Domestic Gas and Electricity (Tariff Cap) Bill

John Penrose Excerpts

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

[John Penrose (Weston-super-Mare) (Con)]

Thank you, Madam Deputy Speaker; I will try to edit as I go.

Today is a great day. To those who say that politicians never deliver on their election promises, we can collectively send a blaring foghorn reply of “You’re wrong.” Today’s energy price cap Bill is an incredibly rare political unicorn: a pledge that not only has cross-party support, but is being fulfilled. As the organiser of the cross-party letter, which gathered an exceptional and unprecedented 213 MPs’ signatures, I thank my co-convenors, the right hon. Member for Don Valley (Caroline Flint) and the hon. Member for North Ayrshire and Arran (Patricia Gibson), for their help. I also thank every MP who signed the letter and the Ministers who have listened and brought its contents forward. Without their help, we would not be here today.

The Secretary of State has already ably described the problem. It is a two-tier market in which millions of customers are penalised for being loyal. Sneaky price hikes mean that people who have forgotten to switch are gouged on super-expensive rates to which they never agreed. Customers are being taken for granted and taken for a ride. So it is a great day, but in spite of all that we still have some pitfalls to step around. First, it is vital that the price cap is temporary. The long-term answer for most people is not an endless cap; it is making the customer king and putting them in the driving seat, so that the energy industry provides the same good-value and sensible deals that we take for granted in every other walk of life.

[Stephen Crabb]

I pay tribute to my hon. Friend for his hard work in ensuring that the Bill was brought forward. He makes an important point about consumers. He described them as behaving in a “loyal” way, but for many people, particularly the most vulnerable and those on the lowest incomes, this is about inertia. We need to change behaviours and get better engagement from some of the most vulnerable energy customers, which will be key to making this Bill work.

[John Penrose]

My right hon. Friend is a co-signatory to the letter, for which I thank him, and he makes an important point. It is not just vulnerable customers, of course; it is the many of the rest of us who are time poor. This is a far broader question than just vulnerable customers, although they are a key part of it. Many other families, either because they are loyal or because they just have not got round to it, have not switched. We need to persuade them to change their behaviour, and we need to change the market to help them to do so.

Choosing a new supplier should be no more complicated than changing our brand of coffee or corn flakes. The big six should have to work a lot harder to attract and keep our business. To be fair, as we have heard and as I think my right hon. Friend was alluding to, the regulator, Ofgem, has made a start. We have more than 50 new competing firms that are scrambling to take business off the big six. Smart meters are coming, and switching is slowly getting simpler, quicker, easier and less scary.

The Bill rightly says that the price cap should die after a couple of years, but what about the other details? Price caps, as we have heard, are dangerous things. They are fiendishly difficult to get right: they drive suppliers away if the price is set too low, and they gouge customers if the price is set too high.

So how do we design a cap that does not make things worse rather than better? Well, the Bill says that the price will be set by an all-knowing committee of Ofgem regulators every six months, but the international price of energy moves around every day. Although I am sure Ofgem is full of clever and well-intentioned people, no one is that clever. Any energy trader will tell us it is impossible to know what the price will be in the next six minutes, let alone the next six months.

[Caroline Flint]

Some 5 million people are already benefiting from the price cap for those on pre payment meters or on the warm home discount, and Ofgem is in charge of that. Why cannot it be trusted to extend its skill to a wider group of customers?

[John Penrose]

The right hon. Lady is one of the co-organisers of the letter, and I thank her again for her help. No matter how clever, good and high calibre the committee, people are just not as good as the market at price discovery, provided the market runs properly. When she was shadow Secretary of State for Energy and Climate Change, I heard her talk about having to get a better energy market with better price discovery and having to re-establish an energy pool precisely because of that point. Ofgem, no matter how hard it tries or how well intentioned it may be, just will not get it right a large proportion of the time.

[Bim Afolami (Hitchin and Harpenden) (Con)]

My hon. Friend knows a great deal about this issue. Is not the point that this is not a price freeze but a price cap? Those two things are different and allow a sensible regulator, as the right hon. Member for Don Valley (Caroline Flint) suggests, to set a ceiling rather than an absolute price.

[John Penrose]

I agree that there is a difference between a freeze and a cap, but there are a couple of things that, none the less, make it an extremely risky and dangerous proposition to go down that road. For example, what if Ofgem picks a number and the international price of energy falls the very next day? What then? Switching customers in the ultra-competitive part of the market would find their prices drop quickly as energy firms react to the news, but Ofgem’s capped prices for loyal, non-switching customers on default tariffs—that is the example my hon. Friend talks about—would not move at all for another six months, when the cap can be reset according to the terms of the Bill. In that situation, the cap would be ineffective at protecting the customers it is designed to help and, because it is officially blessed by Ofgem, it would embed and legitimise high prices. Things would get worse rather than better.

