UK Energy Market

Dan Poulter Excerpts

Wednesday 9th March 2016 Westminster Hall

[Dr Daniel Poulter (Central Suffolk and North Ipswich) (Con)]

I beg to move,

That this House has considered competition in the UK energy market.

It is a pleasure to serve under your chairmanship for the first time, Mr Percy. Energy prices and the challenges facing the energy market—perhaps the failure of the energy market—are issues that have vexed consecutive Governments for many years. The challenges we face in tackling the behaviour of the big six energy companies were most recently illustrated by the debacle of the Age UK-E.ON energy tariff. Age UK offered its customers a tariff with E.ON—one of the big six companies—which was not the best deal on the market and cost them many hundreds of pounds more than they needed to pay. That is an example of the big six energy companies’ behaviour. I have a good impression of Age UK from my engagement with both the local organisation in Suffolk and the national charity, which campaigns for the needs of older people. That tariff is an example of one of the big six energy companies behaving poorly and not offering good value for money for customers.

An important review of the energy market will be published tomorrow, so this debate is timely. It gives us an opportunity to talk about the challenges we face in developing a sustainable energy market that serves customers and looks after the most vulnerable—people on fixed incomes, people in social housing, older people and people who are in fuel poverty.

The energy sector faces three sometimes conflicting pressures, which we often call the “energy trilemma”. First, since the liberalisation of the domestic gas and electricity markets at about the turn of the century, energy customers have grown accustomed to relatively cheap energy. More recently—particularly since the recession —many households have struggled with energy bills and the cost of heating their homes due to increases in energy prices.

Secondly, the UK’s future energy requirements are an increasingly pressing challenge. The Department of Energy and Climate Change—the Minister may talk about this later—estimates that electricity capacity in the UK will need to grow in the long term, as demand is likely to increase by between 30% and 100% by 2050.

Thirdly, and rightly, the UK committed to reducing its greenhouse gas emissions by at least 80% by 2050 under the Climate Change Act 2008. That Act, which set out steps towards the decarbonisation of the British economy, was underpinned by cross-party support. When it was enacted in 2008, the right hon. Member for Doncaster North (Edward Miliband) was the Energy Secretary, and the Prime Minister, who was then the leader of the Opposition, gave the support of Her Majesty’s Opposition to that important measure.

In short, energy must become low carbon while remaining affordable to consumers and attractive to investment and investors. That is the energy trilemma. It has perhaps been made slightly less challenging in recent months by the fall in the global oil price and the lower fuel costs for many customers. Certainly, the cost of kerosene—the fuel that many of my constituents use for home heating—is at a record low level.

Since 2008, Governments and the energy regulator, Ofgem, have sought to reduce the barriers to effective competitiveness in the gas and electricity markets, particularly for supplies to domestic customers. Up until now, the main aims of the regulatory interventions have been to ensure that the wholesale and retail gas and electricity markets are competitive. For retail consumers, the aim has been to make tariffs simpler, clearer and fairer and to reduce the complexity that previously dogged pricing in the energy market. The various interventions culminated in 2014 when Ofgem requested that the Competition and Markets Authority conduct an energy market investigation. Referring the matter to the CMA was intended to secure a once-and-for-all investigation as to whether there were further barriers to competition in the energy market, because the CMA had the more extensive powers with which to address the issue of big, long-term structural barriers.

In the course of the CMA investigation to date, the authority has published a large volume of evidence on its website, including more than 100 submissions from interested parties and transcripts of 30 hearings with industry participants and other important groups. In the provisional findings, which were published on 7 July 2015, the CMA suggested a range of adverse effects on competition in the energy market, as well as areas that did not give rise to such effects. The key provisional CMA findings were that a range of problems is hindering competition in the market, including the extent to which consumers are engaged in it and the shortcomings of the regulatory framework to support active consumer engagement.

The CMA also found that customers are not taking advantage of switching suppliers. Dual-fuel customers could save an average of £160 a year by switching to a cheaper deal, again highlighting behaviour of the big six of which we are too well aware. Furthermore, about 70% of customers are on the default standard variable tariff, despite the presence of generally cheaper fixed-rate deals.

