Domestic Gas and Electricity (Tariff Cap) Bill

Debate between James Heappey and Alan Brown

3rd reading: House of Commons & Report stage: House of Commons
Monday 30th April 2018 Commons Chamber

[James Heappey]

It is a pleasure to follow the right hon. Member for Don Valley (Caroline Flint), with whom I agree on the risk to green tariffs and on making sure that we do not perpetuate the belief that green tariffs are a premium product. We want them to become the universal norm.

Generally, the Bill is a necessary evil. Interference with the market is not our first choice of action, but it is the consequence of a market that has stopped working and is exploiting customers, especially those who are least engaged in it. The Bill’s key point is its temporariness. I know that the Minister shares my strong belief that temporary should be as temporary as it absolutely can be. It therefore becomes essential that once the Bill is passed—it is good to see the Opposition’s continued support—Ofgem moves very quickly not only to come up with a mechanism for price capping, but to consider what sort of market transformation it can deliver as it changes the regulatory framework in the market, so that we end up with something that is markedly better than what we have now. The big savings come not from a cap that cuts bills by £100 or more, but from the delivery of an energy market that is digitised and cheaper because we have facilitated the disruptive powers of all the new suppliers that are coming in, which in turn will encourage the current large suppliers to change their ways to do business better.

I intervened on the shadow Minister, the hon. Member for Southampton, Test (Dr Whitehead), about his amendment 5, so I will not say anything more about that. The purpose served by amendment 6, as we discussed in Committee, is to say to the energy companies that all they need to do is save customers £100—so they will just save customers £100. I passionately believe, therefore, that we should not tell them just to save customers £100. Instead, we should deliver the biggest saving that we reasonably can through whatever device Ofgem delivers, but the moment that we put a figure on it, lo and behold, that is exactly what all the energy companies will deliver.

The hon. Gentleman has made some changes to amendment 7 since Committee stage. He knows I share his concerns about vulnerable customers and possible unintended consequences from the Bill, and I know the Minister will be keen to reassure us that the Government have got this covered, but I prefer amendment 9, tabled by the hon. Member for Leeds West (Rachel Reeves), which has the support of many on the Select Committee and is well worth considering. The Government have looked at the vulnerable customer issue since Committee stage, and I wonder, given today’s very sensible amendments, if they might run one more lap on this between now and consideration in another place.

On amendment 8, which we also discussed in Committee and which the hon. Gentleman has also come back with, my concern is that the list could be much longer. If we are to specify all the circumstances, why not designate another dozen or two dozen things that we could legislate for, if we absolutely had to? I am not convinced it is necessary.

I also have a problem with new clause 1, because the Bill needs to be temporary. As I said either on Second Reading or in a Westminster Hall debate, it needs to be a raid into the energy market, not an occupation. New clause 1 is a raid with a few troops left behind thereafter, which I am not sure I like very much. We want to ensure that Mr Nolan and his team at Ofgem can, in delivering the price cap, facilitate a transformation in the market that makes such legislative provisions redundant. The consumer-friendly, disrupted, digitised market that awaits will be so much cheaper that we will be glad to have made this slightly un-Conservative, temporary raid into the market, to deliver something on the other side that is much better for consumers.

[Alan Brown]

The Bill is designed to intervene in the energy market and correct market failure, which is why it has cross-party support, but not surprisingly, because it is a reaction to market failure, there are nuanced differences in how people think that can best be dealt with. One good thing is that everybody seems keen to protect the most vulnerable customers. The question is: what do effective competition and a fairer market look like?

One fundamental still being debated is whether the cap should be a relative or an absolute cap. The hon. Member for Weston-super-Mare (John Penrose), who has been absolutely consistent in his belief that it should be a relative cap, should be commended for sticking by that, although obviously that does not mean I agree with him. As I mentioned in an intervention, one concern about a relative cap is that, because of the bunching effect, we might lose the competitive tariffs at the bottom end. We heard evidence of that in Committee. Some of the newer energy companies argue that they could deliver the lower tariffs even if there were a relative cap, but these companies appeal to those who switch regularly. He says the switching market works really well. Well, it does for those who switch regularly, but we are trying to protect those who do not switch and are stuck on these rip-off tariffs, which is why I agree with an absolute cap.

That brings me to new clause 1, tabled by the Labour Front Benchers. I am struggling to get my head around this. Labour says it does not believe in a relative cap but it believes in a relative tariff, and it would not be a cap but somehow it would work better being relative. It is too big a contradiction for me. I am not sure new clause 1 would work in the way suggested, and for that reason, if it goes to a Division, I will not support it, although I appreciate what the hon. Member for Southampton, Test (Dr Whitehead) is trying to achieve.

