Domestic Gas and Electricity (Tariff Cap) Bill

Caroline Flint Excerpts

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

Do the Government not already have powers, under section 26 of the Energy Act 2010, to introduce a price cap if one group of customers is treated less favourably than others by an energy supplier? Ofgem fears that if it used its powers, there would be a ruling against it and it would end up in the courts. Our purpose today, and my purpose in supporting the Bill, is to lay out once and for all the powers to introduce a price cap for people who are losing out.

[Greg Clark]

It is true that Ofgem has said that it might be challenged in the courts. I do not think we should be afraid of testing arguments in the courts, and I would have preferred to see that happen. The statute that the right hon. Lady mentions would not enable the gap to be closed in a way that would allow competition to continue in the other part of the market—other Members have raised that matter. It would require a closing of the gap, but that could take place by means of the deletion of other tariffs, which is not what we want.

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[John Penrose]

My right hon. Friend is a co-signatory to the letter, for which I thank him, and he makes an important point. It is not just vulnerable customers, of course; it is the many of the rest of us who are time poor. This is a far broader question than just vulnerable customers, although they are a key part of it. Many other families, either because they are loyal or because they just have not got round to it, have not switched. We need to persuade them to change their behaviour, and we need to change the market to help them to do so.

Choosing a new supplier should be no more complicated than changing our brand of coffee or corn flakes. The big six should have to work a lot harder to attract and keep our business. To be fair, as we have heard and as I think my right hon. Friend was alluding to, the regulator, Ofgem, has made a start. We have more than 50 new competing firms that are scrambling to take business off the big six. Smart meters are coming, and switching is slowly getting simpler, quicker, easier and less scary.

The Bill rightly says that the price cap should die after a couple of years, but what about the other details? Price caps, as we have heard, are dangerous things. They are fiendishly difficult to get right: they drive suppliers away if the price is set too low, and they gouge customers if the price is set too high.

So how do we design a cap that does not make things worse rather than better? Well, the Bill says that the price will be set by an all-knowing committee of Ofgem regulators every six months, but the international price of energy moves around every day. Although I am sure Ofgem is full of clever and well-intentioned people, no one is that clever. Any energy trader will tell us it is impossible to know what the price will be in the next six minutes, let alone the next six months.

[Caroline Flint]

Some 5 million people are already benefiting from the price cap for those on pre payment meters or on the warm home discount, and Ofgem is in charge of that. Why cannot it be trusted to extend its skill to a wider group of customers?

[John Penrose]

The right hon. Lady is one of the co-organisers of the letter, and I thank her again for her help. No matter how clever, good and high calibre the committee, people are just not as good as the market at price discovery, provided the market runs properly. When she was shadow Secretary of State for Energy and Climate Change, I heard her talk about having to get a better energy market with better price discovery and having to re-establish an energy pool precisely because of that point. Ofgem, no matter how hard it tries or how well intentioned it may be, just will not get it right a large proportion of the time.

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[Caroline Flint (Don Valley) (Lab)]

Today is a political lesson in never giving up. Despite all the lobbying noise of vested interests, constant denials of market failure and numerous attempts to persuade energy bill payers to shop around, the Government could no longer ignore the fact that the majority of energy bill payers were—and are—being ripped off.

The Bill has a virtuous purpose: to protect customers from unfair energy prices in a market which, sadly, has failed to deliver. Its greatest shortcoming is its timing. In October 2011, I first raised the failings of the UK energy market—the overcharging and the poor value for money offered by the big six. In that year, energy prices had risen by 20%. Data required by the last Labour Government had become available to those with an “anorak” interest in tracking what was happening to prices. It was becoming clear that they did not reflect wholesale costs, and that those on standard variable tariffs were paying over the odds.

The coalition Government of Conservatives and Liberal Democrats attempted reform, but they had little to offer to affect the pricing structure of the failing retail market. They opposed Labour’s energy price freeze—a proposal to cap prices for 20 months while the energy market was reformed—but they knew that they were on the back foot as evidence of overcharging mounted. David Cameron’s agreement to a Competition and Markets Authority review in 2014 was an attempt to take pressure off the Government and kick the issue beyond the 2015 general election. That worked, but it delayed action further.

It must have come as quite a surprise to some in government when the CMA’s findings vindicated Labour’s concern about unfair energy prices. It took two years to reach a conclusion that some of us had already exposed: customers were being systematically overcharged. Between 2012 and 2015, people were overcharged by an average of £1.4 billion a year, and the detriment had increased to £2 billion a year by 2015. By the time the CMA reported the damage, overcharging since 2012 amounted to more than £8 billion. Delay has cost consumers dear.

Some may have thought that the introduction of a price cap for prepayment meter customers would lay the matter to rest, but that was never going to be the case. Ministers and others on the Government Benches were now keen to talk about market failure and systemic overpricing, using language for which my party and I had been condemned only a few years earlier. Progress has been too slow by half, but now the Government are taking action that has cross-party support, and we have an opportunity to serve notice on injustice and legislate for price protection for consumers, which I believe should take the form of a protected tariff. In fact, I argued for such protection after the 2015 general election. Consumers need nothing less than a regulated maximum charge based on wholesale prices, network costs, and an acceptable level of profit set by Ofgem.

To expose market failure is not to be against all markets. Despite privatisation, energy has always rightly been a managed market when it comes to changes in our energy generation, contracts for difference and capacity markets, and that is the case today. I believe that, across the House and across British society, it is recognised that certain products, such as energy and water, require a different level of Government intervention and regulation.

Even today, with record levels of switching—about 5 million people switched in 2017—many of the criticisms that I levelled at the energy market in 2011 still apply. The market is still dominated by the big six. Between them, they control 78% of the market. The biggest new entrant has just 1% of market share. Movements in energy prices bear little relation to the movement in wholesale prices. The majority of customers have little faith in switching and have not changed supplier for a decade or more, and, as we all know, the majority sit on expensive default standard variable tariffs. More than 5 million people have been helped with a safeguard tariff. The Bill addresses the 11 million households who are overcharged year in, year out.