The CMA outlined that regulatory interventions designed to simplify prices, such as the four-tariff rule, are not having the desired effect. A lack of transparency is hampering trust in the sector and, as I am sure that Members in the Chamber today know, a good example of that is the scandal exposed by the Select Committee on Energy and Climate Change in the previous Parliament, under its then Chair, Tim Yeo. The price comparison websites were only advertising deals that they were sponsored to advertise, so some of the very best deals were not available to the people using the websites. Every step of the way, there has been a lack of pricing transparency, even on the part of the price comparison websites. The history of the big six energy companies is far from one of benefiting the consumer.

Competition in the wholesale gas and electricity generation markets can work well—according to the CMA provisional report—but the presence of vertically integrated firms does not necessarily have a detrimental impact on competition.

[Julian Knight (Solihull) (Con)]

My hon. Friend is making an important contribution and I congratulate him on securing the debate. I understand about the failings in the aggregator and price comparison sites sector, which we need to be aware of, but competition in the energy market has made some progress. In 2010, 99% of the domestic market was shared by the big six, but we now have more than 30 providers and independent suppliers having 30% of households. Does he recognise that there has been progress, and that we just need more and at a quicker pace?

[Dr Poulter]

There has been progress, but it has been among empowered consumers. The most vulnerable consumers—such as people on fixed incomes, pensioners and those who live in the poorest housing, are unemployed, have mental illness and people who are sometimes the least able to advocate for themselves—might not even have engaged with the internet, which plays an important part in supporting consumer choice. Such lack of engagement is not true of all older people, but it is of some. Such consumers have not been engaged in the energy market and we have a duty to look after them, in particular those who live in fuel poverty. In that respect, there is ongoing market failure, and that needs to change.

May I develop my earlier point, which is key? As I am sure my hon. Friend is aware, this was picked up in the recent Which? report. Despite the CMA investigation and its provisional findings of last year, the behaviour of the big six energy companies seems to remain unchanged, profoundly uncompetitive and certainly not in the best interests of vulnerable consumers. Ahead of the final conclusions of the CMA’s investigation into the energy market, which I hope and understand will be published tomorrow, the latest Which? research has revealed that the recent price cuts announced by the big six energy companies are dwarfed by the savings that customers could be making by switching to an alternative provider.

Customers on the standard tariffs of the big six providers save only £30 a year from the recently announced cuts, which is a 5% reduction for those on a standard single-fuel gas tariff and only a 2.6% reduction for those on a standard dual-fuel deal—the cuts applied only to gas, not to electricity. The same customers, however, would save a massive £400 a year if they were to switch to the cheapest dual-fuel deal on the market, or £260 a year for the cheapest gas-only tariff. Clearly, there are still problems with and concerns about the behaviour of the big six energy companies, in spite of the provisional CMA report.

That is why a number of not-for-profit energy collectives such as the Big Deal have sprung up to support consumers to get better energy deals. According to Government estimates—I am sure the Minister will correct me if I am wrong—only 12% of customers switch their gas provider, with seven in 10, or 71% of gas customers stuck on standard tariffs and nine in 10, or 88% of households still with the big six. The forthcoming energy inquiry must therefore make it easier for customers to engage with the energy market and to switch to a better deal.

Consumers include the most vulnerable people who live in our constituencies, in particular the elderly, pensioners and people who live in social housing and private rented accommodation—frequently in some of the worst and least energy-efficient accommodation. They are the poorest consumers, often living in fuel poverty, and they are paying the biggest price for the failure of the energy market.

[David Mowat (Warrington South) (Con)]

I do not want to be an apologist for the big six, but there is something about the subject that I always find intriguing. We have heard mention of “market failure”—another term for a cartel, frankly—but why have the big six not been able to turn their cartel into profits? Yesterday, npower announced the laying off of some 2,500 people and a loss of £100 million. Other members of the big six, according to the numbers, do not appear to be making massive profits either. Where does the money go?

[Dr Poulter]

I assume that the inflated energy tariffs are benefiting the shareholders in a number of those companies, because the companies are certainly not passing the reductions in their costs on to the consumer. If we want to restore trust in the energy market, they need to do so. Some of the most vulnerable consumers, the people least likely to switch, are losing out. Clearly there is exploitation in the big six market position, at the expense of vulnerable consumers.

[David Mowat]

My hon. Friend is of course right: we must have more switching—we are all behind that—and we must make the market work better. My point, however, is that shareholders do not appear to be benefiting. Npower lost £100 million in the UK, and others have not made a great deal of money out of the market. It would be useful for us to reconcile that—perhaps the three Front Benchers will help us later.

