Domestic Gas and Electricity (Tariff Cap) Bill

Debate between John Penrose and Caroline Flint

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

[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.

Energy Prices

Debate between John Penrose and Caroline Flint

Thursday 16th March 2017 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

It is a pleasure to follow my hon. Friend the Member for Brent Central (Dawn Butler). I congratulate her on the work she has done serving communities and families that are over-reliant on prepayment meters, and it is a welcome change that they will get some help in the months ahead. I would also say that I have a number of people living in the private rented sector in my constituency—I am sure the proportion is far higher in her constituency. It is a big problem for tenants when landlords do not do enough to make sure that the homes they rent out—they often get housing benefit from the state for doing that—are not decent homes with proper energy-efficiency measures. I know that my hon. Friend will carry on working on behalf of her constituents and people elsewhere.

I would like to thank the co-sponsors of the debate, the hon. Member for Weston-super-Mare (John Penrose) and the hon. Member for North Ayrshire and Arran (Patricia Gibson), who helped to secure the support of 50 other hon. and right hon. Members to obtain this important debate.

My thanks also go to the Backbench Business Committee—Parliament’s own “Dragons’ Den”—for agreeing to our application. It was only five minutes before we went in that I realised the meeting was going to be broadcast, so I had to get my act together quickly, but we were clearly successful, and we secured this debate for today.

It is well known to family and friends that I love the movies. [Hon. Members: “Hear, hear!”] Thank you. It is still on my bucket list to be an extra in one—I just put that out there. One of my favourite comedies is “Groundhog Day”, in which the character played by Bill Murray has to replay a single day until he sees the error of his ways. For me, today’s debate feels like “Groundhog Day” because we are reliving the same arguments about our uncompetitive energy market, companies’ poor customer service and ripping-off of customers on standard variable tariffs—points I have made for the past six years. The Ministers keep changing, but I am still here, and I hope that the Minister today, like Bill Murray in the film, will break this spell, because, not for the first time, the headlines have, as hon. Members have mentioned, been full of the eye-watering price increases made recently by four of the big six energy companies—price hikes that are completely unjustified.

However, in many respects, that is not the principal reason for this debate. We sought the debate to address the fact that the energy market is not working; it is failing Britain’s consumers in almost every respect. It does not promote effective competition. The regional giants created after privatisation remain the dominant players in their home regions 30 years later. We talk about the big six, but for many regions, it is the big one.

The energy market also does not promote transparency. In the period following the Thatcher privatisation of British Gas in 1986 and of the regional electricity boards in 1989, there was a succession of mergers and takeovers. That led to companies being, at one and the same time, energy retailers and power generators. Today, the generation and retail arms of these companies remain within pretty much the same corporate structures. One consequence of that is a complete lack of transparency over the price at which these companies sell energy to themselves before retailing to the public. The reforms Labour proposed in 2015 would have resolved that.

The energy market does not promote consumer confidence. The issue is not whether, superficially, one company offers a fixed-price deal for £150 less than another; it is why 88% of consumers still refuse to switch from one supplier to another. The evidence from the CMA survey of 7,000 consumers was clear: 56% had never switched supplier, or did not recall ever switching, and 72% had never switched tariff with an existing supplier. This market is suffering a long-term crisis of consumer confidence. While a minority of customers shop around, the vast majority seem to want little or nothing to do with the energy companies.

That is not a sign of contentment—of millions of satisfied customers—but quite the opposite. The CMA found that the number of recorded customer complaints rose sixfold from 2008 to 2014. Ofgem’s own research between 2014 and 2016, which was published in September 2016, found that the proportion of domestic complainants who were very dissatisfied with how their complaint was handled increased significantly over that two-year period. The most recent figures showed that 67% of npower customers and 64% of Scottish Power customers were very dissatisfied. Even the medium-sized and smaller companies were not immune—we cannot let them off the hook. First Utility performed worst, with 63% of customers very dissatisfied. The figure for Utility Warehouse was 53%, and for OVO, it was 49%.

The Government preside over a domestic energy market that is not competitive, lacks transparency and has a hell of a lot of dissatisfied consumers. Those factors alone should ring alarm bells in Whitehall and Westminster, but it is the outcome for consumers that ensures that the Government must act. The secrecy, the dominance by a few uncompetitive companies, and the disillusioned, untrusting customer base, which is largely disengaged, all lead to one certain outcome: a consistent failure of the market to offer fair prices. That should be no surprise to any of us. We have regional monopolies—secret and inefficient—low customer engagement and unresponsive pricing. That is why this debate is so important.

