Alan Whitehead
Main Page: Alan Whitehead (Labour - Southampton, Test)Energy Price Freeze
Alan Whitehead Excerpts
Mr Davey
No, I am not giving way.
The right hon. Lady talked about the pool and the exchange on which the electricity will be traded, but she has not noticed that the day-ahead market in Great Britain has boomed under this Government. In 2011, just 5% of final Great Britain demand for power was traded on the day-ahead exchange. In the past six months, more than 50% was traded. We have seen a big increase, but she did not even bother to mention it.
Mr Davey
No, I am not giving way.
Ofgem has looked at whether or not it should mandate 100%. It will ensure that there are new reporting requirements so it can check what is happening. It will say that, if the number does not improve and stays as it is, it will intervene. It is not intervening now—the right hon. Lady will not know this because she has not read the document—because the independent generators have not asked for it to do so. The independent generators say that the day-ahead market is not the problem for competition and that the day-ahead market is not the market in which there is room to drive down prices. They say that the problem is the forward markets—the month-ahead, six months-ahead, year-ahead and the two years-ahead markets.
Mr Davey
Let me finish answering the hon. Member for Denton and Reddish (Andrew Gwynne). I am not satisfied with the energy markets that we inherited from the last Government. We want to make sure that competition is working. That is why we have already had the retail market review with Ofgem, which is now improving competition in the retail markets. It is why we have Ofgem’s latest proposals in “Secure and Promote”, which the Opposition have not read, to improve competition in the wholesale market. I am not satisfied with the markets at the moment, but our policies—with Ofgem’s help—are coming into place now.
We have had to run to make sure we turn round the markets we inherited, but I can tell the hon. Gentleman how quickly our policies are now coming in. The retail market review comes into effect, in terms of people’s bills, next month. Ofgem is still consulting with the industry, but expects to give a final response to its consultation this year. Then its proposals for a market maker, which will ensure transparency so there are none of the secret deals that the right hon. Lady keeps on about, will start happening in the first half of next year. We are producing the competition proposals and they are coming into force. People have not seen the benefits of them yet—I accept that—because we have been trying to turn round the rigged market that we inherited. We are now turning it round and people will begin to see the benefits over the years ahead.
Dr Whitehead
The Secretary of State has been waving a document around. Can he turn to the page in that document that discusses netting off between companies in the long-term market? Can he turn to the page in that document that discusses the question of creating trades at time of closure by companies? If he cannot do so, will he accept that the document is not quite the panacea for all the transparency issues that he thinks it is? Will he go away and review the things that the document does not say as well as what it does say about the transparency of the market?
David Mowat
No, I cannot, because I am not an expert on the market. I am merely trying to establish whether the absolute prices that we are paying vis-à-vis our European competitors indicate the existence of a cartel, as has been claimed on many occasions. That does not appear to me to be the case, but someone can always intervene on me—actually, they cannot, because that would be the third intervention and I would not be given extra time, but someone could always discuss the point with me in future.
The fact remains that we have the 26th highest gas prices out of 27 in Europe and we need to be clear about what problem we are trying to solve. The problem that we should be trying to solve is the problem of our housing stock, whose standards need to be raised to the level of the standards in the rest of Europe. Germany’s gas prices are 40% higher than ours, but its gas bills are lower than ours. Why? Because its housing is better insulated and better built.
I have five points to make. My first point is that whatever we decide to do on the basis of the various reviews, we should not reverse the thrust of our policy on insulation. We should not give up on the energy company obligation, the green deal and smart meters. I do not agree with the hon. Member for Brighton, Pavilion (Caroline Lucas) on many issues, but I do agree that far and away the most effective way of making progress on energy in general is to ensure that there is better conservation and more efficiency.
Secondly, we need to make the market work better—
David Mowat
No, I will not, because I have already given way twice.
I welcome the proposal for a competition review: it would clear the air. If there is indeed no cartel, surely everyone should welcome it. I also welcome the proposal for 24-hour switching, although, having reflected on why I might not switch as often as I should, I concluded that it was still too difficult. I have just moved house, and it took a long time for me to manage to speak to those guys on the phone. I suggest to Members on both Front Benches that we should introduce a fining system. If it takes more than 10 or 12 rings for any of the big six to answer the phone and transfer callers to someone who can deal with their query, that company should be fined. I bet that if we introduced such a system, we would find that the energy companies hired more people and dealt with calls more efficiently, and switching—whether in 24 hours or not—would be much easier.
