Domestic Gas and Electricity (Tariff Cap) Bill

Alan Brown Excerpts

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

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

It is a pleasure to follow the hon. Member for Weston-super-Mare (John Penrose). He has clearly done a lot of work on this and is revelling in the fact that the Bill is here today, but I thought for a moment near the end of his speech that he was starting to argue against the principle of a cap. Clearly, I, too, welcome the principle of the legislation, which is intended to limit the amount of money paid by consumers stuck on tariffs above the market rate. It is usually those from the lowest-income households who suffer in that way.

I pay tribute to the ongoing cross-party work by the hon. Member for Weston-super-Mare, the right hon. Member for Don Valley (Caroline Flint) and my hon. Friend the Member for North Ayrshire and Arran (Patricia Gibson). They have garnered massive support from all parts of the House, and the cross-party letter to the Prime Minister, which was signed by more than 200 Members, helped to build the momentum to get us to this stage, with the Government introducing a Bill to the House.

When in October 2017 the Secretary of State initially announced the Government’s intention to introduce a cap, he stated:

“Over the past 15 years energy prices have risen by over 90% in real terms.”

He also said:

“Customers of these firms have seen their energy bills increase by between 7% and 10% within the past 12 months, increases on prices the CMA had already concluded were too high.”

In the same speech, he acknowledged that despite action by Ofgem to protect a further 1 million households, there would still be

“13 million families paying more than they would in a competitive market.”—[Official Report, 12 October 2017; Vol. 629, c. 473-74.]

The Secretary of State’s justification not only illustrates the need for the Bill but confirms that it has taken too long to get to this point.

The headline figure for customer overpayment was £1.4 billion in 2016 alone—that is the poorest and most vulnerable customers subsidising the more wealthy. It is therefore no surprise that the Business, Energy and Industrial Strategy Committee has criticised Ofgem and the energy suppliers for failing customers. The fact that intervention and protection is required for some 17 million to 18 million households is a stark illustration of the current market failure. In addition, the fact that there has been a debate between the Government and the regulator about whether primary legislation is even required to introduce a price cap is perhaps a further indicator of a market that is not fit for purpose. With all that said, I acknowledge that the Bill represents progress and welcome the fact that the Government are taking steps to make sure that a cap is going to happen, rather than having an ongoing battle with Ofgem.

Customers have an innate suspicion of energy companies, especially when it comes to their profit announcements, or the fact that when wholesale prices drop, they feel they never see a corresponding drop in their energy bills. There needs to be greater clarity on the operation of the market. I understand that energy companies buy in advance and hedge against future wholesale costs; that there are many components to an energy bill; and that profits make up a relatively small part of energy bills. However, unless there is greater clarity on all these matters and an easy-to-understand bill format, customer suspicions will remain. Generic pie charts are fine for showing the make-up of a bill, but customers really need to know what is going on with the relationship between wholesale prices and the buying power of the big six, and how locked in companies really are to higher-than-market-rate prices at a given point in time.

I accept that a 5% profit cannot be classed as excessive profiteering, but we have to acknowledge that 5% of huge turnover sums still equals a huge profit in terms of actual numbers and the bottom-line figures that the public see. An absolute cap should protect some customers, but if the companies aim to maintain the same profit numbers, there will clearly be losers elsewhere in the system. If the average saving between a big six company’s cheapest tariff and its standard variable tariff is £300 per annum, somebody other than me can do the maths to assess the sort of amounts that these companies will seek to recover from other customers. Arguably, if those other customers were the people who should be able to afford to pay a bit more money, that would mean that any possible cross-subsidies would be working in the right direction, but there is a risk that the companies will just recover the money from elsewhere.

Given that profits, along with VAT, are the joint second-lowest component of a bill, if we are looking to get lower energy bills, the only other way for there to be substantial savings is if the wholesale cost of energy comes down or if the network costs, which are estimated to account for 26% of energy bills, are reduced. I therefore suggest that the market mechanisms for network costs should be reviewed and considered.

On the back of the Government’s intention to introduce this Bill, we have now seen three of the big six—E.ON, SSE and Centrica—announce a move away from standard variable tariffs, and Scottish Power has indicated that it will do likewise. Those companies are now using this strategy as an argument against a cap, but of course they need to acknowledge that it was their inertia on standard variable tariffs that actually led us here in the first place, so they are having that argument once the horse has bolted from the stable.

None the less, we must be careful that the unintended consequence of the cap is not an equalisation effect that drifts towards the higher end of the scale. I understand that that is why the hon. Member for Weston-super-Mare is calling for a relative cap. However, even a relative cap can have an equalisation effect, eliminating lower level tariffs. I note that the Business, Energy and Industrial Strategy Committee and Citizens Advice, among others, support an absolute cap, which is what is proposed at the moment. However, this strategy needs to be reviewed. With a requirement on Ofgem to consult on the cap methodology, I hope that we will be able to flesh out the risks and thrash out mitigations.

Not surprisingly, the big companies are against the Bill, and, intuitively, that is quite a good thing. However, some of the concerns that have been raised possibly require consideration by the UK Government. There is a suggestion that appeals to the CMA should be allowed, as happens for every price control and every price-regulated sector in the UK. I can see the logic of that, and if appeals to the CMA are allowed, consumer groups, as well as the suppliers, could make representations, so that is not necessarily a concession to the energy companies. Additionally, the companies argue that there needs to be clarity on the conditions on which a cap may be removed or extended in 2020. From the point of view of the investor and of a tariff setting policy, I can understand the argument for further clarity on this matter.

Even the consumer group Which? wants to ensure that there are no unintended consequences that limit the success of the cap and eliminate future competition. It has suggested that Ofgem must: set out clear criteria for effective competition that the price cap will be reviewed against; monitor and evaluate the success of the price cap before, during and after the period it is in place; publish monitoring reports, detailing actions to be taken to mitigate any adverse impact on competition; and test how the price cap is communicated to consumers and report any negative effect following that engagement.

Hopefully, the Minister will explain how the concerns of both suppliers and, importantly, consumer groups can be mitigated. On energy bills, we must remember that to lower bills and eliminate fuel poverty, the UK Government’s wider energy strategy and welfare strategy have to be correct as well. The smart meter roll-out, which we have heard about, is seen as an enabler for smarter, lower tariffs, but that is still unreasonably linked to a 2020 deadline forcing a roll-out of SMETS1 meters rather than a longer roll-out period with more appropriate updated technology that allows for better and easer switching in the future.

