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.