Energy Markets (Competition)

Barry Gardiner Excerpts

Wednesday 26th March 2014 Westminster Hall

[Barry Gardiner (Brent North) (Lab)]

It is a pleasure to speak in the debate, and I congratulate my hon. Friend the Member for Edinburgh North and Leith (Mark Lazarowicz) on securing it.

“The party’s over for the big six.” Those are not my words, but those of Evan Davis on the “Today” programme this morning. I was delighted to hear that, but was even more delighted to hear the comments of Alistair Phillips-Davies, the chief executive of SSE. He made them quite calmly, given all the furore when a few months ago my right hon. Friend the Leader of the Opposition announced that we would impose a price freeze and break up the vertical integration of the big six.

Alistair Phillips-Davies said, “If that’s what the customer wants, we are very happy to participate in that agenda.” Labour party policy, it seems, has moved from the unimaginable and unacceptable to the mainstream in just a few short months, and that has to be welcomed. If the second largest company in the UK is saying that it is happy to participate in that agenda, it seems that it has seen the writing on the wall.

Energy bills have risen by almost £300 for families and businesses. More importantly than simply that, however—this should be of specific concern to the Minister, whether he is listening or not—the employers’ federation, EEF, in its “Executive Survey 2014”, highlighted rising input costs as the primary risk to growth: I repeat, the primary risk. In 2014, 61% of companies surveyed by EEF cited input costs as a risk to their growth plans. That figure was up four percentage points on the 57% of just one year earlier. That is fundamental for business. Bills are going up because when the price of energy increases, energy companies pass that on, although they are reluctant to see the change passed on when prices go down, or at least they are not nearly so quick about it.

Why has that been possible? Why has it been allowed to happen? The answer is limited competition and weak regulation by Ofgem. Evidence presented to the Select Committee on Energy and Climate Change showed that the big six were engaged in inconsistent accounting. The hon. Member for Warrington South (David Mowat) asked for evidence—thank God he left his speech at the pub, because he managed to take twice as long as your recommended time limit without the speech, Sir Roger; goodness knows what would have happened had he brought it with him. He said that if anyone knows about such things, they should report it, so let us look at what evidence there is and at what has been presented.

BDO found that the vertically integrated companies were using four different accounting standards. The improving reporting transparency review conducted by BDO for Ofgem recommended that Ofgem

“Require the reporting of trading function results, including disclosure of the risk each trading function assumes”,

as part of companies’ segmented accounts. Ofgem, however, will not act on the proposal, because, it stated, that would have meant the need to change company structures and Ofgem does not have the powers to require such a change. That is, in part, because four of the big six are not UK companies, but it also shows that Ofgem is far too weak to effect the changes needed to our energy market.

It is worth noting that EDF opposed recommendation 2 of the improving reporting transparency inquiry—that would require an independent auditor to provide an opinion on segmental statements—and that the trading arms of the vertically integrated energy companies were implicated in the fixing of the benchmark price for gas. The hon. Member for Warrington South said, “Where’s the evidence?”, and asked us to produce it. Well, with the fixing of that benchmark price for gas, unusual trading activity reduced the price of gas just before the end of the financial year, and that was reported to the Financial Services Authority by a company responsible for setting so-called benchmark prices, ICIS Heren. The practice was indeed reported to the FSA at the time. That type of activity enables the big six to reduce the cost of gas relative to the price paid by independents, creating further barriers to market entry and ensuring that the big six retain their unhealthy monopoly.

I know what the Minister will say about competition in the market, because he has said it on a number of occasions in the House. It is the Government’s prepared agenda. They say, “Oh, but there were 14 players in the market before it was reduced to the big six by the Labour Government through the new electricity trading arrangements, or NETA.” There were 14 regional monopolies, not six national players; I wanted to nail that one before the Minister had the chance to say it.

My hon. Friend the Member for Edinburgh North and Leith has already said what Labour will do differently and that is clear. I am running out of time, but I must add that the decision of my right hon. Friend the Leader of the Opposition has proved prophetic, and it will prove right.

--- Later in debate ---

[Julie Elliott]

I will outline our policy, but it is not for me to answer questions about it today; it is for the Minister to respond to the debate.

Before coming to the bulk of what I want to talk about, I want to comment on some of the issues raised by the hon. Members for Warrington South (David Mowat) and for East Hampshire (Damian Hinds). The hon. Member for Warrington South referred to SSE’s announcement on wind farms. We need to look at the detail of that, but while energy company profits have been rising during the last few years, renewable energy investment has been falling, and only about half of such investment is coming from the big six. Despite huge annual price increases since 2010, investment in clean energy has halved under the Government’s watch, costing jobs and threatening our energy security. Furthermore, there is no correlation between profits and investment. The energy companies with the biggest profits do not make the biggest investment in clean energy.