The UK Government’s nuclear obsession must end. The National Audit Office has already confirmed the impact that Hinkley will impose on electricity bills. Therefore, looking at additional nuclear and a whole raft of micro reactors makes no sense, especially when costs for offshore and onshore wind are now at an all-time low. Energy policy must be consistent. We cannot have a repeat of the debacle of the removal of the £1 billion of funding for carbon capture and storage. Transmission charges have to be considered, particularly when we have opportunities with renewables and energy storage.

On other mitigation measures, further work needs to be done on home energy measures, and that needs direct Government intervention. All energy companies agree on that, and the Scottish Government lead the way in taking direct intervention. The Scottish Government have committed to a warm homes Bill and a statutory fuel poverty target as well as the roll-out of an ongoing further energy efficiency programme.

This Bill imposes a welcome temporary cap, but during the period that a temporary cap is in place, the UK Government must not only review its effectiveness, but explore other strategies and develop that consistent energy strategy. They could also follow the lead of the Scottish Government and look at a not-for-profit public energy supply company, otherwise, there is no doubt that this Bill will take a classic sticking plaster approach. It might represent a quick political win, but, in the long term, we need to have a solution to high energy bills and fuel poverty.

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

Alan Brown Excerpts

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.

[Alan Brown]

Q I was going to ask whether it was okay if Hayden could give an answer. Greg was saying that he favours an absolute cap with a relative cap underneath it, combining the two options. I just wonder whether Hayden had a view on that.

Hayden Wood: We think that the top priority is the absolute cap. As I have mentioned before, there is a risk that homes will not get relief from the cap if that is not in. The idea of a relative cap underneath the absolute cap sounds fine to us, too. I think more price competition in the energy market is a great thing.

The third point I would mention on these extraordinary powers that Ofgem would have under this new set-up to set prices is that those powers need to come with more transparency. The formula and methodology for calculating what the absolute cap would be should be published so that there are no surprises for suppliers and we can plan. We also think there should be more transparency around the contributions that Ofgem receives from suppliers and the meetings that they hold with them, in order to ensure that there is more transparency.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

Q I want to pursue the question of the absolute and relative cap. The way the relative cap has been talked about, it does not look like a cap to my mind. In fact, as Greg mentioned, it is a process of narrowing the range between possible tariffs that are offered, in order, I would have thought, to regulate the market subsequent to an absolute cap. Is it your view that that is the role that might be played by what is called a relative price cap? Or is it something that ought to be done in parallel with an absolute cap? That is, is it a market solution for the future or is it a cap solution for now?

Greg Jackson: You are quite right that the phrase “relative price cap” is not necessarily the most helpful name. It is a simple restriction—a simple limit—on the difference between the highest and lowest price from a single supplier. There is no reason at all why that would not operate underneath an absolute cap. In fact, there is no reason at all why it would not be defined at the same time as the pricing rules of an absolute cap.

If we did that, it would simultaneously attack the loyalty penalty, which is one of the biggest topics currently being looked at in pricing in consumer markets where you pay by direct debit. The real issue is that in consumer markets where you pay by direct debit—running an account—you do not know what you are being charged. If you do not know what you are being charged, companies essentially can have these enormous false differentials, and the opportunity, alongside this absolute cap, to bring the differential down is sitting there today. That would turbocharge competition because it would mean that, if a company wants to win new customers, it would have to bring prices down for its existing ones. But not only that: if it wanted to hang on to its existing customers, it would have to bring prices down.

We saw that British Gas provided a useful case study during the period when they were having to sit in front of Select Committees. They reduced their differential to basically zero for that period, and they lost 823,000 accounts in four months, I think, leading to a 12.5% drop in share price and a 20-year share price low. That demonstrates that companies that try not to offer good value in a world of a relative price cap will lose customers, market share and share price.

Therefore, we think that bringing that alongside the absolute cap, sitting underneath it, is the best way to use the force of competition to drive prices down for everyone. When you remove the protection of the absolute price cap, you will actually have a competitive market.

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[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.

[Alan Brown]

Q I have a supplementary question. This is slightly tangential, but there is a proposed amendment that the Bill should aim to make sure that each SVT customer saves £100. Would an amendment that sets an absolute value within the Bill help or hinder you as a regulator?

Rob Salter-Church: At this stage it would be difficult to say exactly how much money a customer would be able to save through the price cap that will be put in place. We can say that—indeed, the Bill requires this—our first and primary objective is to think about protecting consumers, but we need to make sure that in setting the cap we also take account of the other factors that we need to consider, which is ensuring there are incentives for customers to switch and ensuring that suppliers are able to continue to finance their activities and fund things such as the smart metering roll-out. Although we are keen to ensure that we can save consumers as much money as possible, ultimately it would potentially create some unintended consequences to fix that amount at this stage in the Bill.

[Michelle Donelan]

Q I want to go back to the competition point. Some members of the previous panel supported a relative cap as well as an absolute cap in order to stop the cross-subsidisation that is happening between consumers. What are your thoughts on that? Would that be helpful?

Dermot Nolan: Is this a relative price cap and an absolute price cap co-existing at the same time?

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[Dr Whitehead]

Q Pete Moorey, your submission to the pre-legislative scrutiny of the BEIS Select Committee raised issues about the extent to which the remedies put forward by the CMA as far as market restitution was concerned were not, in your view, sufficient. Bearing in mind that it is going to be down to Ofgem to declare that the market is now functioning reasonably well and that the cap can now be taken off, what sort of remedies, in addition to those suggested by the CMA, might you have in mind to get the market working again? Do you think those should be introduced during the price cap or after it? Should they run after the price cap is over or concurrent with it?

Pete Moorey: We supported many of the remedies of the CMA, so while we did not believe that they would take us far enough to deliver effective competition, it was absolutely right that the CMA recommended that we would be testing and trialling new ways of engaging people in the energy market. We were disappointed that the energy industry did not respond effectively enough to that. We said to the industry immediately after the CMA inquiry, “Start getting on with it. Test and trial new ways of engaging particularly the most disengaged people with the energy market.” I think that a lot of that work should continue. The good news from Dermot Nolan this morning, and from other statements Ofgem have made over time, is that they are going to continue to do work on that, which is welcome.

We are not necessarily suggesting that there are other remedies such as that that could be trialled. It is more that we should be spending time considering what transformational changes can be made to the market along the lines that Dermot Nolan was talking about, particularly in his responses to James Heappey, to ensure that we have much more innovation in the market through new suppliers who can be tapping into the benefits that smart and other changes in the energy market will make. That is likely to be the transformation that will lead to a new kind of energy market where consumers are more engaged. That is the critical element, alongside all the key factors around switching levels—particularly engagement of more vulnerable consumers, energy satisfaction, trust in the market and so on—that we should be looking at.