It is not just me who is worried about that. Which? says it is

“not certain that customers on a capped default tariff will benefit as market conditions change in future”.

[Sir Oliver Letwin (West Dorset) (Con)]

As my hon. Friend knows, I have some sympathy with his arguments. Does he recognise that, as drafted, the Bill enables Ofgem to set the cap by formula, which could be related to wholesale prices and have the flexibility required to overcome the problem he describes?

[John Penrose]

I wish I shared my right hon. Friend’s confidence in Ofgem. All the discussion of the Bill so far from Ministers, from comments on the Bill and from people inside Ofgem is not what he describes. They are talking about an absolute cap in which people sit in a room and come up with a number, which stays that way until it is reset after six months—that is the way the Bill is drafted.

If the Bill can be amended in a way that allows it to be far more flexible—that is one of the things I hope to encourage both Members here present and Ministers at later stages to consider—we might be able to iron out some of these issues, but I do not share my right hon. Friend’s optimism in that regard.

[Sir Oliver Letwin]

Looking at clause 2(1)(b), as drafted, it seems perfectly clear to me that Ofgem will have to set out how the cap is to be calculated, which positively points in the direction of a formulaic rather than an absolute position.

[John Penrose]

But as my right hon. Friend will know, it is also stated elsewhere, particularly in the guidance and in many of the other documents on this, that we are looking at an absolute cap. The word “absolute” is used repeatedly, and it has been used repeatedly to me in conversations with Ministers. If we can remove those other points as well, so that they are not going to push us in the direction I worry about, many people here would be a great deal more reassured. We will have to come back to this on Report—

[Sir Oliver Letwin]

rose—

[John Penrose]

I will give way one more time and then I will have to make some progress, because Madam Deputy Speaker is catching my eye.

[Sir Oliver Letwin]

I certainly will not press the point beyond this. Does my hon. Friend not need to distinguish between absolute, which means not relative—to offer tariffs—and formulaic and flexible, which the drafting certainly does allow, as opposed to a point that is set by a Committee for six months?

[John Penrose]

We will need to come back to this matter, but it would be tremendously helpful if Ofgem came up with some clarifications on it, because that might reassure me and others. So far I have had nothing to reassure me in that direction—in fact, quite the opposite.

As I was saying, it is not just me who is worried about this: both Which? and uSwitch worry it will mean cheaper fixed deals will be withdrawn from the market; and leading challenger energy firms such as Octopus Energy, Utilita Energy, Utility Warehouse, Ebico and Good Energy are all worried that Ofgem’s price-fixing efforts will inevitably get it wrong. The lawyers and lobbyists for the big six are licking their lips at the prospect of all those fat fees from legal challenges and persuasive lunches. It is no coincidence that they are already demanding the Bill should allow expensive and time-consuming appeals to the Competition and Markets Authority whenever Ofgem’s committee sets a price.

If all these people think the Bill’s details create problems, what is the alternative? What needs to change? The thing to remember is that default tariff prices are just a symptom of a much deeper problem. The moral flaw at the heart of this market—the thing that sticks in the throat —is the mark-up loyal customers are charged compared with competitive switching deals. I am talking about the enormous, unjustified, sneaky price hike the big six hit people with, without their consent, just because they are loyal or simply too busy to switch. That is the unfairness, the burning injustice and the thing that drives customers—our constituents—to write to each and every one of us demanding, “This must change”.

If the problem is the mark-up as between the competitive deals and the default tariffs, why does the Bill only address half the problem—the price of the default tariffs—rather than the gap between the two? If we are really serious about solving the problem, why not cap the gap instead? A cap that creates a maximum mark-up would deal directly with this moral underlying problem—the cause of the rip-off—rather than only half of it. It would mean default tariffs would have to move in tandem with the ultra-competitive, consumer-friendly part of the market. People who took the trouble to switch would still get the best deals, but customers who forgot or did not want to switch would get protection, too.