Let us look at who supports a relative cap versus an absolute cap. Ofgem, the regulator that will have to implement it and Citizens Advice are in favour of an absolute cap. Citizens Advice is a third sector organisation that works for the most vulnerable in society on a daily basis and often has to deal with those bearing the brunt of the Government’s austerity agenda, and if it says it is in favour of an absolute cap, I think we should listen. Now let us look at the company the hon. Member for Weston-super-Mare keeps. Signatories to his amendments include the hon. Member for North East Somerset (Mr Rees-Mogg) and the right hon. Member for Wokingham (John Redwood)—two of the most right-wing, free-market capitalists in this place. That helps me to make up my mind.

Domestic Gas and Electricity (Tariff Cap) Bill (Second sitting)

Debate between James Heappey and Alan Brown

Committee Debate: 2nd sitting: House of Commons
Tuesday 13th March 2018 Public Bill Committees

[James Heappey]

I rise to speak briefly. I know exactly what the shadow Minister is trying to achieve with the amendment, and I agree with him that the cap must be a temporary measure. On Second Reading, I answered an intervention by saying that this should be a raid into the market, not an occupation. It is very necessary indeed to set out clearly the terms on which the cap will come to an end.

Having said that, my concern with the amendment is that whereas the Bill as drafted refers explicitly simply to progress with smart meter deployment—it quite reasonably leaves the regulator and the Minister to work out what progress is being made on the remainder—the hon. Gentleman’s list is so lengthy as to be overly prescriptive. Some measures in his list, such as improving efficiency in suppliers’ business models, are not the business of the regulator at all. I rather think that suppliers will be driven to find efficiency by the creation of competition, rather than needing to have it required of them. That is what the market does.

The hon. Gentleman is an enthusiastic fellow traveller on the route to a decentralised, digitised, dynamic energy system, so I wonder why his list does not include half-hourly settlement or the universal application of demand-side response, why he does not require the market to be electric vehicle-ready, why he is not concerned about transmission costs as well as distribution costs, why he does not seek signals from the regulator about the readiness of the market to manage a decentralised energy system given all the price advantages that might bring, and why he is not enthusiastic about a code review or embedded benefits, or about looking at what energy-efficiency measures have been made or at whether we are ready for a data-heavy digitised market.

As well as all those things, there is the unknown scale of the renewable deployment that might come our way, alongside the flexibility that storage and demand-side response will bring with them, and what impact that might have on price variability over the course of a year. There are so many unknowns, and the pace of change in the energy system is such that being as prescriptive as the hon. Gentleman desires at this stage would risk hindering progress in the system. It would shape the way the market worked towards achieving the end of the price cap, rather than allowing it to be disrupted in the way that I know he and I genuinely hope it will be.

[Alan Brown]

Will the hon. Gentleman give way?

[James Heappey]

I was done, but I am happy to give way.

[Alan Brown]

I understand the hon. Gentleman’s point about other factors that may ultimately influence the retail energy market, but why should progress with smart meter installation be the one thing we tell Ofgem it must measure in its review? It seems to me a bit strange to specify that criterion but say that we do not want all the other important criteria that the hon. Member for Southampton, Test laid out.

Domestic Gas and Electricity (Tariff Cap) Bill (First sitting)

Debate between James Heappey and Alan Brown

Committee Debate: 1st sitting: House of Commons
Tuesday 13th March 2018 Public Bill Committees

[James Heappey (Wells) (Con)]

Q I wonder whether the panel shares my concern that this also allows green tariffs to be seen as a premium product. To achieve our decarbonisation goals, what we actually want is for green tariffs to be seen as the norm. Therefore, to allow them to be sold as a sort of premium rather defeats that long-term aim.

Hayden Wood: I completely agree with that. It perpetuates the myth.

Juliet Davenport: My view is that you can have cheap greenwash tariffs alongside genuine innovative tariffs and you can have a differentiation. You have to focus on the big six and make sure that there are not any loopholes, but most of these companies have had people come to them as a choice. What is great about this market is that we do have choice. We have the cheap greens, and we also have the more innovative products such as us. Why would you close that down? You can see that we have been leading this market and making changes in it. We support about 140,000 homes who generate power in their own house. Those are the kind of innovations that we want to continue to do. To be honest, if you price-cap us, we are going to have no investment left for that kind of innovation.

