Energy Bill [HL]

Earl Cathcart Excerpts

Monday 31st January 2011 Grand Committee

[Lord Teverson]

My Lords, there are many strange things about electricity bills. This amendment caused me to look at mine more carefully. There are four pages of information, which normally I fail to look at—and most of the time when I need to look at it I find it too complex and I understand it less after I have read it than I did before I read it. On tariffs, the first tranche of units used by a normal consumer is at a significantly higher level of charge than the ensuing tranche. Some consumers may have even more divisions, but I have two and, as it is for most people, the first units used are far more expensive. On 23 December 2010, my first units were 20.1p each and the next units after I had finished those were a quarter less at 14.55p. I do not know whether that completely replicates what other people have, but it seems fairly representative.

We have two issues affected by tariffs generally. When I learnt economics as a corporate economist, we learnt that on the whole when prices were high you demanded less and that when they were less you demanded more. That was a demand curve, in which I am sure all noble Lords are well versed.

We are really trying to do two things in the Bill. One is to reduce the amount of electricity and energy used in the nation, thereby reducing carbon emissions. The other is to reduce fuel poverty by investment in making houses, dwellings and business premises more energy efficient. Yet these types of tariff—higher at the beginning and less at the end—mean that the market signals that we are trying to do exactly the opposite. That is why I have tabled my amendment in this way. I will be interested to know whether the Minister criticises the way in which it is written, as the noble Lord, Lord O’Neill, seems to think he might.

I would like to probe this area particularly. There should be a better way of doing this, which is what my amendment attempts. First, it says that things should be the other way round, so that there is an incentive to keep energy consumption relatively low and that those normal consumers who suffer fuel poverty are charged less. Having tried to table a suitable amendment, I absolutely agree that it is difficult to encapsulate exactly how that should happen, which is why it suggests a general scheme of what we are trying to achieve. At the end of the day, the arbiter would probably have to be Ofgem. We want the electricity units used by an average household for essentials to be at the lower rate, with a higher rate after that. Overall, the outcome should be revenue neutral. I say, maybe from my work as an economist, that the existing dual-pricing function is probably an indication of a monopolistic marketplace. You certainly do not have perfect pricing here. At another time, maybe we will want to address that.

Unfortunately, the amendment does not state that pre-payment meters should not charge significantly more than ordinary electricity tariffs, thus heavily and severely working against the poor and the fuel poor. We might consider that another time; perhaps it goes back to the smart meter issue. However, that is not what the amendment is about. It is about trying to bring a much more just tariff into the industry. The only way in which that can happen is through legislation. I beg to move.

[Earl Cathcart]

My Lords, I certainly support the thrust of the amendment, as I devoted almost my entire Second Reading speech to the subject. When I looked at my own electricity bill, I noticed that I was being charged nearly 30p for the first 900 units, after which the price dropped to about 13p; I obviously must have a word with the noble Lord, Lord Teverson, to see where he gets his from. I argued that that way of charging seemed cack-handed. As my noble friend said, it seems to defy the laws of supply and demand and their relation to price. The greater the demand, the greater should be the price. When I asked other customers and neighbours, they confirmed that they, too, were charged nearly double for the initial units that they consumed.

I further argued that the first few thousand units should be relatively cheap—near the break-even point of the supplier—and that the more you consume, the more expensive the units should become. Therefore, the more you use, the more you pay per unit. I am afraid that I have no idea what the break-even point for energy suppliers is but, if they are able to charge some customers below 10p a unit for daytime use, it must be somewhere below that—around 6p or 7p per unit. I presume that Ofgem would know exactly what the break-even points are for each supplier and, if not, it could find out. It begs the question whether energy companies should be required to disclose the break-even points and the changes throughout the year, which could then be verified either by auditors or by Ofgem.

I like the wording in the new clause proposed by my noble friend Lord Teverson. Subsection (2)(a) says that,

“the number of lower priced initial units shall represent the average amount of energy required for a household of that size to keep warm, clean and fed to a modest but acceptable standard”.

I suggested at Second Reading that it would not be too difficult for energy companies to obtain the council tax banding of each property, so that they could differentiate between, say, band A and band D properties. Obviously, a single person living in a bedsit would not require the same amount of energy as a couple with 2.4 children living in a three-bedroom or four-bedroom house. As things stand at the moment, there is little or no difference in the tariffs for living in a bedsit or a six-bedroom house. That is wrong. The person in the bedsit is paying a much higher proportion of their energy bill at the higher initial rate that is currently charged. Perhaps the electoral roll could help in determining how many adults live in each property.

If we are going to try to do something about fuel poverty, I believe that the way in which we charge customers must be changed, which is the whole thrust of my argument. In 2008, there were 4.5 million households in fuel poverty. I believe that, after the recent cold snap of November and December, this figure jumped dramatically, perhaps to 6.5 million households, 50 per cent of whom are pensioners. Those in badly heated homes are more prone to illness, which just pushes the problem and the cost on to the NHS. It was not surprising to read in the papers recently that energy companies have been cashing in on the cold snap and increasing their profit margins by 50 per cent. I am glad that Ofgem is investigating; it will report its findings on excessive profit margins in March. Consumers feel hard done by. Some whom I have asked feel that they are being ripped off.

Can Ofgem make energy companies change their tariff structure? I realise that energy companies are profit-making public companies, some of which are foreign owned. Can, as the amendment provides, the Government introduce regulations to force companies to change their tariff system so that the initial units supplied are at a lower cost to the consumer than the remaining units? Subsection (2)(c) of the amendment provides that,

“overall, the new combined tariff should be revenue neutral to the energy supply companies”.

