Domestic Gas and Electricity (Tariff Cap) Bill

Greg Clark Excerpts

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

[The Secretary of State for Business, Energy and Industrial Strategy (Greg Clark)]

I beg to move, That the Bill be now read a Second time.

Virtually every household in the country depends on gas or electricity, or both. They are essential services on which we rely. On average, each household spends around £1,250 a year on energy at home—it is one of our biggest household bills—and for the poorest 10% of households, energy is 10% of their annual household expenditure.

Since the early 1980s, when the industry was privatised, consumers have benefited from a more reliable service. Power cuts are at half the level that they were before privatisation and prices have been among the lowest in Europe. Last year, household electricity prices were 13% below the EU average. In recent years, more than 60 new energy suppliers have entered the market, selling direct to consumers. One in five consumers are now with small and medium-sized suppliers and save significant sums.

[Gareth Thomas (Harrow West) (Lab/Co-op)]

Is not the problem with the Bill the fact that it locks the stable door after the horse has bolted? Energy companies have jacked up their prices ever since whispers of an energy cap surfaced, such that there is a nice cushion that they can continue to benefit from enormously over the coming months.

[Greg Clark]

I disagree with the hon. Gentleman. As I will go on to explain, part of the problem that we are addressing is that the competition authorities have for some time identified this tendency on the part of companies, and the Bill’s proposals will give Ofgem the power to correct that. He brings me to my next point: for all the progress that has been made since privatisation, it is clear that the market is not perfect. That is indeed why the coalition Government referred the industry to the Competition and Markets Authority to assess how competitive the retail market was.

In 2016, the CMA concluded, following a two-year investigation, that

“our view is that the overarching feature of weak customer response gives suppliers a position of unilateral market power concerning their inactive customer base and that suppliers have the ability to exploit such a position through their pricing policies…by pricing their standard variable tariffs materially above a level that can be justified by cost differences from their nonstandard tariffs; and/or by pricing above a level that is justified by the costs incurred in operating an efficient domestic retail supply business.”

The CMA identified the detriment to consumers—that is, how much consumers are overpaying compared with a fully competitive market—at an average of £1.4 billion a year. This comes from the approach to pricing that is practised by the biggest six energy companies, which for the most part, inherited their customers from previous monopolies. Their approach is to charge their customers on default tariffs much more than those who engage in the competitive part of the market. Currently, the differential for the big six stands at around £300 a year. Those paying the default tariff are much more likely to be in reduced circumstances; 80% of households with an income of less than £18,000 did not switch supplier in the past three years.

From the outset, the UK’s energy market has had a regulator whose responsibility is to act in the interests of consumers. Indeed, if we look back, we can see that Britain has long been a pioneer in not only the privatisation and liberalisation of industries but the regulation of these utility industries, too. Indeed, the British model of privatising state-owned monopolies is to liberalise the market to allow new competitors in and to protect consumers against the power of incumbents—from BT to British Gas—which enjoy an advantage of inertia and loyalty. That has always been recognised in our regulatory arrangements.

[Stephen Crabb (Preseli Pembrokeshire) (Con)]

My right hon. Friend is making a very important point about regulation, but is not part of the context of the Bill the fact that the regulator, Ofgem, was far too slow to respond to the pressures on people, particularly those on low incomes and in vulnerable households?

[Greg Clark]

I agree with my right hon. Friend, and I was making the point that we have long been a pioneer in regulation, which has meant adapting regulation to the changing circumstances. We started with RPI minus X, and that evolved into different models, including looking at the regulated asset base. In my view, it is necessary to keep up with our traditions of acting boldly to protect consumers’ interests, and we should be agile in response to new behaviours, especially those brought on by new technologies.

[Albert Owen (Ynys Môn) (Lab)]

I find myself in agreement with the Secretary of State and shall support the Bill. Indeed, I am in agreement with the Prime Minister that the energy market is broken and that customers are being ripped off. The importance of this legislation will be that Governments of whatever colour and the regulator cannot blame each other when something happens in future. There will be a framework that the Government, the regulator and the energy companies understand, and that is why we need legislation.

[Greg Clark]

I agree with the hon. Gentleman, and I was saying in response to my right hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) that I think the regulator should be more agile in responding to the behaviour that had come about. In fact, the energy companies themselves should have recognised this, and one thing that they said to me was that none of them wanted to act individually and that they would prefer to have a consistent approach.