Of course we need more new entrants to the market, but I have a further, serious criticism to make of the big six. They have described a margin of 4% or 5% as reasonable, which is an entirely spurious observation. I have no idea whether such a margin is reasonable, but the point is that we should evaluate them on the basis of their return on capital employed. A margin of 4% is a huge margin for a foreign exchange dealer and for a petrol retailer, but a very small margin for any other retailer. When someone asks if £7 million a day is too much profit or too little, that is a very hard question to answer. The big six are entitled to a reasonable return on their capital employed. We should focus on that, and they should focus on it too when they are telling us how reasonable they are.
Neil Carmichael
That brings me to my next point, which is, ironically, that there is a tension between wanting to have lower prices and protecting the environment. I have often thought that the Department of Energy and Climate Change is both poacher and gamekeeper. We need to continue investing in green energy. I will always promote green energy because my constituency has a lot of important companies that are working extraordinarily hard to develop green technologies. However, we must respond to the price issue as well. That is why the Government are right to calibrate the green taxes more sensibly to reduce prices in the energy market. I get the sense more and more that the Opposition agree that the price freeze is simply idiotic.
I will talk about two other important matters. The first is energy storage. We do not give enough attention to that subject. Energy storage technologies will help and we need to invest in them. I hope that we will see energy storage treated as a capacity in the Energy Bill and that it will be invested in. Liquid air, for example, provides us with an opportunity to store energy and thereby flatten out demand and sort out the trough problems.
My hon. Friend the Member for Warrington South (David Mowat) spoke sensibly about the need to focus on making houses more energy efficient. Of course we must do that. We have the least energy-efficient houses in Europe in broad terms. We have to continue with the green deal. I am delighted that the Minister is promoting that and that it has got off to a good start. We have to ensure that our houses do not leak energy, but contain it and therefore use less of it. That is one way to reduce bills.
Something that has not been discussed in the debate thus far is competitiveness, not just in this country, but across Europe. In January, the Prime Minister set out the stall for renegotiating our position in the European Union. One of the key points that he made was that we should strengthen the single market in energy. He was absolutely right. We have to recognise that there are lower commodity prices on the continent. We must be able to benefit from those prices. We need to attract investment from the continent and we must invest in the continent so that we have a more competitive and more connected energy policy.
Connectivity is lacking in certain areas. We need more investment in our infrastructure so that we can be sure that whatever form of energy we alight upon can get to the right place in the most cost-effective and efficient way. That is definitely a way to drive down prices. We must set out the stall for increasing competition in the energy market both locally and internationally, with Europe as a target. That would not be a particularly difficult thing to do.
Dr Whitehead
The hon. Gentleman makes an important point about interconnectivity. Will he therefore explain why the Government have specifically excluded interconnections from their capacity market arrangement? Will he be at the forefront of trying to change that?
Neil Carmichael
It is always great to hear from a fellow member of the Environmental Audit Committee. He asks a very good question. [Hon. Members: “Answer the question.”] And he will get a very good answer. I am referring to connectivity across Europe. I do not think that the remit of the Energy Bill extends that far. There is not sufficient connectivity between England and France. There is no connectivity between Norway and—
Neil Carmichael
No, the hon. Gentleman has had a fair crack of the whip.
In summary, this is about powering through with more competition and ensuring downward pressure on prices, while recognising the global and economic challenges we still face, even though they are being rapidly dealt with by the Government. We cannot talk about a subject as critical as energy without considering those other issues—that is the key point on which I shall conclude.
David Morris
I am referring to the announcement in the Chamber—obviously this is a more official domain than the Labour party conference.
The three-year price freeze negated completely the policy. It seemed popular, people are still talking about it, and the press are talking about it with gusto. But the reality is that unless the energy industry is renationalised, that is how the markets will react. Last time there was a similar run, the Leader of the Opposition was Secretary of State for Energy and Climate Change. We had a price fix of three years. If he could not do anything against the markets when he was in power, what makes him think that he can do it now? It is all pie in the sky. In reality, the energy companies will carry on looking after themselves, the consumers will get the hike on the threat of a price freeze, and it will cause pandemonium among consumers, especially in their pockets.
