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

James Heappey Excerpts

Committee Debate: 3rd sitting: House of Commons
Thursday 15th March 2018 Public Bill Committees

[Dr Whitehead]

I thank my right hon. Friend for that encapsulation of how the pool works and for her important point that a pool system would allow independent generators to trade on exactly the same basis as those vertically integrated generators, and, equally importantly, independent retailers bidding into the market would be able to bid in transparently, on the basis that they would know what the price was at that particular point. There would be hands on the table and the price would be clear for everybody. The whole trading process would be thoroughly transparent, to the particular advantage of how the market works in its new incarnation as a large number of independent retailers and generators operating alongside the more integrated generators and those large inheritors of customers from, essentially, the days of the Central Electricity Generating Board.

[James Heappey (Wells) (Con)]

I am not sure that I am that enthusiastic about this idea for further intervention, on two grounds. First, the big six are increasingly separating out their supply and generation businesses, because it makes commercial sense for them to do so, and I am therefore not sure that we are tackling a problem that will continue to exist. Secondly and more importantly, in one of the most successful green finance models that is coming through the cheapest cost of capital tends to be when generation is built with a contract directly to a supplier. I wonder if the hon. Gentleman has considered what impact this measure might have on that very cheapest cost of capital that seems to be available for quite significant amounts of generation capacity coming onstream.

[Dr Whitehead]

I will make two points in response. I hope that the hon. Gentleman will be enthused by the merits of the pool when he looks into it—knowing, as I do, how deeply he does look into these matters on a regular basis. Although it is true that a number of companies are dividing themselves in different ways from the model that there used to be, it is by no means clear that in the complete vertical integration of those companies those divisions all face in one direction. In some instances, such as the recent merger of SSE and Innogy, retail has been put together in one company. In other instances, companies are breaking themselves up into what might be called a good company and a bad company, in terms of the different forms of generation, without distinguishing between vertical integration and generation. Indeed, there are further moves abroad. For example, E.ON in Germany has effectively taken over elements of Innogy, which may have effects back on SSE and Innogy in the UK. A variety of things are happening in the market, some of which point towards different forms of vertical integration and some of which, as the hon. Gentleman says, point in the direction of demerger.

That is not necessarily the central point about how a pool operates. Even if there are circumstances under which there is rather less vertical integration, the fact that the pool is bringing complete transparency on all trades to the table means that everybody in the market is absolutely on the same level as far as both those trades and the retail element, whereby people are bidding in, are concerned. As the hon. Gentleman knows, a number of newer companies will largely be bidding into the day-ahead market. They may be considerably disadvantaged in not knowing what has happened with trades down the curve when bidding into that market. Having that transparency right across the piece is, in principle, a very powerful lever to ensure that the market works well regarding retail trading.

Secondly, the pool system is not a fanciful notion that some people might think is a good idea but that has never worked in practice. Probably the most successful trading arrangement in Europe at the moment is Nord Pool, which does precisely this across the whole of Scandinavia. It does not have the negative effects that the hon. Member for Wells suggests it might in terms of cost of capital and investment, but stabilises that market across the whole of Scandinavia and produces transparency across borders.

In any event, a pool system is something that this we ought to look at for this country. What this amendment does is rather less than that. It asks whether the Minister thinks that, under circumstances in which it has not been possible to frank the market for returning to competitive purposes by 2023, other instruments should be introduced to get us beyond the end of the temporary pool and out of that temporary price cap, which is what we all want. That will be on the basis that we between us will have not just done a good job of running a cap but changed how the market works, so that the cap does not have to be in place subsequently and we do not need to return to the idea of one in the future.

That is what the amendment intends to do. I think it is a relatively modest ask of the Minister. I am sure that, if she is not promoted, she will be in her post in 2023—if there is a Conservative Government. At that point, she would simply have to produce a small report setting out how the pool system might work. Then we will look to see whether we can take that forward at that point as a key measure, to ensure that competition returns to the markets after the end of the temporary price cap.