Ed Davey
Main Page: Ed Davey (Liberal Democrat - Kingston and Surbiton)(10 years, 6 months ago)
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The Secretary of State for Energy and Climate Change (Mr Edward Davey)
I join the right hon. Member for Don Valley (Caroline Flint) in congratulating the hon. Member for Totnes (Dr Wollaston) on her election as Chair of the Health Committee.
The right hon. Member for Don Valley began by wanting to reach consensus and, to be fair, it is not the first time that she has done so. Right hon. and hon. Members might be surprised to learn that she talked warmly in a speech last week about the consensus on energy policy in the UK. They might be even more surprised to learn that I agree that there is consensus on some aspects of energy and climate change policy. The Labour party has accepted the coalition’s major reforms of Britain’s electricity market. Labour voted for the Energy Act 2013 and backed its centrepiece—contracts for difference—which will be crucial in creating the world’s first ever low-carbon electricity market. Labour appeared to be backing our measures that are driving the massive increase in energy investment from which the UK is benefiting, including the more than doubling of renewable electricity. Labour seemed to be backing the measures that we are introducing to keep Britain’s lights on, such as the plans for a capacity market and National Grid’s supplemental balancing reserve.
I am fairly confident that there has been a consensus on energy security and climate change for some time, because the right hon. Member for Don Valley never questions me about our climate change or energy security policies. I am grateful for her support, however tacit. It would be nice to have more opportunities to explain by how much renewable investment has risen in the UK. According to Bloomberg New Energy Finance, the UK had the highest level in Europe in 2013. It would be nice to have a chance to tell the House in detail how we have turned around the legacy of under-investment that we inherited, which was threatening Britain’s energy security.
To be clear, I am more than happy, instead, to be debating energy prices again. I will deal with the right hon. Lady’s core argument head-on, because energy prices are of concern to people and businesses. Even on energy prices, there is some agreement between us. We agree that Britain’s energy markets need to be reformed. If we are to get a better deal for people, whether in terms of prices or customer service, there needs to be change. There needs to be some form of intervention to improve the markets.
The differences between us start to arise over what sort of intervention will work. What is it, exactly, that the Government and the regulator can do that will help the consumer most? The right hon. Lady believes that the change we need is regulation—price regulation. Labour now wants two regulatory interventions on prices. First, it wants legislation so that the Government can fix prices through a temporary 20-month price freeze. In addition, she now wants the energy regulator to intervene when retail prices do not quickly follow changes in wholesale prices. Such price control would be a massive, permanent state intervention.
Ian Swales (Redcar) (LD)
Does the Secretary of State share my surprise that the motion talks about the importance of passing on wholesale cost changes as quickly as possible, while also calling for a price freeze?
Mr Davey
My hon. Friend has spotted a point to which I will return. There is a bit of inconsistency there.
The historians among us might note that the two proposals for price control regulations are particularly interesting because they reverse the policy that Labour backed in government. In 2002, under Labour, Ofgem abolished all price controls on gas and electricity. Is it not interesting that, even though there is now more competition than in 2002, Labour has done a U-turn and wants price control regulations back?
Mr Sheerman
I have a lot of respect for the right hon. Gentleman, as he knows, but he has spoken about history and about inconsistencies in Labour policy. We were all prepared to oppose the greenest Government ever. If he wants to get the history right, he will recognise that there has been a wholesale retreat from that commitment.
Mr Davey
I am very grateful for the hon. Gentleman’s intervention. This is the greenest Government ever. We have the green investment bank. We have more than doubled renewable electricity. Low-carbon electricity is booming. This is the top place in Europe for renewable electricity, the best place in the world for offshore wind, the best place in the world for tidal investment and the second best place in the world for biomass. I could go on. I hope that he intervenes on that point again.
As I was saying, the interventionist approach of the Opposition is not our approach. We want to aim our intervention at ensuring that our energy markets are more competitive and work harder for consumers. We want to get more energy firms into the market, make it easier for customers to change energy supplier when they do not get a good deal and prevent firms from abusing their market dominance. Price controls will not do any of that.