So what should we do? Let us build on the cross-party support and, through the Bill, defend the principle of a short-term cap on a failing market. We should not be cowed by the self-interested propaganda that we have heard from opponents of the price cap. At the extreme end, we have Centrica linking its plan to shed jobs up to 2020 with the cap. That is outrageous. Centrica has lived off its nationalised legacy—a sticky customer base that it has treated badly. Business analysts observe that British Gas’s businesses supplying energy to business have been performing poorly and that Centrica’s US operation, Direct Energy, has underperformed. They note that almost 80% of those employed by Centrica are abroad—just one in five are in the UK. While those UK jobs are important, it is little surprise that trade unions representing Centrica employees—Unite the union, GMB and Unison—are rightly sceptical about why UK employees might bear the brunt of the effect of corporate failures internationally under the leadership of Iain Conn.

A cap does not mean an end to competition. A reasonably set upper limit on unit prices that is reviewed every six months allows lots of opportunity for competition beneath the cap. It is not a difficult concept. The cap is a maximum; it is not a requirement to charge prices at that level, and the industry knows that full well. It also knows that it will put a bar on unfair prices, and not before time.

[Geraint Davies]

I am listening fascinated to my right hon. Friend’s speech. She is aware that there has been a history of oligopoly abuse in terms of delays in changing prices for customers when world commodity prices change, meaning that there are excessive differentials. Does she think it is possible to have a relatively simple system that takes those two factors into account, but also takes the opportunity to encourage renewables?

[Caroline Flint]

Absolutely, and I am going to come on to renewables. Ministers should beware of any proposal to exempt green tariffs or low-carbon tariffs from the price cap, and let me be clear why. In 75% of days in 2017, wind power supplied more energy than coal power in the UK. Nuclear and renewables are central to our power output in the UK energy market and the generators are well rewarded for that. The notion that any energy provider should charge a premium for so-called green tariffs does not stand up to scrutiny. Consumer support for 100% green energy is welcome, but the idea that they should pay the most expensive tariff cannot be justified. I therefore hope that the Secretary of State will rule that out and deliver a comprehensive cap.

[Sir Oliver Letwin]

I am listening with increasing admiration to the right hon. Lady’s speech, which reminds me of why there was once a Labour party with which I had a great deal more sympathy than I do at present. I strongly agree with what she says about green tariffs. We want to promote green energy, but to do so on a basis that is economically rational.

[Caroline Flint]

I welcome the cross-party support that continues to blossom on this issue.

I urge Ministers to ensure that Ofgem is equipped with all the powers it needs to act as a consumer champion, and to deliver both a price cap and penalties for corporate misbehaviour. I have not been uncritical of Ofgem. For too long the regulator did not hold the big six to account for poor customer service. Where fines were issued, companies were allowed to strike a deal to use the so-called fine to subsidise tariffs for new customers—there was nothing for their loyal customers stuck on default tariffs. Thankfully that has changed.

We saw last week the CMA having to rule on a challenge by SSE and EDF against Ofgem when they tried to modify industry rules. Ofgem determined that those modifications would have led to consumers paying a £120 million rebate to generators and said no. Ofgem was immediately challenged. In this instance, the CMA backed Ofgem and the consumer interest was protected, but let us be under no illusion: there is a constant veiled threat that the energy giants will contest its decisions. We need to be certain that Ofgem has the powers and remedies it needs under the Bill so that it can do the job this House expects and does not become a scapegoat for failure.

Finally, may I urge Ministers to use the period of the cap to review the structure of the energy market? Good regulation, fairness and innovation from existing and new players must all be part of a reshaped energy market of the future. Let us get on with it. The Bill has my support; let us give Ofgem the power to act and cap unfair energy bills.

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[Mark Pawsey (Rugby) (Con)]

It is a pleasure to follow the hon. Member for Leeds North West (Alex Sobel). Unlike him, I do remember the time before privatisation took place in the 1980s and 1990s. It is worth remembering some of the objectives of the privatisation led by the then Conservative Government.

The first objective was to spread ownership, which has happened—ownership is much more diverse now. It is a little concerning when we hear Labour Members oppose private investment in our utilities and infrastructure, from wherever it may come. A serious message is coming from the Opposition, one that they need to think long and hard about before it goes out more broadly to overseas investors who want to come and invest here in the UK.

[Caroline Flint]

Would the hon. Gentleman be surprised to learn that it was only in 1998 that people were first able to change their electricity supplier?

[Mark Pawsey]

That is a concern, but let us not forget who owned these businesses at the time. In many instances, shares in the utilities were bought by the customers, some of whom have since disposed of their shares—some utilities have been acquired by larger corporations. I agree that the ability to change supplier is important.

The other reason for privatisation was to make the industry more efficient. There is no question but that that happened in the immediate aftermath of privatisation. There were dramatic falls in price. I accept that there has been some consolidation, and it is now important that there is some intervention.

I am a member of the Business, Energy and Industrial Strategy Committee, which has taken evidence on this subject. I am probably the most sceptical member of the Committee, and I needed some persuading of the merits of the Bill. I accept that the market could work better, and other interventions could be made to improve it. I have concerns about the long-term consequences of the cap, and I know the Minister will address some of those concerns in her summing up.

The Select Committee has drawn attention to two key issues: the lack of activity by the regulator in holding the big six—the legacy companies of those that were privatised—to account; and, more importantly, the “feeble” response of the big six to the threat of a cap. It may be that the industry did not take the Government’s remarks to heart and that it thought it would get away with it. It is a shame that this legislation has had to be introduced.

As for the market, all customers receive the same product and it is therefore entirely wrong that so many of the big six have a large proportion of their customers on standard variable tariffs—the most expensive rates. I understand that 57% of big six customers are on those tariffs. Of course, it is wrong that those companies should use the high standard variable tariff price to subsidise low prices to attract new customers—we hear of a £300 difference—and in that respect the energy companies have not done the right thing in recent years. One thing they could have done easily was change the description of a “standard variable tariff” to an “emergency rate tariff”, so that consumers were clear that they were on a default rate and that a better rate would be available to them if they were to change tariff. It is wrong that the big six have taken advantage of inertia in that way.

