Energy Prices and Profits

Albert Owen Excerpts

Wednesday 4th September 2013 Commons Chamber

[Mr Davey]

I was not making phoney accusations, but giving the facts and the history. Labour may want to run away from its history, but we will hold it to its record.

Before I talk about the action that I and the Government are taking to help consumers, let me return to Labour’s three-point plan, having already demolished its first proposal to abolish Ofgem. The House might like to note that the abolition of Ofgem is not recommended by the Energy and Climate Change Committee.

Labour’s second proposal is to drop Ofgem’s long-awaited reforms of the wholesale energy market in favour of reintroducing the pool. It was Labour that abolished the pool just over 10 years ago, as my hon. Friend the Member for Sherwood (Mr Spencer) reminded the House, at an estimated cost of £1.4 billion. Labour said that is was not working—wait for it!—in the interests of consumers. Apparently things have changed. However, under the policies that Labour put in place after it abolished the pool, things have not got much better. Labour’s abolition of the pool produced the vertically integrated energy markets that we see today. Independent generators find it tough to get into the wholesale market because of the changes that Labour made. Independent suppliers do not find the wholesale market competitive enough to supply their customers. Electricity prices are therefore likely to be higher than they should be.

The Government and Ofgem want to fix Labour’s mistake. We do not want to reintroduce the pool, because that would be an expensive distraction and would not tackle the real problem, which is liquidity in the forward markets. We are going to tackle that with a well thought through package that is designed to drive competition to help consumers. Ofgem’s “secure and promote” proposals include the idea of a market maker and mandating the six vertically integrated companies—the big six—to publish the prices at which they will buy and sell up to two years in advance. That will help independent suppliers and large power producers.

As Secretary of State, I want to be sure that such reforms by the regulator work and have teeth, so that they drive competition. That was why I introduced into the Energy Bill reserve powers to act should Ofgem’s reforms not work. In other words, whereas Labour wants to go back to a failed policy that it got rid of itself, we are taking the tough measures needed to boost competition and help the consumer.

[Albert Owen (Ynys Môn) (Lab)]

The Secretary of State said that he had improved and strengthened Ofgem. One issue that I have raised with him and his predecessor is extending its remit to cover customers who are not on the mains gas grid. Has he had a chance to look at that, and does he personally support giving it the strength to deal with those customers, as it does with those on mains gas? Yes or no?

[Mr Davey]

The hon. Gentleman asked that question when I appeared before the Energy and Climate Change Committee, and I told him then that I would examine the matter. I am afraid that we have not come to any conclusions—he only asked me a month or two ago—but I am happy to look at that. The Minister of State, my right hon. Friend the Member for Sevenoaks (Michael Fallon), is extremely concerned about the high prices paid by consumers who are off the gas grid, as I am. When we examine the research on fuel poverty, we see that some of the worst is among those customers, so this Government will do something about it where the last Government did not.

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[Albert Owen (Ynys Môn) (Lab)]

It is a pleasure to follow the right hon. Member for Hitchin and Harpenden (Mr Lilley), my colleague on the Select Committee on Energy and Climate Change with whom I have many discussions. I do not agree with him on many issues, but we have great discussions. His speech today was not an attack on our motion—I did not identify anything in the motion that he was referring to—but a critique of the Government, as well as previous Governments. I stand by social tariffs. It is right to help the poorest in our society, who are suffering. That is important. The Secretary of State was right in his intervention on the right hon. Gentleman to point out that he was not talking about just renewables; rather he was talking about many of the social tariffs that successive Governments have supported and that I think we should support into the future.

The right hon. Gentleman was right to point out that energy prices remain a big issue for all our constituents; they have risen by some 20% in real terms since 2007, while average bills have risen by a staggering £300 since 2010, as the motion says. The motion rightly refers to the Energy and Climate Change Committee report on prices, profits and poverty. The inquiry discovered the complexities of the current, vertically integrated system and found it difficult to establish the profits and losses on the companies’ balance sheets. It is not that the companies do not have small or large margins—the right hon. Gentleman referred to that—but that we do not have clarity. We cannot really see what profits are made in which parts of their businesses. That is why the report called for a simpler methodology agreed between the regulator and the energy companies, so that we can identify clearly what profits and losses are made by the companies.