My argument today is that our reforms to Britain’s energy market are beginning to work. Increased competition is beginning to help people not only to freeze but to cut energy bills. Our approach, fixing the messed-up energy markets we inherited from the Leader of the Opposition, is now bearing fruit.
Paul Uppal (Wolverhampton South West) (Con)
The concern is the inelasticity of prices, especially in their coming down. I am pleased that the Competition and Markets Authority is looking at the market. Does my right hon. Friend agree that a solution to price volatility would be to move from centralised energy production to a system whereby individual customers—SMEs—produce their own energy, increasing long-term competition in the sector?
Michael Connarty
It is very important that the Minister is not allowed to get away with an empty boast. The Energy and Climate Change Committee report states that
“gas and electricity have risen by 41% and 20% in the UK in real terms. . . This has had an adverse impact on fuel poor households and thrown Government targets to eliminate the problem by 2016 off-course.”
How can the right hon. Gentleman boast that prices are being cut in real terms when the facts in the Committee’s report deny that?
Mr Davey
I am about to do so. I said that our reforms are beginning to work. It is true—that is what I said. I admit that energy prices have gone up in this Parliament, but they have gone up slower than they did in the last Parliament, when energy bills went up faster on average every year than they have in this Parliament. Indeed, fuel poverty went up under Labour, whereas the latest statistics show it falling. The hon. Gentleman should look at the facts.
Mr Davey
No, I will not; I am going to make some progress.
Pursuing the Opposition’s policies would be nothing short of a disaster, not just for consumers but for investment, for decarbonisation and for energy security. If any Government were so misguided as to intervene with the two prices regulations proposed by the right hon. Member for Don Valley (Caroline Flint) it would lead to chaos in our energy system.
Today’s latest debate on energy prices does have something new—well, sort of new. The right hon. Lady—quite rightly, in my view—wants us to focus on the fact that while wholesale prices for gas and electricity have by and large fallen in recent months, most energy companies have yet to cut their retail prices. Many people, over many years, have looked at this phenomenon—at the way in which wholesale and retail energy prices relate to each other and at how there always seems to be a time lag between changes in wholesale prices and in retail prices, especially when wholesale prices are falling. The explanation that energy firms give for this time lag is the way in which they buy their wholesale energy: to spread their risks and hedge, to smooth out the prices they charge customers, they buy much of their gas and electricity six months, 12 months, 18 months or even further ahead on the futures markets. Therefore, energy firms claim, they cannot immediately pass on today’s wholesale price falls, because the gas or electricity they are supplying was bought at the higher prices of months past. The right hon. Lady spoke a lot about that. Like many people before her, she is worried about the so-called rocket and feather problem: the energy companies appear all too ready to allow their retail prices to go up like a rocket when wholesale prices rise, but when wholesale prices fall their retail prices are no longer rockets but feathers, gently falling ever so slowly so that the energy firms can profit.
That argument leads to two questions: first, is it true? Do energy prices follow this rocket and feather model? Secondly, if it is true, what should we do about it? My answers to these questions are clear. It may well be true—there seems to be evidence that it happens. It was one of the reasons I asked the competition authorities last year to undertake the first-ever annual competition assessment of the energy markets. Interestingly, the independent competition authorities stated:
“We have found that suppliers do not adjust their prices as quickly when costs fall compared to when wholesale costs rise.”
In fact, it was one of a number of reasons and findings that led Ofgem to propose a market investigation reference. That is exactly what I think we should support when faced with such a worrying finding for consumers. There should be a no-holds barred inquiry by independent experts, whom we have given real teeth to act for consumers. That is the action that the right hon. Lady should be proposing and that I am backing as Secretary of State for Energy and Climate Change.
Mr Davey
No.
I am not the first Secretary of State for Energy and Climate Change to be confronted with the problem of wholesale and retail energy prices—the possibility of a rocket and feather consumer energy price rip-off. As Secretary of State for Energy and Climate Change, the right hon. Member for Doncaster North (Edward Miliband), the Leader of the Opposition, presided over a period in which wholesale prices crashed and retail prices did not. When he did my job, between September 2008 and January 2010, wholesale prices actually fell faster than the figures set out in the Opposition’s motion. Wholesale electricity prices on the day-ahead market fell not by the 23% mentioned in the motion but by 62.5%. Under the Leader of the Opposition, wholesale gas prices to businesses fell not by 38% but by 43%. A big driver of those falls was, of course, the massive recession, and they went on so long that, eventually, retail prices for consumers fell—but only by a bit: electricity by 7.5%, not the 62.5% fall in wholesale prices enjoyed by the energy firms, and gas by 5.6%, not the wholesale fall of 43%.