The other innovation that could have been introduced, at the instigation of the regulator, would have been to have a fixed-term contract for the supply of energy, in the same way as people have a fixed 12-month period for their insurance, be it for their home or their motor. If people receive a renewal that is significantly different from the price they have been paying, that in itself is a trigger to shop around. It is a great shame the regulator has not identified and done this, and instead has been far too slow and too reluctant to use the powers it has had.

Switching rates are a useful measure of the effectiveness of the market, and it is great that more and more people are switching. We hear that about 20% switched in the past year. The rate is increasing, but I accept the point that the Minister will make that the figures we see are affected by super switchers. Like my right hon. Friend the Member for New Forest West (Sir Desmond Swayne), who sounds as though he is a super switcher, these people are changing very regularly. We do not need huge numbers of super switchers; we need people to look at and understand their bill, and change when they see themselves at a disadvantage.

I also hope the Minister will address the issue of the detriment that the CMA found—the £1.4 billion. We are looking at a transfer of that sum from companies to consumers, in many cases rectifying the wrongs done to those on standard variable tariffs. One concern is that that detriment exceeds the profits of the energy companies, so the question we might want to ask is: where is that money going to come from? I hope that the action of Government will drive efficiencies, but are those going to be able to be generated sufficiently quickly?

Alternative measures could have been implemented, and one of the first things I would have liked to have seen the Government consider is extending the existing protections for vulnerable customers. We have had protection for those on prepayment meters for some time, and that has been extended to those on the warm home discount. It should not have been difficult to look at Department for Work and Pensions data in order to identify other people who we might consider as being vulnerable and extend those existing protections to them. I am disappointed that we have not looked at doing that.

I am also disappointed that we did not look at more effectively turbo-charging the marketing programme to encourage people to change their supplier or tariff. Some 5.5 million people switched in 2017. If more people exercised the power to which the right hon. Member for Don Valley (Caroline Flint) just referred—the ability to switch—this legislation would not be necessary.

The third issue I wish to raise is that of smart meters, which will empower consumers. It is a great shame that we have not managed that process more successfully and we have not got SMETS2 meters out into the market more quickly, so that people are also provided with the tools to be able to change their supplier swiftly and easily. It is important that the Bill is a short-term measure. It is vital that the sunset clause is in place, and I know that the Minister will be keen to state why that is there. Like other Members, I hope she will address how we are going to identify whether the market is working sufficiently well to make the second term unnecessary. I hope that it will not be necessary and that the action the Government are taking now will cause the energy companies to address the issues and deal with standard variable tariffs.

I wish quickly to address one concern about the possible consequences of the price cap. I am worried that we will see the same as what happened with tuition fees, with suppliers congregating around the cap and there being less incentive for people to change. I am worried that in the short term some of the work we have done to encourage people to switch will be lost as things stabilise. As I have mentioned, I am also worried about the difficulty of removing the cap, and, as I said in my intervention on the Secretary of State, I am concerned about how we can set it at the right level.

As other Members have said, there is currently lots of change in energy generation. I hope that the dynamic nature of the market in generation can be replicated in the market in supply, and that the temporary measure in the Bill will be exactly that so that we can return to an effective, competitive market as quickly as possible.

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[Antoinette Sandbach (Eddisbury) (Con)]

It is a pleasure to follow the hon. Member for North Ayrshire and Arran (Patricia Gibson). I agree with many of her comments.

It is quite clear that gas prices fell in the period between the early 1990s and 2001, and bills were down by about £102, but they rose in the period from 2001 to 2015 by about £408. Electricity prices rose 44% between 2003 and 2007. Although I agree that we need to take action, I argue that it this Government who are acting when the previous Government failed to do so. Why do we have to act? As my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) pointed out, it is because of predatory pricing by the big six companies.

[Caroline Flint]

I accept that we are talking about decades—I do not think that the market we ended up with was one that Margaret Thatcher thought that she was creating. The truth is that it was only after 2010 that we had any transparency and could access the data to tell us what was going on with these prices and why the mark-ups were so high. That is an important lesson from all this: transparency in this market is absolutely key.

[Antoinette Sandbach]

I agree that transparency is key, but I do not think that the price rises would have been hidden in the period between 2003 and 2007. Ordinary consumers would have seen—as we all did—what was happening in their bills at that time. I also agree that evidence-based policy making is the best way forward. In instituting the CMA review, David Cameron was not kicking the matter into the long grass; he was getting the evidence that proved that consumers have had a detriment of £1.4 billion. This is the action that is coming out of that inquiry, which reported in 2016. It is right that we are taking action. Which? shows that energy prices topped the list of consumer worries— 64% of consumers were worried about their energy prices. I find it puzzling that switching rates are so low—only 18%—given the way that consumers worry about their bills.

On the Select Committee, it was very shocking to hear the high numbers of people on the standard variable tariffs. Some companies had more than 80% of their customers on standard variable tariffs, which is simply unacceptable. It is that predatory pricing by companies where they are using those so-called sticky customers on the higher rates to offer switching rates that new entrants to the market cannot compete with and are therefore squeezed out. The Bill will address that practice, and I welcome that.

There is another area where we need to act. I follow on from the hon. Member for North Ayrshire and Arran in saying that switching is biased towards the A, B and C1 social groupings. Some 29% of those earning over £16,000 have never switched, but this figure rises to 39% among those who earn less than £16,000. As others have said, if people are not switching, they are not able to access the best deals. This cap is needed to protect those on the lowest incomes, but we must also encourage people in those groups to take advantage of the market. They can do so through Citizens Advice. Many libraries have computers that people can use to look up deals on the internet. It is important that, as well as the cap, the Government look at how they can reach out to the more disadvantaged social groups—groups D and E—that have never switched and at how they can take advantage of the market.