As I say, simply removing the cap in 2023, and the market looking effectively as it is now, will not, I think, be the kind of change that we all want to see in the energy industry, and certainly will not deliver the kind of change that consumers need.

[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.

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

Alan Brown Excerpts

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

I think we all share the aspiration that this Bill should be passed quickly. We want to get it through both Houses of Parliament in as good a shape as possible. However, I am concerned, first, that by putting a hard stop date in the Bill, we may constrain the critical process that Ofgem has to go through to set the cap at the right level, and secondly, that we potentially increase the risk of a successful challenge to the cap once it is structured and put in place. So I was reassured to have heard from Ofgem again this morning. Ofgem wrote to the Chair of the Select Committee, who did an excellent job in pre-legislative scrutiny, setting out its strong belief that it understands the need to do this and can complete the necessary analytical processes. Although I strongly share the hon. Gentleman’s desire, I feel there is nothing to be gained by making this a statutory deadline. That potentially creates implementation risks which would mean this long-awaited price cap could not be put in place. With that explanation I hope I have persuaded the hon. Gentleman to withdraw his amendment —though I appreciate that his amendments are tabled in the spirit of trying to improve the legislation.

[Alan Brown]

It is a pleasure to serve under your chairmanship, Ms McDonagh. I was not originally going to talk, but 25 minutes into the Bill Committee my frustrations kicked in. It felt like 25 minutes of almost agreeing with the amendment. We have got an amendment with a date and everybody agrees that it is a reasonable deadline and timeframe. We are seeming to agree that Ofgem has committed to doing this in five months. I thought that Dermot was absolutely resolute in the evidence session in saying “We will do it in five months”, but his colleague had slightly more caveats and was slightly more restrained.

I cannot see any problem in getting a deadline that puts a marker down: humans work better to a deadline. It sends a message to our constituents and the people out there that we have this clear deadline. I listened to the comments from the Minister and I understand that she is saying that she wants to minimise any risks going forward in getting the Bill implemented. What if there is a legal challenge and then the deadline becomes a possible issue? But given that we have already agreed that we think this is a robust Bill that has been well written and well crafted, I think we have got to have confidence that it is robust. Having a date on the face of the Bill will make it that bit more robust and watertight.

[Claire Perry]

I appreciate the hon. Gentleman’s support, and I am delighted that we have cross-party support. I think we are all agreed that this is a robust Bill. I thank the hon. Gentleman for sharing his tribute to the parliamentary team, who have done a good job drafting it.

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[Dr Whitehead]

I do not think the amendment would allow energy companies to get round what we seek to achieve, although I accept the analysis that it may produce more work for Ofgem. I based amendment 4 on what the Prime Minister said. One could argue that she was being overly prescriptive—I do not know.

[Alan Brown]

I am glad the hon. Gentleman has explained that the £100 is not arbitrary, but a figure from the Prime Minister. Equally, I assume the Prime Minister’s £100 was arbitrary as well, so I must admit that I have concerns about stipulating a figure in the Bill. When I asked about it earlier, Ofgem said that there would be unintended consequences.

Presumably, concerns have been expressed about the big energy companies gaming in terms of exemptions and green tariffs. I am concerned that they will use this as a way to do gaming, so that they provide savings on paper by dodging and changing rates before the legislation kicks in. Could he address that?

[Dr Whitehead]

The hon. Gentleman makes an important point about what could happen prior to the cap coming in. Energy companies could be gaming ahead of the game with their prices, so what would savings look like after that? I am not sure that we can do anything about that right now. As Ofgem mentioned, if energy companies are too blatant in their price rises over the next period, they will be in breach of their obligations to Ofgem anyway.

We have seen several instances of small price rises recently. We heard about one—a comparative gas price—this morning. Bulb, one of the witnesses this morning, put up its rate by £24 just a few weeks ago. That was for particular purposes, but one could argue that it was a gaming price rise ahead of the legislation. Bulb was very clear that it was not, and that it was for other purposes, but we clearly have to be alert to that possibility.

If that does happen, what anyone has said about what savings would result from this price cap would have to be taken relative to whatever that price was at the point when the price cap was introduced. It would be possible for consumers to say at that point, “Actually, we were promised a £100 price saving. It does not look like a £100 saving to me, because it is a saving against a price rise that will end up increasing my bills.” In wishing to place this in the legislation, I am indicating that we in this Committee do not wish to let the public down regarding what might happen with this price cap.

The Prime Minister has already said that there will be a £100 saving. Indeed, I do not know whether this applies to anyone present, but interestingly The Sun article states:

“Government insiders say the cap should save at least £100, potentially rising to £300 a year with increased competition and faster switching.”

Government insiders, whoever they are, are suggesting that the £100 is a minimum and it could be considerably more.

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That is what those amendments do. They are a sensible addition to the Bill—to what Ofgem should consider in the first place and to what the Secretary of State should consider in the last place, as it were, as the price cap moves through its life up to 2023. I hope the Minister will see a way to accept some or all of the amendments. Their intention is certainly to strengthen the Bill and the Minister’s consideration of it, and not anything else.

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

I rise to speak to new clause 1, which is tabled in my name. It replicates or mirrors amendments 8, 9 and 10 in trying to provide explicit support for vulnerable and disabled consumers.

In the Minister’s opening remarks this morning—in private and in the evidence session—she expressed her concern to ensure that vulnerable customers are protected in future. Clearly, part of the Bill’s aim is to protect the vulnerable and those who have been getting ripped off. When I asked one of the panels about improving the Bill, and I specifically mentioned vulnerable and disabled people, the representative from Citizens Advice said that the protections are implicit in the Bill, but not explicit. Ofgem agreed that the protection of vulnerable people needs to be considered, although it believes that some measures are already in place. New clause 1 would explicitly ensure that vulnerable and disabled consumers have that protection and consideration in terms of effective market competition for the grouping they sit within.

New clause 1 effectively mirrors a clause proposed by Scope—a charity whose strapline claims that it exists

“to make this country a place where disabled people have the same opportunities as everyone else.”

Given that Scope are expert advocates and campaigners, I was happy to move this new clause.

As Scope rightly observes, people with disabilities are often high consumers of energy due to their impairment or condition. The hon. Member for Southampton, Test highlighted that a quarter of the households in which a disabled person resides—4.1 million households—spend more than £1,500 per year on energy, and nearly 800,000 households spend over £2,500 a year. That is a huge, significant sum and clearly has a huge impact on their expenditure. In terms of market regulation, it therefore makes absolute sense to make specific provision for vulnerable and disabled consumers.

