Domestic Gas and Electricity (Tariff Cap) Bill (First sitting)

James Heappey Excerpts

Committee Debate: 1st sitting: House of Commons
Tuesday 13th March 2018 Public Bill Committees

[Vicky Ford]

Q The approach of making sure that Ofgem, the regulator, has to consult before making the decision.

Juliet Davenport: I would agree on that.

Hayden Wood: This Committee has an opportunity to help 12 million homes that are currently languishing on standard variable tariffs and massively overpaying for their energy, and help them to reduce their bills. If we allow a loophole such as this into the legislation—let us say that it is Ofgem’s responsibility to manage that loophole and to keep it closed—we open it up to being manipulated or lobbied on or people working around it. We saw how the retail market review regulation years ago led to some unintended consequences in how the energy market is structured, and we now suffer from this “tease and squeeze” problem, which others on the panel have described. We would propose completely removing clause 3(2) of the Bill to eliminate any issues with unscrupulous suppliers introducing non-green tariffs and removing the effect of the cap.

[James Heappey (Wells) (Con)]

Q I wonder whether the panel shares my concern that this also allows green tariffs to be seen as a premium product. To achieve our decarbonisation goals, what we actually want is for green tariffs to be seen as the norm. Therefore, to allow them to be sold as a sort of premium rather defeats that long-term aim.

Hayden Wood: I completely agree with that. It perpetuates the myth.

Juliet Davenport: My view is that you can have cheap greenwash tariffs alongside genuine innovative tariffs and you can have a differentiation. You have to focus on the big six and make sure that there are not any loopholes, but most of these companies have had people come to them as a choice. What is great about this market is that we do have choice. We have the cheap greens, and we also have the more innovative products such as us. Why would you close that down? You can see that we have been leading this market and making changes in it. We support about 140,000 homes who generate power in their own house. Those are the kind of innovations that we want to continue to do. To be honest, if you price-cap us, we are going to have no investment left for that kind of innovation.

I completely agree that we should have a differentiation and we should have products that are cheaper green. I met one of Bulb’s customers at the rugby the other day who was very enthusiastic. She was so excited by the fact that she is going on a green journey. I think that is brilliant, and that is what we should embrace in this. We should not try to close it down to be one thing or another. We should allow innovation within the marketplace.

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

Q On the cap mechanism, there has been debate about absolute versus relative, and I think there are split views across the panel. Why would we go with one versus the other? Some models are clearly more favourable to a relative cap, and others to an absolute cap. Why choose one over the other? The Government have come down for an absolute. I think that has almost got the majority view, but is it possible to find a cap level that is fair to everybody? Is there any trade-off between short-term customer needs and the long-term competitive market that we are trying to achieve? I will just throw that open.

Greg Jackson: That is the most important issue to address during these conversations. An absolute cap, as per the Bill, will provide a decency level beyond which no default customer will be charged. That is a good thing. However, at the moment, a loyal customer of, for example, one of the big six is paying £250 a year more than the price that the same company advertises openly to new customers. When I say “openly”, of course, you still have to type in 25 sets of details to see that price, because energy is too complicated. Under an absolute cap, we think that might fall to £200. It is still not going to create an effective market in energy, where competition thrives, if we do not do something about those tremendous differentials. That loyalty penalty is by far the biggest barrier to true competition in the energy industry, so we would propose that, with the protection of an absolute cap, it is the perfect time to bring in a simple limit on the difference between the cheapest and most expensive tariff offered by a supplier, to prevent it hoodwinking its customers into overpaying for loyalty.

The only reasons given during the Select Committee hearings not to have a relative cap were a concern that large suppliers—existing former nationalised suppliers—would raise their prices to fit a relative cap. The absolute cap prevents that being a concern. Bringing in the absolute cap provides the perfect opportunity to generate real competition underneath it by a simple limit on the loyalty penalty. If you do that, I think we will find a price war among energy companies, equivalent to that in supermarkets, where everybody sees the same price. In supermarkets, you do not need to switch, because the threat of some people switching forces supermarkets to bring prices down for everybody. That will be the effect of a relative cap underneath an absolute cap. It is one line of additional rule in the statement of a price cap that would enable this. I think that what you would find, when you take away the absolute cap, which is defined to be a temporary measure, is that you would have a truly competitive market in energy for consumers.