[Caroline Flint]

The hon. Lady is making an important point. Does she agree that it worth looking at how we could regulate independent brokers who could switch customers—on the customers’ behalf and under their authorisation—to the best deals? That might help these customers, and it could apply not only to energy, but to broadband, mobiles and insurance.

[Antoinette Sandbach]

We are already seeing those kinds of mechanisms with MoneySuperMarket.com and other organisations. However, some are incentivised, getting payments for switching. The Government have given Citizens Advice £100,000 to provide transparency regarding the rates offered and to help those who come to it with debt problems or other problems to switch.

Domestic Gas and Electricity (Tariff Cap) Bill (Second sitting)

Caroline Flint Excerpts

Committee Debate: 2nd sitting: House of Commons
Tuesday 13th March 2018 Public Bill Committees

[Caroline Flint (Don Valley) (Lab)]

Does my hon. Friend agree that it is quite useful to discuss this at the start of our Bill consideration, because our constituents will want to know that, in truth and earnest, we are going to push, in whatever way we can, to ensure—let us hope we do not have as bad a winter as we have had in recent weeks—that we get this cap into place? It is worth while to have this discussion. I hope the Minister can give reassurance in her response that it is up to all our endeavours to ensure that the cap is in time for when those winter bills drop on our mats.

[Dr Whitehead]

I thank my right hon. Friend for that intervention underlining the thrust of what I have to say. Although we may take serious account of Ofgem’s earnest intentions, which we heard about this morning, we are not legislating for the good side of earnest intentions, but for what we want to happen in the end with the Bill. To put in the Bill what we actually want to happen clarifies matters for the future, rather than spreading confusion. We will have declared—I use that word because we cannot entirely proof ourselves against the possibility of an unexpected legal challenge, although, if I can be congratulatory to the Bill’s constructors for a moment, they have done a good job of ensuring that it is as legally unchallengeable as it can be—

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[Dr Whitehead]

I take the hon. Gentleman’s point. I have tried to think about this point precisely on those sort of lines. It is difficult, in looking at such tariffs, to see the circumstances under which a company offering not a wholly renewable tariff is protected from a slippery slope—from going right down that slope and saying, “Well, as long as there is something in there that is renewable, we can call it a renewable tariff.”

I was about to make a point about the circumstances under which companies trade. Normally, because of the extent of renewable penetration into the energy system, most companies will come across a renewable supply as part of their trading arrangements. As I said, it is pretty difficult to avoid that, so we can imagine how relatively easy it is in principle for someone sitting in a company boardroom to say “How can we produce a tariff that looks like a green tariff but does not give us any sort of problem in producing it? Why don’t we just set aside what we have come across by chance, as far as our energy supply is concerned, say that it is our green purchase and put it in a tariff? Then we will have a green tariff and will be fine.” No work would have been done to distinguish that tariff from anything else, and the company would have no intention of doing anything within their tariff offer but trade in the ordinary way. That is a worry.

[Caroline Flint]

This is an important area of the Bill. Does my hon. Friend agree that there is a requirement on energy companies to source renewable energy—quite rightly—and those costs are already spread across all bill payers? Why should there be a premium on top?

[Dr Whitehead]

The point that my right hon. Friend makes is, I think, taken into account by the circumstances that now apply across the board for energy sourcing. As she and I know, having talked about this for years, the process of the renewables obligation did impose a particular obligation for a proportion of energy purchased to be green. Then there was a system of trading those obligation certificates. Those people not directly purchasing green energy would have to purchase certificates, which could be traded from those who had actually traded in green energy in the first place, so that those involved had, in one way or another, carried out their obligation. The overall design of the renewables obligation system was to encourage the production of green energy, because the beneficiaries of the certificates when they were traded in cash would be the producers. That was a system that very much incorporated in it an incentive to trade in green energy in the first place.

Now, of course, the renewables obligation is no more. It continues as a ghost trade system and will continue on a declining basis, I think, until 2027, but as of March 2017 no more renewables obligation certificates are being issued. They are being replaced by the contracts for difference system, which does not impose an obligation to purchase green energy in the same way as the renewables obligation system did. The prospective system does not, as my right hon. Friend suggested, provide a universal underwriting of green energy production. She is right, of course, that the system overall encourages renewable energy production, but not in the same way as the renewables obligation.

I do not think that that particularly detracts from my right hon. Friend’s fundamental point, but it puts us in a position where we can properly consider the idea that a number of energy companies might accidentally, as it were, purchase green energy that does not, otherwise, have an obligation attached to it, and introduce it as part of a green tariff that is not really a green tariff. I suggest that companies wholly in the business of producing renewable energy, or those that produce it from their own sources or sources guaranteed through a power purchase agreement, or something similar, with the operator, are in a different category. I want to emphasise that difference with respect to the purpose of the amendment.

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I am suggesting a small sparrow on the shoulder of eagles—an additional point to make the provision absolutely right. I hope that the Minister will be able to accept the amendment in the spirit in which it is intended and as an assurance that we get the Bill completely right. That is the beginning and end of the purpose of this amendment. I hope that it can be accepted on that basis.

[Caroline Flint]

It is a pleasure to serve under your careful stewardship, Ms McDonagh.

I find myself in an interesting position. I completely understand what my hon. Friend the Member for Southampton, Test is trying to do with his amendment. The sense I get from the interventions so far is of common agreement, and that is also the response of the Select Committee. I am glad to see on page 24 of the Select Committee’s report that I have a footnote—I have never been a footnote before, and I am so proud. Good Energy and I, and others, made a submission to the Select Committee about why we have to be very careful about gaming in moving forward in relation to the price cap.

My hon. Friend has clearly outlined the concerns that we have—and share with others across the House and those outside who have made representations—about the danger of people trying to use green as a way to avoid providing fair prices. Let us be clear: we are talking about the sticky customer base—those people who, year in year out, find that their energy bills go up. The CMA review and others have found how people have been overcharged for a number of years now, and there has been much discussion in this place about that. I totally understand my hon. Friend’s intent in trying to introduce “wholly” as another way to separate those who might game the system from those who are in all good faith seeking to invest in and buy 100% renewable energy.