Capping the gap is future-proof as well. If the international price of energy fell suddenly, as we were discussing earlier, it would not just be the competitive switching deals that would get cheaper; the price of capped tariffs would fall, too, and people would not have to wait for six months for Ofgem’s all-knowing committee to meet and change it. Capping the gap would not dilute or derail the all-important underlying market changes which are going to make energy feel competitive and normal either. Customers would still have plenty of incentives to start switching. That is why this Bill and its introduction make this a great day— I meant it when I said it. This Bill is important, even though it is only temporary. It will save millions of customers hundreds of pounds on an essential product. Although it is not perfect and it could be better, it is a very important step. So for the moment, for the principle of the thing, for the Second Reading debate today, let us just celebrate the fact that it is here at all and support it.

--- Later in debate ---

[Rachel Reeves (Leeds West) (Lab)]

It is an honour to follow the right hon. Member for Harlow (Robert Halfon).

I welcome the Bill and look forward to its clauses becoming law in due course, with the impact that will have on energy bills. Of course, Labour first proposed action to tackle excessive energy prices in 2013. I look forward to hearing shortly, I hope, from my right hon. Friend the Member for Don Valley (Caroline Flint), who was the architect of that policy. As my right hon. Friend the Member for Doncaster North (Edward Miliband) put it at the time,

“When wholesale prices go up, people pay more. When they come down, they still pay more.”

Between 2010 and 2015, energy bills went up by £300 on average, so in the 2015 Labour party manifesto, we committed to cap energy bills until 2017, ensuring that bills could fall but not rise. That same winter, we committed to giving the regulator the power to cut bills and then to reform the energy market to deliver fairer prices and a better deal for consumers. Like all good ideas that Oppositions have, it has now somewhat belatedly become Government policy. I congratulate the Secretary of State and the Minister on that.

The fact that the energy market is broken is undeniable. It is a feeling shared by Members across the House and, indeed, by all our constituents. The Business, Energy and Industrial Strategy Committee’s report showed that it is a two-tier market in which customer loyalty is not rewarded but punished with excessive prices. It is totally unacceptable that nearly 60% of customers pay up to £350 more a year for their energy, on average, especially when those customers are the most vulnerable: 83% of those living in socially rented housing, 75% of those on low incomes and 74% of disabled customers are on standard variable tariffs, which we know rip consumers off. It is unacceptable that the exploitative behaviour of some energy providers exacerbates the financial woes of customers who were already facing difficult financial decisions. I do not want to live in a country where so many people are priced out of heating their homes in the winter, or having to choose between sitting in a freezing cold flat and putting food on their table. This Bill is a step in the right direction in addressing some of those concerns.

The big six energy companies insisted in evidence to our Select Committee that the market was already competitive and delivering fair outcomes and that this action was excessive and unnecessary, but our report showed why that is not the case. The CEO of E.ON told us in evidence that it is fair that customers who do not engage in the market pay more for their energy. We found that this kind of discriminative pricing is unfair on customers who cannot engage with competition, as opposed to those who can take advantage of it. Centrica admitted in its evidence to making the majority of its profits on expensive standard variable tariffs. It is not alone in that position, as a large majority of all big six customers are on standard variable tariffs, including 68% of Centrica’s customers.

The big six have lobbied intensely to get appeal rights to the Competition and Markets Authority because they want to try to stop this cap happening by dragging the process through the courts. I am pleased that this Bill rules out that action by those companies. Some argue that switching is increasing and so a cap is not necessary. Although the number of customers switching suppliers has improved recently, it is not improving nearly fast enough, with only a third of customers having switched in the past three years. It is time to try a different approach —one that puts the onus on suppliers to do the right thing. The big six energy companies have brought this cap on themselves by their discriminative pricing practices.

The BEIS Committee held four evidence sessions and analysed 44 pieces of written evidence as part of our pre-legislative scrutiny of the draft Bill. We welcome the Government’s Bill and the intention to put an end to the overcharging of 12 million households on poor-value standard variable and default tariffs.

One of our key recommendations to the Government was that they seek Royal Assent for the Bill before the summer recess, allowing Ofgem time to consult and then set the cap, so that customers do not spend another Christmas facing excessive prices. I welcome the letter from Ofgem today saying that it will be able to meet that timetable, so that we do not go through another winter of excessively high bills. My only disappointment is that this legislation did not come sooner. Last week, temperatures dropped significantly across the whole country. If there had been a price cap in place, families would not have had to worry about rising bills during this unprecedented drop in temperatures.

Following our Select Committee’s work, the Government have accepted all the recommendations that we made, including excluding the possibility of a relative price cap—something that the hon. Member for Weston-super-Mare (John Penrose) advocated, but which I believe would push up prices for customers who switch, rather than reducing the standard variable tariffs. It seems obvious that that is what would happen. For the big six energy companies, 70% or 80% of their customers are on standard variable tariffs and that is where they earn their profits, so they will not unilaterally drop those prices. Instead, they will increase prices for new customers, to cling on to their profits. That is why excluding the possibility of a relative price cap is the right thing to do.