As I have said, my constituency has two nuclear power stations. The announcement by the Leader of the Opposition has the potential—if it has not already—to damage pension funds through the shares in the company.
Dr Whitehead
Because gas is the market maker, the two nuclear power stations in the hon. Gentleman’s constituency are making large amounts of additional money from the electricity they sell at gas market maker prices because they are not subject to the carbon floor price. Therefore they are completely insulated from the effects that he mentions. Far from being worried about the situation, I would suggest that they are worried about the possibility that the Government might remove the carbon floor price and thus remove the free money that they are getting.
David Morris
I disagree with the hon. Gentleman’s analogy. We are talking a lot about gas, but the two nuclear power stations are huge employers in my constituency. What is the Opposition saying to my constituents with the suggestion of a price freeze? Will there be a freeze on their wages? That is what would happen. How can those two new stations produce energy efficiently and make some profit out of doing so without passing the effect of the price freeze down to the people who work in the area? The local economy would be hard hit. It is one thing to announce price freeze policies on the hoof, but that is the reality.
We are trying to be more responsible. I agree that we must take down green levies, which are a blight on struggling families. The average British family pays £112 a year because of green levies and I am delighted that the Prime Minister is taking action on that. We all support low-carbon energy production, but there is no point in confusing saving the planet with taxing people to death. We also need to invest in local energy production which is less susceptible to foreign crises and currency fluctuations. My hon. Friend the Member for Warrington South (David Mowat), who is no longer in his place, articulated accurately how the European markets are dealing with this problem. We can debate what sort of locally produced energy we should have, and I am very aware of people’s different views on that, but having local production is vital in my area for a variety of reasons, including the local economy and the cost to the consumer.
Duncan Hames (Chippenham) (LD)
I did not anticipate having the opportunity to speak, so I am grateful to you, Madam Deputy Speaker, for calling me and to colleagues whose speeches I have heard.
It is important first to set out our objectives for energy policy, on which, even in this heated debate, a large majority of the House can reach a consensus. We want energy that is affordable and reliably available to businesses and households. We want to meet our energy needs in a way that also meets our commitments in the carbon budget to reduce carbon emissions and take responsibility for the consequences of our choices for the rest of the world. It is worth bearing in mind, in seeking to do all those things, that the question of affordability can be addressed not only through energy-specific policies but through wider economic policy.
I suspect that energy is not going to get any cheaper, so it is important that we look to other mechanisms to make our energy more affordable. Above all, I would certainly agree with those who have spoken today about the need to become more efficient in our energy use in order to get the bills down. I also hope that we can support economic policies that will provide for growing incomes, so that people’s ability to pay their energy bills will be improved. That should be an objective of this Government and any other.
My main interest in speaking in the debate is to elicit more detail from those on the Opposition Front Bench about the proposals that they want MPs to vote for this afternoon. The “deep structural reforms” that the right hon. Member for Don Valley (Caroline Flint) talked about introducing after a 20-month price freeze are worthy of closer scrutiny by Members on both sides of the House, but I lack any confidence that the interim measure of a price freeze would actually work. I want to ask some questions about that, and I hope that the hon. Member for Rutherglen and Hamilton West (Tom Greatrex) will be able to answer them when he sums up.
How long would it take to bring about a price freeze, once a Government Minister had decided to introduce one? Could he or she do it under their own executive authority? Would they need to put it to the Cabinet, or get a Government write-round to support the proposal first? Could it be done through regulations, or would it need to pass through this House? Would it require primary or even emergency legislation?
I would be interested to hear how long it would take to implement such a freeze, regardless of which party was in power, if a Minister was minded to do so. That would also tell us how long the energy companies would have to respond to the situation before the Government were able to implement the freeze. Would it be possible for the energy companies, either under this Government or a future Government, to get price rises in before a freeze came into effect?
