Energy Markets (Competition)

David Mowat Excerpts

Wednesday 26th March 2014 Westminster Hall

[Mark Lazarowicz]

Absolutely. That is one of the areas where a fundamental investigation is needed, with fundamental questions asked and fundamental changes made. I recognise that businesses have to make a profit for their shareholders and future investments. They are big businesses, so the profits will have big numbers in them. Nevertheless, there are fundamental questions. Today, SSE has made an announcement that promises an energy price freeze until at least 2016 and it is preparing to separate legally the retail and wholesale sides of its business. Those changes are in line with the policies announced by the Labour party last year.

[David Mowat (Warrington South) (Con)]

This debate is indeed timely, given the SSE announcement. The hon. Gentleman will also be aware that SSE announced this morning that of the four offshore wind farms it was planning, three will not now go ahead.

[Mark Lazarowicz]

I see that that is how it has been described by some in the media. I have not had a chance to look at the SSE comments in great detail, but I am not sure that the causal linkage that the hon. Gentleman suggests exists. It was interesting, given the various comments on the Labour party proposals, that SSE has welcomed the need for long-term stability in the framework for investment. Perhaps the single biggest problem for long-term investment in offshore wind has been the confused and mixed messages sent by the Government recently.

[David Mowat]

rose—

[Mark Lazarowicz]

I will draw to an end, because I know a lot of colleagues want to speak in the debate, including the hon. Gentleman. There is an increasing focus on price, the customer, the structure of industry, long-term prices and long-term investment, and that focus comes from many quarters. If it had not been for the intervention of my right hon. Friend the Leader of the Opposition and our policies last year, we would not have seen this welcome concentration of minds on the issues. That has encouraged many to bring forward their proposals for change. I hope that this debate will contribute to getting the changes in the industry’s structure that are so desperately and urgently needed.

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[David Mowat (Warrington South) (Con)]

I did not rise to indicate that I wanted to speak, because I was with a colleague last night and I left my speech in the pub. I have been trying to rewrite it and I will happily now go ahead.

[Sir Roger Gale (in the Chair)]

Order. The hon. Gentleman did the courtesy of putting his name down to speak, which is why he was called. We try to call people, as a general rule, who bother to put their names in first. No doubt the circumstances he faces will lead to brevity.

[David Mowat]

Certainly the second part of my remarks will be brief, Sir Roger.

The issue before us is serious. Everyone at this debate is concerned about fuel poverty in their constituencies and high fuel prices. Most of us, I think, are concerned about energy intensive industries, particularly in the north-west and the north-east. Some 900,000 people work in industries where the price of energy is a significant determinant of profitability, and it behoves us all to take the issue seriously. We are where we are because issues have been raised on the market fairness and market effectiveness of the energy industry in the UK, and it is right that we look at that. The Secretary of State has talked about referring the industry to the competition authorities, and I support that.

It is important—the opening remarks did not do this—to distinguish between gas and electricity, because they are different markets. I want to talk a little bit differently about each of them. There are suggestions that the industry is some kind of cartel and “the big six” is, frankly, often used in this House almost like a swear word. We hear that the big six do this and do that. I have heard the shadow Secretary of State use the phrases “price fixing” and “secret deals”. If the Opposition have evidence of cartels or price fixing, that is extremely serious. If it exists, directors of public companies will go to prison. Fines can be levied that are several times the turnover of those companies. It is important that the Opposition bring that evidence forward, if it exists.

When words like “cartel” and phrases like “secret deals” and “price fixing” are being used, be aware of what is being suggested and be willing to take that forward and give that evidence to the competition authorities in the European Union and the UK and to the police. If such evidence does not exist, it might behove the Opposition to use more moderate language, which they were doing in their opening remarks in this debate, at least.

I want to make some comments on how the UK market compares with the EU market. One way to find out whether there is price fixing, cartels or other problems is to see how our market compares in structure and outcome with the rest of the EU. I have done a little analysis on that, under three headings. The first is out-turn prices for gas and electricity in the UK compared with other EU countries. The second is market structure. People say that we broadly have the big six in gas and electricity, and other countries in Europe do not have that structure. The third is the profitability of those energy retailers in the UK versus other places. I report that the answer is different for gas and electricity.

On gas, we have to distinguish between taxed and untaxed prices. In this country, we tax gas very little, while the EU taxes it much more heavily. It can appear that prices are higher there, so it is only fair to look at untaxed prices; on that basis, our gas prices are the second lowest in the EU, although it is true that they are significantly more than in some other countries. They are triple the prices in the United States of America, but we know that that is to do with shale gas and all that goes around that. Our gas prices are the second lowest in the EU, yet broadly speaking we have an EU energy market for gas, and some comparability would be expected. If a cartel is operating in the gas market, it is hard to see that it is being very effective.

