Domestic Gas and Electricity (Tariff Cap) Bill

Baroness Vere of Norbiton Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 11th June 2018 Grand Committee

[Lord Stevenson of Balmacara]

My Lords, I support the amendment of the noble Baroness, Lady Featherstone. The amendments in this group are variations on the same theme, which is the question of how one can find in the Bill the right balance between the wish to encourage the drive towards reduced carbon and no-carbon generation of power as far as possible and, at the same time, trying to get out of what appears to be a cul-de-sac in which the more we propose exemptions from the tariff for those who exercise clear preferences for green supply and carbon-free generation, the more they will not feel the benefit from measures that are meant to reduce the cost of the electricity and power that they consume. I do not know what the right balance for that is, so this is a probing amendment.

Our solution—we are not wedded to it but I would be interested to hear the Government’s observations on it—is that a situation where a consumer has clearly and unambiguously signified their intention to always select energy provided from wind or other renewable sources might provide a break point in which one could exercise discretion on whether they obtained the benefit of the cap. That seems to play to my earlier concern that this would prioritise people who used carbon-based energy sources as the only ones to benefit from the cap and would therefore reduce their costs.

I am not entirely clear which way we should go on this. It seems unreasonable to take an extreme position one way or the other, but that seems the only way to find an equitable solution. I look forward to hearing the Minister’s response.

[Baroness Vere of Norbiton (Con)]

My Lords, I will address the proposed amendments to Clause 3 from the noble Baroness, Lady Featherstone, regarding arrangements for exemptions from the price cap.

On Amendments 13 and 14, the Government are clear that it is right for Ofgem, as the expert regulator, to look at an exemption from the cap for green standard variable tariffs, remembering that fixed-term green tariffs are not covered by the cap. The Bill requires Ofgem to consult on an exemption and, if it decides to put an exemption in place, it must be for tariffs that are chosen by consumers and which support the production of gas and the generation of electricity from renewable sources.

The Government do not wish to prejudge the outcome of Ofgem’s consultation. We are very much aware of the arguments around having an exemption but are also aware that, as with any exemption, there may be a risk of gaming—or greenwashing, as it is sometimes known. This is a complex area and we should not make any judgments or decisions until Ofgem has undertaken its consultation and examined the approaches to an exemption.

The Government note that many fixed-term green tariffs that support renewable energy generation are already available on the market. These offer consumers considerable savings compared with non-green SVT tariffs. Some new entrants to the market also expect to deliver green standard variable tariffs at levels below where they expect Ofgem to set the price cap. Fixed-term green tariffs would still be available in the event that the regulator chooses not to exempt green SVTs from the price cap. In view of this explanation, I feel that Amendments 13 and 14 are unnecessary.

Amendment 15 concerns vulnerable consumers. As has been noted in relation to earlier amendments, Ofgem will keep the safeguard tariff in place for warm home discount recipients if it offers a higher level of protection than the market-wide price cap under the Bill.

Amendments 16 and 17 are in the name of the noble Lord, Lord Grantchester. Amendment 16 creates a situation whereby, if Ofgem decides that actively chosen green tariffs that support the production of renewable energy should be exempt, all consumers on such tariffs would need to opt in to this exemption; otherwise, the cap would still apply. There may be unintended consequences from this approach. If Ofgem does decide to exempt green tariffs and yet only a small proportion of consumers opt in to the exemption—for whatever reason—these suppliers could find that their tariffs become financially unsustainable. Such a situation could counteract the aim of encouraging and maintaining investment in renewable energy, while also limiting the choice of green tariffs available to consumers. The Government are therefore not convinced that an opt-in clause would be helpful.

On Amendment 17, I remind noble Lords that Ofgem published its policy consultation on 25 May and it remains open for submissions. The consultation contains a section on the green tariff exemption. Ofgem is engaging widely on the consultation, including through workshops with suppliers and consumer groups. As such, the amendment comes somewhat after the fact, and so I believe it is not necessary.