What would be the consequences of a price freeze while it was in place? The right hon. Lady said that, even if wholesale prices were changed during a freeze, electricity suppliers would not feel the effect or need to increase their prices because they would already have purchased their energy on the forward markets. As I have tried to explain in earlier interventions, that will present a particular challenge to the very companies that I hope all Members want to have a greater presence in the electricity market, because those smaller companies are at a disadvantage compared with the big six when trying to buy electricity on the forward markets.
It is not difficult to understand. An independent electricity generator entering into a contract to sell its electricity some time in the future to a supplier of electricity to businesses and other customers is giving up the opportunity to sell it to anyone else. It will therefore have to be extremely confident that the supplier will still have the financial strength to pay for that electricity later on. Generators look for collateral in those circumstances, and the big six clearly have the necessary collateral to see them through that process. It is much harder for the smaller, challenger companies.
Dr Whitehead
The hon. Gentleman talks essentially about the security of long-term bilateral deals. Does he accept that the effect of a pool, particularly a full purchase-in and a full buy-out pool, removes a number of the issues he has raised about the uncertainty of whether we can get a buyer and whether the person who is buying ultimately has the wherewithal to do so?
Duncan Hames
I thank the hon. Gentleman for that intervention. I said that I was interested in the long-term proposals outlined by the right hon. Member for Don Valley. However, I am talking about what happens during the period of the price freeze, before some of the changes she proposed come into effect; and I was highlighting the difficult position in which the small suppliers are left during that period.
This issue relates not just to wholesale prices, as other increases in costs that suppliers will experience during this price-freeze period are relevant, too. Suppliers will experience regular increases in costs for distribution and transmission, and unless they are in a position to change their prices before the freeze comes into effect, that will be a direct hit. Although some Labour Members may believe that the big six can take that hit, it is a much bigger challenge for smaller competitors to be able to absorb it. In fact, a market in which losses need to be absorbed for a period of time before it is possible to break even acts as a barrier to entry. If we want a more competitive market, introducing a new barrier to entry and to the viability of new entrants will clearly not help bring about competition. In order to be able to grow market share, new entrants rely on people having an incentive to switch. I would be interested to hear what the Opposition think will be the practice of competition during the 20-month freeze. How possible do they believe it will be for the smaller competitors to challenge the big six during this period, or will it just be one of entrenchment for the big six companies?
At the start of the debate, I asked whether the right hon. Member for Don Valley agreed with me—and she did—that it was in the long-term interest of consumers for Government policy to seek to reduce the cost of capital to businesses in the industry. If we enjoy in the future a very competitive energy market—after whichever Government have been busy reforming the electricity market—the lower the cost of capital, the lower the prices will be that consumers pay.
It seems to me incontrovertible that an industry experiencing a Government intervention which forces a price freeze for a period of 20 months will have the effect of raising the cost of capital. Investors do not have to invest in the sector if they do not wish to do so; they can invest elsewhere. If they know that the Government have frozen prices, that will be a reason for the cost of capital to increase. Ultimately, that would push up prices for consumers, even after all the reforms that the shadow Secretary of State outlined. That would not be in the best interests of consumers. I do not believe that this idea is going to work.
Dr Alan Whitehead (Southampton, Test) (Lab)
Perhaps the best thing we can do this afternoon is to shoot a number of canards standing in the way of grasping the central issue of how to reset the market in such a way that it will work in favour of consumers and customers instead of against customers’ interests. Frankly, saying that proposals to reset the market will lead to a deterioration in investment prospects or a loss of market value that will prevent people from investing is the first and one of the biggest of such canards.
A substantial amount of investment is needed, but it cannot be judged on the basis of the interests of integrated utility management; it will come from companies investing in the wires, in smart meters and in new forms of generation that are independent of the utilities. Indeed, the balance sheet of the big six suggests that not a very high proportion of that £100 billion-plus investment is likely to come from them in any event. It appears that the factors relating to the investment will be manifold, and will not necessarily be related to the fortunes of the big six.
To say that resetting the market will cause it to work in a terrible way in the future is effectively to say that breaking up what is currently a seriously dysfunctional system will lead to problems. That strikes me as a counsel of despair not just where the market is concerned, but where consumers are concerned, and it is, perhaps, the second big canard to be shot. It is claimed that the Energy Bill will put a number of things right, and it will, but what it will not put right is the malfunctioning of the market. What is extraordinary about the Bill—as with the energy reform White Paper that preceded it—is that the one thing it does not do is reform the energy market. It lets the market carry on just as it has in the past, and we know that the market is seriously dysfunctional.