My only problem is that I feel that we want to make this legislation as simple and straightforward as possible, given that there is also agreement that this is a temporary measure for a period, which will hopefully allow people to get a fairer Bill for their energy and not be overcharged, and in which we and the Government can look at what further reform might follow from this in the future. My hon. Friend and I have spent many hours discussing that and we think there is much that could be done—but that is not for today’s debate, Ms McDonagh.

As someone who very much supports renewable energy, not only for our electricity and power supply but for our heat supply as well, I am not sure of the evidence. I may be convinced during the passage of this Bill that a premium price for green energy stacks up. I might be wrong, but I am not sure it does stack up. I apologise to colleagues on the Committee that I was not able to be here this morning, but I have read the written submissions—in particular, those from Bulb and OVO, who outline their concerns about exempting green tariffs from the legislation. A lot has been done to contribute to today’s situation, where the sort of energy that we want, for climate change and in terms of being innovative in the sector, has seen a huge reduction in overall costs and is therefore able to compete very effectively in the market.

[Claire Perry]

In my mind, the right hon. Lady is not a footnote—she is a major chapter heading. I am enjoying listening to her speech, because it was largely as a result of the great cross-party consensus that we brought in the Act—and some pretty tough decisions, which she supported in her shadow Secretary of State role. That is why we are able to buy renewable energy at prices that do not require a substantial subsidy. That is why we all look forward to a situation where customers should not be charged a premium for that renewable energy source.

[Caroline Flint]

I thank the Minister for that intervention—I aspire to be a book. [Interruption.] A library, no less. Goodness. People will not be able to work out what the hell we are talking about in this Committee!

A lot has been done to drive investment in the renewable sector, and some of that is ongoing. My hon. Friend is quite right that the renewable obligation is coming to, if not its end, then close to it. We also have contracts for difference. We also have the renewable heat incentive for heat. A business in my constituency that produces green gas is a beneficiary of that. In lots of different ways, there continues to be support for renewable energy of one form or another. No doubt, should it get the green light, the tidal lagoon will also be receiving a contract for difference that will guarantee a price for what it produces over a number of years.

I would question my hon. Friend, and also the Minister—she has tried to tighten up the wording and, in this clause, has enabled Ofgem to step in, assess, consult and what-have-you—because I am still not convinced that there is any need for exemptions in the way they suggest. The more complicated things become, the more clarification that is required and the more points at which Ofgem is tied up finding a formula for what the price should be—we will have more discussions down the road about how often that should happen and the methodology for that—the more tasks we are giving it, which could lead to more confusion. The last thing I want, after all this, is a legal challenge that could stop the price cap being in place in time for the people we care about as they start paying their winter bills in 2018 and early 2019.

I hope we can think more about those issues. We may not resolve them today, but we should give them some more thought—I certainly will. I might be wrong about this, and I am happy to receive submissions and thoughts from others outside this place. For reasons of simplicity, and for the development of the renewable energy market and how it has been helped to get to a place where it provides cheaper energy today than our fossil fuels, it is still worth considering whether any kind of exemption is warranted in the Bill.

[Alex Norris]

It is a pleasure to serve under your chairship, Ms McDonagh. I will briefly follow the contributions of my hon. Friend the Member for Southampton, Test and my right hon. Friend the Member for Don Valley with one simple point.

I should say, for context, that we have obviously broken out into violent agreement—that is always good—not just on the need for the legislation, but on what it is for. It is not the end state that we seek, but a key part of getting us on the journey there. We all want the market and the providers to use this time, whether the full five years or not, to change practices so that, at the other end, the consumer gets what they need. There is a lot of enthusiasm for that.

With that in mind, as we look at each and every line in the Bill, we should think about how the individual words fall and the unintended consequences that might arise from a superfluous word or a missing word, because we know—and we would expect nothing less—that there will be conversations in the big companies about the different ways to approach the next five years. The choice will be whether to genuinely change or to game the system. We have to be mindful of that and look to close down every possible opportunity to game the system, so as to be clear that this is legislation to drive proper change. It is a short-term cap, but will lead to a long-term benefit.

The amendment does that. It takes up the cudgels from what the Select Committee said. It is proportionate, simple and easy to understand. I understand that delivering what sits behind it may be complicated, but it sends a clear signal about what this Parliament values and I support it.

Domestic Gas and Electricity (Tariff Cap) Bill (Third sitting)

Caroline Flint Excerpts

Committee Debate: 3rd sitting: House of Commons
Thursday 15th March 2018 Public Bill Committees

[The Minister for Energy and Clean Growth (Claire Perry)]

Good morning, Sir Edward. It is a pleasure, as always, to serve under your august chairmanship, and I am impressed with your X-ray eyes seeing the coffee cup. It is, once again, a pleasure to welcome fellow travellers on our Committee.

I was of course interested in what the hon. Member for Kilmarnock and Loudoun said—in essence getting back to that long-term question that we have all been discussing as to what “good” looks like. In 2023 how will we know whether the cap can be removed? Interestingly, the hon. Gentleman is in a way seeking to bind the hands of a future Government with his amendment, by putting in place, when the cap is finally removed—I think we all agree with the sunset clause—the need to opine as to whether further legislation should be introduced.

My hope is to persuade the hon. Gentleman to withdraw the amendment, so I shall set out a couple of reasons why he should, although I think we all agree that we support the cap. We want the cap to be in place for the period it takes to restore effective competition in the market. We also agree that we do not want permanent caps to run in the market, because we want it to move towards a more competitive position. The Bill is an intelligent intervention to speed up that journey.

Frankly, the Government have no wish for a price cap to be a permanent feature of our energy market. We debated that point briefly last week. I think there is strong consensus in the Committee—if I have not misjudged it—that the cap should have a sunset clause. In order for a sunset clause to be effective, there should be an end date to the legislation. Of course, as we discussed last week, that does not simply mean we will pass the Bill quickly through both Houses—as I hope we will—and have the cap in place by the end of the year, as Ofgem has assured us is possible; we will also all be working alongside Ofgem to ensure that the conditions for effective competition are in place by the 2023 deadline. I think we would all want to see those conditions in place well before that date.

