Energy Markets (Competition)

Damian Hinds Excerpts

Wednesday 26th March 2014 Westminster Hall

[Damian Hinds (East Hampshire) (Con)]

I congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate. As the hon. Member for South Antrim (Dr McCrea), who has just left the Chamber, said, the issue is very important to many of our constituents. They are at the sharp end and they feel the effect of the high price of heating their homes. It is also a big issue, of course, for firms and for the competitiveness of the UK economy.

There are several elements to the price we pay for energy: the wholesale cost, which accounts for about 44% of a typical dual fuel bill; the cost of supply; the policy costs; taxes, of course; and, finally, profits. Today we are focusing on competition and competitiveness in the market. That will flow through; it will be seen in companies’ profits, of course, and to an extent in the cost base—the part of the operating cost that is retail distribution in particular. Of course there is also the question of the allocation of costs, where there is vertical integration in the market. In 2012, the big six made an average margin on domestic energy of about 4.3%, which is not the sort of level to raise alarm bells. However, the question that many people want to ask is whether the vertically integrated companies are making super-normal profits elsewhere in the chain, and in particular in generation. That is a question that even the collective wisdom of all the hon. Members in Westminster Hall today will probably not be able to solve. It needs a full-on economic analysis by the competition authorities, and I hope that that will come soon.

For today, we are focusing on retail distribution. I do not want to get all theoretical about it, because, as the hon. Member for Edinburgh North and Leith said, the issue is a practical one that people feel in their pockets and in the heat or cold in their homes. Perhaps not the stupidest place to start a discussion about competitiveness in any market is the conditions for perfect competition. The things that are needed are a commodity product; many buyers; many sellers; no barriers to entry; perfect information; and no switching costs. In the market that we are concerned with, the first two are given: there is a commodity product, whether it is gas or electricity; and clearly lots of people need to buy it. Everything else in the list does not come naturally. There are not, naturally, many sellers. There would not naturally be perfect information or an absence of switching costs and barriers to entry. Those are the things that public policy should be concerned with, for competitiveness.

It is worth dwelling for a moment on history. There is a rumour, although I do not think that the hon. Gentleman perpetuates it, that there began to be a problem with high energy prices in about May 2010, and that it is all the fault of the present Government. That is of course absolutely and wholly untrue. According to the Office for National Statistics, in 2002, 2003 and 2004 the average monthly household energy bill was £70. That rose to £108 by 2009 at otherwise constant prices—a massive rise of 50%. The rise was even worse as a proportion of income for the poorest fifth of customers. The price came down, but only slightly, I am afraid, after 2009-10. If I had more time, I would talk more about the international comparisons, although my hon. Friend the Member for Warrington South (David Mowat) did that extremely well. We should remember that, of course, the biggest factors in the price of energy are, sadly, things that we cannot control, to do with wholesale energy prices. However, a lot could be said another day in another debate about how those markets might work more in this country’s favour.

Whatever the other main factors may be, we always want a more competitive market, and that always has an impact on price. There are two areas where that is particularly relevant: the number of sellers in the market and the barriers to new ones coming in. There are many markets in this country with high concentration ratios, including confectionery, soap powder and grocery retail. However, we would all agree that they are competitive markets in which companies compete hard with each other. A problem arises, particularly, when products are less comparable, at higher value, and harder to switch between; so in a market such as banks, where there are high concentration ratios, there are concerns about the way competitiveness works. Challenges therefore become important, and I greatly welcome what the Government have done to encourage more companies into the market, but we need more trusted brand names in the market, to which people would feel more comfortable about switching. I should be interested to hear what the Minister thinks could be done to encourage more of those in.

A bigger issue is comparability and ease of switching. I acknowledge that we are part way through a process. Much has already been done through the regulator and in legislation, and the full effects have not yet been felt. It would be wrong to prejudge things. Tariff complexity reached almost comic proportions when there were hundreds of tariffs, including one that came with a free football shirt, for some reason. That, combined with the intangible nature of the product, and the fact that none of us really understood the dynamics of consumption and volumes, made the market a hard one for any consumer to master.

There is more that I should like to say, but I will not be saying it this morning. Suffice it to say, we obviously have high energy prices, and we all care about that and want to bring the price down. Several issues are relevant, but we cannot say that lack of competitiveness is the largest, or even a very large, single factor. However, we know that factors in competitiveness need more attention, and I hope that the competition authorities will deal with that, and that the Government will continue their push for diversity and competitiveness in the market.