Finally, Amendments 18 and 19 are also in the name of the noble Lord, Lord Grantchester. I agree with the thrust of Amendment 18. As I have said, Ofgem’s policy consultation is already under way. In Appendix 13 of the consultation, Ofgem sets out the proposed criteria by which it may consider green tariffs to be exempt. One is that the green tariffs,

“provide support for renewables, materially beyond support provided through subsidies, obligations or other mandatory mechanisms”.

On Amendment 19, the Bill requires Ofgem to complete the consultation so that the licence modifications giving effect to the price cap include the exemption. Of course, this is subject to Ofgem deciding to put the exemption in place following the consultation. As setting a price cap and determining a robust exemption—subject to the outcome of the consultation—clearly involve a lot of work, the Bill provides a little flexibility in the event that this is not possible. Nevertheless, it still requires Ofgem to put in place any exemption as soon as practicable following the modifications putting in place the cap taking effect. Consequently, the Government do not see the need to include Amendments 18 and 19 in the Bill, and I hope the noble Lord will feel able to not move them.

[Lord Stevenson of Balmacara]

I am sorry to interrupt: perhaps I might check two things with the Minister. I think we agree that there is an issue here that is very difficult to bottom out and therefore the consultation process is obviously helpful in that. What I was trying to get across, although perhaps I failed—I think the noble Baroness, Lady Featherstone, made the same point—is that given that we are in a consultation process, where does this all lie in relation to the Bill? Are the Government really saying that actually this is too difficult to deal with in the Bill and it is being passed to Ofcom to make whatever decision it can make in the light of the consultation?

I am not saying that that is wrong. I just ask the Minister to accept my earlier argument that this was actually rather a difficult principle and perhaps should be in primary legislation; otherwise, there is a question of gaming and other things. The point of principle was whether we should give priority to the encouragement that would flow to smaller, greener energy producers, which would not have their income reduced because they were carved out of the new tariff, at the expense of green-minded ordinary citizens who want to get their supply from green sources but are poor, vulnerable, disabled or fall into the category of needing support but find themselves removed from that support system because they are prioritising green energy. That does not seem fair. I wonder whether we should think very carefully about whether it is right to simply pass this to Ofgem to do on the basis of the consultation or whether we should take a decision within the Bill itself.

[Baroness Vere of Norbiton]

I thank the noble Lord for his questions. I would like to come back to the second question in due course because I did not quite follow the tension he identified between different types of consumers and whether they would be caught by the exemption and so on. I think there is an opportunity for us to meet again after this to discuss the green tariff exemption specifically.

On the first issue, the consultation, it is the Government’s intention to put an exemption in place for appropriate green tariffs, but the issue, as was brought out in previous discussions on the Bill, is that sometimes what is green is not green and the whole area can actually be very grey. We must not get ourselves into a situation where the real green tariffs are losing out. I am happy to have conversations in future.

[Baroness Featherstone]

I listened carefully to what the Minister said. It is very complex. There is still the kernel of an issue here, so I will read Hansard and consider what the Minister said. At the moment, I am uneasy that we have not bottomed out the issue that needs to be defined in the Bill to give the Government and the opposition parties surety that we have not, by accident or by design, done something to ace out what we are trying to value in all this. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Grantchester]

I shall speak to Amendments 21 and 24, which are in my name. Under Clause 4, Ofgem must undertake various actions by way of notice of proposed modifications, including giving notice that it proposes to make modifications. Amendment 21 specifies that Ofgem must provide reasons in a narrative that explains why it is making modifications—ideally, an assessment of why modifications are being proposed.

We all recognise that energy bills soared 20% between 2007 and 2013 and that the average household pays around £300 more today than it might otherwise do in a more competitive market. However, in the interests of transparency it is imperative that Ofgem outlines its reasons for setting the price cap at any given level for the benefit of suppliers and customers alike. That would help set parameters when undertaking later reviews and assist greater scrutiny.