It is worth noting that we are all challenger brands. We have to fight for every single customer from scratch. Eleven challenger brands favoured a price cap, and split roughly equally between absolute and relative, with a lot favouring the combination. We are one of those companies, and that is because we know that will generate the most competitive market for the benefit of consumers.

Juliet Davenport: This is not a position, so much as I just want to add in the risks that we need to be aware of with the absolute price cap, just to see whether there is anything else we can think about in terms of softening those risks.

One risk with an absolute price cap that I am concerned about is that Ofgem will be setting the prices. There is no downside to Ofgem with getting that wrong; if Ofgem sets that price incorrectly—I know you are seeing Dermot after this, so you can ask him the question—what are the sanctions against Ofgem for getting that price wrong?

And it is really difficult to set prices at the moment. I could ask my colleagues about the unidentified gas charges that we have just seen go from 0.6% to 2% of gas bills. This is a post-charge that we were not aware was coming. We knew there was some discussion of it, but it has been charged in arrears. How does Ofgem factor some of those things into its price? Does it put a risk in the price? That would be one question.

The other question is, because we set the price cap at a particular time of year, we will get everybody forward-contracting with their hedging position at the same time of year. The concern I have is that we might see some distortion within the wholesale market. Can we keep an eye on the wholesale market? I do not know whether that means that we have to ensure that there are extra powers to ensure that the wholesale market does not try to spike at exactly the time that everybody will be forward buying their power.

Those are the two risks that I am concerned about with the absolute cap. That is not to argue against it, but those risks are there and they need addressing whether in the Bill or in guidance from Ofgem.

--- Later in debate ---

[Bill Grant]

Thank you, we will leave it at that. It was my misinterpretation.

[James Heappey]

Q You have the Minister to your front and the regulator behind you. What does the end-state look like? Is this price cap to repair the current market, or to deliver something new. If new, what is it?

Greg Jackson: You now have a market of 70-odd companies, mainly vying it out in a 20% churning area. If we get this right, you will be able to let loose the competitive efforts of companies like ours and 68 or however many others to bring prices down for everyone. Getting it right involves the decency cap or the absolute cap and finding a way to tidy up the entirely unjustifiable hundreds of pounds of difference between the cheapest and most expensive tariffs from each supplier. At that point you can let loose our competitive efforts to bring prices down for everyone.

[The Chair]

Order. I am ever so sorry about what I am about to do, but I am required to do it. I am afraid that has brought us to the end of the allocated time to ask questions. I thank all the witnesses. It has been a very good session. Thank you very much. I now call the next panel.

Examination of Witnesses

Dermot Nolan and Rob Salter-Church gave evidence.

--- Later in debate ---

[Claire Perry]

In other words, reimburse customers who would otherwise be overcharged if for some reason the energy companies delayed the introduction of the cap through any form of legal challenge.

Dermot Nolan: First, before coming back to that, I want to reiterate again that we want the cap in as quickly as you do. There will be no drift; we will make sure that we meet that timeline. I absolutely say that as clearly as I possibly can. So we will bring in the cap.

At that point, the cap would apply to all energy suppliers. If they were in breach of it, they would be in breach of their licence obligations and potentially they would be subject to fines, and ultimately to losing their licence. So, it is almost inconceivable to me that, if the cap was in place, a supplier was not in compliance with it. We would obviously use every single power we had at that point in time.

[James Heappey]

Q On the last panel, Dermot, the price spike of two weeks ago come up. So, to follow on from Vicky’s questions, first, against your modelling, what event did we see two weeks ago? Was that a once-in-five-years event or a once-in-10-years event, in terms of the price spike it generated? Secondly, how do you model against the reality that there will occasionally be those price spikes, but at the same time that we will all urge you to take as much risk as you are willing to, in order to make the price cap a meaningful cap? It would be interesting to know how you strike that balance between the variability in the wholesale market, albeit that it happens very infrequently, versus our wish that you are as bold as possible with the cap.

Dermot Nolan: Absolutely. Two points on that. First, regarding, the events of last week, it is difficult to be precise. I would say they are more the type of once-in-five-years spikes. I will note that, if I may sound very gnomic, there are spikes and spikes. This was quite an acute spike in the gas price, and then there was a spike in the electricity price, but it was not that long-lived. Forward prices for four or five days did not change dramatically, so it was an abrupt spike but a short one.