Ultimately, we want a fully working and competitive market that is transparent, innovative and adaptive, that promotes competition as the best driver of value and service to customers, and that has a regulator with the powers and appetite to regulate actively should a situation arise, as it has done, where we do not believe some groups of customers get that value and service.

We discussed last week the roll-out of smart meters—where we have seen good progress but we need to go further and faster—and moving to faster and more reliable switching. I am very interested in Ofgem’s midata proposals, which will make switching an almost seamless process. Indeed, my hon. Friend the Member for Weston-super-Mare (John Penrose), who was so instrumental in creating the Bill, told me about his latest app, Flipper, which enables someone’s supplies of various services to be transferred almost seamlessly, with their consent, to the best value tariff, based on what tariff they are looking for.

There are plenty of opportunities for consumers to benefit from that improved competition, but we have discussed the fact that, although some of us are active switchers and are aware of those opportunities, some of us are too time-poor to do that. Worryingly, there is a large group of customers who are on bad-value tariffs and either do not know it or are sufficiently disengaged from the market not to do anything about it. That is why we brought forward the Bill and why it is extremely important to test the initiatives that the Competition and Markets Authority proposed to improve engagement with so-called disengaged customers.

We have discussed incredibly exciting technological changes, such as the move to distributed energy, the increase in renewable energy and people’s ability almost to create their own energy network, which includes them, local businesses and other local energy consumers. New business models will also come into the sector. I was interested to hear the evidence of some of the more innovative new entrants about where they want to go with the market. They mentioned half-hourly settlement and payments to people who do not consume energy at certain times. There is an enormous range of adaptations, and of course smart metering will unlock even more.

We are all determined to have a fully competitive and fair energy market, but I think we are all of a mind that the cap should be a temporary measure. I pay tribute once again to my hon. Friend the Member for Stirling, who serves with great effect on the Business, Energy and Industrial Strategy Committee, to which we all owe a great debt of gratitude. The Committee said that there is a risk that if the price cap became a longer- term fixture it

“would put the Government unduly in charge of setting energy prices for the foreseeable future.”

[Caroline Flint (Don Valley) (Lab)]

rose—

[Claire Perry]

It is always a pleasure to give way to the right hon. Lady.

[Caroline Flint]

I thank the right hon. Lady for giving way and congratulate her on receiving Privy Counsellor status—she joins a merry band of us. I accept the argument for a temporary price cap, but does she accept that we should look closely during this period at whether any other structural reform of the energy market is needed to ensure that there is even wider competition and hunger for customers, rather than complacency?

[Claire Perry]

I could not agree more. I thank the right hon. Lady for her kind congratulations. I feel it is an undeserved honour, but it is amazing. She is absolutely right. One of the reasons we were minded to bring forward the Bill was that we have a competitive energy market, with more than 60 companies that would like to sell us energy—either combined heat and power or, in some cases, just power—but we gifted incumbency to a large number of companies when we took what I thought were sensible steps to privatise the energy system. That brought in more than £60 billion of new capital and caused prices to fall and power cuts to halve, but the companies that were gifted incumbency have not had to work for customers. It was interesting to hear from new entrants about how they are determined to shake up that complacency.

I think the right hon. Lady also alluded to practices further up the energy system—or further down; I am not sure whether it starts at the top or the bottom—and particularly profits in the distribution sector and overall network costs, which have come down but arguably could come down further. Work has been done in that area, but I am determined that the whole sector, from generation right to the customer’s meter, should be highly efficient, that efficiency and customer service should be rewarded, and that we ensure we have not created a shield of incumbency that allows companies to persist with bad customer practices. This is the start. We may not need legislation to get there, so we may not have the pleasure of—

--- Later in debate ---

The advantage of such a system is that trading is completely transparent at all times. At that point, depending on how far down the curve the pool goes, there are no bilateral deals, which hon. Members may well know have been quite a subject for investigation in previous years. It is not always obvious with bilateral deals in which companies are effectively trading with themselves—when one company has both generation and retail capacities—that they affect what is happening with the real price of energy at the point at which the trade is made. Nor is it particularly obvious, because it is not transparent, whether those deals are in the public interest in keeping the prices as low as possible. Suggestions have been made that on occasions where companies are effectively dealing with themselves, there can be price transfer. That is, a company is actually trading up in its bilateral deals, so that a price is taken out of the retail and transferred to the wholesale operation and an additional profit could be made.

[Caroline Flint]

My hon. Friend is making an important point. To sum it up, the big six are both generators and retailers. The case is that they generate energy, sell it to themselves and then sell it on to us, without us really being clear about what the true price is. But does he agree that the advantage of a more transparent pool is for those independent generators to have a marketplace in which they can sell their energy, as well as those smaller retailers that would like to operate in a much more open and transparent way? I am glad to say that that was the policy when I was shadow Secretary of State for Energy and Climate Change. If, like other policy areas, it seems to be more popular these days, more strength to his elbow.

[Dr Whitehead]

I thank my right hon. Friend for that encapsulation of how the pool works and for her important point that a pool system would allow independent generators to trade on exactly the same basis as those vertically integrated generators, and, equally importantly, independent retailers bidding into the market would be able to bid in transparently, on the basis that they would know what the price was at that particular point. There would be hands on the table and the price would be clear for everybody. The whole trading process would be thoroughly transparent, to the particular advantage of how the market works in its new incarnation as a large number of independent retailers and generators operating alongside the more integrated generators and those large inheritors of customers from, essentially, the days of the Central Electricity Generating Board.