[Rebecca Pow (Taunton Deane) (Con)]

The Secretary of State is making a valid case for the Bill, which, after all, is all about fairness for the consumer, but will he comment on the fact that we do not want the Bill to reduce competitiveness in the industry—I am sure that it will not—and is that not key? Competitiveness has already done so much for the industry, and we want to encourage it, not reduce it.

[Greg Clark]

I quite agree with my hon. Friend. In fact, the Competition and Markets Authority found that, in effect, two markets were operating. There is a vigorous and highly competitive market, but among those consumers who, for whatever reason, trust the company of which they may have been customers for some time to reward them for that loyalty, there is an absence of competition. We need to change that, but, as I shall go on to say, the analysis shows that the market is not fully competitive at the moment and will take some time to get to that stage.

[Sir Desmond Swayne (New Forest West) (Con)]

As someone who has benefited significantly from changing my supplier on a number of occasions, my concern is that by placing a cap we will diminish the competition from which I have benefited in the same way that the provision of a cap on university fees has led to everyone charging the maximum. Can the Secretary of State persuade me that that will not be the case?

[Greg Clark]

My right hon. Friend personifies engagement and activity, so it does not surprise me that he has a good deal. His point is very important, and, as I shall go on to explain, the minority report from the Competition and Markets Authority recommends, and the Bill requires, that the cap should be set at a such a level that competition can take place for active consumers such as him. There should still be an advantage in shopping around, but customers should be protected from an ever-increasing differential that particularly penalises those who are vulnerable.

[Several hon. Members rose—]

[Greg Clark]

I want to make a bit of progress, but I will give way to the right hon. Member for Birkenhead (Frank Field).

[Frank Field (Birkenhead) (Lab)]

On protecting the vulnerable, we know that the most vulnerable do not move around, despite having shining examples of people doing that. Will the Secretary of State consider putting a duty on companies, running alongside capping, which is a key part of the Bill, to put their poorer consumers on the lowest tariff, so that it is not up to them to try to match the skills of the right hon. Member for New Forest West (Sir Desmond Swayne)?

[Greg Clark]

The right hon. Gentleman makes an important point. That is not within the scope of the Bill, which is meant to protect those consumers from the excesses that can be visited on them by the market. The Bill is narrow in scope and particular in its effects.

[Frank Field]

I am pushing the Secretary of State on this, but even if we cannot get an amendment because the long title is drawn so carefully, may I ask him to consider the need to introduce such a measure, so that the poorest constituents are automatically looked after by their company and put on the lowest rate for the range of consumption?

--- Later in debate ---

[Greg Clark]

There already is a cap for those on prepayment meters, and that is being extended to some of those who are identified as the most vulnerable. The reason for this more general scope is that not everyone can be identified through the receipt of particular benefits—that does not comprise the whole population of those who are vulnerable—so the Bill proposes a backstop.

[Rachel Reeves (Leeds West) (Lab)]

I thank the Secretary of State for giving way and I welcome the Bill, which will do a great deal to reduce the energy prices paid by consumers. On the point about helping the most vulnerable customers, one issue that we have is that data about who those customers are is not shared with energy companies. The Cabinet Office already has a consultation on showing this data as part of the Digital Economy Act 2017, and the Department for Business, Energy and Industrial Strategy has announced another consultation. When will the Department get on and give the powers to enable the data to be shared, so that we can protect the most vulnerable customers?

[Greg Clark]

The hon. Lady makes a very important point. The statutory instrument that will allow that data sharing will be tabled shortly, before this Bill, which we hope will make rapid progress, receives Royal Assent. She is absolutely right.

I was explaining that the original RPI minus X model, which required annual reductions in prices by incumbents, was followed around the world, but with new developments in technology and practice, it is vital to keep our regulatory system up-to-date. In recent years, it has become more and more possible for suppliers to have extensive information on the habits and behaviour of individual consumers—often more information than the consumers know about their own habits, which are studied so minutely. Incumbent suppliers can identify which of their consumers do not respond to higher prices and instead display loyalty to what they might think of as a long-standing and trusted supplier. They can then penalise those customers with ever higher prices.

The CMA identified the problem and recommended that certain consumers, those on prepayment meters, should be protected from such pricing behaviour. It also recommended measures to drive up the rates of switching. The roll-out of smart meters in particular can make information that is currently only available to the incumbent supplier available to other potential suppliers, with the customer’s permission, which is what everyone wants to be able to drive up competition.