I hope that the energy companies are willing to discuss this.

The thrust of my argument is to get as many of the 6.5 million households currently in fuel poverty—that is 26 per cent of total households—out of fuel poverty. I believe that progressive charging may be one way of achieving this. It would act as a real incentive for all households to reduce their consumption and to take up the Green Deal.

I received a useful letter this week from my noble friend Lord Marland, saying that the Committee on Climate Change looked into introducing rising block tariffs two years ago, before the recent hike in energy prices. It said that rising block tariffs would have an adverse impact on fuel-poor households, as they generally require more energy to heat their homes to an acceptable level. This is because the fuel poor tend to live in less energy efficient homes. Many of them, including pensioners, tend to spend more time in their homes. This suggests that a rising block tariff would make it more expensive for them to heat their homes to an adequate standard and make it more difficult to remove them from fuel poverty. The Committee on Climate Change concluded that rising block tariffs,

“should not be introduced until fuel poverty has been addressed through targeted energy efficiency improvement and other fuel poverty measures”.

Quite so; I cannot argue with that. But is this not exactly where the Green Deal comes in? If the tariff system was changed and these households took up the Green Deal, they should be much better off.

--- Later in debate ---

[Lord Davies of Oldham]

My Lords, I am going to offer a word of solace to the Minister: I recommend that he suggests that the noble Lord withdraws his amendment, not that the Government should accept it. I doubt whether the Government will accept it, not least because although this has been an interesting and informed debate, the cross-currents have been very sharp and very obvious. In seeking the objectives that we all seek, the question of strategy is difficult. I doubt whether this Bill can stand the strain of carrying an amendment which indicates that the whole of the tariff position should be restructured as far as the electricity companies are concerned, particularly given that we are short of information.

First of all, the companies are short of information about which households ought to have preferential treatment. I very much enjoyed the thoughtful and considered speech of the noble Earl, Lord Cathcart. He took us with him in terms of the objectives, but council tax will not do as a measure of the relative strength or weakness of household economies. We are in the historic position—as the noble Lord, Lord Oxburgh, identified—that this initial tariff is the old standing charge written into a new pricing framework. Now there are elements of a standing charge which companies have to meet.

However, our consideration with this Bill is, how do we make the Green Deal effective? I listened very carefully to my noble friend Lord O’Neill, who indicated the difficulties of both ends of the spectrum in this argument. In terms of making the Green Deal effective, it would complicate matters enormously if we were also saying that in a short period of time, we would be changing the nature of the pricing policy. There is enough of a problem with pricing anyway. We all know that we have a terrifying situation at the moment with world energy prices and the issues faced by consumers. None of us knows what lies ahead, but it is unlikely that energy will become significantly cheaper in the foreseeable future. Therefore households treat energy bills with great seriousness.

Can this be solved along the lines of this amendment? In due course, I think it would probably need to be. We have to get away from the issue of why the pricing policy is as it is. The Bill has to deliver the drive towards the Green Deal. The priority has to be to emphasise to households that they must pursue strategies to reduce the consumption of electricity. It is consumption that we have got to reduce or, more accurately in many cases, we have got to reduce waste, given that our houses are so ill-equipped for the circumstances.

We have to deliver the Bill’s objectives before we move, and expect the industry to move, to that dimension identified by the amendment of the noble Lord, Lord Teverson. This has been a very useful debate, but I fear that if the concept in that amendment was put into the Bill, we would complicate matters enormously in terms of the impact on households. We would therefore fail with the main strategy to which we are all committed under the Bill. I hope the Minister will take a similar view.

[Earl Cathcart]

The noble Lord, Lord O’Neill, said that there were inconsistencies in my argument. What I was doing was reporting from the letter that my noble friend had sent to me, where there may have been inconsistencies. I said in my remarks that putting rising block tariffs in this Bill would be like putting the cart before the horse. I agree with the noble Lord, Lord Davies; I am not expecting to have an amendment to get rising block tariffs into the Bill. I am asking the Minister to assure us that this will be looked at, so that the Green Deal can take effect first, and then the whole issue will be considered after the Bill is done and dusted.

[Lord Marland]

My Lords, I am grateful to the noble Lord, Lord Davies, for summing up so well—he has done most of my job for me, which is extremely kind. The noble Earl, Lord Cathcart, drew this matter to my attention several months ago, as did the noble Lord, Lord Teverson. I am extremely sympathetic to it, but this debate has thrown up the different and slightly schizophrenic aspect of this tariff system. On the one hand we have the inequality of it, and on the other we have to take into consideration things like the fuel poor, inefficient houses, time tariffs, colder parts of the UK and so on.

There are two fundamental things that I can suggest to the Committee. The first, as I said earlier, is that we are going to carry out a full-scale review of fuel poverty and its implications. We will be announcing that review in the very near future, and it will look into the various aspects that noble Lords have brought up here. Secondly, I recognise that this is a complicated issue, not a simple matter which the Committee can debate now and then present a conclusion on. I can therefore suggest—and we have already started work on it—that officials within the department should look very closely at this in order to determine its operability without reference to the climate change committee, and between Committee and Report stage we will have the opportunity to explore it further with noble Lords who may wish, with officials, to see whether there is merit in this amendment. That is a genuine offer. I agree with the noble Lord, Lord Davies, that this is not a matter for this Bill as it is a complicated issue that needs considerable thought. Therefore, despite the merits of the amendment, I ask the noble Lord, Lord Teverson, to withdraw it.