[Dr Poulter]

The Front Benchers can speculate why the benefits of the reductions in costs for the energy suppliers are not being passed on to consumers, because they are clearly not being. The money is going somewhere, but not to consumers’ pockets. If we genuinely want to have an energy market that has the trust of the public and protects those people who are perhaps not engaged with it effectively, something different needs to happen. The money is going somewhere, but not to the people to whom we want to see it going, and that is what a market mechanism is designed to do—to benefit the consumer.

[Julian Knight]

I was in conversation with Npower today, because it is a major employer in my constituency and I had concerns about the job losses that were announced. Npower told me that, in effect, the industry is running on a profit margin of about 4% to 5%; by comparison, Tesco and Sainsbury’s normally look at about double that figure. So a huge profit margin is not in place and perhaps where the disconnect—excuse the pun—comes in is in areas such as prepayment meters, where vulnerable groups are paying over the odds for their energy, compared with more everyday and active consumers.

[Dr Poulter]

My hon. Friend is right. Indeed, I have raised that point. You quite rightly kicked off the debate a little earlier than we had anticipated, Mr Percy, because the previous debate came to an early end, and in my opening remarks I alluded to exactly that point in relation to E.ON’s recent Age UK tariff, which was an uncompetitive deal compared with some provided by other big six energy providers—I give some of them credit in that respect. It was about £140 more expensive than the best big six deal at the time. That exploited the good will of Age UK and of its customers, who would have expected that Age UK would provide them with the best deal available, which it clearly was not. That has further damaged the reputation of the big six and how they can use their market position to the detriment of the customers they purport to serve.

[Julian Knight]

My point related more to prepayment meters, which are topped up at shops or other retailers, but people find that they go into emergency credit and end up paying far more for their energy. My hon. Friend is making some valuable points, but I wonder whether there is an acute difficulty only in small areas of the market, with overall profit margins being relatively low.

[Dr Poulter]

My hon. Friend is right to make that point about pre-payment meters. In that situation we are often dealing with some of the poorest energy consumers who can least afford to pay, but who pay a lot more for their energy as a result of those meters. I am sure the Minister will want to comment on that. Citizens Advice gave evidence to the Energy and Climate Change Committee on the importance of protecting vulnerable consumers and ensuring that they are not left behind by an energy market that benefits more informed, internet-savvy consumers. We need to protect those who by dint of social circumstance—they may not be very well off, or they may be in difficult circumstances—may not have the same opportunities as others to choose where they live. They may have to deal with pre-payment meters, which I am sure none of us would choose for ourselves. There is clearly a role for the Government in looking at how to protect vulnerable consumer groups.

[Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)]

The hon. Gentleman is making a fantastic speech. People on prepayment meters are the disguised self-disconnectors, which is a bad news story for those individuals but also for the country and for companies. That must be addressed, as the hon. Member for Solihull (Julian Knight) said.

[Dr Poulter]

I completely agree with the Chair of the Energy and Climate Change Committee; that is a good point well made. I hope we will have the opportunity to do that either through legislation or through cross-departmental work. This is an issue not just for the Department of Energy and Climate Change but for the Department for Communities and Local Government, which can implement much energy legislation that affects homes in the private rented sector. I am sure the Minister will want to take the issues forward with Ministers from that Department in some cross-Government working, because it is important that the energy market benefits the most vulnerable people in our constituencies.

Despite the CMA’s investigation and its provisional findings last year, the behaviour of the big six energy companies seems to remain broadly unchanged, profoundly uncompetitive and, as I outlined, certainly not in the interests of some of our most vulnerable constituents. Ahead of the conclusion of the CMA’s investigation into the energy market, numerous measures have been put in place that have not been in consumers’ best interests. I am aware that other Members wish to speak, so I will try to bring my remarks to a conclusion fairly soon, but it is worth highlighting where that review is and where it may lead us.

The CMA’s provisional findings were a clear indictment of a market that in my view—this is not without a good amount of evidence—is failing consumers. They showed that energy suppliers were exploiting their unilateral market power to price tariffs above a level that could be justified by the costs at which they were buying energy. In the Which? annual energy supplier satisfaction survey, three of the big six suppliers failed to meet the overall average customer satisfaction score of 53%, and npower had the lowest score for the sixth year running, at 41%. I am sorry to highlight that to my hon. Friend the Member for Solihull (Julian Knight), given the point he made.