In its report, the CMA was in two minds about whether that action was sufficient, and a minority report thought that such remedies, including smart meters, would not come soon enough to eradicate this detriment quickly enough. The minority report said:

“The harm which is presently inflicted on households…is very severe…the remedies proposed for the large majority of households will take some time to come into effect. That is why…they must be supplemented by a wider price control designed to give household customers adequate and timely protection from very high current levels of overcharging”.

[James Heappey (Wells) (Con)]

I agree with the report that the march of technology was not correcting the market quickly enough, but there is no doubt that the arrival of all this technology in the energy system is creating a market that will benefit consumers in the future. Can the Secretary of State reassure us that while the Bill provides a temporary measure to correct the current market, it will in no way impede the arrival of the digitised market that will be so greatly to consumers’ advantage in the future?

[Greg Clark]

My hon. Friend has captured the position very succinctly. That is exactly the point. These remedies will introduce more competition based on technology, allowing consumers to have access to the data that will drive it. However, it will take a few years for that to come into effect, so the Bill is doing what my right hon. Friend the Member for Preseli Pembrokeshire (Stephen Crabb) advocated—it is addressing the current problem with greater agility than the regulator has shown.

In 2016, the CMA’s minority report stated:

“These customers are exposed to the prospect of excessive prices on a scale which might amount of many billions of pounds of harm over the next four years”.

Experience has shown that the CMA was right. In the last few years, prices for customers on the standard variable and default tariffs have not declined; in fact, they have continued to increase, in some cases by double digits. There has certainly been no change in the behaviour of many of the companies.

[Yvonne Fovargue (Makerfield) (Lab)]

I support the Bill, but does the Secretary of State not agree that, while it may tackle the so-called loyalty penalty for certain customers, more needs to be done to tackle the loyalty penalty in other markets, which, according to Citizens Advice, costs the most vulnerable and possibly the oldest customers about £900 a year?

[Greg Clark]

The Bill focuses narrowly on a problem that the independent inquiry has exposed as being very significant. As I have said, 10% of the annual expenditure of the poorest households is on energy. I recognise that we need to be agile in our regulatory system, and I hope that the behaviour of companies in other markets will reflect the fact that it is not acceptable to use information to ratchet up the amount paid by vulnerable consumers in particular. This is a regulated market with a regulator that is there to protect the interests of consumers, and I think it right for the Bill to focus on that.

[Stephen Kerr (Stirling) (Con)]

I fully support the Bill, but I have a question about Ofgem. The Secretary of State has mentioned a change in the behaviour of the energy companies, but what about a change in the behaviour of Ofgem in increasing productivity and being more on the ball? So far it has failed consumers miserably in that respect.

[Greg Clark]

I too would like to see greater agility on the part of the regulator. It seems to me that its powers would have allowed these actions to be taken under its existing remit, and it is a matter of regret that we have to introduce a Bill to compel it to act in this way. I concede, however—this was made clear in evidence given to the Select Committee on which my hon. Friend serves—that in recent months the current management of Ofgem have displayed more understanding of the need to act to protect consumers.

[Caroline Flint (Don Valley) (Lab)]

Do the Government not already have powers, under section 26 of the Energy Act 2010, to introduce a price cap if one group of customers is treated less favourably than others by an energy supplier? Ofgem fears that if it used its powers, there would be a ruling against it and it would end up in the courts. Our purpose today, and my purpose in supporting the Bill, is to lay out once and for all the powers to introduce a price cap for people who are losing out.

[Greg Clark]

It is true that Ofgem has said that it might be challenged in the courts. I do not think we should be afraid of testing arguments in the courts, and I would have preferred to see that happen. The statute that the right hon. Lady mentions would not enable the gap to be closed in a way that would allow competition to continue in the other part of the market—other Members have raised that matter. It would require a closing of the gap, but that could take place by means of the deletion of other tariffs, which is not what we want.

[John Redwood (Wokingham) (Con)]

I fully support the effort to lower energy prices, and competitive markets should be able to do that. Last week we were very short of both gas and electricity. There seems to be a capacity problem, and we are going to close a load of coal power stations. What action is being taken to expand capacity to increase the chance of competitive prices?

[Greg Clark]

The capacity auction arrangements that have been pursued over the last few years have been very successful. We have had a higher margin this winter than last, and the prices of securing that capacity for future years have fallen in successive auctions. My right hon. Friend is right to raise the question, but the framework is actually delivering more resilience than has been delivered in the past.

[James Heappey]

My right hon. Friend the Member for Wokingham (John Redwood) made a good point, but does the Secretary of State agree that it is not just additional capacity that is required, but more flexibility in the system so that we can make existing capacity work better?