[John Penrose]

I thank the hon. Lady for giving way; I will try to keep this brief. Does she accept that that criticism about a potential rise in competitive switching deal prices is being levelled by others at the absolute cap? When such a course as she described was experimented with last summer by Centrica, it lost market share hand over fist and was really hurt commercially, so it is unlikely to try that again.

[Rachel Reeves]

When we took evidence from the big six companies and probed them on where their profits came from, they were very clear that their profits came from the standard variable tariffs. Centrica has a £287 difference between its standard variable tariff and its best tariff, while Scottish Power has a £333 difference between those tariffs. They are earning their profits on the higher tariffs, and I just do not think that they will unilaterally reduce those tariffs, because that will be a hit to their profits, not a slight reduction in the number of new customers they get. The Government are right to exclude that cap, and that is why our Select Committee recommended that.

The Government have also accepted our recommendation to continue encouraging consumer switching. I believe that competition and regulation can co-exist effectively.

--- Later in debate ---

[Sir Oliver Letwin (West Dorset) (Con)]

In the interests of brevity, I want to make one point about the rationale for the cap that I do not think has yet been stated in this debate, and two points to reassure my hon. Friends about issues that have arisen.

On the rationale, it is true that Ramsey pricing—the gouging of so-called loyal or, in other words, inertial customers—is a major issue, but predatory pricing on the other side of the balance sheet is equally important. As the hon. Member for Leeds West (Rachel Reeves) said, large suppliers are making uncovenanted surpluses out of the default tariffs, which they are using to cross-subsidise their competitive tariffs to exclude entrants from the market to the greatest possible extent. Once they are deprived of the ability to generate oligopolistic returns from the default tariffs, as my hon. Friend the Member for Weston-super-Mare (John Penrose) mentioned, they will have to do what they are very reluctant to do —namely, recognise more closely the true cost of their own inefficiencies in their more competitive tariffs, thereby allowing much greater penetration of the market by small challengers.

That is why I celebrate the fact that the Government have made the cap a temporary one with reviews. The shadow Secretary of State, when she was engaging in what sounded on this side of the Chamber suspiciously like scraping the barrel to find things to object to, asked the question: how will we know that the time is ripe for the cap to be removed? The answer is when the challengers have actually been able to move into the market in great numbers, because the cross-subsidy in the predatory pricing model has faded away and we therefore have a proper energy supply market.

Of my two crumbs of comfort, I want to offer one directly to my hon. Friend the Member for Weston-super-Mare. We all owe him a great debt of gratitude for banging on about this for a very long time and thinking about it deeply. I assure him that the Bill, whatever anybody may have said about it, clearly allows for a cap that, far from being a freeze, will never be a freeze, as he recognises, and will also not be an absolute point tariff either—or need not be an absolute point tariff. It is entirely in Ofgem’s gift to decide how the cap varies or does not vary depending on circumstances in the external supply markets for energy.

Knowing the current personnel in Ofgem, and having talked to them about this—I am grateful to the Minister for Energy and Clean Growth for facilitating some of those discussions—I am absolutely convinced that they will in fact make this a calculated, formulaic cap that properly reflects the changes in external international circumstances. It will therefore be miles away from the lunacies, although they were politically attractive lunacies at the time, of the Labour party’s original proposal for an absolute price freeze, which, incidentally, would have crippled customers at a time when energy prices were falling.

The second point I want to make to my hon. Friends is that this is the right kind of structure.

[John Penrose]

I seek a little further reassurance from my right hon. Friend. He seems to be coming up with an elegant mechanism for redefining an absolute cap to encompass relative caps, but just relative to the wholesale market rather than relative to other tariffs. If so, that would be incredibly elegant. Does he believe that that would allow repricing within the six-month period before the Ofgem committee sat again?

[Sir Oliver Letwin]

Who knows? The point I was just about to make is that the Bill will hand the whole thing over to Ofgem. This is basically an “Ofgem—you get to decide it” Bill, so we will only know when we see what it produces. However, I would bet my bottom dollar—not that I have very many bottom dollars—that Ofgem will actually produce a formula, not a number, so the cap will vary continuously, or pretty much continuously. Ofgem is pretty sophisticated economically and it knows perfectly well what happens in the wholesale markets. I do not think it will lock itself in to an unvarying cap.