We heard that some disabled people are protected under current schemes, but not all disabled people are automatically eligible for the warm home discount, and nor do they automatically get registered on the priority services register. That, again, reinforces why the Bill needs to make explicit provision for vulnerable and disabled people when setting, implementing and reviewing the cap, particularly in terms of whether conditions for effective competition are in place and whether the cap should be lifted.

We have already heard that, as predicted, additional protections will need to remain in place post cap. I want to conclude with an example from Scope. This is from someone called Lynley:

“Before I became disabled, I never gave heating a second thought. But now, as I’m home every day, things are very different. I find it hard to stay warm as I can’t move around to generate any heat. I need the heating on pretty much constantly. I also use an electric heat pad to help manage my pain and an electric powerchair to go outside. This equipment requires charging frequently. My energy bills are much higher than before, and—coupled with the loss of my income as a teacher—have made getting by very difficult.”

There is cross-party support for the Bill as a whole, and we all agree that it is about doing the right thing to protect consumers from getting ripped off in what has been a market failure to date. But let us do this absolutely properly and make sure that the rights of the vulnerable and the disabled are explicitly protected in the Bill as well.

[Claire Perry]

I would like to speak to amendments 4, 8, 9 and 10 and new clause 1. I will start with the first part of amendment 4, which requires a hard estimate on the face of the Bill as to what the saving might be. I was delighted to hear the hon. Member for Southampton, Test quoting our Prime Minister so extensively. I could quote some of the things she has said about the Labour party, but I would not like to challenge the spirit of cross-party consensus. [Interruption.] The hon. Gentleman really does not want to tempt me on that.

We can all sit and make estimates of what the savings ought to be, but all of that will depend on the level at which Ofgem chooses to set the cap.

--- Later in debate ---

[Claire Perry]

We have had an excellent debate, where we have been genuinely probing and testing the Bill, and we have come to a good outcome. I commend the clause to the Committee.

Question put and agreed to.

Question 6 accordingly ordered to stand part of the Bill.

Clause 7

Review of competition for domestic supply contracts

[Alan Brown]

I beg to move amendment 1, in clause 7, page 4, line 38, at end insert—

“(1A) The Secretary of State shall within six months of the passing of this Act publish a statement outlining the criteria that is to be used by the Authority in the review to assess whether conditions are in place for effective competition for domestic supply contracts.”

This amendment would require the Secretary of State to outline the criteria that shall be used by Ofgem when assessing whether conditions are in place for effective competition for domestic supply contracts.

I do not know if it is my upbringing in the west of Scotland, but compared to the hon. Member for Southampton, Test, I am a man of few words, so I will be really brief.

Amendment 1 and its explanatory notes lay out the case. I have prepared a timeframe for the Secretary of State to set out the criteria by which Ofgem will assess the operation of the energy market for effective competition in the marketplace, and such effective competition clearly will allow the cap to be lifted.

The amendment is important for a couple of reasons. Clearly, if we want the suppliers to change their behaviour, it is important that they know what they will be measured on. Hopefully, that will give them further incentives to change their behaviour and to make the market much more competitive and effective for consumers.

The Government’s aim is that the cap will be only temporary—perhaps lasting only two years. Therefore, it is a limited timeframe. That makes it even more important that, as soon as we can, we understand what the companies will be measured against. If a report is laid that sets out the criteria within six months, that takes away the risk of moving targets, in terms of the suppliers changing how they are operating, but perhaps not in the way we want. Obviously, we want to manage how they operate and make that most effective for consumers. The amendment is quite simple and speaks for itself.

[Claire Perry]

The hon. Gentleman is a man of few words, but what a very pleasant accent, if I might say so, and what a joy it is to welcome so many colleagues from north of the border with similar burrs on our side of the House. I will now try to speak exclusively about the amendment and take his example of brevity in doing so.

The hon. Gentleman is absolutely right to raise the question of the conditions for effective competition so that we can all understand when the recommendation to remove the cap is the right one, as he said, considering how the market evolves over the next few years. We all have a hope and expectation that the market will evolve rapidly; indeed, the whole principle behind the Bill is about an intelligent intervention that will help the market to reset to a more competitive environment.

We have set out these general conditions, but I feel very strongly that with an independent regulator that we all believe has the powers and knowledge to both set the cap and confirm whether competition has been restored, it is right that we do not hold it to a specific set of weightings for what competition looks like. Again, I refer to the BEIS Committee, which said:

“We believe that Ofgem have the required expertise to set and measure indicators of effective competition and make the appropriate recommendation to the Secretary of State.”

The hon. Member for Nottingham North made the point about unintended consequences; we had conversations in pre-Bill meetings about whether we would want there to be a formula that said, “It is 20% switching times and 50% price cap reduction”. All that constrains Ofgem’s ability to review and set an opinion on competition, particularly as the market evolves. We are all expecting the energy market to evolve quickly. The amendment would constrain Ofgem’s job unnecessarily. There is nothing to be gained from seeking to pre-empt Ofgem in its work. In raising this issue, the hon. Member for Kilmarnock and Loudoun is absolutely right to say that that scrutiny of what effective competition looks like will form an extremely active test of whether we can all sit around in a couple of years’ time and say that this Bill on which we have all worked so hard has been effective.

On the basis that the amendment would constrain what Ofgem want to do, I hope that the hon. Gentleman feels content with my explanation and will consider withdrawing it.

[Alan Brown]

Listening to the Minister, on one level I think that constraining Ofgem might not be such a bad thing if it constrains it in a way that we are happy with, because then we can have criteria that we as politicians, and consumers and suppliers, understand. On the other hand, I understand what the Minister says, in that the regulator has its own job to do. I am conscious that some of the submissions we received as part of this process express concern about the fact that nobody knows what these effective competition criteria will look like. I still have some slight concerns, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Dr Whitehead]

I beg to move amendment 7, in clause 7, page 4, line 39, leave out from “must” to end of line 40 and insert

“have regard to the extent to which—

(a) progress has been made in installing smart meters for use by domestic customers,

(b) incentives for holders of energy supply licences to improve their efficiency have been created,

(c) holders of energy supply licences are able to compete effectively for domestic supply contracts,

(d) incentives for domestic customers to switch to different supply contracts are in place,

(e) the barriers which prevent the customers from switching from different supply contracts quickly and easily are addressed,

(f) holders of supply licences who operate efficiently are able to finance activities authorised by the licence,

(g) holders of supply licences have eliminated practices that are to the detriment of customers in their tariff structures,

(h) District Network Operator costs and dividends are proportionate to expectations and the impact of that on domestic supply contracts, and

(i) vulnerable and disabled customers are adequately protected.”