Amendment 24 has been proposed following the debate last week in your Lordships’ House on the European Union Committee’s report Brexit: energy security. In its report the committee portrayed how the UK and the EU are already increasingly interconnected on energy. Already, high levels of gas are being piped from Norway and over 5% of electricity demand is being met from the EU, with estimates that this source of electricity supply is likely to increase to over 25%. At present the UK is a member of the internal energy market and the committee’s report underlines the risk should the UK not remain within the IEM. From evidence received, it is universally argued that the UK could be more vulnerable to supply shortages or challenges, making supply less efficient, with the result that retail prices to consumers could rise. Amendment 24 specifies that the consequences of Brexit must become part of the review of the market and the application of the cap.

In the Government’s response to the Select Committee, they failed to address this point while being pressed to undertake an assessment of the consequences of the UK leaving the IEM. How do the Government propose that Ofgem should assess the situation in its review? The effect should be recognised for the application of the cap and, hence, included in the Bill.

[Baroness Vere of Norbiton]

My Lords, I will speak to Amendments 20, 21 and 24, which relate to the reasons for this cap and the details of its implementation.

The noble Baroness, Lady Featherstone, proposes a review of the energy market, in particular setting out the reasons for the cap, whether it could have been avoided and how a price cap can be avoided in the future. The Bill follows on from an extensive two-year investigation undertaken by the Competition and Markets Authority. This reported that there was, in effect, a two-tier market, with good value tariffs for those who engage in switching suppliers but for those who do not, the market was uncompetitive and these consumers were being charged an unjustifiably high price for their basic energy needs.

The CMA also found that the significant market share of the largest energy companies and the use of the standard variable tariffs had led to a situation where customers, including some of the most vulnerable in society, are simply paying too much, They are also paying for the inefficiencies of the larger companies to the tune of around £1.4 billion a year. The noble Baroness, Lady Featherstone, mentioned E.ON and its 41%. I was not quite sure what she was referring to and whether that was a return on capital. A profit increase of 41% would depend on its starting and end points; it is not hugely relevant, depending on the leverage of the company. Potentially, we should look at its return on capital, which is far more instructive.

It was as a result of this very detailed, two-year report that the Government and Ofgem undertook to protect those on the poorest-value tariffs on a temporary basis until the conditions for effective competition are established. In addition, Ofgem is actively considering the future of the energy retail market. This work is looking at barriers to innovation and whether the current market model needs to be reformed. Another review at this stage would simply tell us what we already know and take resources away from the vital work being carried out to support the necessary reforms of the market.

On Amendment 21 proposed by the noble Lord, Lord Grantchester, I am sure he is aware that, as part of the licence modification process, Ofgem will be required to state that it proposes to make the modifications and their effect. Subject to the will of Parliament, it is clear that this action is going to take place; indeed, suppliers and other interested parties are actively involved in the consultation being conducted by Ofgem. The amendment is therefore not necessary.

The noble Lord’s Amendment 24 relates to those matters which Ofgem should consider during its review of the level of the cap, which must take place at least once every six months. It is incredibly important that Ofgem, as the industry regulator, be allowed to consider what it feels matters the most. He may be pleased to learn that Ofgem has published a consultation paper which sets out the matters it proposes to review when considering the level of the cap. That will of course include wholesale prices and many of the factors raised in the debate of last week, which he mentioned. Hence, the amendment is unnecessary at this stage.

I hope that the noble Baroness and noble Lord are content with my explanations and will be willing to withdraw or not move their amendments.

[Baroness Featherstone]

I thank the Minister for her response. I understand that the Bill puts in place an examination of the conditions for effective competition, as an answer for not having a cap, but I am trying to go a little deeper. I want to avert the idea that a cap can become a mechanism whenever the market is dysfunctional. It is not the answer and we therefore have to go deeper. On the basis that I will consider what the Minister has said, I am happy to withdraw my amendment.

Domestic Gas and Electricity (Tariff Cap) Bill

Baroness Vere of Norbiton Excerpts

Report stage (Hansard): House of Lords
Wednesday 27th June 2018 Lords Chamber

[Baroness Featherstone (LD)]

My Lords, I support the amendment, to which I have added my name. The first basis on which I do so is that, like the noble Baroness, Lady Neville-Rolfe, I regard the cap as an unfortunate necessity. The ambition and the emphasis must be to end the cap as soon as possible. Therefore we need to focus minds on the creation of that effective marketplace.

