Domestic Gas and Electricity (Tariff Cap) Bill

James Heappey Excerpts

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

[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.

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[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.

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[Rebecca Long Bailey (Salford and Eccles) (Lab)]

I am pleased that the Bill is before the House today, but I must express my exasperation that it has taken so long to get to this point. The 2017 Conservative manifesto committed to implementing an energy price cap that would protect 17 million households. The Government then repeatedly rowed back on that promise, passing responsibility to Ofgem, which made it clear that legislation was required. After months of to-ing and fro-ing, the Prime Minister reintroduced her commitment in her conference speech, and finally, on 11 October, a draft Bill was published. That Bill was then passed to the Business, Energy and Industrial Strategy Committee for pre-legislative scrutiny, which, due to the thorough work rightly done by colleagues, was not completed until mid-February. At the same time, a leaked conversation between the civil service and an energy investor seemed to suggest that the Government had no intention of seeing through the legislation. So yes, I was relieved last week to finally see the Bill introduced to Parliament, and I welcome the Government’s foray into a policy that they previously denounced as Marxist, but it remains the case that, as a result of this Government’s inaction, millions of households have been left to scrape through the winter facing a choice between cold homes or astronomical bills.

As all hon. Members will be aware, the UK experienced one of its coldest periods for decades over the past week, with the Met Office reporting that the UK had officially broken its record for the lowest March temperatures in a 24-hour period on Friday. As a result of this Government’s dithering and delay, the 4 million households currently living in fuel poverty, 1 million of which include a disabled person, will be receiving whopping bills at the end of the month. Startlingly, the latest figures from National Energy Action for the winter of 2016-17 show that excess winter deaths were 39.5% higher than in the year before, with an estimated 34,300 excess winter deaths in England and Wales.

[James Heappey]

The hon. Lady underlines the fact that the harshness of the recent weather will have increased energy bills for millions of people. Was she therefore as impressed as I was by the speed at which emergency payments were made to the most vulnerable to help them with their additional heating costs?

[Rebecca Long Bailey]

The emergency payments were certainly welcome—I thank the hon. Gentleman for his comment—but the fact remains that this price cap should have been in place this winter and it was not.

National Energy Action also found that each year an average of 9,700 people die due to living in a cold home. That equates to 80 people per day, the same number of people who die from breast or prostate cancer each year. It has been Labour party policy since 2013 to introduce a price cap on consumer energy bills, and although the principle of this Bill is positive, I remain concerned that, as drafted, it does not go far enough.

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[Rebecca Long Bailey]

The hon. Gentleman makes an important point, and I will refer to this later in my submission. The Bill does not provide an answer to the broken energy market; it is simply a sticking plaster while the energy market is reformed. We would not expect the provision to be in place for a prolonged period. We are not openly against sunset provisions, although we might dispute how they are drafted, which we will explore in Committee.

In considering the cap removal, I must raise an issue that was highlighted recently by the Business, Energy and Industrial Strategy Committee. It found that vulnerable and low-income people were especially affected by poor-value tariffs, with 83% of those living in social rented housing, 75% of those on low incomes, 73% of those with no qualifications and 74% of disabled customers on a standard variable contract. It was clear from the Committee’s findings that, even with the advent of smart meters, those groups will still require protection from overcharging. I therefore urge the Government to consider representations by charities such as Scope, which has called for clause 7 to be amended to ensure that Ofgem, when it considers “effective competition”, has regard to the impact of removing or extending the cap in relation to vulnerable and disabled customers.

Finally on the drafting of the Bill, I am concerned that there is no guarantee that the price cap will be in place this winter, despite the Secretary of State’s earlier assertions. The Bill states that Ofgem must introduce a cap “as soon as practicable” after it is passed, but Ofgem has already said that it would take around five months after a Bill receives Royal Assent to enact a price cap because it has a statutory duty to consult power companies. This morning Ofgem has said that it

“will look to set the level of the cap over the autumn and bring the cap into effect at the end of this year”.

It therefore seems that the cap will not even be in place when the weather turns in autumn this year. I think that the Bill would be greatly improved by the inclusion of a hard deadline by which the cap must be in place, and Labour will be seeking to include such a deadline in Committee.

Given that the Government have already set the date for Committee consideration as 15 March, it would be encouraging if they provided a clear date for cap implementation because, even accounting for the relevant consultation periods set out in the Bill, it would be possible to introduce the cap earlier than next winter. Indeed, my advice is that including such a date might even lay to rest suggestions in some press reports that the big six, and indeed some members of the Cabinet, have been lobbying the Secretary of State to procrastinate or even drop the Bill entirely.

[James Heappey]

The shadow Secretary of State is kind to give way to me a second time. Does she agree that another option she might consider to help to introduce the cap as quickly as possible would be for her party to pledge its full support in helping to get the Bill through the House and the other place as quickly as possible?

[Rebecca Long Bailey]

I thank the hon. Gentleman for that very helpful comment. I have not opposed the Bill in any of my comments so far; I am providing helpful advice. We support the principle of a price cap and want it to be introduced in the most efficient and detailed way possible.