I am afraid this may be the end of the Mr Nice Guy bit. Hon. Members must find that incredible, but it is true. This amendment is potentially very important for the integrity of the whole process of how the price cap is set up, how it works and the circumstances under which it can be brought to a close. There is no real difference between the amendment of the hon. Member for Kilmarnock and Loudoun and mine, except that his requires the Secretary of State to produce a statement to outline the criteria that shall be used by the authority in a review to assess whether conditions are in place for effective competition.

Our amendment seeks to identify what the conditions might look like. That is particularly important, because for this price cap to work clearly both ends of the cap have to be reasonably synchronised. As hon. Members will have observed when we debated an earlier clause, a number of conditions are put forward for the authority to digest when we move from the point of legislation to the point of actually putting the cap in place. There are a number of conditions in clause 1(6) to which the authority needs to have regard when it is putting the cap in place.

That is not so when the authority is considering whether to lift the cap. It is worthwhile considering for a moment what the mechanism for lifting the cap in the Bill actually is. The authority has to carry out a review—in the first instance, in 2020—to look at whether it considers that conditions are in place for effective competition for domestic supply contracts. Therefore, in principle, it can consider whether to bring the cap to an end. Once that review is carried out, roughly before halfway through 2020, the authority must produce a report on the outcome, which must include a recommendation about whether the authority considers that the tariff cap conditions should be extended and should have effect for the following year. When the report is produced, before 31 August 2020, we would expect to see a view from the authority about whether the cap should be continued. Obviously, subject to the sunset clause in the next clause, what the authority says effectively has a one-way view on what the Secretary of State should subsequently say about the cap. As laid out in clause 7(5), the Secretary of State, having received a report,

“must publish a statement setting out whether the Secretary of State considers that conditions are in place for effective competition for domestic supply contracts.”

--- Later in debate ---

[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.

--- Later in debate ---

For me, this is very much a job for the expert regulator. I take comfort from the fact that the process will be very transparent; the regulator will have to set out why it considers this market to be more competitive.

[Alan Brown]

Why would it be a box-ticking exercise if we as parliamentarians set out criteria that we think can be used, but not if Ofgem sets out the criteria?

[Claire Perry]

That is a valid point. I guess that by setting the criteria in the Bill we would effectively constrain the opportunities that Ofgem has. Ofgem, as a regulator, should be able to sit closer to the market and observe its evolution, and amend its processes accordingly. All of us know how even the most tortuous, tiny change to a Bill, even if it is done through a statutory instrument, can chew up an awful lot of time and reopen a debate that did not actually need to be reopened.

The hon. Member for Southampton, Test is right that we absolutely have legal powers to protect our constituents, and that is what we are doing, but what we are also doing is empowering the regulator to be perhaps more nimble and agile than politicians and even my fine civil servants might be.

I turn to the Smart Meters Bill, because it is right to say, “Why is that the only thing in the Bill?” Frankly, the reason is that we are rolling out this massive Government programme. We are talking about £11 billion of investment and £17 billion of benefit to consumers. It is now a licence condition for Ofgem. We have had the first roll-out and we are working hard on the data integration, so that the upgrades to a SMETS2 meter happen seamlessly and remotely. I fully intend to work with industry very closely this summer to start to turbocharge that process. There is huge benefit there; the conditions are in place and we want to accelerate.

We want to make sure that the obligations to be part of the evolution of a competitive market and to roll out smart meters are inextricably linked in the minds of industry. On that basis, although we have an important role to play in talking about the terms of effective competition, we expect the market to continue to evolve. It would not be helpful to constrain Ofgem’s definition now by setting out what could be perfectly sensible ideas.

Of course, there will be an opportunity to review Ofgem’s report and say what the conditions are. We have not yet talked about what the transparency of publication is for that report, but that is certainly something we can address when we discuss that part of the Bill. There is a question as to how transparent that report is made and how widely it should be circulated. As the Committee knows, I am open to ideas of transparency, because it is the way to drive the best forms of competitive behaviour. I fear I may be chancing my luck this late in the day, but I invite the hon. Member for Southampton, Test to withdraw his amendment.

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

Alan Brown Excerpts

Committee Debate: 3rd sitting: House of Commons
Thursday 15th March 2018 Public Bill Committees

[The Chair]

It is water! I do apologise. It was the Clerk who drew it to my attention. We have to obey the rules, but water is very acceptable. Thank you.

Clause 8

Extension and termination of tariff cap conditions

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

I beg to move amendment 2, in clause 8, page 5, line 36, at end insert—

“(3A) In the case that the tariff cap is extended to have effect for the year 2023, the Secretary of State must publish a statement before the end of that calendar year outlining whether the Secretary of State considers it appropriate to introduce further legislation to introduce a new tariff cap to have effect beyond the date outlined in this Act.”

This amendment would require, in the event that the tariff is extended until 2023, the Secretary of State to publish a statement outlining whether he or she considers it appropriate to bring forward further legislation to introduce a new tariff cap to have effect beyond 2023.

It is a pleasure to serve under your chairmanship, Sir Edward. At our last sitting I made a joke about being brief in my comments, but I will be super-brief this time.

The whole reason for the Bill is the admission that the retail energy market is not working in terms of providing effective competition for consumers and allowing them to access the best-priced tariffs. I recognise that the Government have made it clear that the proposed cap mechanism is temporary for that reason and is to allow the market to remedy itself. Because this is a temporary cap, clause 8 is the sunset clause, which in effect states that the cap must end by the end of 2023.

I have tabled my simple amendment because, as we know, the market is not working, but there is no guarantee that it will remedy itself in the time proposed, although we hope it will. There is a risk that there will still be no effective competition in 2023, so the amendment suggests that if we get to that final year of the temporary cap, the Government should make a statement outlining whether they believe it appropriate to introduce further legislation for a new tariff cap with effect beyond 2023.

The amendment is to ensure that the Government update Parliament about where matters are at, and imposes that duty on the Secretary of State. It is a very simple amendment, so my comments have been super-brief. I look forward to hearing what the Minister has to say.

[The Minister for Energy and Clean Growth (Claire Perry)]

Good morning, Sir Edward. It is a pleasure, as always, to serve under your august chairmanship, and I am impressed with your X-ray eyes seeing the coffee cup. It is, once again, a pleasure to welcome fellow travellers on our Committee.

I was of course interested in what the hon. Member for Kilmarnock and Loudoun said—in essence getting back to that long-term question that we have all been discussing as to what “good” looks like. In 2023 how will we know whether the cap can be removed? Interestingly, the hon. Gentleman is in a way seeking to bind the hands of a future Government with his amendment, by putting in place, when the cap is finally removed—I think we all agree with the sunset clause—the need to opine as to whether further legislation should be introduced.

