Energy Markets (Competition)

Alan Whitehead Excerpts

Wednesday 26th March 2014 Westminster Hall

[David Mowat]

Certainly the second part of my remarks will be brief, Sir Roger.

The issue before us is serious. Everyone at this debate is concerned about fuel poverty in their constituencies and high fuel prices. Most of us, I think, are concerned about energy intensive industries, particularly in the north-west and the north-east. Some 900,000 people work in industries where the price of energy is a significant determinant of profitability, and it behoves us all to take the issue seriously. We are where we are because issues have been raised on the market fairness and market effectiveness of the energy industry in the UK, and it is right that we look at that. The Secretary of State has talked about referring the industry to the competition authorities, and I support that.

It is important—the opening remarks did not do this—to distinguish between gas and electricity, because they are different markets. I want to talk a little bit differently about each of them. There are suggestions that the industry is some kind of cartel and “the big six” is, frankly, often used in this House almost like a swear word. We hear that the big six do this and do that. I have heard the shadow Secretary of State use the phrases “price fixing” and “secret deals”. If the Opposition have evidence of cartels or price fixing, that is extremely serious. If it exists, directors of public companies will go to prison. Fines can be levied that are several times the turnover of those companies. It is important that the Opposition bring that evidence forward, if it exists.

When words like “cartel” and phrases like “secret deals” and “price fixing” are being used, be aware of what is being suggested and be willing to take that forward and give that evidence to the competition authorities in the European Union and the UK and to the police. If such evidence does not exist, it might behove the Opposition to use more moderate language, which they were doing in their opening remarks in this debate, at least.

I want to make some comments on how the UK market compares with the EU market. One way to find out whether there is price fixing, cartels or other problems is to see how our market compares in structure and outcome with the rest of the EU. I have done a little analysis on that, under three headings. The first is out-turn prices for gas and electricity in the UK compared with other EU countries. The second is market structure. People say that we broadly have the big six in gas and electricity, and other countries in Europe do not have that structure. The third is the profitability of those energy retailers in the UK versus other places. I report that the answer is different for gas and electricity.

On gas, we have to distinguish between taxed and untaxed prices. In this country, we tax gas very little, while the EU taxes it much more heavily. It can appear that prices are higher there, so it is only fair to look at untaxed prices; on that basis, our gas prices are the second lowest in the EU, although it is true that they are significantly more than in some other countries. They are triple the prices in the United States of America, but we know that that is to do with shale gas and all that goes around that. Our gas prices are the second lowest in the EU, yet broadly speaking we have an EU energy market for gas, and some comparability would be expected. If a cartel is operating in the gas market, it is hard to see that it is being very effective.

On electricity, our retail prices are among the lowest in the EU. When we look at the position without tax, it is a little more nuanced. According to the EU portal, our untaxed electricity prices are slightly higher than those in Germany, Holland and France, although not by very much—5% or 6% higher. That is a lot of money, however, by the time that all works through. On the face of it, there might be a more significant issue with electricity than there is with gas. I would be interested to know whether Opposition Members are talking about the need for a price freeze for both industries or just for electricity.

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

Does the hon. Gentleman accept that the production of electricity using gas means that there is a substantial link between gas and electricity? Investors in new gas-fired power stations claim that the relationship between gas and electricity prices means that they are currently not particularly willing to invest. The hon. Gentleman’s decoupling of the two markets is a bit over-precise and ought to bear that fact in mind.

[David Mowat]

That is a fair point. It is true that no gas power stations are currently being built in this country, but the principal reason is that shale gas in the United States has meant that coal has become cheap on the world market. We will therefore be burning coal in this country at a great rate—even more so in Europe—until we are stopped.

I accept the hon. Gentleman’s point that the markets are not entirely distinct, but my point was simpler than that. I have looked at what we are paying in this country for gas, which is a separate market, and it is the second lowest price in the EU. Members should bear that in mind when making comments later in the debate.

I was about to come on to market structure. I have always thought it a little odd that having six participants was regarded as a monopoly. Looking elsewhere in EU, Germany has two retailers in electricity and three in gas, Holland has three in each and Italy has five in gas and two in electricity. France is a little different because of nuclear power. In terms of market concentration, the report I used for this is the—I do not have it here—

--- Later in debate ---

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

Why are we having a debate on the energy market when, with the Energy Act 2013 having passed through the House, energy has apparently been done to death? The simple answer is that, although all the material that went into the Energy Act mentioned electricity market reform, the electricity market was the one thing that was not reformed as a result.

As my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz), whom I congratulate on securing the debate, outlined, the market in the UK is not working well, in particular because the present structure—I take issue with the suggestion that markets elsewhere in Europe are more concentrated than the UK’s—is concentrated and vertically integrated on both sides. The big six have 95% of the retail market and some 70% of the wholesale generation market. The hon. Member for Warrington South (David Mowat) mentioned Germany, where nearly 50% of generating capacity is in the hands of independents, communities or local agencies, which is a different landscape from the UK’s. Switching is only part of the solution to competition and to market dysfunction.

Indeed, what we need to understand about switching is that small suppliers, which have recently seen their miniscule share of the retail market marginally increase, are subject to a reduction in energy company obligation fees when they have fewer than 250,000 customers. When Mrs Miggins of 7 Acacia avenue switches and becomes a small supplier’s 250,001st customer, that costs the supplier £7 million in the changeover from non-obligation to obligation—[Interruption.] The Minister shakes his head, but I am afraid that that is how that works.