My main point is structural: the Bill will hand the issue to Ofgem. The good news is that that is not nationalising the pricing of the energy markets. It is not taking it into the hands of the Government. What my right hon. Friend the Secretary of State said is true—one of the great achievements of the last 30 or 40 years of the evolution of our utilities markets as a whole is that we have reinvented what the Victorians once had, which we lost in the early and middle part of the 20th century, which was the whole idea of the Government establishing a set of technocrats who are not politically motivated or driven by electoral dynamics, and so are not inclined to do things that are stupid in the long run but look good because they win votes in the short term. Instead, they try to get economically rational results.

Ofgem is such a case. It is not perfect—no regulator is—but it will be a hell of a lot better than politicians at setting prices over time. The Bill therefore has the right structure. It is not a Marxist takeover, a price freeze or a recipe for point tariffs. It is a recipe for allowing a regulator to set an economically rational means of preventing a combination of Ramsey pricing and predatory pricing, and as such those of us who believe in the purities of markets can perfectly well subscribe to it.

Domestic Gas and Electricity (Tariff Cap) Bill

John Penrose Excerpts

3rd reading: House of Commons & Report stage: House of Commons
Monday 30th April 2018 Commons Chamber

We hope that the Government will see the wisdom of and accept the new clause and all the amendments, but if the Minister does not set out a satisfactory explanation of why they cannot agree to new clause 1, we may have to test that principle by means of a Division. Overall we wish the Bill well, as we have shown in our positive stance towards it in our debates so far. We trust that the Government will, in taking on board our assurances about the positive nature of these amendments, produce from this House an amended Bill that will be strengthened by the full support we all give it as it moves to the other place for consideration.

[John Penrose (Weston-super-Mare) (Con)]

I rise to speak to amendments 2 to 4, which stand in my name and those of a variety of Conservative colleagues, including two members of the Business, Energy and Industrial Strategy Committee as well as former Ministers and Cabinet Ministers.

I should pause to say that I am not arguing against the Bill overall—I spoke and voted in favour of it in principle on Second Reading—and I hope that everyone involved in the campaign I have headed in this area for the past year and a half appreciates that I believe an energy price cap is much needed. I pay tribute to the 214 cross-party MPs who signed up to the idea, plus the Prime Minister and the Minister, who have all been vital in getting us to this point today.

My concern is about not the principles but the detail—the type of price cap envisaged under the Bill—because, to put it bluntly, a fair number of free market Tories are pretty concerned that we are choosing the most anti-competitive, complicated, bureaucratic and inflexible cap on offer. It is inflexible because the Bill specifies an absolute cap that will be set by an all-knowing committee of Ofgem regulators every few months. However, the international price of energy moves around every day, and it is impossible to know what the price will be in the next six minutes, let alone six months, so the cap price will be out of date in moments and will stay out of date until it is reset again months later. That means it will not protect customers in the way we all want and, because it will be officially blessed by Ofgem, it will embed and legitimise high prices. It is not just me who is worried. Which? says it is

“not certain that customers on a capped default tariff will benefit as market conditions change in future”.

The proposed cap is also complicated—hideously complicated. Why? The assiduous folk at Ofgem have already started publishing details of how they might go ahead and they are warming to their task. It would not be just a single cap, they say; it would be 42 different ones to cover gas and electricity, different meter types and different parts of the country. There would be more than 42 different caps, however, because each one may be split into several different versions depending on whether people pay by direct debit or in some other way, and each will have a fixed standing charge and a variable element—oh, and there is headroom, too. Each of those three items can be calculated in a marvellously technical and complicated variety of ways. For example, the variable element could use a basket of market tariffs, an updated competitive reference price, or a bottom-up cost assessment. Those things might be calculated using a periodical review of realised costs, or third-party data with pre-specified allowances for certain cost items, and so on and—turgidly, complicatedly—on.

[Sir Oliver Letwin]

My hon. Friend and I have had an engaging conversation about this for many months, but given all the things he reports Ofgem as planning, surely that means we will have not a single point tariff that rapidly becomes outdated, but rather a tariff that will respond—for example, to input costs?

[John Penrose]

As my right hon. Friend says, he and I have had many conversations about this over many months. I can only say to him that if his argument is that Ofgem might come up with a version of an absolute cap that is a bit less absolute and a bit closer to what I am proposing—in effect, one that caps the gap: a relative cap—I would agree with him that that is a good thing, but if that is the case, as a source of advantage for the cap, why would it not be even better to go the whole hog and have a relative cap in the first place?

[John Redwood]

Does my hon. Friend think that a relative cap is more likely to deliver a better deal for the customer than an absolute cap?

