Energy Prices

David Mowat Excerpts

Wednesday 11th January 2012 Commons Chamber

[Caroline Flint]

I am afraid that that is the case. I have met a number of the energy companies over the past few months and they are obviously hurting as a result of the public criticism being directed their way. However, when we examine today’s Which? report, we find that 4 million people complained in the past year and that the number of complaints rose by 26% in the past three months, so something is seriously not right. The real problem is that there are too many tariffs on offer. Having more than 400 tariffs is not about competition or choice, and it does not serve the public interest; it serves only the interests of the energy companies. So we need, as we have said before, a simple new tariff structure that is clearer and fairer, and that will help all customers to get a better deal. I know that consultations are going on at the moment, but the Government really need to step up the pressure. We should not be unable to knock a few heads together, and we need to do that sooner rather than later. We must keep the pressure on as that is the only way to make the companies change. The Which? report has highlighted the terrible situation with bills that were overestimated or incorrect as well as the mis-selling that went on in the past. We need a proper investigation and proper compensation for people who have been ripped off. Only then will we start to rebuild trust in our energy companies.

As well as a more responsive energy industry, we need a more competitive energy market. The energy market is dominated by just six firms that supply more than 99% of electricity and gas. Today we heard that EDF will cut its gas prices by 5%, but the public will ask why energy companies are still so quick to put up people’s bills when wholesale prices go up but slow to bring them down when they fall as well as when the other big energy companies will follow suit.

[David Mowat (Warrington South) (Con)]

I have in front of me a copy from the EU website of the gas prices for every country in Europe and it would appear that the UK has the fourth lowest gas price of the 27. What is the right hon. Lady’s analysis of why that has happened?

[Caroline Flint]

First, that is not about the point I was making, but is the hon. Gentleman defending the way in which prices have soared in the past year? Is he defending the companies’ atrocious record in dealing with people’s complaints? I would not stand in his shoes and make that case. The truth is that prices need to be transparent and we need to know how they are arrived at. It is quite clear—it has been proved by an Ofgem report and the Secretary of State might back me up on this point—that there is evidence that when prices go up the bills go up far quicker than they come down when prices fall.

[David Mowat]

Will the right hon. Lady give way on that point?

[Caroline Flint]

No, I will not give way to the hon. Gentleman again.

The bigger issue is how we carry out a root-and-branch reform of the energy market for the future.

--- Later in debate ---

[John Robertson (Glasgow North West) (Lab)]

I shall try to talk to the subject that we are here to discuss, unlike the hon. Member for Elmet and Rothwell (Alec Shelbrooke).

Last year, the average household saw energy costs rise by about £300 and Ofgem announced last October that the profit for energy companies had risen to £125 per customer per year, from £15 in June. My contention is not that the cost of energy is rising, but that the big six do not have a great track record of passing on wholesale decreases as quickly as increases.

Today’s wholesale energy prices are lower than they were a few years ago—and lower than they were only a few months ago. According to Bloomberg, the wholesale price for gas in autumn 2008 hit over 70p a therm. If we compare that with 59p per therm last October, we see that wholesale gas prices have actually dropped 15% since then. Similarly, prices in the wholesale electricity market reached £120 per megawatt-hour in autumn 2008. Today, they are just over £50 per megawatt-hour—less than half the price back then. But gas prices have dropped by only 15% and electricity prices by only 11% since last May’s peak. According to Bloomberg, in December natural gas futures declined by 30% compared with 2011. Today, energy companies can buy their gas for 53p per therm, some 9% cheaper than even last October.

The reason for this is sadly apparent. European demand is going down as the continent is moving towards a downturn and productivity is declining. This may be why EDF announced today a 5% cut, but—as my right hon. Friend the Member for Don Valley (Caroline Flint) pointed out—the company raised its gas prices last year by 15.4% while future gas derivative prices were falling, and while current market prices are down on previous years.

As a result, there is great suspicion among many, including Ofgem, that the big six have not been passing on wholesale market price reductions, not only last year but this year. These are clear acts of anti-competiveness in themselves, especially towards smaller energy companies, let alone customers and small businesses. For example, section 2 of the Competition Act 1998 prohibits the abuse of a dominant position in a market by one or more undertakings which may affect trade within the UK. I will quote competition law guidelines again as it seems that the Secretary of State did not hear me the last time I did so. They state:

“Conduct may be abusive when, through the effects of conduct on the competitive process, it adversely affects consumers directly (for example, through the prices charged) or indirectly (for example, conduct which reduces the intensity of existing competition or potential competition). A dominant undertaking is under a special responsibility not to allow its conduct to impair undistorted competition.”

I strongly suspect that one reason behind the price rises is probably that the companies have grossly failed to stockpile their energy reserves to hedge adequately against future prices. That could explain why, when future prices have fallen by almost a third, the companies are not passing on the reduction. There may be numerous reasons for that—one reason is probably ineptitude—but I feel that the main answer lies more in the lack of any incentive to pass on substantial price falls.

[David Mowat]

Will the hon. Gentleman give way?

--- Later in debate ---

[David Mowat (Warrington South) (Con)]

I have been sitting here for a few moments trying to work out whether to talk quickly in the next few minutes or to curtail my remarks. I wish briefly to say something about the structure of the UK gas and electricity industries.

First, I shall discuss the gas industry. I heard the comments made by hon. Members from both sides of the House, but particularly by Labour Members, about the predatory nature of the industry, cartels, price fixing and so on. I return to my earlier intervention by saying that this country has the lowest gas prices in Europe, leaving aside three small countries. I am not defending these organisations and if the prices could be lower, they should be lower. However, if that situation is the result of predatory pricing and the operation of a cartel, the companies are not very good at it.

[Ben Gummer]

Is my hon. Friend aware that the probe initiated by the previous Secretary of State found that the energy companies were not acting as a cartel and that there was indeed price transparency between them?

[David Mowat]

I was aware of that, and I shall finish on this point by saying that if Labour Members have evidence of directors operating a cartel, which is a criminal offence, they should come forward with it. Alternatively, they should just stop making the accusation, which is becoming increasingly silly.

I was somewhat disappointed by the Secretary of State’s answer to the question about shale gas, because it has the potential to be a game-changer. In the United States gas prices have reduced by a factor of three and, in 2015, the US is going to start exporting shale gas, and if we do not have it here, that could well have a major impact on the structure of the industry and how it will work in the future. For the first time, we are seeing the decoupling of gas and oil prices, and once that has happened, all bets are off. The price of gas in Europe—in the European balancing hub—is three times what it is in the US. If a fraction of what happened in the US happens here, the results could be very radical and could create some issues to address in terms of the debt strategy.

Whereas we have nearly the lowest gas prices in Europe, the same cannot be said for electricity prices. We have structural issues to address in our electricity market. We do not have cheap nuclear power, as France does. We have missed the opportunity on that, although we are doing our best to catch up.

In the minute remaining, I want to suggest to the Minister one area that I believe we have got wrong in policy terms. The Climate Change Act 2008 sets a very ambitious target of 80% decarbonisation, and I accept that, but I believe we have confused the need to decarbonise with the need to go for renewables. The 20-20-20 directive from 2009, which imposes a renewables target over and above what we could have done to reduce carbon, has confused the issue. As a result, we have gone into nuclear more slowly than we should have done and, frankly, we have gone more slowly into carbon capture and storage, which is an alternative. Will the Minister assure us that the Green investment bank will be concerned with decarbonisation, not just renewables, and that the money available from it will therefore be available to the nuclear industry, which is in as much need of it as other parts of the decarbonisation chain, and the CCS industry?