The whole point of how to set the cap, and over what time period, is a fundamentally important one. The Bill suggests that the price cap must be updated every six months or less. There is an inherent trade-off. One of the things I particularly want to hear about from consumer bodies is over what period people want their prices to change. All the evidence we have in many ways suggests that people like smooth energy prices. They do not like spikes in their own bill. If the cap is set every six months, and a one-week spike is smoothed out over that six months, there is an appeal to that—you get relatively sure prices over a six-month period.

At the same time, you find that if there have been spikes of whatever form during a six-month period—if there has been, say, a fall in energy prices after two or three months—people say, “Why is this fall in wholesale prices not being reflected in my bill? Why do I have to wait six months for it? Why can I not have it after three months?” If we did a three-month price cap, that would ameliorate that issue, but we might be a little bit more vulnerable to spikes and changes in prices. How we balance that is not straightforward and is one of the things that we would particularly want to hear from consumer groups on during a consultation.

[Michelle Donelan (Chippenham) (Con)]

Q On that point, do you think six months is right? I know you have just described the trade-off between a three-month and a six-month period. Do you believe six months is the correct period? There are people that are concerned about flexibility and fluctuations. In the last panel, we heard that if everybody started buying their energy in advance, it could inadvertently cause a spike. What do you believe?

Dermot Nolan: I think six months is the maximum. If the Bill goes through as is, we will consult on it. I honestly cannot say what we would ultimately pick, because it would be an open consultation. Certainly, I cannot imagine, at this point in the way the energy market is, having prices change every week or month. I think it would be a consultation along the lines that I have already mentioned. There is no perfect number though. We would want to try to hear from consumers what they thought was best and what reflected their preferences.

--- Later in debate ---

[Stephen Kerr]

Q Tell us again how you will know that they are working. What are the features of a market to which you will say, “Yes, this is a competitive market.”?

Dermot Nolan: Last year we published a response to the Competition and Markets Authority—which, going forward, will form the core of our report to the Secretary of State, as envisaged under the Bill—that we called a state of the market. It was a detailed look at the state of competition in the retail sector. It will look at a number of indicators; it will be on the basis of this suite of indicators—there will not be one perfect one. It will include the numbers switching, but also survey evidence, levels of satisfaction in the market, whether people feel more trust in the market, and whether the vulnerable, in particular, feel empowered to switch or still feel disengaged. We will focus on and continue to develop a suite of indicators that will form the basis of a report to the Secretary of State, which, as envisaged in the Bill, we will make on a yearly basis.

[James Heappey]

Q I am keen to understand what you think a good market looks like. In a lot of other markets, we would consider happy customers who think that they are getting good customer service and a good deal to be a good thing. In the energy market we seem to be quite aggressively pursuing the absolute opposite. We seem to think that a good market looks like lots of people who are moving constantly to find a better deal.

I wonder how we do something in this price-capping process that, when energy companies go to war with one another over price, ensures that all of their consumers, including those who are loyal and seeing the benefits of good customer service, get rewarded, rather than simply perpetuating this view that a good energy market is one in which everybody is moving constantly and there is no incentive for companies to deliver good service.

Dermot Nolan: Absolutely. When I talked about a suite of indicators earlier, I think one should not over-concentrate on switching. It is perfectly possible, as James Heappey has said, to have a market that is functioning relatively well, but, actually, observed levels of switching are slow. What is important is that the customer must have the ability to switch if treated poorly.

In that sense, what we have seen, particularly in the energy market over the past two years, as we have seen in other markets, is a divergence of outcomes—£200 or £300 between people’s bills. Some—not all, because more than 20% of our domestic residential customers now come from small suppliers—have the disengaged feeling of, “I don’t feel comfortable switching and don’t feel protected.” The reforms that I mentioned in the last question are about trying to create a situation where we go back to the engaged customer—in some sense protecting the disengaged—with less variation between the engaged and the disengaged as a result and with people feeling, “I don’t need to switch, because I am not going to get charged £300 or £400 more by my own supplier if I don’t switch.” That is the kind of market that we would revert to. I think the reforms that we have set out will get us in that direction.

[James Heappey]

Q That is exactly the point. When Tesco and Sainsbury go to war with one another, they might compete over the price of Hobnobs, and that might make a small number of people switch their supermarket, but everybody who shops in those supermarkets gets the benefit of that price reduction. That surely must be the market that we are seeking to design.