[John Penrose]

Yes, absolutely. We heard from the hon. Member for Southampton, Test (Dr Whitehead) what I thought was actually rather a good explanation about why such a cap is so wonderful. The Opposition disagree about the purpose, but the fundamental reason why we are all in the Chamber is that we agree about the injustice in the way the energy market works at the moment, which is that people can start off on one tariff and then get secretively pushed on to a much higher one. It is the clandestine mark-up that riles everybody and really upsets people. By definition, a relative cap would affect what is hacking everybody off, and it would be precisely targeted on dealing with the mischief that is the reason behind the Bill in the first place.

[Rebecca Pow (Taunton Deane) (Con)]

I want to put to my hon. Friend something that has been said by MoneySavingExpert, which is that a relative cap would simply result in firms withdrawing the cheapest deals—the shadow Minister mentioned that—and create the “worst of both worlds”. We do not want to fall into such a trap, as some consumers on expensive tariffs would still be paying more than they need to while many firms would not offer the cheap deals they currently offer.

[John Penrose]

That argument has been advanced for both a relative cap and for an absolute cap; some people argue that it applies to both. We heard earlier a rather good explanation of why the argument does not really apply, which is that it would be commercial suicide, or a commercial kamikaze effort, for anybody to try to raise their prices in the switching market, which is highly competitive, because they would very rapidly start losing customers hand over fist. I understand that argument, but I do not think it would be relevant in practice.

[Stephen Kerr]

Just to underline the delicate nature of the balance that we are talking about in terms of caps, the majority view of the Competition and Markets Authority in its report was that a standard variable tariff cap would

“run excessive risks of undermining the competitive process”.

This would be likely to result in worse outcomes for consumers in the long run by

“reducing the incentives of suppliers to compete”

and

“reducing the incentives of customers to engage”,

so a delicate balance needs to be struck.

[John Penrose]

That is absolutely bang on the money. For goodness’ sake, the Competition and Markets Authority is suggesting such a thing, and that is after all its business.

[Mark Pawsey (Rugby) (Con)]

Will my hon. Friend give way?

[John Penrose]

I will take one more intervention, but then I must make some progress.

[Mark Pawsey]

My hon. Friend is talking about people moving from a competitive rate to the default, which he describes as the standard variable tariff. Does he think that people would be less inclined to put up with the higher rate if it had an alternative name, such as an “emergency tariff”?

[John Penrose]

There is now a whole range of underlying pro-competitive reforms—I am not normally one to give Ofgem a vast amount of credit, but it really deserves some in this case—that are needed in this market. Renaming the default or standard variable tariff may not have a huge effect, but it might have a positive effect. There is a series of other things, some of which are even more important, that must happen. It is crucial—I agree with the Labour spokesman about this, as I think we all would—that we do not waste our time and that Ofgem continues to reform the market while this temporary price cap is in effect because, when the price cap comes off, we will want the market to have been sufficiently reformed that no further price caps are necessary, because it works like a normal market in which the customer is king. If we have not done that, we will have wasted our time and everybody else’s.

I was talking about the complications and the hideous complexity of Ofgem’s proposals, but if all that inflexibility and complexity has not put Members off already, they should have a look at the bureaucracy. Pretty much every free market economist will agree that the best way to discover a price is not through a committee that meets every couple of months, but with a genuinely competitive market in which supply and demand are matched from moment to moment all day, every day. Fortunately, we just happen to have one of those handy. The switching market is full of deals on which energy firms compete like mad for business. It is innovative; it has razor-sharp prices; and it takes changes in wholesale energy costs in its stride every day of every week. The customer is, in other words, genuinely king or queen.

That is, as we have just discussed, exactly what we want to see in the rest of the market, so why are we ignoring it? Why go for a far less competitive version that is inflexible, hideously complicated, bureaucratic and committee-based when we could simply tie rip-off default tariffs firmly to the switching market and go down the pub for a drink? The mechanism, as we have heard, would be simplicity itself: a maximum mark-up between each energy firm’s best competitive price and its default tariff—we would cap the gap. Unlike with the arrangements in the Bill, there would be just one decision for regulators to take: the size of the gap. Everything else would be taken care of by the link to the competitive switching market.

[James Heappey]

I am grateful to my hon. Friend—my neighbour—for giving way. Has he given any thought to what a relative cap would do for time-of-use tariffs, the arrival of which we should surely be encouraging? They rely on a big differential from free or negative pricing to the most expensive prices, which disincentivises energy use at peak times. Is he concerned as I am that what he proposes might discourage the arrival of such tariffs?