The energy prices rocket and feather phenomenon is, therefore, not new. I thought it would be worth finding out what lessons we have to learn from my predecessor, the leader of the Labour party. What did he do when he had the power? He called a summit—a summit. He reported back to this House on what action he had taken:
“I impressed upon the companies the need for retail energy prices to reflect changes in wholesale prices as soon as possible.”
He “impressed upon” them that retail prices should reflect wholesale prices “as soon as possible”. It just never happened. But, to be fair, he went further, in standing up to the energy companies. He told the House that
“The Government and the industry are agreed on the need to bring down retail gas and electricity prices.”—[Official Report, 18 November 2008; Vol. 483, c. 14WS.]
It was “agreed”; it just never happened—it never reflected wholesale prices. Perhaps that was because, a month later, the Labour leader backed down. He said—fiercely, no doubt, and the right hon. Lady should listen to this—
“We have recently seen big falls in wholesale gas and electricity prices, but I understand that because energy companies tend to buy in advance they won't be passed on immediately.”
It sounds as though he was more impressed upon than impressive.
Caroline Flint
The proposition is that we should, across the House, recognise that when wholesale costs fall they are not passed on quickly enough. Does the right hon. Gentleman agree that leaving things to the market does not achieve that and that the proposition that a regulator should have the power is the way forward—yes or no?
Mr Davey
I have already said that I believe that there is a problem—Ofgem and the competition authorities told us that in the report I commissioned. I think there is a need for intervention—that is what I have been saying. The question is: what is the right intervention? Is it the price regulations proposed by Labour—the quite big interventions that I shall explain when I describe how they would work—or is it to ask the independent experts from the competition authorities to ensure that our markets work for consumers. The latter is what we are doing, and I think it is the right approach.
The Leader of the Opposition tells the Government all the time that we should stand up to the energy companies. That leads me to the not unreasonable conclusion that he must have stood up to the energy companies—that he must have a proud record of taking on energy firms at some stage. So I did some more research to find out what tough action the leader of the Labour party took. I was convinced that he of all people, faced with much larger falls in wholesale prices than we face today, would have acted. I therefore commissioned the research on what action Labour’s leader, when Energy Secretary, had actually taken on wholesale energy prices—what announcements he had made.
The research has come back, so let me read it:
“You asked for any statements of information provided by the last government on the link between wholesale and retail energy prices”—[Interruption.]
The right hon. Lady should listen to this:
“I’m afraid there was no substantial policy in this area by the previous government and as a result no announcements.”
There was nothing. The Leader of the Opposition simply did not have the same great ideas as the right hon. Lady.
Perhaps I am being too harsh. Perhaps the Leader of the Opposition was not advised to take the various actions we have taken, such as our support for a reference of such problems to the independent competition authorities—in other words, the experts. My research, however, suggests that the Labour party was told to act when he was doing my job. In fact, we have found that he was told to act on at least three occasions.
The Leader of the Opposition was asked three times to refer the issue of energy prices to the Competition Commission, and three times he refused. On 5 March 2009, he said:
“I do not think that at this stage a referral to the Competition Commission is the right way to go”.—[Official Report, 5 March 2009; Vol. 488, c. 983.]
On 7 December 2009, he said:
“It is better to look at policy options…rather than at a lengthy Competition Commission investigation.”—[Official Report, 7 December 2009; Vol. 502, c. 45.]
Of course, he did not actually take any policy options. On 25 February 2010, he was still in denial:
“I am not in favour of referring these matters to the Competition Commission”.—[Official Report, 25 February 2010; Vol. 506, c. 444.]
That is what Labour’s then Energy Secretary said, so my advice to the right hon. Member for Don Valley is this: stop embarrassing your leader.