My hope is to persuade the hon. Gentleman to withdraw the amendment, so I shall set out a couple of reasons why he should, although I think we all agree that we support the cap. We want the cap to be in place for the period it takes to restore effective competition in the market. We also agree that we do not want permanent caps to run in the market, because we want it to move towards a more competitive position. The Bill is an intelligent intervention to speed up that journey.

Frankly, the Government have no wish for a price cap to be a permanent feature of our energy market. We debated that point briefly last week. I think there is strong consensus in the Committee—if I have not misjudged it—that the cap should have a sunset clause. In order for a sunset clause to be effective, there should be an end date to the legislation. Of course, as we discussed last week, that does not simply mean we will pass the Bill quickly through both Houses—as I hope we will—and have the cap in place by the end of the year, as Ofgem has assured us is possible; we will also all be working alongside Ofgem to ensure that the conditions for effective competition are in place by the 2023 deadline. I think we would all want to see those conditions in place well before that date.

Ultimately, we want a fully working and competitive market that is transparent, innovative and adaptive, that promotes competition as the best driver of value and service to customers, and that has a regulator with the powers and appetite to regulate actively should a situation arise, as it has done, where we do not believe some groups of customers get that value and service.

We discussed last week the roll-out of smart meters—where we have seen good progress but we need to go further and faster—and moving to faster and more reliable switching. I am very interested in Ofgem’s midata proposals, which will make switching an almost seamless process. Indeed, my hon. Friend the Member for Weston-super-Mare (John Penrose), who was so instrumental in creating the Bill, told me about his latest app, Flipper, which enables someone’s supplies of various services to be transferred almost seamlessly, with their consent, to the best value tariff, based on what tariff they are looking for.

There are plenty of opportunities for consumers to benefit from that improved competition, but we have discussed the fact that, although some of us are active switchers and are aware of those opportunities, some of us are too time-poor to do that. Worryingly, there is a large group of customers who are on bad-value tariffs and either do not know it or are sufficiently disengaged from the market not to do anything about it. That is why we brought forward the Bill and why it is extremely important to test the initiatives that the Competition and Markets Authority proposed to improve engagement with so-called disengaged customers.

We have discussed incredibly exciting technological changes, such as the move to distributed energy, the increase in renewable energy and people’s ability almost to create their own energy network, which includes them, local businesses and other local energy consumers. New business models will also come into the sector. I was interested to hear the evidence of some of the more innovative new entrants about where they want to go with the market. They mentioned half-hourly settlement and payments to people who do not consume energy at certain times. There is an enormous range of adaptations, and of course smart metering will unlock even more.

We are all determined to have a fully competitive and fair energy market, but I think we are all of a mind that the cap should be a temporary measure. I pay tribute once again to my hon. Friend the Member for Stirling, who serves with great effect on the Business, Energy and Industrial Strategy Committee, to which we all owe a great debt of gratitude. The Committee said that there is a risk that if the price cap became a longer- term fixture it

“would put the Government unduly in charge of setting energy prices for the foreseeable future.”

--- Later in debate ---

[Claire Perry]

My hon. Friend brings her great knowledge of these markets on a broader European scale to make a telling and vital point. The need to maintain investment in the industry, which we must have as we go through what is possibly the most exciting revolution in our energy markets for decades, is included in the Bill for exactly that reason. Clause 1(6)(d) speaks to exactly that point: we must ensure that we still have the financial investment in the industry that we so desperately need.

Having talked about the need to keep on improving efficiency, and having accepted the view of the Select Committee that the price cap should be only a temporary measure—reflecting a cross-party view that the Government should not be unduly involved in setting energy prices— I hope that I have persuaded the hon. Member for Kilmarnock and Loudoun that his amendment is unnecessary and provides an obligation on a future Secretary of State to impose another price cap. A future Government may decide to do that—who am I to suggest what legislation a future Government might introduce? However, I do not feel that the amendment is appropriate; it creates disincentives and uncertainty in a market where we have to have certainty to generate investment. On that basis, I hope he might be persuaded to withdraw his amendment.

[Alan Brown]

The Minister finished as she started, by talking about binding future Governments. I suggest that most legislation, in one form or another, binds future Governments. It is for future Governments to make changes to the legislation if it does not suit their policy at the time. Binding future Governments is not a reason not to table an amendment or to withdraw an amendment.

Again, the amendment is not about making the cap permanent. It acknowledges that the cap is temporary, but if, for whatever reason, we get to 2023 and we still do not think that there is effective competition in the marketplace, it puts a duty on the Secretary of State to explain what the Government will do to address that, including possibly introducing new legislation.

On what “good” looks like in the future, if the Government had accepted an amendment setting out the criteria for what effective competition will look like—such as the Labour amendment that suggested a whole list of criteria that should be considered to determine and measure that—we would know what “good” looks like in the future. That might also help to generate the effective competition that we are discussing.

That said, to go back to my original point, I am not trying to say that the cap should not be temporary. Following my comments to the Minister, I do not see any point in pressing the amendment to a vote, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

I beg to move amendment 11, in clause 8, page 5, line 36, at end insert—

“(3A) In the case that the tariff cap is extended to have effect for the year 2023, the Secretary of State must publish a report before the end of that calendar year on further measures that can be taken to ensure that conditions are in place for effective competition for domestic supply contracts.

(3B) The report under subsection (3A) must include, but is not limited to—

(a) the merits of establishing pooled trading arrangements which matches energy sellers and buyers on the day-ahead and near-term markets; and

(b) the potential impact of such an arrangement on competition for domestic supply contracts.”

It is a pleasure to serve under your chairmanship, Sir Edward. Before I proceed, I ought to say two things. First, I congratulate the right hon. Member for Devizes on her elevation to the Privy Council. In terms of nomenclature, I am not entirely clear whether I should refer to her as the Minister or the right hon. Minister in the future.

--- Later in debate ---

[Claire Perry]

This clause confirms the geographical extent of the Bill. It will come into force in England, Wales and Scotland, but not Northern Ireland. I am sure the Committee knows that there are separate arrangements for energy supply in Northern Ireland, including existing price controls on incumbent suppliers. We have made reference to that cap in our debates. The Act will come into force on the day it is passed, to make sure that we achieve the crucial momentum in the implementation period.

Question put and agreed to.

Clause 12 accordingly ordered to stand part of the Bill.

Clause 13 ordered to stand part of the Bill.

New Clause 2

Duty to consider the needs of customers in rural areas

“(1) When exercising its duties under section 1, the Authority must have regard to the need to protect customers in rural areas.