[John Penrose]

Much would depend on the size of the cap on the gap proposed by Ofgem, and much would depend on the rest of the pricing structure of the energy firm in question with regard to where it chooses to put its default tariff. Many of these things are, as my hon. Friend points out, yet to arrive. They are starting to be introduced, but they are a relatively new innovation, with small but growing penetration. He is absolutely right that we need to make sure that we do not disincentivise such tariffs. They certainly will not be to everybody’s taste, but they may be to the taste of an increasingly large number of people.

I would prefer to start from a simple cap—capping the gap—and then have to make a couple of adjustments, rather than making even more complicated something that is, as I have described, already hideously complicated. If we manage to take care of all the complexity and bureaucracy by establishing a link to the competitive switching market—hey presto!—we will have driven a stake through the heart of the rip-off tariffs. Switching supplier would still be worth while, and there would be far fewer jobs for bureaucrats, lawyers and lobbyists. The customer would be king.

My amendments would make a relative cap either possible or required, depending on which version was chosen. I do not expect or intend to press the amendments to a Division, but I want everybody to realise that there is a more competitive, more flexible, less bureaucratic, more customer-friendly and generally better alternative, and that at the moment we are not taking it.

It is not just free market Tories such as myself who think that capping the gap is the right way to go. The Labour Front-Bench team, as we have heard, have tabled an amendment that proposes something similar. They might disagree with my description of it, and they have a fancy-schmancy name for it, but, broadly speaking—as my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) pointed out earlier—the wording is very similar and the amendments would effectively do the same thing.

Labour Front Benchers and I disagree over timing, however. The effect of their proposal would be permanent, whereas ours would be temporary while we fixed the underlying anti-competitive problems in the market. There is, none the less, clear cross-party consensus on the principle, at the very least, so why does the Bill ignore this cross-party opportunity? Why are a notionally pro-competition Conservative Government choosing the less competitive, more bureaucratically inflexible and more complicated version instead? Why are we snatching defeat from the jaws of what ought to be a famous free market victory? I look forward to hearing the Minister’s answer.

[Frank Field]

I will not press my amendment to a Division either, but I am very happy to speak to it for 30 seconds. It is designed to request an undertaking from the Minister that she will ask Ofgem to look at the poorest consumers on which it has data and offer them an automatic switch to the lowest rate that suits their expenditure pattern. On that happy note, because I am sure the Minister will give way later, I shall sit down.

--- Later in debate ---

[The Minister for Energy and Clean Growth (Claire Perry)]

I thank all colleagues here this afternoon for their intelligent and sensible contributions to a debate that has run for several years. We are now within striking distance of bringing this Bill to a conclusion and sending it off in good order to the other place. I particularly thank my relatively close—geographically speaking—party colleague, my hon. Friend the Member for Weston-super-Mare (John Penrose), whose dogged and intelligent scrutiny, along with that of his colleagues, has made this a much better Bill, and I pay the same compliment to the hon. Member for Leeds West (Rachel Reeves) and her Select Committee. This shows that when we work together we can deliver good legislation. I will respond to the amendments discussed today and my hope is that in doing so no Member feels obliged to press their amendments to a vote.

New clause 1, which we discussed at length in Committee and again today, seeks to introduce an ongoing, almost perpetual, relative price cap once the absolute price cap is removed. Like the Member speaking for the Scottish National party, the hon. Member for Kilmarnock and Loudoun (Alan Brown), I am a little perplexed by this amendment, as I said in Committee. The hon. Member for Southampton, Test (Dr Whitehead) has spoken so powerfully on many occasions against a relative cap and in favour of an absolute cap, and yet this new clause suggests bringing in the opposite: a relative cap on a perpetual basis. I will talk more about the issues we have with relative caps, but this is a little counterintuitive. It would also mean—this will be anathema to many colleagues who have spoken passionately today in support of a relative cap—effectively perpetual Government intervention in the energy market. There is strong agreement across the House in favour of competitive markets delivering the best for consumers. When those markets are broken, or regulation slips out of date, it is right to improve the powers of regulators, but perpetual Government intervention, particularly in setting prices, is not the way to deliver the best outcomes. Therefore, the new clause is not necessary.

Moving on to the comments on relative caps, Ofgem said in its evidence, which others strongly supported, that a relative cap will be gamed by the largest suppliers. If we introduce this hypothesis, it will be gamed. As my hon. Friend the Member for Eddisbury (Antoinette Sandbach) also pointed out, we also heard in Select Committee evidence sessions that there was overwhelming support for an absolute cap—now and then.