On electricity, our retail prices are among the lowest in the EU. When we look at the position without tax, it is a little more nuanced. According to the EU portal, our untaxed electricity prices are slightly higher than those in Germany, Holland and France, although not by very much—5% or 6% higher. That is a lot of money, however, by the time that all works through. On the face of it, there might be a more significant issue with electricity than there is with gas. I would be interested to know whether Opposition Members are talking about the need for a price freeze for both industries or just for electricity.

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

Does the hon. Gentleman accept that the production of electricity using gas means that there is a substantial link between gas and electricity? Investors in new gas-fired power stations claim that the relationship between gas and electricity prices means that they are currently not particularly willing to invest. The hon. Gentleman’s decoupling of the two markets is a bit over-precise and ought to bear that fact in mind.

[David Mowat]

That is a fair point. It is true that no gas power stations are currently being built in this country, but the principal reason is that shale gas in the United States has meant that coal has become cheap on the world market. We will therefore be burning coal in this country at a great rate—even more so in Europe—until we are stopped.

I accept the hon. Gentleman’s point that the markets are not entirely distinct, but my point was simpler than that. I have looked at what we are paying in this country for gas, which is a separate market, and it is the second lowest price in the EU. Members should bear that in mind when making comments later in the debate.

I was about to come on to market structure. I have always thought it a little odd that having six participants was regarded as a monopoly. Looking elsewhere in EU, Germany has two retailers in electricity and three in gas, Holland has three in each and Italy has five in gas and two in electricity. France is a little different because of nuclear power. In terms of market concentration, the report I used for this is the—I do not have it here—

[Chris Ruane (Vale of Clwyd) (Lab)]

Is it down the pub?

[David Mowat]

It’s in the pub. It was the “Energy Retail Markets Comparability Study” report completed for the Department of Energy and Climate Change, which stated that we have the least concentrated energy market in the EU, with the possible exemption of Austria. Opposition Members may want to reflect on that as well.

The next thing is profitability. Are companies making massive profits? The report states that there are two ways of looking at profits. They can be earnings before interest and tax, known as EBIT, or the return on capital employed or ROCE. On both measures, profitability in the UK market is similar to that in the rest of Europe. It is of course perfectly possible that I have missed the point—that every country in Europe has a cartel, of which the UK market is just one part, and that we are luckily going to fix that in the UK. That may well be the case, but all I am saying is that, by many measures, we seem to be no worse off, and often much better off, than some of our competitors.

[Dr William McCrea (South Antrim) (DUP)]

Listening to the hon. Gentleman, it is as if our constituents were getting a real bargain for gas and electricity, but I assure him that that is not what my constituents are telling me. They are facing a choice between heating and eating and do not believe that they are getting a bargain.

[David Mowat]

I thank the hon. Gentleman for that intervention. I have not said that people are getting a real bargain. I am trying to compare prices here with those in the rest of Europe, including the Republic of Ireland, and to examine whether there is evidence of exploitative behaviour. That is my point.

I wish we had less fuel poverty—I will come on to how we need to vote on measures to reduce it—and would like to see lower prices, which more competition can achieve. The Government’s work on making switching easier and price comparability is important, but switching is still too difficult and leads to stickiness in the market. If it was easier to switch, the market would work better and prices would be lower, so we need more work on that.

I agree that it would be better if there were more new entrants in the market. Having more game-changing new guys coming into the retail market would be beneficial. All I am saying, however, is that there is nothing in the structure of our market that implies that it is worse than elsewhere in the EU. Indeed, it would appear to be slightly better.

We need to be careful about what we wish for on energy policy, because security will be a significant issue over the next three or four years. In my earlier intervention, I mentioned SSE’s decision, announced this morning, to pull out of offshore wind, which I very much regret. I hope that there will be no trend of similar announcements from other players in response to the slow-motion car crash that is Opposition energy policy. We need energy stations to be built to replace ageing nuclear and coal power stations, and they need to be built pretty quickly or we will have a problem.

Finally, I have voted four times against the Opposition on matters of energy prices. Three years ago, there was a Government motion to reduce the solar subsidy from six times grid parity to four times grid parity, but the Opposition voted against the Government on what was a moderate reform to the market. They also voted against the Government on a Lords amendment regarding the accelerated replacement of coal. How we vote on green issues matters. Many of our constituents are in fuel poverty, and we need to be thoughtful as to how we vote.

[Several hon. Members]

rose—

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[Julie Elliott]

My hon. Friend is absolutely correct.

[David Mowat]

I am glad that my remarks have at least made this into a debate. On gas, it is impossible for us to get to the bottom of these numbers in a debate, particularly those given in the intervention from the hon. Member for Brent North (Barry Gardiner). Does the hon. Lady think that our gas prices are not among the lowest in the EU?

[Julie Elliott]

My understanding is that our gas prices are at the EU average, according to the Department of Energy and Climate Change.

[David Mowat]

I want to put on the record the fact that our gas prices are the second lowest in the EU, according to the EU energy portal and the International Energy Agency. I realise that we cannot spend our time bandying this around.

[Sir Roger Gale (in the Chair)]

No, we cannot.