--- Later in debate ---

However, what the proposal of a relative cap does really well is draw attention to a serious, big problem in the energy market today. If energy companies have a very substantial range between tariffs, that affects their ability to switch their customers, and particularly their sticky customers. Let us not forget the range of sticky customers—people on variable tariffs—that a number of companies have. I think SSE, for example, has 89% of its customers on standard variable tariffs and other similar tariffs. Most of the big six have well over 50%. Even some of the newer energy companies are accreting a number of customers who are in that position. Those customers, who have been the focus of the Bill, are the most prone to particular energy companies effectively trading on their loyalty to change the terms of the tariffs over a period of time, so that they migrate towards the top end of the tariff range, rather than the bottom end, which they may have entered into an agreement on in the first place. Even if someone is on a fixed-term tariff offered at a particular point by an electricity company with a substantial tariff range, thinks they got a particularly good deal from that company and is a loyal customer, they may well find themselves placed on a new tariff towards the top end of that company’s tariff range when that mode of deal comes to an end. In many instances, people do not know that has happened: they thought they were getting a good deal but find that they are paying through the nose for their electricity.

[Caroline Flint]

It is worth exploring what might happen down the road when the temporary price cap ends. I am in favour of an absolute price cap rather than a relative price cap. I am listening very carefully to what my hon. Friend is saying and I have read the new clause, but may I say this to him in a friendly way? My concern is that there is a danger that what he is putting forward may inadvertently create a relative price cap and I am against that because a company could set its highest tariff very high so that, even if there were a 6% differential, it would be a differential between a high tariff and a really high tariff. I am totally at one with him on ensuring that another set of bad practices does not come in when the temporary price cap ends, but is there not a danger that that might be the unintended consequence of his new clause?

[Dr Whitehead]

I thank my right hon. Friend for that important point about trying to look at the consequences of what may happen when the price cap ends. Indeed, the new clause considers precisely what circumstances will be in place at that point. In essence, its purpose is to require the Secretary of State to produce a report on what might happen to relative tariff differentials in the period after the price cap ends. I suggest that that may be one of the pillars of a return to reasonable market conditions when the cap ends. If that pillar and other matters relating to the market working well were in place, and had been franked by Ofgem as being in place, the relative tariff range limitation device might come into place at that point.

In those circumstances, it would make no sense for an energy company to start with a very high tariff, because it would simply lose a whole pile of customers. Indeed, in circumstances where companies have done that, for various reasons, they have bled a very large number of customers. We can see that in some of Centrica’s activities, for example. It seems to me that in circumstances where the market was otherwise working reasonably well, the market itself would determine whether companies could hoick their original offer tariff really high to take advantage of a restricted tariff level. That may simply not be a viable strategy for them to adopt under those circumstances. At the same time, however, companies that had offered a competitive tariff would not have the option of transferring customers to a non-competitive tariff if they did not switch.

That is particularly important given that all the evidence we have so far shows that, whatever we do and whatever remedies or new instruments are put in place, it is unlikely that we will ever have a market in which everyone actively switches. It is extremely likely that the system will continue to operate on the basis of a majority of people one way or another not switching and a minority of people switching, sometimes very actively. Yes, perhaps that switching would keep the market in order, but the market nevertheless would still carry a large number of people who did not switch.

In the past, people not switching has led to the maintenance of SVTs and default tariffs. Even when measures are applied, such as Ofgem’s experiments with getting people to switch on the terms of the CMA’s recommendations—a number of pilots have been carried out, including letters from energy companies or from Ofgem informing people about how they might switch —a good number of people do not switch. We have a reasonable responsibility—indeed, a duty—to consider what will happen to that body of people even after we apply all the other remedies to the market. It seems to me that this particular remedy for the period after the absolute price cap ends may actually address that issue of sticky customers continuing not to switch.

Let me give hon. Members an idea of what is happening in the market today. As we might expect, among the 60-plus companies making a tariff offer in the market, there is an upwards curve in basic tariffs. The annual cost of a dual fuel tariff ranges from about £800 to £1,200 for some of the green tariffs we discussed. If we look at those companies’ tariff ranges—I will not mention names—we see that one company that starts at the lower end with an initial tariff offer of a little over £800 has a tariff range of up to £1,150, another company that offers an initial tariff of just over £900 has a tariff range of up to £1,200, and a company that starts at just under £900 has a tariff range of up to £1,150. That indicates that, at the moment, the slope of a company’s initial tariff bears no relation to its tariff range. Indeed, some companies have very good tariff ranges—Members might be surprised to hear some of their names—whereas other companies, which Members might have a rather more benign view of, actually have huge tariff ranges. So the question of tariff range and how that may affect sticky customers is a question not just of there being bad companies doing this and good companies not doing it, but of it being reasonably endemic across the range of companies offering a relatively low initial tariff but having a very high tariff range structure in their arrangements.

Domestic Gas and Electricity (Tariff Cap) Bill

Caroline Flint Excerpts

3rd reading: House of Commons & Report stage: House of Commons
Monday 30th April 2018 Commons Chamber

[Stephen Kerr]

I am grateful to my hon. Friend for his intervention. I share the concerns—I think they are shared across the whole House—about the performance of Ofgem as a regulator. I have broader concerns about the general performance of regulators full stop. Frankly, we seem to have a collection of regulators who either have powers but do not seem to be prepared to use them, or who do not feel they have adequate powers but are not prepared to ask for them. That seems incredible to me. I am very wary of leaving the issue of vulnerable energy customers to the discretion of Ofgem, because I am fearful that the discretion of Ofgem will mean that it will continue, by its own admission, to fail vulnerable customers.

This is an important issue that needs to be aired here and now on Report. Ofgem needs to sit up and take note. It is also important that we hear from the Minister, from the Dispatch Box, what change in the pattern of behaviour we should expect to see from Dermot Nolan and Ofgem. Will they have the determination and grit of the marathon runners in Stirling yesterday? Will they do something with the powers they currently have and the powers they will have when the Bill is passed? Above all, I want the Government to fulfil the promise of our Prime Minister who, on behalf of the Conservative party, said:

“Our party did not end the unjust and inefficient monopolies of the old nationalised energy corporations only to replace them with a system that traps the poorest customers on the worst deals”.

I am fearful that that is what we could do. I look for reassurance from the Minister.

[Caroline Flint (Don Valley) (Lab)]

I welcome back to the House this unfinished business. It has been a long-running saga and I have appeared in pretty much every episode for the past six years. I am hoping tonight will be my final appearance on this particular matter, with no repeats to follow.