For the sake of debate, let me accept another Labour U-turn on energy policy. Let me imagine that the Labour leader has thought more about it, listened to the right hon. Lady and changed his mind. Let me examine their proposals for two new price controls and how they would work.
As set out in the motion, Labour now has two competing ideas. The first is a temporary energy price freeze for 20 months, which is a policy to lock in a price, regardless of what happens in the wholesale markets. If wholesale prices go up, the smaller energy suppliers that cannot soak up the losses will go bankrupt. We have never received an answer to that. If wholesale prices go down, companies hedging against the freeze will have to maintain their prices and customers will lose out. The right hon. Lady is shaking her head, but companies that hedge against a freeze will lose money and potentially go bankrupt under her policy. She does not understand how markets work.
Ian Swales
Does the Secretary of State share my concern that the chief executive of First Utility, the largest independent supplier, says of the prize-freeze proposal:
“Bluntly, it could put me under”?
Mr Davey
My hon. Friend is absolutely right. All the new independent suppliers who are coming into the market and taking on the big six companies created under Labour do not like the policy, because they know it would undermine competition, put them out of business and be bad for consumers. Although we have debated many times the price-freeze intervention proposed by the right hon. Member for Don Valley, she still has not convinced anyone. We have shown time and again that it is just a damaging con.
The second, and latest, price control is proposed legislation to force energy companies to pass on variations in the wholesale markets more rapidly, which is sort of the exact opposite of a price freeze. Rather than keeping prices the same, this price regulation seems to want them to change more frequently and more rapidly, mirroring the wholesale markets.
That is interesting, because if we look at what has happened recently, we will see that wholesale prices can go up and down on a daily basis. A fortnight ago, wholesale prices were falling: day-ahead electricity prices fell by 7% and the natural gas spot price fell by 12%. Last week, however, the day-ahead electricity price went up four days out of five, ending up at almost 6% by the end of the week, and the natural gas spot price was up 10% by the end of the week. In other words, the spot prices on the wholesale markets go up and down—they are very volatile and fluctuate all the time.
The price regulation proposed by the right hon. Lady is a rollercoaster approach to energy price freezes. I call it Labour’s bungee-jumping approach to energy prices, and one would be hard pressed to think of a more incoherent and inconsistent approach. It is a populist, opportunist, soundbite approach to energy policy that would not just hit investment but leave consumers worse off. In other words, yet another con.
Geraint Davies (Swansea West) (Lab/Co-op)
Is not the key difference that we are now in a situation where, because of the flatlining of the economy for the past three or four years—[Laughter.] It is all very well laughing, but real wages have fallen through the floor as prices have rocketed. People are being thrust into abject poverty, particularly those at the bottom for whom energy makes up a bigger proportion of their expenditure. People are in desperation, which is why we need action now. That desperation was not the case in the past.
Mr Davey
I am grateful for that intervention because it shows that Labour has not even looked at what is happening to the economy. Employment is going up and unemployment is going down; inflation and the deficit are going down, and growth is up. The hon. Gentleman ought to notice that.
Let me ask a few questions about Labour’s latest policy. How would Labour’s bungee-jumping energy price regulation work? Let us try to get our heads round what is proposed—Labour wants to be in government in under a year, so I am sure it has thought through the detail. Would Labour legislate to force companies to pass on each and every cut in wholesale prices? Would it give Ofgem that power? How frequently would the link between wholesale and retail prices be made, and which wholesale price would Labour choose for Ofgem to intervene with? The day-ahead or the month-ahead price, or perhaps something else in the futures market? I think we should know. Which all-seeing, all-knowing official in Labour’s new energy Gosplan regulator would work that all out?
Caroline Flint
I understand that Ofgem—the regulator —wrote to all energy companies last week to say that they should pass on reductions in wholesale costs. Has the Secretary of State had a word with Ofgem about its expectations of how that should be achieved?
Mr Davey
I have spoken to Ofgem’s chief executive, Dermot Nolan. He is worried because the Labour party wants to get rid of Ofgem, even though it is doing this fine job and talking to energy companies. Ofgem is worried that Labour wants to undermine the regulatory system. Interestingly, who set up Ofgem? The Labour party. Who reformed Ofgem just a few years ago to make it more effective? The Leader of the Opposition. There is no consistency or coherence about anything on energy policy from Labour.