Ofgem’s latest complaints figures show that the big six received an eye-watering 5 million customer complaints last year. I am sure hon. Members agree that such flaws in the energy market demonstrate the need for radical reform and change. There is also concern about the level of detail that the CMA has provided to date on its potential remedies, which is seen as lacking. I hope that we will get clarity on that tomorrow when its final report is published. There may be merit in the safeguard tariff proposal, but not enough thought has been given to how it will interact with proposals to get more people switching.

Crucially, the CMA appears to have given little or no thought to the steps that will engage people in the energy market, particularly after the failure of Ofgem’s retail market review. At a time when people should be saving as much as £400 by switching from a big six standard tariff to one of the smaller suppliers’ cheapest tariffs, a rise in switching of just 15% is a drop in the ocean. That raises big questions about what can be done to get people to switch and save, and the CMA needs to deliver clear answers.

[David Mowat]

My hon. Friend mentioned npower, which got a very low customer satisfaction score, has lost 200,000 customers, I believe, and is having to make something like 2,000 to 2,500 people redundant. In that respect at least, there is an argument that the market is working.

[Dr Poulter]

The market may be reflecting the damage to npower’s reputation, with some loss of jobs. None of us would like to see job losses in our constituencies, but clearly there are lessons for npower to learn. However, it is only one of the big six energy companies. As a group, their behaviour has consistently been not customer-focused, as the Which? survey bears out, and they have not made improved energy tariffs available to customers, particularly vulnerable customers. I do not believe that that is a good or healthy market, which is why Ofgem referred the issue to the CMA in the first place.

Crucially, the CMA appears to have given little or no thought to how we can engage people in the energy market. There are sticky customers—vulnerable customers, older people and those in the private rented sector—who do not engage, and we need to see that change.

In their draft legislation, the Government are looking at developing greater price visibility, compelling offers and quicker switching. Those ideas have a lot of merit and will encourage greater engagement in the market by some, but I am not sure all, customers. There is a compelling case for the CMA inquiry ensuring that the presentation of pricing is more engaging for customers. In particular, the switching process needs to be improved— both the time limit and how it works. The Government are looking at that in the draft legislation, which is welcome. We know that customers will switch, but the challenge is getting them more engaged in the market.

Today’s energy market is failing customers. Millions of people, many of whom are vulnerable and living on fixed incomes, are being punished for loyalty to their energy supplier, paying hundreds of pounds more for their energy than they should. The big six are using that money to hook in new customers with loss-leading tariffs, which is a cynical and poor way to treat customers that destroys market competition at customers’ expense. That is one of the key reasons why the big six retain their market position. The situation is worsened by too many complex rules and regulations and a lack of pricing transparency.

The CMA has a unique opportunity to deliver a new regulatory model based on simplicity and common sense, underpinned by clear, strong and practical principles that protect vulnerable customers and those on fixed incomes. In a refreshed energy market, with the energy companies showing genuine corporate responsibility, there is an opportunity to put customers at the centre of a market that is meant to serve them. Those who profit from exploiting their customers should have no choice but to change or face much more stringent financial and other penalties from regulators.

I would like to see three changes to the energy market coming from the CMA review, and I would be grateful for the Minister’s comments on them. We need to see fair pricing—energy suppliers’ prices should reflect underlying costs, and suppliers should be stopped from overcharging loyal customers or running loss-leading tariffs that damage competition and drive smaller suppliers out of the market. Regulations should be based on clear principles, with the priority being to avoid customer harm and to protect vulnerable customers and those on fixed and lower incomes, particularly those in fuel poverty. That leads to the key third principle of energy market reform: we must protect the vulnerable. We need a regulated, annually set social tariff that stops the most vulnerable customers and those in fuel poverty being exploited by the big six.

If we do not achieve those things, the energy market will become a contradiction in terms. Consumers, particularly the most vulnerable, deserve better. I look forward to hearing from my hon. Friend the Minister.

--- Later in debate ---

[Dr Poulter]

I thank the Minister, both other Front Benchers and all other hon. Members for their contributions. This has been a very productive debate, and we look forward to hearing tomorrow about the CMA’s findings, which I hope will benefit consumers.

Question put and agreed to.

Resolved,

That this House has considered competition in the UK energy market.