Energy Prices

Debate between Caroline Flint and Iain Wright

Thursday 16th March 2017 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

My hon. Friend makes an important point. It is worth everybody reading that report from the Committee on Climate Change. Does he accept that part of that 9% of the bill goes on helping people—sometimes the poorest in our communities —to reduce their household bill by introducing energy efficiency measures? It is a worthwhile 9% investment.

[Mr Wright]

Absolutely, and as my right hon. Friend, who has done fantastic work on this, knows all too well, energy efficiency measures are a key plank of ensuring our competitiveness, tackling fuel poverty and addressing our decarbonisation targets. Everybody wins when energy efficiency measures are prioritised.

--- Later in debate ---

[Caroline Flint]

Exactly. We have the historical evidence that month by month people are still paying far too much for their energy bills.

It is absolutely astonishing that this is happening in what is meant to be a competitive market. The overcharging and the excessive profit margin made from standard variable tariff customers clearly provides no encouragement to move those customers on to a better deal. I believe that this is a bankrupt business model. If we are all admitting—even the energy companies have had to face up to this—that people are paying over the odds, then the companies have a business model based on that. If all these customers were miraculously to move to a lower tariff tomorrow, where would the companies be left? The inertia is compounded by a management approach that does not seem to want any form of effective change.

Unfortunately, the more the Government have publicly urged consumers to switch to save, the more the companies are absolved of any responsibility to move customers on to a better deal. A sticky, passive, unengaged customer base appears to suit some of these firms down to the ground. When, back in 2012, EDF automatically moved vulnerable elderly customers on to its cheapest tariff, sadly other suppliers did not follow up with this better practice.

The CMA’s final report concluded that to eliminate overcharging, prices would have to fall across the board by an average of 3% per year between now and 2020. It hoped that its measures to promote switching would create more competition in the market and have a downward effect on prices, but it was reluctant to say exactly how successful it expected that to be. The problem that the CMA faces is that the UK has an energy market with unhappy consumers, a dysfunctional pricing mechanism, and companies that are, I am afraid, largely immune to competitive pressures.

Ofgem has reported that some 3.3 million households switched supplier from January to December 2016. This is apparently the highest level of switching for six years, but it equates to less than 12% of households. I worry that we have a two-tier energy market: an active, informed class of consumer who is energy-conscious, internet-savvy, shopping around and managing their accounts online, and a far bigger, less informed, less engaged, less internet-savvy, discontented majority.

[Mr Iain Wright]

My right hon. Friend is second to none in her knowledge of energy policy. She may be coming on to this, but I would be interested to get her thoughts on policy fixes. Does she think that the regulator has the powers but is not using them, or that the Government need to give the regulator more powers to help fix this broken market?

[Caroline Flint]

The regulator already has powers in its back pocket. It can intervene if it thinks that the market is uncompetitive. It can, if necessary, take customers off a company that is failing and allow them to get a better deal elsewhere from other suppliers. However, we do need Government to take responsibility. Whether we have the relative price cap that the hon. Member for Weston-super-Mare proposes or my suggestion of a protected tariff—if not permanent, then temporary—to fix this market, it is clear that more reform is needed. I wish that the regulator would use its powers; it has been very slow to do so, although it has speeded up in recent years. There is more it could do, but there is more that Government could provide it with to do a better job.

One of the CMA’s proposals is that data on customers should be shared so that other energy suppliers can send their offers to customers. The problem is that people will be bombarded with leaflets and emails from operators in a sector in which their trust is already so low that they may not put any more in this marketing mechanism. These are the very people—immune to direct mail, annoyed by calls from would-be energy suppliers, and mistrustful of the whole industry—who are not being helped by any of the measures put forward since the CMA report.

The CMA believes that by encouraging switching and a shared database for companies to market new tariffs to each other’s customers, price competition can be made to work. However, I am afraid that this shared database seems to be a new label for an old solution. We have had six years of trying to bring a consumer benefit by switching—six years of abject failure. I must therefore ask the Minister whether it is realistic to assume that 28 million households will be able to reduce their average bills by 3% a year, as the CMA suggests, for each year between 2017 and 2020. The CMA believes that if it succeeds in its aim, this steady price fall would eliminate the overcharging—the detriment—but even if it did, it would not repay one penny of the money already unfairly taken from consumers. I see no mechanism in the CMA’s prescription that can achieve even the objective it has set. Adding customers who have remained on a standard default tariff for three years to a huge marketing database for other companies to prey on will not, in itself, make this market more competitive.