(2) When exercising their duties under sections 7 and 8, the Authority and the Secretary of State must have regard to—

(a) whether effective competition exists for customers in rural areas, and

(b) additional protection in place for customers in rural areas.”.—(Alan Brown.)

This new clause requires the Secretary of State and the Authority to have regard for customers in rural areas when exercising their powers in setting, reviewing and terminating the cap.

Brought up, and read the First time.

[Alan Brown]

I beg to move, That the clause be read a Second time.

We know that part of the problem with existing tariffs is that certain groups of people are more likely to be adversely affected. New clause 2 would make the duty to consider the needs of customers in rural areas absolutely explicit. To recap what I think we are all aware of, people who reside in rural areas are more likely to have lower incomes; they are more likely to be off the gas grid, which leads to overall higher energy costs; and, particularly in Scotland, they are more likely to have properties that are much more difficult to make energy-efficient, thereby increasing their ongoing energy costs.

Digital connectivity is an issue predominantly in rural issues, which means that is difficult to undertake regular switching. Rural areas also still suffer from notspots for mobile coverage, which is an impediment to getting a smart meter. If we really believe that smart meters will help revolutionise the market and help people get lower tariffs, we need to eliminate the notspots. The Scottish Government have just announced a £25 million fund to provide more coverage in rural areas, but that is perhaps not something they should need to step up to the plate on. Challenger companies are also less likely to tackle the rural issue, so the incumbents—the big six—often have almost a monopoly in some rural areas. That is another barrier to competition.

To cap it all in terms of the disadvantages for rural customers, people in the Scottish highlands and islands have to pay 4p a unit more for electricity usage. Rubbing salt into their wounds, anything generated in more rural areas has higher transmission charges placed on the generation companies, and customers in those areas pay a higher distribution levy. That is a real injustice for those in rural areas. And, of course, the Government have removed contract for difference auction capabilities for onshore wind in rural areas, which compounds the whole feeling of injustice.

The new clause would therefore require the Secretary of State and the regulator to have regard to customers in rural areas in exercising their powers when setting, reviewing and terminating the cap. The clause itself is self-explanatory. Again, I am interested to hear what the Minister has to say.

[Claire Perry]

The new clause seeks to add a clause to the Bill to create duties on Ofgem and the Secretary of State to consider the needs of customers in rural areas and to consider additional protections for them.

The hon. Gentleman spoke about this on Second Reading, and many of us who represent very rural constituencies understand exactly what he is saying. I have been really pleased to learn that, in the north of Scotland, the Government have confirmed their commitment to the hydro benefit replacement scheme, which is worth an average of £41 annually per household in the region.

The hon. Gentleman will be aware that costs are in some cases the function of geography—there is this unfortunate thing that it costs more to get electricity down to certain parts of the country. In my own region, the south-west, the peninsular effect creates some unfortunate energy price increases for those living at the end of the grid, as it were. That is something we have long had to live with. I am not saying that that is acceptable, but to date it has been a function of the pricing of energy distribution.

The other issue for many of those representing rural areas, including mine, is that people rely on heating oil or liquefied petroleum gas deliveries, because we are off the grid. Not only can that be a costly proposition, given the spike in heating oil prices, but it is a problem in terms of carbon emissions. As the hon. Gentleman knows from the clean growth strategy, I am determined to phase out fossil fuel heating—not in a way that penalises existing customers—starting with new builds from 2025, and really trying to come up with cost-effective alternatives in future.

When we have the consultation on the energy company obligation, which will be happening shortly, I am minded to review how much we direct towards customers in rural areas. As the hon. Gentleman knows, and as I know only too well from my constituency, fuel poverty is not an urban phenomenon. Many of our constituents live in old homes, which are not suitable for more modern forms of energy efficiency—[Interruption.] My hon. Friend the Member for Hitchin and Harpenden is putting up his hand to say that his house is like that. These homes are a problem, particularly for those on low incomes; in my constituency the average income is well below the national average, and many of our homes are simply very old. That is why, what I would like to do with ECO, to be forthcoming, is to see how we can deliver more help to rural households and how we can focus that help more on innovation so that we can create more of a route to market for important new technologies that could help.

We have an open market in the supply of heating oil—it has been looked at, and the conclusion was that it is competitive and working. LPG customers have the LPG orders introduced by the CMA, which set a maximum contract length. Under the fuel poor network extension scheme, Ofgem sets a target for gas distribution companies to connect an additional 91,000 low-income homes to the gas grid by 2021. So there is work afoot to reduce some of the disbenefits of living in some of the most beautiful parts of the world, such as the constituency of the hon. Member for Kilmarnock and Loudoun.

I have mentioned additional help, but I suppose the question is whether we should specify in the Bill that more should be done. My argument is that the new clause is not necessary, because the Bill already explicitly requires Ofgem to protect all existing and future standard variable and default customers, including consumers in rural areas. Furthermore, Ofgem’s role as the regulator under the existing gas and electricity Acts confirms that it has a duty to protect the interests of all existing and future customers. It should specifically have regard to the interests of individuals living in rural areas, among other things.

There are already protections at various levels of the law and in the Ofgem regulations for those customers for whom the hon. Gentleman so rightly speaks. I therefore do not believe that the new clause is necessary, but I remain apprised of the issue he raised, which many of us face: how we help people who live in rural areas, who do not have the same options as those who live in urban areas, whether in terms of heating, lighting or broadband. I hope that he is content with that explanation and is minded to withdraw his new clause.

[Alan Brown]

I welcome what the Minister said about ensuring that ECO is rolled out and that people who live in rural areas are prioritised. I realise that a cap in itself is not a means to an end in terms of ensuring effective competition and particularly helping people in rural areas, and that other Government policies are required to do that. Although, as the Minister said, the regulator needs to have due concern for all consumers, the new clause was intended to re-press the need for the Government and the regulator always to remember the disadvantages that people in rural areas face. It is clear that the Minister is well aware of those issues from her own constituency. For that reason, I beg to ask leave to withdraw the clause.

Clause, by leave, withdrawn.

New Clause 3

Assessment of extension of the tariff cap to small businesses

“(1) Within three months of the passing of this Act, the Secretary of State shall lay a report before each House of Parliament assessing the merits of extending the tariff cap to small business customers.”—(Dr Whitehead.)

Brought up, and read the First time.

[Dr Whitehead]

I beg to move, That the clause be read a Second time.

