UK Energy Market

David Mowat Excerpts

Wednesday 9th March 2016 Westminster Hall

[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.

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[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.

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[Dr Alan Whitehead (Southampton, Test) (Lab)]

I congratulate the hon. Member for Central Suffolk and North Ipswich (Dr Poulter) on securing the debate, which is so timely, given that it is within 14 hours of the Competition and Markets Authority’s report on its findings coming out. Unfortunately, it is taking place 14 hours before the findings come out, but it is pretty closely targeted on the important development that we are about to witness. For this afternoon’s debate, we have the CMA’s provisional findings, which I guess will inform the report that will come out shortly. The hon. Gentleman directed his very thoughtful points about the whole question of competition in the energy market to a number of those.

This is a conundrum with many layers—exactly how competition works, how it can best work, how it can be better enhanced and how it can work for those customers who could benefit most from better competitive arrangements in the energy market. In many instances, those customers appear at present to be stuck in a non-competitive mode with energy companies. Energy companies almost regard those sticky customers as assets that they can use to make additional resources, as the hon. Gentleman mentioned, with which they can finance special offers and various other things, which, to some extent, rely on the knowledge that those sticky customers will remain with the company—perhaps that is part of the conundrum—apparently very much against their better economic interests and despite longer term concerns. I will perhaps return to that thought in a moment.

The hon. Gentleman also made the very important point that we are discussing one part of that energy trilemma, in that we have embarked on—and I hope we will continue to be solidly embarked on—a process of decarbonisation of our energy system. Clearly, that has to be achieved, but under the circumstances of two additional imperatives: first, that there should be security of supply, among other things to make sure that the lights stay on, which is perhaps a rather important part of the customer experience of electricity prices and the market; and secondly, that prices should be fair, reasonable and equitable, as far as customers are concerned.

I am not sure that it would too far outside this debate just to reflect on the first part of that energy trilemma. I gently ask whether the Minister has any sort of plan B in the light of the difficulties that we are having with capacity, the recent reports concerning the possible development of Hinkley Point C power station and the apparent inability of the capacity market as it stands to develop any contracts for new long-term building, particularly of gas-fired power stations. Does she wish to share any thoughts with us on how that particular leg of the trilemma might best be supported over the next period? That seems relevant to the other two legs, and particularly to the leg that we are discussing this afternoon.

As for the question of how prices can be as fair and competitive as possible to customers, we need perhaps refer to what is happening with the CMA. It was interesting last summer to see the CMA’s report on provisional remedies. As the hon. Member for Central Suffolk and North Ipswich outlined, it concluded that a number of features of the market gave rise to the finding of an AEC—an “adverse effect on competition”. The report stated that that arose through

“weak customer response, which, in turn, gives suppliers a position of unilateral market power concerning their inactive customer base”,

which they are able to exploit through their pricing policies or otherwise. That refers particularly to sticky customers, but I was slightly surprised at the brief consideration that the CMA’s interim report gave to a number of other factors that seemed to contribute to that, such as vertical integration in energy companies. That may not have a direct impact on competition, but it may have an indirect impact for a variety of complex reasons that may have a hand in the process.

Perhaps part of the answer to the conundrum that has been presented in this Chamber this afternoon about where the money goes when energy companies are apparently posting substantial losses is a better understanding of how vertical integration works. It is not just within the UK power generation and retail market. It has been suggested that companies that buy and sell to themselves create an opportunity to shift sums around considerably.

There is increasing vertical integration outside the UK. Some companies are reporting what is happening in the UK, but also in the context of what is happening outside the UK, such as company structures. The extent to which those companies are able to post profits or losses in particular countries in which they are working does not necessarily reflect entirely what is going on across the board in other countries of operation. That should be examined at least.

[David Mowat]

I am interested in the hon. Gentleman’s comments about vertical integration, because the interim report looked at that and theory of harm 3a and 3b. My reading of it was that the CMA did not regard vertical integration as a major issue. I looked at it quite carefully.

On the point about moving profits around, which is the issue regarding vertical integration, the share price of Centrica, the owners of British Gas and the biggest player in all this, has gone down by around 40% in the last five or six years. I have no truck with these oil companies and big players, but if they are running a cartel, it is one of the worst I have ever seen.

[Dr Whitehead]

The hon. Gentleman makes an important point. This issue is like an onion. It has many layers that must be unpeeled before anyone can get anywhere need the essence of it. Part of the process is that some companies are losing customers with insurgent companies coming into the market, and some are setting up good companies and bad companies to bifurcate the process of where their investments go and where their profit centres are. That clouds the picture. Obviously, there is the effect of energy prices, particularly who has bought what, where and when, and what those prices now mean in terms of strategies that took place two, three or four years down the line.

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[David Mowat]

People can move profits around and have good companies and bad companies. What I am saying is that Centrica, which owns British Gas, has somehow turned the cartel that it is apparently operating —we will find out tomorrow so we are speculating—into a 40% reduction in its share price in the last five years. That is not a good performance in running a cartel.

[Dr Whitehead]

Indeed. As the hon. Gentleman underlines, that may be a factor of other processes at work in those companies and what investors think is their long-term security and future in the light of rapidly changing energy conditions. A whole series of factors is at work, and I hope that, in the report that the CMA will publish tomorrow, it has paid due attention to the complexity of those factors. I fear that some of that complexity was not fully reflected in its initial proposals.

A second complexity is transparency: who is buying what at what point round the curve, how companies are hedging their trading processes and whether they are trading with themselves and hedging advantageously compared with other companies down the line. One might argue that that is good practice or bad practice, but we do not know that because the market is not transparent at the moment.