I completely agree that we should have a differentiation and we should have products that are cheaper green. I met one of Bulb’s customers at the rugby the other day who was very enthusiastic. She was so excited by the fact that she is going on a green journey. I think that is brilliant, and that is what we should embrace in this. We should not try to close it down to be one thing or another. We should allow innovation within the marketplace.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

Q On the cap mechanism, there has been debate about absolute versus relative, and I think there are split views across the panel. Why would we go with one versus the other? Some models are clearly more favourable to a relative cap, and others to an absolute cap. Why choose one over the other? The Government have come down for an absolute. I think that has almost got the majority view, but is it possible to find a cap level that is fair to everybody? Is there any trade-off between short-term customer needs and the long-term competitive market that we are trying to achieve? I will just throw that open.

Greg Jackson: That is the most important issue to address during these conversations. An absolute cap, as per the Bill, will provide a decency level beyond which no default customer will be charged. That is a good thing. However, at the moment, a loyal customer of, for example, one of the big six is paying £250 a year more than the price that the same company advertises openly to new customers. When I say “openly”, of course, you still have to type in 25 sets of details to see that price, because energy is too complicated. Under an absolute cap, we think that might fall to £200. It is still not going to create an effective market in energy, where competition thrives, if we do not do something about those tremendous differentials. That loyalty penalty is by far the biggest barrier to true competition in the energy industry, so we would propose that, with the protection of an absolute cap, it is the perfect time to bring in a simple limit on the difference between the cheapest and most expensive tariff offered by a supplier, to prevent it hoodwinking its customers into overpaying for loyalty.

The only reasons given during the Select Committee hearings not to have a relative cap were a concern that large suppliers—existing former nationalised suppliers—would raise their prices to fit a relative cap. The absolute cap prevents that being a concern. Bringing in the absolute cap provides the perfect opportunity to generate real competition underneath it by a simple limit on the loyalty penalty. If you do that, I think we will find a price war among energy companies, equivalent to that in supermarkets, where everybody sees the same price. In supermarkets, you do not need to switch, because the threat of some people switching forces supermarkets to bring prices down for everybody. That will be the effect of a relative cap underneath an absolute cap. It is one line of additional rule in the statement of a price cap that would enable this. I think that what you would find, when you take away the absolute cap, which is defined to be a temporary measure, is that you would have a truly competitive market in energy for consumers.

It is worth noting that we are all challenger brands. We have to fight for every single customer from scratch. Eleven challenger brands favoured a price cap, and split roughly equally between absolute and relative, with a lot favouring the combination. We are one of those companies, and that is because we know that will generate the most competitive market for the benefit of consumers.

Juliet Davenport: This is not a position, so much as I just want to add in the risks that we need to be aware of with the absolute price cap, just to see whether there is anything else we can think about in terms of softening those risks.

One risk with an absolute price cap that I am concerned about is that Ofgem will be setting the prices. There is no downside to Ofgem with getting that wrong; if Ofgem sets that price incorrectly—I know you are seeing Dermot after this, so you can ask him the question—what are the sanctions against Ofgem for getting that price wrong?

And it is really difficult to set prices at the moment. I could ask my colleagues about the unidentified gas charges that we have just seen go from 0.6% to 2% of gas bills. This is a post-charge that we were not aware was coming. We knew there was some discussion of it, but it has been charged in arrears. How does Ofgem factor some of those things into its price? Does it put a risk in the price? That would be one question.

The other question is, because we set the price cap at a particular time of year, we will get everybody forward-contracting with their hedging position at the same time of year. The concern I have is that we might see some distortion within the wholesale market. Can we keep an eye on the wholesale market? I do not know whether that means that we have to ensure that there are extra powers to ensure that the wholesale market does not try to spike at exactly the time that everybody will be forward buying their power.

Those are the two risks that I am concerned about with the absolute cap. That is not to argue against it, but those risks are there and they need addressing whether in the Bill or in guidance from Ofgem.

--- Later in debate ---

[James Heappey]

Q That is exactly the point. When Tesco and Sainsbury go to war with one another, they might compete over the price of Hobnobs, and that might make a small number of people switch their supermarket, but everybody who shops in those supermarkets gets the benefit of that price reduction. That surely must be the market that we are seeking to design.

Dermot Nolan: That must be the market we are seeking to design. I would say more generally that new technology, through which we are buying goods and services in many areas, is such that that old area is, to some extent, breaking down. I do not want to go beyond the topic, but you will see people paying different prices buying online, and that is good in many ways, but it also has public concerns more generally. One thing about the energy market is that it will clearly not be successful if we are still seeing observed differentials of £300 in two or three years’ time.

[Alan Brown]

Q You have already said that when the absolute cap ends, you still think there needs to be protection for vulnerable customers. Does that not suggest that the Bill is not doing enough to protect vulnerable customers? What protection do you think they need going forward?