In March, Ofgem published the information that January’s cheapest available tariff was 22% cheaper than the average customer’s bill, but did not identify how long that offer lasted or how many customers benefited. However, let us follow its logic. What if that tariff was widely available? What if the 12% of switchers—3.3 million consumers—all switched to this new best value tariff, and what if those 12% of customers all got a saving of 20% on their bills? This change alone might notionally cut average bills by 2%—almost the 3% the CMA hoped to achieve through its measures—but it would not reduce the detriment by one penny for the 88% who do not switch. The penalty incurred by the vast majority would remain.

Also among the CMA’s recommendations is that price comparison websites should no longer have to display every deal on the market, so consumers may only see the deals that give the website a commission. The majority of customers who remain resistant to the lures of the marketeers will still see no gain. Those customers—some 20 million who pay the default standard variable tariffs and endure their prices going up and down as the energy provider chooses—are left at the mercy of their supplier, which the CMA has already identified as consistently overcharging them. They certainly cannot rely on wholesale prices to save them, because there is no obligation to pass on falls in wholesale prices to consumers—not even in part. Ofgem reported that wholesale gas prices fell by 44% between 2012 and 2016, yet consumers saw their energy bills rise by 7% over the same period. Such a perverse result could happen only in a dysfunctional market. Where do consumers turn to get fairness? The only avenue for the majority of consumers is the Government, who are the one agency with the powers to change the game at a stroke. How long will the public have to wait before the Government finally act as a consumers’ champion?

In 2011, when I became shadow Energy and Climate Change Secretary, I advised the Government that energy bills were soaring, but they did nothing. In October 2011, the then Prime Minister convened an energy summit and proposed to write to millions of consumers about switching, but that did not work. In November 2013, Mr Cameron tried a different approach: “get rid of all the green crap,” a senior source reported him as saying.

As has been touched on in this debate, the big six always like to divert discussion of bills on to green levies, even though investment in renewable energy and low carbon energy is exerting a downward pressure on wholesale prices. It is ironic that domestic consumption of energy, in kilowatt hours, has gone down, but we are paying more in our bills. The former Prime Minister said, “get rid of the green crap”, and he did so. The Government shortly afterwards reduced some of the environmental obligations and network charges and cut bills by between £39 and £50. Unfortunately, that year energy bills rose by an average of £120, so that did not work.

Mr Cameron always ridiculed Labour’s energy price freeze, which was a proposal to cap energy prices for 20 months while the energy market was reformed. Instead, in 2014 he announced the CMA investigation. Its initial findings the following year and its final report in June 2016 entirely vindicated Labour’s concern about unfair energy prices. We now have it on the record from one of the Government’s regulators: Britain’s consumers were ripped off year after year for a period of four years—that we know of. About that there is no dispute. It is an £8 billion scandal, and every month the financial punishment for customers grows.

So what do we want? My plea to the Government is simple. Recognise the scale of the problem. Recognise that switching campaigns, which have now become a gimmick, can only scratch the surface. They will never get to the heart of the problem. Recognise that the industry needs reform, and that until it is reformed, the Government need to introduce price protection for consumers.

I believe that that protection should take the form of a protected tariff, and I first argued for such a tariff after the general election in 2015. Consumers need nothing less than some sort of regulated maximum charge that companies can levy, which is based on wholesale prices, network costs and an acceptable level of profit. I do not believe that that can be left to the companies. Any voluntary measure is welcome, but the approach has been too piecemeal. We need the Government to act by introducing a protected tariff, which is set by Ofgem. We know that Ofgem is capable of that calculation, because it has just done a similar exercise for 3.5 million prepayment meter customers.

Am I asking for something outlandish? No. Northern Ireland still has price regulation, and a majority of countries in the European Union still have price controls of one sort or another. In the matter of price controls, we are not thwarted by the European Union. We cannot blame either the EU or Brexit for the Government’s failure to address this injustice. The problem lands on the doorsteps of No. 10 and the Department for Business, Energy and Industrial Strategy. The Government have the power and the means to end the unfairness in our energy market, or at least to offer a temporary respite, as they have done for prepayment customers, until more substantial reforms can be enacted.

In November the Secretary of State said:

“Customers who are loyal to their energy supplier should be treated well, not taken for a ride. It’s high time the big companies recognised this. I have made clear that this cannot go on and they must treat customers properly or be made to do so.”

I say to the Minister: now is the time. This problem is not going away, and I urge the Government to listen to the voices of Members of all parties who believe that the current energy market does not serve the British people well. Action is long overdue.