Let us consider some more basic questions—Labour Members will have to answer them at some stage if they are to be vaguely credible. If the regulation forces energy bills to drop immediately when day-ahead wholesale prices drop, what will that mean when wholesale prices rise? Will the regulation be exactly same both ways? If regulation forces retail prices to track wholesale prices, how often will a consumer’s energy bill have to be recalculated and what will be the cost of that? Who will be the genius who second-guesses companies’ forward buying strategies, and decides whether they are good or bad? Will all suppliers have to purchase at the same time for the same contract period in Labour’s brave new world?
The logic of the massive state price control that Labour is proposing is clear: Labour wants to destroy the forward energy markets. It wants to end competition between companies, which is based on who has the brightest and best purchasing strategy to deal with things such as events in the UK or in Iraq, and manage those sorts of problems. If we end that competition, who will lose when the risks are greater? It will be consumers who pay in higher prices.
Paul Flynn
On a point of order, Mr Deputy Speaker. I came to the Chamber expecting a debate about energy prices. Nowhere on the Order Paper does it say that we would be treated to a drivelling, ad hominem attack on the Leader of the Opposition.
Mr Deputy Speaker (Mr Lindsay Hoyle)
That is not a point of order. You have made your point, Mr Flynn, but it is up to the Secretary of State whether he wishes to give way. He is giving way now and again. It is not as though he could not hear you, so I suspect he is not giving way by choice.
Mr Davey
The House can probably see why I made that choice—[Interruption.] Frit? That is a joke.
The forward markets help competition, smooth prices for customers and make fixed-price deals possible. Under Labour’s proposals, there would be no more fixed-price deals for consumers—ironically, the area in which competition between companies is greatest. The plain truth is that this latest headline-grabbing, price-control state intervention is as unworkable and damaging as Labour’s last one. Just like under the last Labour Government, such policies would simply mess up our energy markets and hit consumers hard. Labour reduced competition and created the big six. We have had the hard task of clearing up Labour’s energy mess. This Government have reformed the energy markets and boosted competition so that the big six—created by Labour—are now being challenged like never before.
We have seen 12 new entrants into the market. The share of independent energy firms has risen from less than 1% to almost 6%—and fast. According to Energy UK, in May this year for the first time ever more than half of people switching switched to an independent supplier. Small suppliers have gained more than 1 million customers since May last year.
The Government have worked to help all consumers. We have been harder and more effective in working for consumers in just four years than Labour managed in 13. We have championed switching, acting to make it simpler, with fewer confusing tariffs and easier to read bills—all things that Labour never did. People now understand the choices they have and are more confident about switching. We have acted to speed up switching too. Ofgem this week confirmed that switching times will be cut in half by the end of the year, from the ridiculous more than five weeks that we inherited, and that we are on course for my objective of 24-hour switching within four years.
We have even acted to encourage new forms of switching. Labour talked about the collective principle, but never did anything about it. The Cheaper Energy Together firm is piloting initiatives around the country that have saved tens of thousands of people millions of pounds. Just today, in the latest collective switch—the Big Deal—we learned that customers on a typical standard tariff with a big six supplier could save £210 by switching to the new deal delivered for consumers who have come together to buy energy. That is a new deal from an independent energy supplier which entered the UK energy market only last year. That is competition working.
We are always looking to do more for consumers, to sharpen competition and to explore new business models. That is our approach to helping people cut their bills. At the next election, the choice on energy bills will be clear. People can either trust Labour politicians to fix energy prices for them with state intervention or they can trust the growing number of new, smaller energy suppliers which are already delivering for millions of people, taking on Labour’s big six with competition. People can opt for the right hon. Lady’s approach to improving our energy markets—policy on the hoof with 1970s-style price controls—or they could opt for the most detailed ever, in-depth inquiry into Britain’s energy markets by independent experts.
Above all, at the next election, people can vote for energy price freezes under Labour or back the cuts in energy bills our policies are now making happen. Labour and the Leader of the Opposition flunked energy policy when they were in office. We must not ever let them do that again to Britain’s energy system.