This is a simple and brief new clause that would require the Secretary of State, immediately after the passage of the Bill, to lay a report before both Houses assessing the merits of extending the tariff cap to small business customers. I do not think I need to emphasise that the Bill’s title gives the game away about what the tariff cap will cover: the Domestic Gas and Electricity (Tariff Cap) Bill applies to domestic customers and to no one else. That rather gainsays the idea that, in many instances, small businesses have far more similarities with domestic customers than with large companies, which may have wholly different arrangements for dealing with their electricity supply—they may engage in private wires or bilateral long-term contracts, or have their own generating plant—from small businesses, which in effect hug pretty closely to the principles for domestic customers.

It seems a little invidious that the cut-off point for the price cap is the end of the domestic customer level. I am sure no hon. Member present is in this position, but it is quite possible for a very large house with multiple activities going on in it to consume a lot more electricity than a high street retailer or a small business. A number of small businesses will find that their electricity bills are not capped even though, to all intents and purposes, they are indistinguishable from domestic customers as far as their patterns of use, means of purchase and so on are concerned.

The new clause would require the Secretary of State, shortly after the Bill’s passage, to think about whether it might be appropriate to bring small businesses under the cap as it progresses, with a proper definition of which small businesses are in and which small businesses—those at the larger end—are out, so that the cap’s benefits can be extended to that particularly hard-pressed sector of the UK economy, and so that a proper relationship can be established between who is doing what so far as their energy purchases are concerned and who should benefit from a cap as a result of doing those things.

This is a simple, straightforward amendment, which I hope the Minister will consider carefully.

--- Later in debate ---

[Dr Whitehead]

Like the Minister, I thank everyone who has taken part in this stage of the Bill’s passage. We have had a genuinely constructive debate, in which we have all been facing in the right direction. I particularly thank the Clerks for their assiduous work and for their help with tabling Opposition amendments; unfortunately we do not have an entire civil service on our side, so we must seek other help, but we have not been failed.

I hope that the Bill will now progress to its remaining stages with consensus that the tariff will be an absolute cap, and with good support from all sides of the House for the result that we all want.

[Alan Brown]

Without going on for too long, may I, too, thank the Clerks and the Chair? I thank the Minister for listening—I hope—and congratulate her on her appointment to the Privy Council. Like the hon. Member for Southampton, Test, I look forward to seeing the tariff cap in place, competition in the marketplace and consumers being saved money.

[The Chair]

On behalf of us all, I congratulate the Minister on her great honour; we are all absolutely delighted. On my own behalf and my fellow Chair’s, I thank all hon. Members who have taken part, particularly Dr Whitehead and the Minister. For an unreconstructed Thatcherite libertarian marketeer like me, it has certainly been a useful re-education camp on the benefits of intervention in the marketplace.

Question put and agreed to.

Bill accordingly to be reported, without amendment.

Domestic Gas and Electricity (Tariff Cap) Bill

Alan Brown Excerpts

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

[Dr Whitehead]

The hon. Lady is, I think, under the impression that the new clause seeks to introduce a relative price cap. It does not seek to do that at all, or indeed during the period when an absolute price cap is in place. When the absolute price cap has come to an end, which could happen on various dates, there should be a mechanism in place to ensure that tariff differentiation is within certain bounds—I mentioned having a piece of elastic on tariffs—so that companies cannot return to the practice that unfortunately exists today whereby they can take people on board on one particular tariff, and even introduce a discount tariff for a certain period to entice people on to it, and then place people on one of their highest tariffs when that one comes to an end. It is a long piece of elastic in that case. That disadvantages the customer and is not what they thought would happen when they first went on to that tariff, and it seems thoroughly laudable to prevent that.

We need to ensure that market mechanisms are in place to prevent us from returning to where we are at present and to the situation that got us into this position in the first place. We believe that the mechanism for a relative tariff differential has a different function entirely from the relative price cap being suggested in some quarters. I think we would all agree that a relative tariff differential is not a price cap in its own right, as the Select Committee concluded strongly, but a strong mechanism for ensuring that the market works better in future.

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

One concern about a relative cap is that there could be a bit of floor-raising, with some of the cheaper tariffs disappearing. Although there might not be a cap in future, what is to stop the same thing happening with a relative tariff system, where we lose the bottom tariffs in the market?

[Dr Whitehead]

The hon. Gentleman makes an important point about the possibility that within a relative tariff range arrangement, a company could put forward a very high tariff as a starting point and then put customers on an even higher tariff subsequently, if that tariff is within the piece of elastic keeping the tariffs within reach of each other. If an energy company were to do that outside a price cap, it would be a sure way of losing a large number of customers, because it would have put its initial tariff way above that of any competitors. If it was agreed that market circumstances were such that those sorts of arrangements should be able to return, companies would have to be kamikaze-inclined to pursue that way of doing things.

[Alan Brown]

I appreciate what the hon. Gentleman is saying, but is that not why we are introducing an energy tariff Bill in the first place—because people have been on standard variable tariffs that are too expensive, but they are not moving? It is the same with a relative tariff differential; people will not necessarily move, and that is what we really need to sort out in the market.

[Dr Whitehead]

We have to bear in mind that people will be introduced to a new tariff. Indeed, we hope that by the time the market returns, the issue of people remaining on SVTs for years and not switching will be a thing of the past and there will not be SVTs in the system, but also that there will be other tariff arrangements that effectively prevent SVTs from playing the role they have played before.

--- Later in debate ---

[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.

--- Later in debate ---

[Alan Brown]

I will be really brief. Clearly, we all support the Bill, so there is no point in over-debating it and delaying things much further. As the Secretary of State said, an overpayment of £1.4 billion was collected from customers in 2016. Some £650 million of that was effectively excess profits that customers were paying to the energy companies. That proves the need for the Bill. We can argue that it should have been introduced before, but at least it is here now, so let us get on with it.

I welcome the Secretary of State’s comments about ensuring that there are safeguards for vulnerable customers. That is really important; it is the whole ethos of the Bill. I hope that vulnerable customers get the protection that they need. I know that the Conservative party and the Government really hope that the provision will be temporary and that there will be no further state interventions in the market. It would be fantastic if that were the case, but I am not sure whether that will happen—we will wait and see. That is the whole point of Ofgem having the correct measures and of ensuring that we understand how the markets and the companies work. It was interesting that the mere threat of the Bill was enough to make companies change their behaviour and start reviewing their standard variable tariffs. At the very least, we need to be willing to threaten further state intervention if the market is not working as it should.

If we really want customers’ bills to come down, we will need further state intervention, including home energy efficiency schemes. I will finish with my usual plea about getting onshore renewables back on to the market because they are the cheapest form of energy at the moment. We know how successful the bidding process has been for offshore renewables, so let us get the cheapest form of energy back to market and help to bring down customers’ bills. I commend the Bill and look forward to its implementation.

Question put and agreed to.

Bill accordingly read the Third time and passed.