Dermot Nolan: I think there are already 5 million people who are vulnerable under price cap protection. If the Bill was not going forward, we would have extended that, anyway, to another tranche of vulnerable customers. Regardless of whether there is a price cap or not market-wide, the regulator is likely to have price caps for vulnerable customers going forward. I might be wrong on that, but it will be an absolute priority for the regulator to do that, which we believe we can and already are doing under our own powers. Obviously, I want as much protection as possible for vulnerable customers. Any regulatory body, given the statutory duties that it has, will take on that itself. If it does not, it will be messing up. So I feel there will be protections there from the regulator in any case.

--- Later in debate ---

[Alan Brown]

Q Are there any improvements needed to the Bill? I have a couple of suggestions and considerations. We have already heard the merits of trying to introduce what is called a relative cap to work underneath the absolute cap, and we have spoken about vulnerable customers. Are there any improvements that could be made to the Bill to protect vulnerable and disabled customers?

Peter Smith: I will try to be a bit more concise than I was earlier. Clause 2 needs to be amended specifically to ensure that the safeguard tariff is considered when setting the SVT-wide cap, and Ofgem needs to have a duty to consider that. In clauses 7 and 8, we need to include customer engagement, particularly vulnerable customer engagement, as part of that overall assessment of competition and of whether it is working effectively.

I could give you a couple of examples, but perhaps they are best fleshed out in some further written evidence. They would include online access. For instance, we know that households that are offline do not benefit from the considerable discounts for online deals and from paperless billing discounts, and they do not get to apply to the warm home discount scheme. Cumulatively that could be up to £300. Things like that need to be considered when we make that overall assessment.

Rich Hall: From our perspective, we are broadly comfortable with the Bill in its current form. In the area of providing enhanced assurance that vulnerable customers’ circumstances are being improved, we think that is something that should be captured within the annual assessment by Ofgem and by the Secretary of State. We are reasonably comfortable that that is implicitly delivered through the Bill, but I can understand that there are arguments that there might be benefits in it being explicitly delivered on the face of the Bill.

In terms of there potentially being a relative cap underneath the absolute cap, I have some similar views to Dermot on that, in that it is an idea that has been floated only really in the last few days and weeks, possibly by people who would prefer a relative cap and who are now trying to use absolute plus relative as an alternative vehicle to reintroduce that approach.

We have some concerns about the relative cap approach. Because the large incumbents have so many sticky customers, in comparison with the relatively small number of customers they could pick up through any promotional campaign, if they were to seek to hold their line on their acquisition prices, that would make the cost of acquiring new customers punitively expensive. Because of that, we think it is more likely that the large incumbents would simply exit the acquisition market, which would neither help their SVT customers, who would continue to pay the same prices, nor improve pressure in that market. There is a risk that a relative price cap could backfire and be worse than the status quo, so we see the decision on absolute versus relative as not simply a choice between a good model and an excellent model, but as a choice between a good model and an unworkable model.

Pete Moorey: I would not add anything to what Rich said, but in terms of other changes to the Bill, there could be some changes to ensure there is more transparency and accountability of Ofgem, in terms of setting the cap. We would like to see changes so that Ofgem are required to set out clear criteria for monitoring and evaluating the success of the cap. We wanted to see a requirement to review the price cap every six months. It may well be that the evidence you have just heard from Dermot Nolan suggests that they will be reviewing it anyway every six months and that the bar could be set lower. It may well be that that is unnecessary in the Bill itself, given that it seems likely from what he said this morning that we will have a consultation on that as well. I think Ofgem should be required to publish reports on the impact of the cap on a regular basis and on how they would take any action if the cap was having any negative impacts.

[James Heappey]

Q Some of the big six, in particular, have tried to head off this legislation by, apparently, removing people from their SVTs already. I wonder whether you have made any analysis of the sort of tariffs they have been transferring people on to and of whether that represents genuinely better behaviour, or are they just getting ripped off in a different way?

Rich Hall: We do not have any analysis on that to hand, but it is a crucial issue, in that the problem with SVTs is not their name, but their characteristics; it is the fact that they are extremely poor value products that exploit consumer inertia. If the replacement products simply have the same characteristics, and they are benchmarked to a similar level of pricing, that is simply an attempt to get around the intent of the Bill rather than to reduce the detriment that those customers see. That is an area where we, Ofgem and others will need to improve our monitoring in the coming months, as we see more of those tariffs in the market. At the moment, it is still fairly soon after the launch of these approaches by three suppliers, so it is a bit too early to say, but it is a genuine issue.