I said the UK energy market does not offer fair prices, so let me illustrate that central criticism. First, as my hon. Friend the Member for Hartlepool (Mr Wright) said, the big six energy giants account for 85% of the market, and they treat their long-standing loyal customers worst, as the hon. Member for Weston-super-Mare pointed out. Those customers, without exception, will pay for energy on the most expensive default tariff. The only customers treated worse are those forced to live in a home that has a prepayment meter, either because the landlord requires it or because they have a poor credit or payment history. In 20 years, this group has grown to account for 16% of all households. Even the CMA could not ignore the fact that this group pays a premium of around £80 a year, as well as paying in advance for its energy. I therefore welcome, as I said, the decision to provide some price protection by capping the amount an energy company can charge these customers, but that measure does nothing for the remaining majority of customers who are also being overcharged year after year.

What about the overcharging of the majority of mainstream consumers? Even the CMA could not fully explain this overcharging. Its best estimate was that between 2012 and 2015 the average amount overcharged was some £1.5 billion per year, reaching almost £2 billion per year by 2015. The CMA also found that the revenue from standard variable tariff customers was 11% higher for electricity and 15% higher for gas compared with the average revenue for other customers—and this before any of the current price hikes came into effect. The CMA concluded that in any one year the “detriment”, as it describes it—the amount that is overcharged—was made up of about £600 million a year in excess profits, and the remainder, about £850 million, was down to “inefficiencies”, whatever they may be. This points to bad management by some very highly paid individuals.

[John Penrose]

The right hon. Lady is making a very compelling case, as she did with me in the dragons’ den pitch for this debate. She is absolutely right about the CMA’s figures showing such horrendous levels of customer detriment. Not only that, but the gap between the standard variable price that is being charged and the wholesale price has been getting wider over the past four years, so the situation is bad and getting worse as time goes by.

[Caroline Flint]

Exactly. We have the historical evidence that month by month people are still paying far too much for their energy bills.

It is absolutely astonishing that this is happening in what is meant to be a competitive market. The overcharging and the excessive profit margin made from standard variable tariff customers clearly provides no encouragement to move those customers on to a better deal. I believe that this is a bankrupt business model. If we are all admitting—even the energy companies have had to face up to this—that people are paying over the odds, then the companies have a business model based on that. If all these customers were miraculously to move to a lower tariff tomorrow, where would the companies be left? The inertia is compounded by a management approach that does not seem to want any form of effective change.

Unfortunately, the more the Government have publicly urged consumers to switch to save, the more the companies are absolved of any responsibility to move customers on to a better deal. A sticky, passive, unengaged customer base appears to suit some of these firms down to the ground. When, back in 2012, EDF automatically moved vulnerable elderly customers on to its cheapest tariff, sadly other suppliers did not follow up with this better practice.

The CMA’s final report concluded that to eliminate overcharging, prices would have to fall across the board by an average of 3% per year between now and 2020. It hoped that its measures to promote switching would create more competition in the market and have a downward effect on prices, but it was reluctant to say exactly how successful it expected that to be. The problem that the CMA faces is that the UK has an energy market with unhappy consumers, a dysfunctional pricing mechanism, and companies that are, I am afraid, largely immune to competitive pressures.

Ofgem has reported that some 3.3 million households switched supplier from January to December 2016. This is apparently the highest level of switching for six years, but it equates to less than 12% of households. I worry that we have a two-tier energy market: an active, informed class of consumer who is energy-conscious, internet-savvy, shopping around and managing their accounts online, and a far bigger, less informed, less engaged, less internet-savvy, discontented majority.

Energy Prices and Profits

Debate between John Penrose and Caroline Flint

Wednesday 4th September 2013 Commons Chamber

[Caroline Flint]

I think that the difficult thing here is for the country to understand why the Secretary of State has set his face against opening up the market and making it more transparent. This is not about companies not making a profit; it is about creating more competition. Every time we discuss the price of energy, we will have various voices, including the Government’s, defending how the companies operate. I want to create a more open and transparent market, so that we can all judge what is a fair price and, alongside that, what are fair profits. It is not fair if people cannot get to the bottom of how energy is bought and sold. It cannot be right for the market to be rigged in such a way that the vast majority of energy is sold within a company and then sold on to us. Other countries do it differently, and I think that we can, too.

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

Does the shadow Secretary of State not accept that even if her proposals were to introduce extra transparency and potentially yield some of the benefits that she is claiming, those benefits would be unlikely to be passed on to consumers unless we also reform switching and the information available to consumers, so that more are willing to vote with their feet by moving their business elsewhere? It is not just the over-75s who are less likely to switch; the entire market is insufficiently informed or able to switch conveniently to have that kind of consumer pressure on producers.

[Caroline Flint]

I agree with the hon. Gentleman. We could look at lots of different policies to improve customer choice and the ability to move more flexibly between suppliers. My point is that, whatever we do to the retail side of the consumer offer, we must deal with how the market works. Even the best tariff that we have at the moment might still not be a good one, because of how the wholesale market works. When I met companies that are part of Nord Pool, they did not voice the concerns that the Secretary of State mentioned today about hampering investment. Actually, I am pleased to share with the House the fact that over the past 18 months I have seen some movement in a number of the energy companies in the UK as well. I think that they are beginning to realise that some openness and transparency in the market would serve them and the British public well.