I welcome the proposed absolute price cap. We have arrived at a place where there is much cross-party agreement, but it comes at a price. That price has been borne by consumers. The Competition and Markets Authority confirmed in 2016 that between, 2012 and 2015, the average detriment to the consumer—overcharging, in plain English—was £1.4 billion a year. The CMA found that the scale of overcharging, far from diminishing, was rising, reaching £2 billion a year by 2015.

--- Later in debate ---

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

You will be pleased to hear, Mr Deputy Speaker, that I will be brief.

I thank all Members who have contributed to proceedings on the Bill and all members of the Public Bill Committee, who worked diligently and in such a consensual way. I particularly congratulate my hon. Friend the Member for Southampton, Test (Dr Whitehead), who over the past weeks and months has spent many hours working on not only this Bill, but a great many pieces of legislation. I thank the Public Bill Office and the Clerks for their tremendous support, as always.

Somewhat unusually, I am delighted that we are here to send a Bill to the other place in a speedy fashion. The Opposition will support the Bill’s Third Reading. However, the Minister and the Secretary of State, diligent as they are, may share some of my exasperation that wider Government inaction—shall we say?—and delay at the beginning of this Parliament has meant that millions of people are still suffering with big energy bills as the winter comes to a close.

The 2017 Conservative manifesto committed to implementing an energy price cap that would protect 17 million households. On 9 May 2017, the Prime Minister herself wrote of the cap in The Sun:

“I expect it to save families on poor value tariffs as much as £100.”

Yet the policy was thrown into doubt when the Queen’s Speech said merely that the Government would introduce

“measures to help tackle unfair practices in the energy market to help reduce energy bills.”

That was followed by numerous letters between Ofgem and the Secretary of State in which it was made clear that legislation was required, but the Government still did not introduce a draft Bill.

It was not until mid-October that we saw evidence of the Government’s commitment coming to fruition, but even then there were reports that some in the Cabinet had no intention of seeing legislation on the statute book. Thankfully, pressure from the Opposition, and indeed from Government Members, has ensured that the Bill has made progress. A price cap will therefore eventually be in place, but the fact sadly remains that in nine days’ time it will have been exactly a year since the Prime Minister wrote her commitment to energy customers in The Sun.

I am happy that we are here today—I commend the Minister and the Secretary of State—but it is disappointing to say the least that a year has passed and the cap is still some way from implementation. As a result, energy customers have not been protected during a winter in which we have seen some of the coldest weather on record. Prices have continued to rise, and in the past couple of weeks, British Gas has announced a 5.5% price rise, while EDF has announced a 2.7% rise.

My hon. Friend the Member for Southampton, Test and other hon. Members attempted to improve this Bill and help the Government to ensure that their own commitments were met. Sadly, although the Minister was very amiable, the Government did not accept many of the amendments.

[Caroline Flint]

May I add another couple of dates to help Members to understand how long it has taken to get us here today? I think that, as I get older, collective memory becomes an even more important asset. It was in October 2011 when the then Prime Minister, David Cameron, held a summit to tackle rising energy prices, and it was in October last year—six years later—when we finally heard talk of a Bill.

[Rebecca Long Bailey]

My right hon. Friend is correct. I share her exasperation and that of many Members on both sides of the House about how long it has taken to tackle this very serious issue.

Briefly, let me turn to some of the amendments that were discussed—Members will be pleased to hear that I will not go through all of them. Amendment 6 would have required Ofgem to ensure that the tariff cap conditions resulted in customers on standard variable and default rates having their annual expenditure reduced by no less than £100, as per the Prime Minister’s election promise. If the Government had accepted that amendment, it would have given energy customers confidence that the Government were serious about their commitment significantly to reduce the bills of millions of customers. However, the Minister said that she felt that the Opposition had been mischievous in trying to place a Government policy within a piece of Government legislation. I do not think that I need to say any more about that—we will not try to do so again.

After our discussions in Committee, we redrafted an amendment that we had previously tabled. Rather than proposing a hard stop date, amendment 5 would have simply ensured that the cap would be in place within five months of Royal Assent. Ofgem has stated that it will take five months from Royal Assent to implement the cap. It indicated that placing such a deadline in the Bill would not cause it a problem or hinder its process so, again, it was sad that our amendment was not accepted.

Similarly, new clause 1 would have developed requirements for a differential between a supplier’s cheapest and most expensive rates after the termination of the cap. That would have offered a degree of ongoing protection for consumers while wider market reform could take place.

I wish to pick the Secretary of State up on a statement that he made on Second Reading. He said:

“Britain has long been a pioneer in not only the privatisation and liberalisation of industries but the regulation of these utility industries, too.”—[Official Report, 6 March 2018; Vol. 637, c. 206.]

I am afraid that I have to take issue with him. Although I am pleased that the Bill is completing its final stages today, the necessity of the Bill in itself demonstrates the Government’s abject failure adequately to ensure that our UK utilities have been regulated. In the past year alone, £120 has been paid by every household in the UK for dividends to energy company shareholders. As I have said before, the six distribution network operators had an average profit margin after tax of 32% a year between 2010 and 2015, which equates to £10 billion over six years. During that time, shareholders received £5.1 billion in dividends, or half the net profit generated. In the past 10 years, water companies paid 1,000 times more in dividends than in tax. Three of them paid more in dividends than they made in profit in that period, which means that they were borrowing on the back of household bills to pay their shareholders. Radical reform of our energy market is needed—it is not optional, but necessary.

We have yet to see any response to Dieter Helm’s consultation on the cost of energy, which included many proposals for reform. Perhaps the Secretary of State will confirm when a response to that consultation will be published. It is urgent that we have such a response if effective competition is to be achieved by the end of 2020, or indeed by 2023, when the energy price cap will definitely be lifted.

I support the Bill and I welcome this Government action, but, as I have said, the cap is simply a sticking plaster. I hope that the Government will now act speedily and listen to the comments of Members about the wider reforms that our energy market requires.