[Greg Clark]

My hon. Friend is absolutely right. We have already had the pleasure of debating that issue. The hon. Member for Southampton, Test (Dr Whitehead) has spent many hours in Committee scrutinising the Smart Meters Bill, which will contribute to making the energy system more interactive and therefore more resilient.

The Bill follows precisely the advice to set a non-renewable price cap for a short period while competition increases. Address the problem was one of the commitments made by the Prime Minister when she entered Downing Street. I recognise the important campaigning work done by my hon. Friend the Member for Weston-super-Mare (John Penrose) and, indeed, by the right hon. Member for Don Valley (Caroline Flint).

The Bill comes to us today having been scrutinised in draft by the Select Committee on Business, Energy and Industrial Strategy. I am very grateful to the Committee, and to its Chair and members, for their swift yet thorough scrutiny. The Committee took evidence from a wide range of stakeholders and produced a well-considered report. It agreed with the CMA’s minority report and with the Government’s proposed approach.

The Bill has been supported by consumer groups and, indeed, by many energy suppliers. Citizens Advice has said:

“We welcome the…Bill, which will prevent loyal customers being ripped-off”.

Octopus Energy, one of the newer and more innovative entrants to the market, has called the Bill:

“A crucial step towards a fair energy market in which energy suppliers compete to offer their customers the best value and service”.

The Bill constitutes a sensible intervention to address a specific problem in the market. The Government are not setting prices, and this is not a price freeze. Such a freeze could disadvantage consumers by leaving them stuck on high prices when underlying costs fall, or force energy suppliers to face the entire risk of international commodity markets. Subject to parliamentary approval, the Bill will require Ofgem to cap domestic standard variable and default tariffs until 2020. It will be for Ofgem to decide the methodology and the level of the cap, as appropriate. The cap will stay in place until the end of 2020. Ofgem will then be required to assess the conditions for effective competition in the market and make a report and recommendation to the Government, which I am sure the House and its Select Committees will consider as well.

The price cap can be continued for one year at a time up to the end of 2023, when a sunset clause will come into effect. The Government have no wish for the price cap to become a permanent feature of the landscape. The inclusion of the sunset clause relates directly to the point made by my hon. Friend the Member for Taunton Deane (Rebecca Pow) that we need to address the problem by increasing competition. Ofgem currently has the power to impose a cap for vulnerable consumers, and is taking steps to do that. When consumers make an active choice to opt for green standard variable or default tariffs, they will be able to continue to pay extra for such tariffs if they choose, to prevent unintended consequences. That was a very helpful recommendation from the Select Committee, and I can confirm that all of its recommendations have been accepted in full and are reflected in the Bill before the House today.

The Government want the market to thrive. We continue to promote competition as the best driver of value and services for consumers.

[Mark Pawsey (Rugby) (Con)]

The Secretary of State talks about the setting of the cap, and setting it at the right level in the Bill is incredibly important. If it is too high, it will not achieve its objectives; if it is too low, there is a danger that some of the new entrants into the market will fail. The power is with Ofgem, but we have already heard that Ofgem has not been exactly brilliant in exercising its existing powers. Is the Secretary of State confident in Ofgem’s ability to set the cap at the right level?

[Greg Clark]

I am. There has been recognition from Ofgem that this role is perhaps more important than was suggested by the attention it has been given in the past. Most observers recognise that the work on setting the cap for consumers on prepayment meters has been effective and that competition still exists in the market.

[Mark Menzies (Fylde) (Con)]

Can my right hon. Friend assure me that any changes to the price cap will also take into account those on prepayment meters, so that if, for example, the price cap changes every six months, that is taken into account for those on prepayment meters or prepayment cards and they are not disadvantaged?

[Greg Clark]

The arrangements for prepayment meters will continue separately from these provisions, not least because the costs of the prepayment meter are different from those of consumers on normal meters, and that must not be used to the disadvantage of those consumers.

The price cap must be in place as soon as possible, and our intention is that it should be by the end of the year subject to progress in this House and the other place. Ofgem is undertaking preparatory work alongside the consideration of the Bill by Parliament. The Bill will require Ofgem to put the price cap in place as soon as possible after the Bill is enacted.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

The whole House wants to help those in vulnerable circumstances in particular. My right hon. Friend alluded earlier to the provisions of the Digital Economy Act 2017, which will give suppliers access to customers in difficult circumstances. At that point, if we do not take action through legislation, will my right hon. Friend work with the industry to develop best practice so that suppliers seek out their vulnerable customers and do whatever they can to get them on to the lowest tariffs?