Bilateral trade that rolls down the curve conceals a considerable amount of what is actually going on. One might think, for example, that there is a relationship between the 24% profit that is made by generators overall and the 5% that is made by retailers, because one sells to the other, and one might therefore wonder where the missing money in the middle is going. In fact, much of it is going to people who are trading with themselves and “netting off” so that their trades do not appear as trades at all, or even creating trades close to gate closure in order to balance the two sides of the operation of an integrated company.
We know that the energy market is pretty dysfunctional, and we know that it needs to be reformed. The question is, can we reform it by simply continuing with business as usual and hoping that Ofgem will continue to produce documents that aim to introduce a little more transparency to a market that, by definition, is largely not transparent, or should we do more to reset the market in favour of customers?
Mr David Anderson (Blaydon) (Lab)
I apologise for not being in the Chamber earlier, Madam Deputy Speaker. I was at a Select Committee meeting.
As always, my hon. Friend is speaking very knowledgeably, and he is making a good point about the dysfunctionality of the energy market. When, 25 years ago, it was first suggested that the market should be privatised, we were told that one of the key reasons for privatising it was that the risk would be transferred from the Government—from the public purse—to the private sector. Is not the truth that, in the last 25 years, the risk has been transferred from the Government to the private sector, and thence to the customer? The customer bears the risk whatever happens.
Dr Whitehead
My hon. Friend is right. The market tends eventually to land its risk, its transfer arrangements and its outcomes squarely on customers’ bills. The point about a price freeze is that it must be seen in the context of the other measures that it is being suggested should accompany it as a way of securing a pause while the market is reset.
Bob Stewart
For the sake of my education, will the hon. Gentleman clarify one point? It seems to me that if we had a nationalised energy company and the prices went up, there would be only two ways of paying for that: through the customer, and through the Government. Does the hon. Gentleman agree that, whether a company is nationalised or commercial, the customer pays in the end?
Dr Whitehead
The hon. Gentleman asks a rather complicated question. Currently, gas is the market-maker and companies that produce energy that is not gas-based sell their energy into the retail market at the electricity-equivalent of the price of energy produced by gas. It is to be hoped that one of the effects of energy market reform will be that a change in the balance of production, in particular as a result of increasing amounts of renewables, will mean that gas is no longer the market-maker. That is another canard that will need to be shot in the long term.
Dr Whitehead
Obviously, the world gas price varies considerably. The UK market is currently based around the gas price. If gas is no longer the market-maker over the medium and long term, a number of interesting consequences will arise, particularly in terms of how we would relate volatile markets to retail prices.
That is one of the issues that would be dealt with by the Opposition’s proposals to introduce a pool. If there is a pool into which everybody transparently sells their products and the pool then sells to energy retailers, that would deal with a number of problems that have arisen as a result of the imperfections in the market, and which would remain despite the Energy Bill trying hard to address them. If there was a pool, they would be dealt with even if gas was still the market-maker, but the market would be much more efficient in the long term if that was not the case.
We should consider in this context the fact that independent generators do not believe they have a clear market for their products. That issue remains unsolved by the Energy Bill provisions. If there were a pool, it would be substantially solved in as much as they would know they had a buyer into the pool and a seller out from the pool. If the current dysfunctional market were reset in the way the Opposition propose—with a price freeze while the market is reset, a pool, and a regulator that can properly relate what is happening in world prices to how they are being passed on through the pool and out the other side—a lot of the issues we have been talking about today would become far more simple and transparent, and the future solutions would be customer-oriented.
I do not say that that would solve the problem of increased energy prices in the future, because it is certainly true that world energy prices continue to increase and that there would be price increases for the consumer. It is not true, incidentally, that under those circumstances energy companies would simply take back the money lost during a price freeze, because there would be regulation reflecting world prices. Although prices have gone up, the world gas price has not gone up over the past year and a half. A fair relationship between world energy prices and retail prices could be achieved through a combination of new forms of regulation, an energy pool and a reset of the market.