The Minister has commented on energy costs. Electricity prices in the UK, excluding tax, are the fourth highest in the EU15 and second highest in the G7. They are not what the hon. Gentleman quoted: they are among the highest in Europe. Gas prices are not as high, and are at the European average.

[Barry Gardiner]

I am listening carefully to my hon. Friend’s comments. She is doing very well. Will she comment on the fact that in the UK the profit margin for shareholders has been between 5% and 7%, whereas on the continent it is between 2% and 3%? The hon. Member for Warrington South did not mention those figures when he compared the UK with the continent.

[Julie Elliott]

My hon. Friend is absolutely correct.

--- Later in debate ---

[The Minister of State, Department for Business, Innovation and Skills (Michael Fallon)]

I, too, congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate and on his immaculate timing in fitting it between SSE’s announcement this morning and the forthcoming publication of Ofgem’s assessment. We have had a good debate on some of the major issues.

My hon. Friend the Member for Warrington South (David Mowat) made an excellent speech, which was all the more impressive for him not being able to stick to his prepared text. He made some important points of comparison with the European Union and the key point that all of us need to have regard to the need to ensure that energy companies are able and willing to invest in the new energy capacity the country requires. He also made the point that, in the end—this answers a question from the shadow Minister, the hon. Member for Sunderland Central (Julie Elliott)—it is not for politicians to decide on profit margins or the merits or disadvantages of vertical integration. Such matters need to be weighed up on the basis of evidence and investigated by regulators that are independent of Government.

The hon. Member for Southampton, Test (Dr Whitehead) is usually knowledgeable on these matters, but he was not right about the effect of the threshold on the smaller suppliers. Three suppliers now have more than 250,000 customers and a taper is in place to deal with what I think he called the £7 million problem.

My hon. Friend the Member for East Hampshire (Damian Hinds) emphasised the importance of switching. I will later give him the latest statistics on that, which are encouraging.

The hon. Member for Brent North (Barry Gardiner) was a little out of date in his reference to the Engineering Employers Federation. It was concerned about energy costs, but I do not think that he has picked up its latest release, which followed my right hon. Friend the Chancellor’s excellent Budget last week, in which it welcomed the new support package being given to the most energy intensive industries. He was also not quite right about the regional monopoly among the suppliers. After 2000, the 14 suppliers were free to compete nationally, not just in their regions, but after 10 years, we discovered that there was still a regional concentration and that obviously needs to be looked at.

The hon. Member for Angus (Mr Weir) spoke about the importance of transparency. I confirm that that is one issue that Ofgem has been looking at and a great deal needs to be investigated. The hon. Member for Ynys Môn (Albert Owen) asked me about distribution and transmission. Perhaps he will allow me to write to him on some of the detail. It is difficult to get more competition into the major transmission network, but he makes a point about distribution companies. They are monopolies at the moment, although they are rigorously regulated. Perhaps he will allow me to write to him on that particular point.

The hon. Member for Inverclyde (Mr McKenzie) wants to see simpler tariffs. We certainly do, too. That power has been taken and Ofgem has managed to simplify the tariff structure, which will apply from next week. He also said that supply should be separated from generation. I make the point again that integration has advantages and disadvantages. The best way to weigh those up is independently on the basis of evidence so that we can understand whether change is needed.

The hon. Member for Sunderland Central was not able to clarify whether Labour’s proposed price freeze will apply to the very smallest companies outside the big six. There still seems to be some confusion about that. She asked me specifically whether I welcomed SSE’s announcement this morning. The answer is yes, I do. I strongly welcome that and I am sure that customers of other suppliers will be asking whether they will follow suit. She asked me whether that was evidence that the market is not working well. That is exactly why we have referred the market to Ofgem for the annual competition assessment.

Competition is at the heart of our energy policy. Consumers get the best deal when suppliers face tough competition. Competition also helps to deliver innovation, and ensures that prices are kept as low as possible. Investors will only have confidence in a market that they see as fair and in which all participants compete on equal terms. That is what—

[Barry Gardiner]

Will the Minister give way?

[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.

[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.

[Barry Gardiner]

I am grateful to the Minister for eventually giving way. He has spoken about competition a great deal. Does he accept that the whole purpose of vertical integration by a company is precisely to be a bulwark against competition and, although what he has said about introducing greater liquidity into the long-term market is absolutely right, does he not accept that that would be achieved by breaking up that vertical integration?

[Michael Fallon]

That is something, as I have said, that we require independent investigation to establish on the basis of evidence. There are arguments in favour of vertical integration. I am not putting them forward today, but there are those who argue that vertical integration can lower the cost of capital and lead to more efficient risk management. These are issues on which the evidence needs to be properly weighed—with the greatest respect, neither by the hon. Gentleman nor by me, but by independent investigators who are detached from the political process. I am very disappointed to see that the regulator would be abolished if Labour ever came to power. The evidence needs to be weighed independently, and we need to have a proper judgment. The first competition assessment is being completed—