I think that there is consensus across the House that the energy price cap is no more than a sticking plaster, and that much deeper problems within the UK’s energy market need to be addressed. The market is fundamentally broken. Electricity bills soared by 20% between 2007 and 2013, while in the past year alone, every household in the UK paid £120 for dividends to energy company shareholders. Over the past few months, report after report and news story after news story have detailed the unfairness of the current system, but it must be noted that the final bills that consumers face are not simply a consequence of manipulation by some supply companies. As the Business, Energy and Industrial Strategy Committee has highlighted, network costs make up the second highest element of a duel fuel energy bill.

The Energy and Climate Intelligence Unit found last year that the six distribution network operators made an average profit margin after tax of 32% a year between 2010 and 2015, equating to £10 billion over six years. At the same time, shareholders received £5.1 billion in dividends. In a subsequent report, the ECIU calculated that electricity network companies’ exceptionally high profits are set to add £20 to household energy bills this year. Moreover, analysis by Citizens Advice last year calculated that network operators, including National Grid, had made £7.5 billion in unjustified profits, which it thinks should be returned to consumers. Quite frankly, that is the exploitation of a natural monopoly. It is not a market and there is no effective competition, and I want to hear how the Minister will deal with competition within this element of the energy market.

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[James Heappey (Wells) (Con)]

This is an important Bill that comes from a very good manifesto commitment. Our energy market is undoubtedly broken, with millions of consumers stuck on the most expensive tariffs. Many are taken for granted and, arguably, even exploited for their loyalty, and it is right that the Government have intervened to protect them.

In many ways, in delivering this cap we have accepted that we failed over the last few decades to create the culture of switching that we hoped for. That is not to say that impressive progress has not been made; it has been, and we have seen further progress in the last few months, but even if that recent improvement in progress were to continue, we would still have far too many people—disproportionately concentrated among the most vulnerable and the lowest income consumers—left on the most expensive tariffs.

We should also note that some of the biggest energy suppliers have changed the way they operate SVT-type products over the past nine months, which is very welcome. One suspects that they saw what was coming down the tracks. None the less, I know that they will feel aggrieved by the Bill after voluntarily acting to tackle the problem of those stuck on rip-off SVTs.

The progress on switching and the improved behaviour of the big suppliers underlines why the cap need only be temporary. My hope is that the Secretary of State will encourage the industry to respond quickly to the cap so that tariff structures become fairer for the most loyal consumers. Clear criteria for ending the cap would be most welcome. While the cap is in force, let us not take our foot off the accelerator in encouraging more people to start switching. In short, the cap must be regarded as a means to an end, not—I suspect this is the view of some Opposition Members—as an end in itself.

[Bim Afolami]

Does not the Bill show the Government’s general approach to intervention in markets, which we have heard a lot about this afternoon, which is about markets not as a means in themselves, but as a means to an end, which is good, cheap and reliable energy for the British people?

[James Heappey]

My hon. Friend is indeed right. To resort to my former career as a soldier, I hope that the Government see this as a raid into the energy market, rather than an occupation.

In her opening remarks, the shadow Secretary of State made the important point that an amazing energy future is emerging in the margins of our current broken market, although I disagree with her analysis that the Government are not embracing that, because the clean growth strategy is a passionate embrace of those opportunities. Insurgent companies such as Octopus Energy are relishing bringing the new time-of-use tariffs to the market, giving consumers the benefits of fluctuating wholesale energy prices. Others are looking at how localised generation or aggregated shifts in demand might allow consumers to access cheaper energy or monetise their flexibility. Others still are looking at delivering heat and power as a service, often enabled by clean tech provided by the supplier for free, with the supplier then monetising the customer’s flexibility in order to make their margin. These and countless other innovations are accelerating our decarbonisation, increasing system flexibility—and therefore our energy security—and will mean lower bills for consumers.

We must also create an energy system that allows the full price-reducing power of clean technologies to bring down prices for the consumer. This will require significant regulatory change in order properly to unlock storage, demand-side response and the advantages of generating and consuming energy locally. We must also encourage the deployment of more renewables, no longer because they are the cleanest method of generation, although they still are, but because they are now so obviously the cheapest.

[Rebecca Pow]

My hon. Friend has great knowledge of this subject. Will he comment on the fact that we need to concentrate not only on energy efficiency, but on cutting energy waste, particularly in our domestic systems, because there is a lot of great new technology that could be harnessed?

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[James Heappey]

I very much agree. Let us be clear that energy efficiency measures are no longer simply barrier technologies—in windows, walls and roofs—but digital technologies that ensure that we use less energy, or that devices immediately stop working when we no longer need them, rather than being left on unnecessarily.

Ofgem has a key role in delivering the Bill, but that work must be no more of a priority for it than ensuring the much-needed regulatory change that will be delivered through the unlocking of wholesale disruption of our energy system and market. Let us be clear that the real prize is not the correction of the old, analogue, broken market system of today, but the arrival of a digitised, decentralised, dynamic and disrupted energy system with a market that allows consumers to benefit fully from the price reduction that these technologies will deliver. A cap that saves consumers £100 or £200 is very welcome, so I support the Bill wholeheartedly, but not at the expense of the much greater savings that await consumers with the green, clean energy system of tomorrow.