We must look at these proposals as part of a wider package that, at its heart, is on the side of the consumer. At present we have a dysfunctional market that will never end up on the side of the consumer unless it is fundamentally reset so that it points in the right direction. My sorrow is that, although the Energy Bill has many good provisions that deserve to be supported, it does not do that, and that is what the Opposition proposals are trying to do, and that is why they should be looked at seriously—
Madam Deputy Speaker (Dawn Primarolo)
Order. Time is up. I call Debbie Abrahams.
Christopher Pincher (Tamworth) (Con)
I thank you, Madam Deputy Speaker, and my legion of fans. I apologise for not being here for the opening exchanges of this important debate, but I had to attend a funeral. I congratulate the Opposition on tabling this motion but, in as much as we are discussing long-term structural energy issues, as much as it is a challenge to the Government, it is also an admission by the Opposition of their failure during their 13 years in government, when they had the time, the money and the majorities to make changes but did not do so.
The shadow Secretary of State said, with characteristic chutzpah, that we need to develop more home-grown energy. Of course, she is right, but the question then must be: why during 13 years of Labour Government was no new nuclear power station opened? The last to open was in 1995 and the next will be opened under a Conservative-led Government in the future. Labour also had no keenness to explore shale gas. These things the Labour Government failed to do. Labour Members have said that we need greater competition in the energy market—
Christopher Pincher
I will not give way, because I am on borrowed time—[Interruption.] In a parliamentary sense. In addition, both the Opposition spokesman and the and Treasury Bench spokesman need to speak.
The Opposition have said that we need greater competition in the energy market. They are right, but the energy market as it stands—the big six—is Labour’s creation. The right hon. Member for Oldham West and Royton (Mr Meacher) called it an oligopoly, but it is Labour’s oligopoly and the Opposition must take some responsibility for that, as the hon. Member for Blaydon (Mr Anderson), who is now shaking his head, said in his speech.
The Opposition have now suggested that we should fix prices under a price freeze for a period of time so that we can right the market. If something looks too good to be true, sounds too good to be true and smells too good to be true, most right-thinking people would say that it is too good to be true. A price fix is too good to be true.
Fixing prices, as many experts have said, will only mean that the energy companies will hike their prices in anticipation of that fix. That means that people will be paying artificially high prices, particularly if the wholesale price falls during the period of the freeze. It is not just me who is saying that; Professor Dieter Helm is saying it, too.
The Opposition also say that we need to get more competition into the energy market, but if we listen to Steve Fitzgerald, the darling of the Select Committee who ran rings around some of the players from the big six at that meeting, or to First Utility, the Leader of the Opposition’s provider of choice, we hear them say that a fix will make it more difficult to operate in the market. It will not allow small players in and will entrench the position of Labour’s big six. The Labour party ought to admit that.
The Opposition also say that investment will flow into our infrastructure anyway. I do not believe that is true. We need to spend at least £110 billion in the next 10 years on our power stations, our pipes and our pylons to keep the lights switched on and we need much of that investment to come from private companies. The hon. Member for Southampton, Test (Dr Whitehead), who made a thoughtful speech and is my colleague on the Energy and Climate Change Committee, said that he does not believe that the energy companies will invest that sort of money. We learned in the Select Committee inquiry just a week ago that E.ON alone has invested £7 billion in its generating capacity over the past five years. If we extrapolate that over the big six, that would suggest that they are spending some £40 billion on the infrastructure we so desperately need.
If the investment dries up because of a price freeze that sends the wrong message to the markets, the poor old taxpayer—the van driver, the nurse, the doctor, the teacher and the pensioner—will have to pick up the tab. That is why I think the Opposition’s proposal is a con. It is a scam. It is a swizz. It is voodoo economics. It is political charlatanism. They know it and the electorate can see it, too. What we need is not some artificially high price freeze in the future but price cuts now. That is what our electorate want and what our constituents tell us. If we roll back some of the green levies that account for some £112 on the average dual fuel bill, if we make it easier to switch, saving people some £200, and if we get people on to the lowest tariffs, saving them about £158, we can reduce bills now for hard-pressed consumers. That is the way to deal with our energy challenge.
The proposals made by those on the Labour Front Bench might look good and might sound good on television, but we and our voters know that they are not going to wash.