Dermot Nolan: That must be the market we are seeking to design. I would say more generally that new technology, through which we are buying goods and services in many areas, is such that that old area is, to some extent, breaking down. I do not want to go beyond the topic, but you will see people paying different prices buying online, and that is good in many ways, but it also has public concerns more generally. One thing about the energy market is that it will clearly not be successful if we are still seeing observed differentials of £300 in two or three years’ time.

[Alan Brown]

Q You have already said that when the absolute cap ends, you still think there needs to be protection for vulnerable customers. Does that not suggest that the Bill is not doing enough to protect vulnerable customers? What protection do you think they need going forward?

Dermot Nolan: I think there are already 5 million people who are vulnerable under price cap protection. If the Bill was not going forward, we would have extended that, anyway, to another tranche of vulnerable customers. Regardless of whether there is a price cap or not market-wide, the regulator is likely to have price caps for vulnerable customers going forward. I might be wrong on that, but it will be an absolute priority for the regulator to do that, which we believe we can and already are doing under our own powers. Obviously, I want as much protection as possible for vulnerable customers. Any regulatory body, given the statutory duties that it has, will take on that itself. If it does not, it will be messing up. So I feel there will be protections there from the regulator in any case.

--- Later in debate ---

[Michelle Donelan]

Q You would say that getting this entire process put through simply will foster competition, and that is one of the goals you believe should be in the Bill.

Dermot Nolan: I think it will have an effect. We have a prepayment meter cap already. I said that switching is only one aspect of competition; I want to be clear on that. After the prepayment cap, we saw that some of the cheaper deals left the market, but not all of them did. Some stayed, including from existing suppliers, and there were still cheaper deals from some of the smaller suppliers. I think that is likely to occur. There might be a measured drop in switching for a period of time, but as long as the mechanisms are put in place, this can facilitate competition over the medium and long term.

[James Heappey]

Q This is similar to the question I asked at the end of the previous session. What does effective competition look like to you as the regulator? Are you looking at measuring this in terms of engagement within the market and net fall in the number of SVT customers? Is it based on some differential between SVTs and introductory or promotional prices? Alternatively, is this an opportunity for transformation? We bring in the price cap, but in the process we look at what has been wrong with our old energy system and what the innovation and disruption is likely to be that leads to something for the future, and whether this is your opportunity to deliver that.

Dermot Nolan: I think it is an opportunity for transformation. I have talked about some of the short to medium-term things we will do. Over the period of the price cap—this would probably be a legislative thing, working with the Department and ultimately with Parliament—it represents a chance to perhaps radically recast the supply market.

The supply market has become quite complex. I am not saying that the system of suppliers acting as vehicles for delivering the various obligations has not worked—in many ways, it has—but we see a situation in which a host of new suppliers will be entering the market in three to five years. These might be quite large ones that do not currently provide energy, and they could come in selling energy in a bundled product with other goods.

We will see electric vehicles being rolled out, and a price cap will have to deal with issues such as electric vehicle charging and how people are charged for them. I see a situation in four to five years’ time in which the energy market could have changed radically. The key point of the price cap is that it has to be flexible to any changes and fulfil its basic role of protecting consumers. With great respect to the suppliers in this room and suppliers already out there, I would hope that we could see radically different sets of people providing energy in five years’ time.

[Alex Norris]

Ofgem said to the Department for Business, Energy and Industrial Strategy Committee when this was being considered that the cap ought to be temporary. How do you feel about 2023 as the sunset clause? What should Members in 2023 have seen to be assured that the cap would be unnecessary?

Rob Salter-Church: It is right that everyone is focused on what happens at the end of the price cap. It is important to us that if the price cap is removed, then all consumers get to benefit from the new competitive market that we are seeking to create.

We are comfortable with how the Bill is currently drafted. It requires us to have a comprehensive report from 2020 on the state of competition, and whether we believe that the conditions for effective competition that benefit all consumers are in place. Every year, we will be providing recommendations to the Secretary of State.