[David Mowat]

The hon. Gentleman is right to ask for more transparency in the way that we judge this issue. One way of judging whether any market abuse is taking place is to look at the end price. I have a list from the EU Portal—this is from page 2 of 8—of gas prices in 27 European countries, which shows that the UK is the 26th most expensive. That does not imply that there is abusive behaviour here, or if there is, there is a lot more in other places.

[Albert Owen]

I am grateful to the hon. Gentleman; I am sticking to the report and the evidence base that we were given.

Our report identified—this is important—poor communications between the energy companies and the public. It is fair to say that some companies are now getting it, because of strong lobbying from consumer groups and the work done by the Select Committee in identifying the complexity of tariffs and how many there are.

[John Robertson]

Was not part of the problem the fact that we did not know how much profit was made on the generation side? It was estimated to be something like 20% of turnover, which, when added to the profits that everyone has been talking about, starts to become excessive. The other thing that was wrong was that the companies refused to turn over their books, so unless someone had a good degree in accountancy, they would not know where the money was spent.

[Albert Owen]

My hon. Friend is absolutely right; it was complex. I recall a conversation that I had with the new chief executive of E.ON, who has a master’s degree in mathematics. He told me—he has also said this in public—that he could not understand an E.ON bill because it was so complex. He has now taken steps to simplify the bills.

Energy markets are not delivering the low, stable prices that we were promised at the time of privatisation. The short-term profits that are said to have resulted from the privatisation of gas have meant long-term pain for many of our constituents, who have been paying higher prices for their gas and electricity in recent years. Switching is not an option for everyone, and it has not been taken up by the majority of people. We are paying high prices for our gas and electricity and the switching of tariffs is not working.

There is also mistrust between the public and the energy companies, as we have discussed in a number of debates. It remains a concern that prices are rising quickly, and that the price to the consumer goes up considerably when the global price of oil increases but does not go down nearly so quickly when the global price is reduced. I believe that there is consensus between the Government and the Opposition that we should examine that issue with the regulator, to establish how best to deal with it. Ofgem has done some good work on that already. However, I have to take issue with the Secretary of State’s comment that he was putting pressure on the regulator and that all the good results were coming from that Government pressure. When things do not work out quite so well for the consumer, the regulator is described as independent. The Secretary of State cannot have it both ways. The regulator is independent, and I believe that it needs more teeth. It also needs to use some of the powers that it already has.

In the time that I have left, I want to talk about the possibility of giving Ofgem a wider remit in regard to people who are not on mains gas, of whom there is a considerable number. I have been campaigning for them since about 2007, when gas prices became a real issue. The prices went up, but for those who are not on the grid, they went up considerably more. That has become a huge issue. The alternatives to mains gas are oil and other forms of gas.

[Mr Spencer]

Will the hon. Gentleman give way?

[Albert Owen]

I will not, if the hon. Gentleman does not mind. I do not have much time left, and I want to develop this important point. I have raised it with the Secretary of State and with the Ministers who have appeared before the Select Committee. They have always tried to push the subject away by saying that it is a matter for Ofgem. In the Select Committee, however, I have put questions to the chief executive of the regulator, and he says that it is a matter for the Government. It is time for us all to sit down and look at this together, because the rise in prices is causing great anxiety and hardship for many of our constituents.

I want to see the establishment of a champion for those customers who do not have mains gas or electricity, as well as for those who do. Those customers do not benefit from dual fuel deals. We can talk about an average price for a household, but they will be paying more. I would appreciate a straight response from the Secretary of State on this. A Back-Bench Committee and an all-party group have looked into it and made recommendations. I am sure that he has seen their report on the off grid, and I believe that we can work together to establish that champion.

