absolutely agree that it is difficult to encapsulate exactly how that should happen, which is why it suggests a general scheme of what we are trying to achieve. At the end of the day, the arbiter would probably have to be Ofgem. We want the electricity units used by an average household for essentials to be at the lower rate, with a higher rate after that. Overall, the outcome should be revenue neutral. I say, maybe from my work as an economist, that the existing dual-pricing function is probably an indication of a monopolistic marketplace. You certainly do not have perfect pricing here. At another time, maybe we will want to address that.

Unfortunately, the amendment does not state that pre-payment meters should not charge significantly more than ordinary electricity tariffs, thus heavily and severely working against the poor and the fuel poor. We might consider that another time; perhaps it goes back to the smart meter issue. However, that is not what the amendment is about. It is about trying to bring a much more just tariff into the industry. The only way in which that can happen is through legislation. I beg to move.

[Earl Cathcart]

My Lords, I certainly support the thrust of the amendment, as I devoted almost my entire Second Reading speech to the subject. When I looked at my own electricity bill, I noticed that I was being charged nearly 30p for the first 900 units, after which the price dropped to about 13p; I obviously must have a word with the noble Lord, Lord Teverson, to see where he gets his from. I argued that that way of charging seemed cack-handed. As my noble friend said, it seems to defy the laws of supply and demand and their relation to price. The greater the demand, the greater should be the price. When I asked other customers and neighbours, they confirmed that they, too, were charged nearly double for the initial units that they consumed.

I further argued that the first few thousand units should be relatively cheap—near the break-even point of the supplier—and that the more you consume, the more expensive the units should become. Therefore, the more you use, the more you pay per unit. I am afraid that I have no idea what the break-even point for energy suppliers is but, if they are able to charge some customers below 10p a unit for daytime use, it must be somewhere below that—around 6p or 7p per unit. I presume that Ofgem would know exactly what the break-even points are for each supplier and, if not, it could find out. It begs the question whether energy companies should be required to disclose the break-even points and the changes throughout the year, which could then be verified either by auditors or by Ofgem.

I like the wording in the new clause proposed by my noble friend Lord Teverson. Subsection (2)(a) says that,

“the number of lower priced initial units shall represent the average amount of energy required for a household of that size to keep warm, clean and fed to a modest but acceptable standard”.

I suggested at Second Reading that it would not be too difficult for energy companies to obtain the council tax banding of each property, so that they could differentiate between, say, band A and band D properties. Obviously, a single person living in a bedsit would not require the same amount of energy as a couple with 2.4 children living in a three-bedroom or four-bedroom house. As things stand at the moment, there is little or no difference in the tariffs for living in a bedsit or a six-bedroom house. That is wrong. The person in the bedsit is paying a much higher proportion of their energy bill at the higher initial rate that is currently charged. Perhaps the electoral roll could help in determining how many adults live in each property.

If we are going to try to do something about fuel poverty, I believe that the way in which we charge customers must be changed, which is the whole thrust of my argument. In 2008, there were 4.5 million households in fuel poverty. I believe that, after the recent cold snap of November and December, this figure jumped dramatically, perhaps to 6.5 million households, 50 per cent of whom are pensioners. Those in badly heated homes are more prone to illness, which just pushes the problem and the cost on to the NHS. It was not surprising to read in the papers recently that energy companies have been cashing in on the cold snap and increasing their profit margins by 50 per cent. I am glad that Ofgem is investigating; it will report its findings on excessive profit margins in March. Consumers feel hard done by. Some whom I have asked feel that they are being ripped off.

Can Ofgem make energy companies change their tariff structure? I realise that energy companies are profit-making public companies, some of which are foreign owned. Can, as the amendment provides, the Government introduce regulations to force companies to change their tariff system so that the initial units supplied are at a lower cost to the consumer than the remaining units? Subsection (2)(c) of the amendment provides that,

“overall, the new combined tariff should be revenue neutral to the energy supply companies”.

I hope that the energy companies are willing to discuss this.

The thrust of my argument is to get as many of the 6.5 million households currently in fuel poverty—that is 26 per cent of total households—out of fuel poverty. I believe that progressive charging may be one way of achieving this. It would act as a real incentive for all households to reduce their consumption and to take up the Green Deal.

I received a useful letter this week from my noble friend Lord Marland, saying that the Committee on Climate Change looked into introducing rising block tariffs two years ago, before the recent hike in energy prices. It said that rising block tariffs would have an adverse impact on fuel-poor households, as they generally require more energy to heat their homes to an acceptable level. This is because the fuel poor tend to live in less energy efficient homes. Many of them, including pensioners, tend to spend more time in their homes. This suggests that a rising block tariff would make it more expensive for them to heat their homes to an adequate standard and make it more difficult to remove them from fuel poverty. The Committee on Climate Change concluded that rising block tariffs,

“should not be introduced until fuel poverty has been addressed through targeted energy efficiency improvement and other fuel poverty measures”.

Quite so; I cannot argue with that. But is this not exactly where the Green Deal comes in? If the tariff system was changed and these households took up the Green Deal, they should be much better off.