[Baroness Vere of Norbiton (Con)]

My Lords, the amendments in this group tabled by my noble friend Lady Neville-Rolfe would ensure that the price cap comes to an end in 2020 with no provision to extend it. The Bill allows a temporary and targeted price cap on poor value, standard variable and default tariffs. Fixed tariffs that are not default tariffs will not be affected by the cap as these are where the most competitive rates can be found. The price cap is only necessary to protect consumers on poor value tariffs until the conditions for effective competition are in place.

The Bill has a sunset clause at 2023 and the cap would fall at the end of 2020 if, at that point, the conditions for effective competition are in place; I think that my noble friend wanted a response on that issue. The Bill is constructed in this way because the Government do not want an open-ended intervention, which would not be good for competition and, therefore, consumers.

At this point, I want to address the communication received by many noble Lords about the way the Bill is drafted, potentially preventing the cap from being removed, as the cap itself may have an impact on competition. That point was not lost on the Government when the Bill was drafted, which is why the judgment on removing the price cap, as set out in Clause 7(5), depends on whether,

“the Secretary of State considers that conditions are in place for effective competition for domestic supply contracts”.

In its recent consultation, Ofgem stated:

“We interpret ‘conditions for effective competition’ as meaning that the right market framework is in place for competition to be effective for currently disengaged consumers once the cap is removed”.


In assessing whether the conditions for competition are in place, Ofgem said that it would expect to analyse both the demand side and the supply side of the market, consider whether the market structure will promote good outcomes for disengaged consumers and consider whether there are remaining barriers to engagement. It refers to market conditions, not current market outcomes, for example on the rate of switching.

Coming back to the amendment, it is clear that the Government want the cap to be in place for as short a time as necessary. Ofgem will report on the conditions for effective competition and make a recommendation. Ofgem’s recent consultation points towards a number of factors that might indicate that the conditions for effective competition are in place. On the supply side, these include more innovative business models and the rollout of smart meters. On the demand side, they include making it easier for customers to share their data securely with third parties—meaning that they do not have to look up and enter lots of data on websites when they want to switch—and promoting engagement to help customers identify the best deal. These measures will need time to be established but it is right that we ensure protections are in place until the conditions for effective competition are in place. That is why the Bill enables the price cap to be extended, one year at a time, up to the end of 2023 at the latest.

I am grateful to my noble friend for her amendments. I can confirm that, all being well, the price cap will fall away in 2020—but as we have noted, if all is not well, it will not. With that, I hope that my noble friend is assured and will withdraw her amendment.

[Lord Mackay of Clashfern]

It seems that the Secretary of State has to make a decision before the end of 2019, in respect of 2020. At that stage, it must be assumed that the price cap will not continue because, unless the Secretary of State continues it, it will stop at the end of that year. There is an extra argument, as it were, to the argument about the cap stopping then: the cap will not be in contemplation in examination of the situation because we will have to assume that it has stopped. Therefore, any effect that it has on reducing competition is out of the equation at that juncture. I hope that noble Lords follow me.

[Baroness Vere of Norbiton]

My Lords, I was doing really well until the last sentence. I tried to follow my noble and learned friend. Of course, there will be a period leading up to the point at which the Secretary of State has to make the decision on whether to keep the cap. At that time, he will look at the information that is available to him and make a judgment on whether the conditions for effective competition are in place.

[Baroness Neville-Rolfe]

My Lords, I thank my noble friend for her full and helpful answer. I was very clear when she sought to sit down that all was well. I will need to read my noble and learned friend Lord Mackay’s intervention before we come back at Third Reading. My expectation is that we can find a way through this to meet my concern that, conditions permitting, the cap can end in 2020, and to meet the concerns that have been expressed by a number of learned experts from the industry on the correct discretion on the extension of the cap. I beg leave to withdraw my amendment.