Mr Mike Weir (Angus) (SNP)
It does seem to me sometimes in these debates that it is the same old gang assembling to go over their greatest hits. However, the recent decision to make a referral to the Competition and Markets Authority has changed the scene significantly. I support the referral and hope that a decision will come fairly swiftly, although the history of such referrals does not give me a great deal of confidence.
Mr Weir
I will wait and see how quick “quicker” is.
It is interesting to look at some of the reasons that Ofgem give for the referral. It notes that average dual fuel prices increased by 24% between 2009 and 2013, which is just over 10% higher than general inflation over the same period. At the same time, energy consumption has decreased. In effect, even though consumers are perhaps reacting to the message of saving energy, they are still seeing substantial costs, leading many to question the cost-effectiveness of energy-saving measures. I have made the point before that one of the defects of the green deal scheme is that many consumers simply no longer trust the energy companies and will be reluctant to take part in any scheme—even a good one—that they are promoting. This is borne out by the state of the market assessment, which says:
“We found evidence of low levels of consumer satisfaction. Only 51-52 per cent of customers said they were satisfied with their supplier, and customer complaints have increased by more than 50 per cent since the beginning of 2011. Our survey evidence showed that in 2013, 43 per cent of customers did not trust energy suppliers to be open and transparent in their dealings with consumers, an increase of 4 percentage points from the previous year.”
Not surprisingly, it concluded:
“Levels of customer confidence and trust are not what we would expect to see in an industry that is successful in meeting its customers’ needs and expectations.”
That is a fairly damning indictment of the way consumers view the major energy companies, and should not come as a huge shock to anyone who has dealt with the issue. This is especially true since the assessment also notes that between 2009 and 2012, the earnings before interest and tax, as it puts it, of the energy companies have shown a very substantial rise of around £700 million, standing as of 2012 at £3.7 billion.
It is interesting to note that within non-domestic supply, profits have fallen slightly, while domestic supply profits have increased from £233 million to £1,190 million —a staggering rise over a four-year period. It seems to me that there must be something wrong with that. Clearly, the hard-pressed consumer was bearing the brunt of the massive price rises at a time when wages were, at best, static and other essential costs such as food were also rising sharply. It is no wonder that many of our constituents were feeling under very considerable financial pressure, and many still feel that they are seeing no benefit from a recovering economy, when their family circumstances remain very tight indeed.
It was interesting to hear what the Secretary of State said about the rocket and feather approach. I am not an expert on hedging, but it seems to me that its object is to prevent sudden price spikes or price falls. Whether it comes down like a feather is one side of the equation, but if it is going up by a rocket, the hedging strategy is clearly not working. We must question whether the energy companies are truly taking part in a hedging strategy, or whether this might be just another excuse. The Competition and Markets Authority needs to look at that.
The figures on the costs are only part of the picture. It is all very well talking about the average cost of a dual fuel bill, but that disguises a multitude of other consumers who are on much more expensive deals. I have often cited the costs that those on prepayment meters face. Although it is true that many companies set those tariffs to the rate of their standard domestic tariff, those are still much higher than the tariffs for those who can pay by direct debit or have dual fuel or fixed-term deals, many of which are not available to those on prepayment meters. The situation can be much worse for those who have debts because the meter can be set at a very high recovery rate. Research by Citizens Advice Scotland disclosed cases where some people had £7 out of every £10 they paid taken towards arrears.
Governments have consistently argued—we have heard it again today—that switching is the way for people to save money. The truth is that those who would benefit most from switching are those who find it very difficult, if not impossible, to switch. Those who are most active in switching are those who are already on better deals. As Ofgem put it in its report:
“Customers that are prepared to manage their accounts online, pay by direct debit, and fix the cost of energy for 12-18 months are able to get the best deals.”
It is also true, it seems to me, that the amount that can be saved is relatively small; the differences between the best online deals of the major companies tend not to be great and the benefits of repeated switching are subject to a law of diminishing returns.
It is also the case, however, that the very nature of these deals—managing accounts online, paying by direct debit and so forth—tend to exclude those who are the most fuel poor since they are also the least likely to have bank accounts, or at least bank accounts prepared to accept direct debit payments, and the least likely to have ready access to a computer to enable them to manage their accounts online.