[Greg Clark]

My hon. Friend makes an excellent point, and my Department will work closely with Ofgem to ensure that those consumers can benefit from these provisions.

[Albert Owen]

The regulator will need time to consult before the Bill’s provisions are enacted. Is the right hon. Gentleman confident that, with the Bill being put before both Houses of Parliament today, customers will be able to benefit from it this winter?

[Greg Clark]

I am indeed confident of that, and it is one of the reasons why I am so grateful for the swift attention of the Committee on which the hon. Gentleman served in giving the Bill pre-legislative scrutiny and taking evidence from expert witnesses.

As I said earlier, the Bill has been constructed to be proportionate and to be directed at a particular problem that we expect to be temporary. On that basis, I hope it will enjoy support from across the House and we can swiftly progress it so that we can correct an intolerable situation in which consumers have been exposed to paying £1.4 billion more than they would in a competitive market. That abuse should end. This Bill will give Ofgem not only the ability to do so, but the requirement that it should do so, and I commend it to the House.

--- Later in debate ---

[Mark Menzies]

My hon. Friend makes a valid point. We would not want a situation in which energy companies, especially big energy companies, seek to delay the implementation of the measure for that reason through appeals to the Competition and Markets Authority. Perhaps the Government could consider having a time-limited window of appeal lasting for a matter of weeks in which any appeal could be looked at by the CMA. I am not sure whether recourse to judicial review, with a case tied up in court and argued by incredibly expensive lawyers, is the solution to the problem. I am not sure where the transparency is in that, and I am not sure that judges are the best people to make a determination. I shall say a little more on that as I proceed.

Appeals on price controls are always to the Competition and Markets Authority. This is consistent with every other comparable sector, including telecoms, water, and aviation, and there are very good reasons why. Energy suppliers, just like National Grid and distribution network operators, invest huge sums into our energy infrastructure. The Treasury has estimated that approximately £250 billion of projects are in the pipeline in the coming years. All companies require certainty to deliver these projects and they only get this if Ofgem sets a fair and accurate price.

In most cases, if Ofgem gets it wrong, National Grid, DNOs and their shareholders can make their case to the economic experts at the CMA. They know that they have effective recourse against Ofgem’s decision and they have certainty that the CMA will not allow any price cap that places these billions of pounds of investments into our vital energy network at risk. Under the Bill, however, retail suppliers are being sent out on to the high wire only to find that this effective and long-standing safety net has been removed from beneath them. Should Ofgem fail, the Government believe that judicial review will adequately cushion their landing. It will not.

As I have mentioned, the CMA is designed precisely to consider such appeals. As an expert appeals body, it has specialist panels with experience of deciding whether price controls have been set properly through consideration of the economic merits of each case. In contrast, a judicial review would consider only whether Ofgem reached its decision reasonably and in accordance with the relevant procedure. A judge with legal—not economic —training and with no specialist expertise would be asked to assess whether these deeply technical price control issues were fair and accurate.

If we follow through with this and allow such uncertainty to fester, even if only in the minds of our major energy suppliers, what assessment has been done of the impact of that on investment in our energy market? What assessment has been done of the impact that the initiative will have on the prices that consumers on non-default tariffs will be asked to pay? I have asked to be furnished with that information, but the Government do not have it. They answered that this calculation will depend on the methodology employed and the ultimate decision taken by Ofgem when setting the level of the cap.

I can be persuaded to agree that the Bill should pass without considering the future supply in this country—at least for this afternoon. I can be persuaded to agree that Ofgem sets the methodology. I can be persuaded to agree that Ofgem sets the level of the energy price cap. However, I cannot be persuaded, because it defies simple logic, that Ofgem has the sole preserve of wisdom in these matters. I cannot be persuaded that there should be no possible recourse to the Competition and Markets Authority.

[Greg Clark]

My hon. Friend raises reasonable questions about whether the approach that is taken will be fair. That is why Ofgem will have to consult on the methodology. Applying it in particular cases is simply the mechanical application of something that has already had the degree of scrutiny that he is looking for.

[Mark Menzies]

I thank the Secretary of State for his intervention. Steps like that seek to reassure me. As the Bill makes progress, I will follow its course in detail, particularly on this matter. I want to ensure that the Bill is effective and does not end up disappointing where we hope that it will succeed.