[John Penrose]

rose—

[Claire Perry]

My hon. Friend wishes to intervene, and I will of course give way.

[John Penrose]

I hesitate to pray the Labour Front Benchers in aid of my argument, but the Minister has just quoted Ofgem in favour of hers, so perhaps it will make sense. Does she not agree that it would be commercial suicide for a supplier to raise its tariffs in the competitive market, to protect its position, were a relative cap to be introduced? I think the shadow Minister said earlier that it would be commercially suicidal or a kamikaze move.

[Claire Perry]

I am afraid that I have to disagree with my hon. Friend and reject that point. That is what has been happening for many years to the most vulnerable customers, who have seen price rises recently and who are not switching for a variety of reasons. We are trying to deal with that customer group today. I hope that the hon. Member for Southampton, Test will withdraw the new clause on the basis that it is not rational and not needed.

Amendment 5 proposes that a set period of five months be placed in the Bill. We debated that at length in Committee, and I believe that we are all seized of the need to bring the Bill into force in good order as quickly as possible—we do not want to wait any longer. We want the Bill to be in place by the time we rise for the summer recess, and obviously it has to go through the other place first. We want the caps to be transparent and to be applied in time for this winter, 2018, so that people can start to benefit and make savings on their energy bills immediately.

We heard from Back Benchers why they felt the five months provision would be difficult, and I will add my concern that if Ofgem were to go over such a legal limit, even by a couple of days, it could inhibit its ability legally to bring forward the cap. We must do nothing to reduce Ofgem’s ability to consult on the cap and put it in place. It is worth emphasising again—I am sure the regulators and others are listening—that we want and expect the cap to be in place by the end of the year. I do not think the proposal in amendment 5 is either legally permissible or necessary.

Amendments 2, 3 and 4 were tabled by my hon. Friend the Member for Weston-super-Mare and supported by many Members who have thought carefully about this issue. We have refined the Bill through the course of our discussions and made it into a better piece of legislation, and I am grateful for that. We have heard again today many of the arguments that we have heard during the Bill’s passage. We are talking about a theoretical position in talking about a relative cap, because the only cap we currently have is the safeguard tariff, which is an absolute cap and which appears to be working to save customers money.

Our concern is that with a relative cap, we could see suppliers lifting their skirts on their cheaper tariffs, and that there could be an inhibiting effect on some of the innovations that my hon. Friend the Member for Wells (James Heappey) mentioned, with companies charging extremely low prices for time of use tariffs. We heard overwhelming evidence during the evidence sessions chaired by the hon. Member for Leeds West, and also in the Public Bill Committee, that absolute caps were considered a much better way of bringing forward the protections that we all want. That is the view of Ofgem, the Select Committee, Citizens Advice, moneysupermarket.com and some of the new energy companies, and I am persuaded that those organisations have the interests of the customers we are trying to help at heart.

I am also concerned that if we had relative caps, there could be a lot of gaming going on and a lot less transparency. We have talked about what would happen if suppliers lifted their prices. We know that the trouble we have is with a group of customers we refer to as disengaged. They are not digitally enabled; they tend to be older, on lower incomes and more vulnerable; and they are not as susceptible or sensitive to the price elasticity that would perhaps persuade others to switch. The aim of this price cap Bill is to protect those customers, so I do not believe that it is necessary to accept those amendments.

[John Penrose]

I just want to point out that the criticism that the relative cap can result in an increase in switching rates and tariffs has equally been applied to the absolute cap. There has been criticism of both kinds of cap, not just of the relative cap.

[Claire Perry]

There has been a lot of criticism of both kinds of cap, but if we look at the one sort of cap that we have—the prepayment meter cap that is extended to vulnerable customers—we see that those customers have saved between £60 and £120 on the basis of that cap. It has actually worked to reduce their prices. I am pleased that my hon. Friend is not intending to press his amendment to a vote.

Amendment 6 seeks to ensure that we have a stated amount of the savings that might accrue. I think that is perhaps slightly mischievous, and it does not really reflect the consensual spirit that we have had throughout the passage of the Bill. I can imagine that the people coming up with these numbers were looking at the savings that we have discussed in relation to the prepayment cap, or indeed the £300 average difference between the most expensive and the cheapest tariffs in the market. However, as my right hon. Friend the Member for Wokingham (John Redwood) said, we need to calculate volume as well as price to estimate the service, and we do not yet know what cap Ofgem will set. We also do not want to constrain Ofgem’s ability to set the cap or to create targets for the big six to work towards as the maximum saving. I hope that, on the basis of that explanation, the hon. Member for Southampton, Test will be content not to press his amendment.