How one fixes and deals with market competition is about looking at the whole question—how the market works together. The Opposition proposals on the separation of retail and wholesale businesses and the development of a pool—essentially an exchange to secure transparency and access to the market for all, including independents—start to tackle that overall market issue. The Government will pray in aid an Ofgem report—I believe the final report is out tomorrow—about wholesale power market liquidity, and the “secure and promote” licensing conditions. It will, clearly—certainly in relation to what has been proposed so far—deal only with the day-ahead market, one end of the trading arrangements, and not with the arrangements whereby companies trade with themselves.

That is an essential question in dealing with how to get the market working better. In bilateral deals, companies trade with themselves. They not only buy extended amounts in advance and then whittle amounts down to balance, but, at gate-closure time, they trade with themselves so as to balance their own arrangements much better, to avoid being fined in relation to balancing arrangements. That provides, among other things, a particular advantage compared with independent suppliers or, indeed, retailers, who have to buy from the spot market or the day-ahead market to balance their own supplies. It is a completely integrated arrangement as far as self-supply is concerned.

It is no coincidence, therefore, that SSE announced this morning a price freeze until 2016 and possibly beyond, and a separation of supply from retail. I think that what we should read into that is that SSE anticipates a Labour Government making the changes and getting ahead of the game. That change is greatly to be welcomed, and we need to put that on the table in discussions on competition.

--- Later in debate ---

[Michael Fallon]

I hope that the hon. Gentleman will allow me to proceed, because I have a number of points to cover.

That is what both Government and Ofgem are working to achieve. Through the Energy Act 2013, supported by all the major parties in the House, we have introduced far-reaching reforms to the electricity market and supported Ofgem’s reforms to the retail market and the improvements that it is seeking in liquidity in the wholesale market.

Poor liquidity in the wholesale market is cited by small suppliers and independent generators as a key barrier to entry and growth. Since 2010, trading in the day-ahead market has grown rapidly. The amount of power traded on the day-ahead exchanges has increased from just 6% in 2010 to more than 50% last year.

However, we also need to strengthen liquidity in the forward market. That is one of the key concerns. From next week, Ofgem will be introducing tougher licence conditions that further strengthen forward market liquidity. Those conditions will require the big six suppliers and the largest independent generators to trade fairly with small suppliers or face financial penalties. They will also impose a market-making obligation on the big six, meaning that they will have to post the prices at which they will buy and sell power up to two years in advance. That will make it easier for independent suppliers to buy power for their customers. Knowing that the big six will buy power at the prices that they post will also help independent generators to sell their output in the forward market. The new licence conditions will be supported by Ofgem’s powers to fine companies if they are in breach of them. We have underpinned those reforms by taking powers in the Energy Act to act if Ofgem’s reforms are delayed or frustrated.

[Dr Whitehead]

Will the Minister give way?

[Michael Fallon]

I hope that the hon. Gentleman will forgive me if I do not.

Our work to break down barriers to entry into the retail energy market is already bearing fruit. The supplier base that we inherited had shrunk, as I have said, from 15 majors in 2000 to just six in 2010. In 2011, we raised the customer threshold for participation in the key energy programmes from 50,000 to 250,000. Since 2010, 11 new companies have entered the domestic supply market—they include one that now has more than 800,000 customers—and we see more companies preparing to enter. There are now 18 independent suppliers, which are increasingly penetrating the market share of the larger, more established players. Their market share, although small, has doubled since 2010, and we will continue to work to remove barriers to entry and growth.

According to industry figures—this is the answer to the point made by my hon. Friend the Member for East Hampshire—between October and February alone, about 1.5 million customers switched their electricity supplier and, of those, nearly 500,000 switched their account to one of the smaller suppliers. The smaller suppliers are of course the ones that would be most exposed by Labour’s price freeze. They are less able to absorb any increased costs arising from network charges or increases in the price of wholesale energy and would struggle to compete with the big six in those conditions, so we do need an answer to the question that I put to the shadow Minister.

I was also asked about consumer engagement. An engaged consumer base is a key component of a competitive market, which is why we are reforming the retail energy market and making it easier for consumers to navigate. In 2010, we inherited a market that was not working in the best interests of consumers. There was a profusion of more than 350 complex tariffs, no doubt supported by Opposition Members, but that complexity made it very difficult for people to work out how to get on to the right tariff for their circumstances. Bills were complicated and unclear, making it difficult for consumers to compare their existing tariffs against others on offer.

The retail market review that Ofgem has already carried out has simplified tariffs and limited suppliers to offering just four simply structured tariffs per fuel. New rules, introduced next week, will make bills clearer and simpler. Suppliers will be required to tell their customers about the cheapest tariff that is available to them and the savings that they could make by moving to it. That information will now be provided on bills and annual statements. By June, all customers on poor-value dead tariffs will be moved to the cheapest variable tariff.

The measures that I have outlined demonstrate our determination to drive greater competition in the energy market, but those measures are not, of course, all that we are doing. My right hon. Friend the Prime Minister announced last autumn that the competition authorities would carry out an annual competition assessment. The first assessment is being carried out by Ofgem, the Office of Fair Trading and the Competition and Markets Authority. We expect it to be published very soon.