We are confident that, as the Bill is drafted, there is sufficient opportunity for the Secretary of State to determine whether there is a future role for an overall price cap, or whether there are things within our powers that we should be doing. Earlier on, Dermot mentioned the likely ongoing need for vulnerable consumer price protection. More broadly, we will be able to report on the progress made by us in creating what is ultimately a more effective form of competition where everyone benefits, whether you choose to switch or whether you choose to stay with your current supplier.

--- Later in debate ---

[Alan Brown]

Q Are there any improvements needed to the Bill? I have a couple of suggestions and considerations. We have already heard the merits of trying to introduce what is called a relative cap to work underneath the absolute cap, and we have spoken about vulnerable customers. Are there any improvements that could be made to the Bill to protect vulnerable and disabled customers?

Peter Smith: I will try to be a bit more concise than I was earlier. Clause 2 needs to be amended specifically to ensure that the safeguard tariff is considered when setting the SVT-wide cap, and Ofgem needs to have a duty to consider that. In clauses 7 and 8, we need to include customer engagement, particularly vulnerable customer engagement, as part of that overall assessment of competition and of whether it is working effectively.

I could give you a couple of examples, but perhaps they are best fleshed out in some further written evidence. They would include online access. For instance, we know that households that are offline do not benefit from the considerable discounts for online deals and from paperless billing discounts, and they do not get to apply to the warm home discount scheme. Cumulatively that could be up to £300. Things like that need to be considered when we make that overall assessment.

Rich Hall: From our perspective, we are broadly comfortable with the Bill in its current form. In the area of providing enhanced assurance that vulnerable customers’ circumstances are being improved, we think that is something that should be captured within the annual assessment by Ofgem and by the Secretary of State. We are reasonably comfortable that that is implicitly delivered through the Bill, but I can understand that there are arguments that there might be benefits in it being explicitly delivered on the face of the Bill.

In terms of there potentially being a relative cap underneath the absolute cap, I have some similar views to Dermot on that, in that it is an idea that has been floated only really in the last few days and weeks, possibly by people who would prefer a relative cap and who are now trying to use absolute plus relative as an alternative vehicle to reintroduce that approach.

We have some concerns about the relative cap approach. Because the large incumbents have so many sticky customers, in comparison with the relatively small number of customers they could pick up through any promotional campaign, if they were to seek to hold their line on their acquisition prices, that would make the cost of acquiring new customers punitively expensive. Because of that, we think it is more likely that the large incumbents would simply exit the acquisition market, which would neither help their SVT customers, who would continue to pay the same prices, nor improve pressure in that market. There is a risk that a relative price cap could backfire and be worse than the status quo, so we see the decision on absolute versus relative as not simply a choice between a good model and an excellent model, but as a choice between a good model and an unworkable model.

Pete Moorey: I would not add anything to what Rich said, but in terms of other changes to the Bill, there could be some changes to ensure there is more transparency and accountability of Ofgem, in terms of setting the cap. We would like to see changes so that Ofgem are required to set out clear criteria for monitoring and evaluating the success of the cap. We wanted to see a requirement to review the price cap every six months. It may well be that the evidence you have just heard from Dermot Nolan suggests that they will be reviewing it anyway every six months and that the bar could be set lower. It may well be that that is unnecessary in the Bill itself, given that it seems likely from what he said this morning that we will have a consultation on that as well. I think Ofgem should be required to publish reports on the impact of the cap on a regular basis and on how they would take any action if the cap was having any negative impacts.

[James Heappey]

Q Some of the big six, in particular, have tried to head off this legislation by, apparently, removing people from their SVTs already. I wonder whether you have made any analysis of the sort of tariffs they have been transferring people on to and of whether that represents genuinely better behaviour, or are they just getting ripped off in a different way?

Rich Hall: We do not have any analysis on that to hand, but it is a crucial issue, in that the problem with SVTs is not their name, but their characteristics; it is the fact that they are extremely poor value products that exploit consumer inertia. If the replacement products simply have the same characteristics, and they are benchmarked to a similar level of pricing, that is simply an attempt to get around the intent of the Bill rather than to reduce the detriment that those customers see. That is an area where we, Ofgem and others will need to improve our monitoring in the coming months, as we see more of those tariffs in the market. At the moment, it is still fairly soon after the launch of these approaches by three suppliers, so it is a bit too early to say, but it is a genuine issue.

[Vicky Ford]

Q Just to come in on this issue of reviewing every six months, that is of course in the Bill.

Pete Moorey: That is good news.