Energy Price Freeze

Debate between Alan Whitehead and Duncan Hames

Wednesday 6th November 2013 Commons Chamber

[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.