I want to make a few more brief points. We talk about the domestic customers who have been severely hit by the uprating in prices, but businesses, including small businesses, are also affected. I would like businesses to be able to compare prices in the same way that domestic customers can. When small businesses are set up, they are hit by rates and start-up costs, and they then get hit by high energy bills. However, it is difficult for them to switch from one company to another. To be fair, the Government are looking at this issue and trying to do something to help, but I believe that if those businesses could use a price comparison—instead of receiving bespoke prices from each individual energy company, as they do at present—they would have a greater choice. Businesses are telling me loud and clear that excessively high energy bills are resulting in a lack of investment in their business.

My final point is on the cost and impact of the transmission of electricity and gas to the regions. The National Grid Company is a private, American-owned company that passes all its profits to shareholders. It passes any extra costs on to its customers via the generator. I would like to see National Grid acting in the British national interest, not in shareholders’ interests; I would like to see a not-for-profit organisation distributing our electricity. We could then have a bigger impact and reduce the transmission costs, which are considerable—about 16% of the energy prices that customers pay.

Another problem is that people pay more for gas and electricity on peripheries and in rural areas, yet many of those areas produce that gas and electricity, which is unfair. I would like us to help customers in these areas more by looking at the cost of the transmission and distribution of electricity and gas.

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[Chris Heaton-Harris (Daventry) (Con)]

I found myself in an interesting position—and one that I am not used to—as I agreed with just about every word the Secretary of State said, probably because he veered well away from the thorny subject of renewables. That is the point that I shall concentrate on, following on from the speeches made by my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) and the hon. Member for East Antrim (Sammy Wilson).

Before I do, let me say one thing about people’s bills. I received a bill from EDF a few weeks ago and it was possibly the most complex document I have ever received through the post—it had day tariffs, night tariffs and prices that were so much per kilowatt-hour for this and for the first 20 of that. If people are to be expected to understand their electricity bills, simplification is required. I would welcome anything that points us in that direction.

Renewables, as my right hon. Friend the Member for Hitchin and Harpenden said, are the part of the debate that we in this House can affect. RWE npower issued a report in July on what will happen to energy prices in the United Kingdom in the coming years. It predicted all sorts of interesting things, but the commodity and production costs that make up 45% of an average bill will reduce by 2020 to 35% of an average bill as rising policy and transportation costs become more significant. Supplier costs—their cut, their profit—will remain about 16%, so where is the big increase? Transportation costs and the costs of updating the UK’s network of infrastructure to accommodate lower carbon and more distributed generation technologies are expected to add an extra £114 to the average domestic bill by 2020—a 124% increase on 2007 prices. That is the money for connecting turbines and other dispersed energy to the grid.

Policy and regulation costs are expected to rise by 78% between 2013 and 2020. That is meant to pay for the low-carbon economy and significantly improve energy efficiency, as we have heard. Those are worthy aims but have huge costs attached. There are also huge costs for the consumer, who will end up paying for all those things. In 2011, National Grid produced a report entitled “Operating the Electricity Transmission Networks in 2020”. It talked about wind turbines and said that during periods of demand renewable generation output is likely not to be enough, but because it is a must-take resource, wind power will need to be constrained in some way.

The Daily Telegraph took a snapshot of energy produced by wind farms on a still day this summer. It showed that a host of payments had been made by National Grid to shut down wind turbines so that they would not overload the electricity supply system.

[Albert Owen]

Will the hon. Gentleman give way?

[Chris Heaton-Harris]

I will not give way; Mr Speaker would scowl at me like Speaker FitzRoy in the 1920s and ’30s. I do not want that to happen.

The constraint payments reached £7.5 million for the first three weeks of August. If people are really concerned about fuel poverty, they should think about this: the increased cost of electricity due to the renewables obligation in 2009 may have pushed about 100,000 households into fuel poverty, and the wind element was responsible for 40,000 to 50,000. That information is from the fuel poverty dataset for 2009 produced by DECC.