Energy Bill

Lord Cameron of Dillington Excerpts

Monday 28th October 2013 Lords Chamber

[Lord Roper (LD)]

The noble Lord, Lord Broers, and my noble friend Lord Deben have widened the amendment tabled by my noble friend Lord Jenkin to other, rather important issues on competition in the course of this Bill. Although it may take us a little time to get from six to 60, or even 600, this amendment is important because of the immediate impact upon independent generators when the capacity mechanism comes into operation next year.

As my noble friend Lord Jenkin points out, the Bill and the proposed rules for the capacity market would make it virtually impossible for independent generators to raise project finance and compete with the big six. My noble friends Lords Jenkin and the noble Lords, Lord Cameron of Dillington and Lord Berkeley, have talked to a number of them and they really do not see how they would do it. We have also talked to their bankers and they do not see how this would be possible for independent generators. That is why it is very important that the regulations and other provisions for the capacity market are drawn up in a way that is fair to smaller generators.

As my noble friend Lord Jenkin has said, we would obviously prefer it if the Minister were able to accept these amendments today. However, there may well be technical problems with them, so we hope that if she were not able to accept them today, she would be able to give us some indication that she will bring back something covering this ground at Third Reading.

[Lord Cameron of Dillington (CB)]

My Lords, as this is my first intervention on Report, I must declare an interest as a farmer with a renewable scheme on my land.

Most of what needs to be said in favour of these amendments concerning competition has already been said and as a co-signatory I very much support them. However, I want to underline the fundamental point involved. It has become obvious to anyone reading newspapers in recent months that the electricity industry needs a huge amount of investment. In Europe it amounts to trillions of euros, and in the UK it is hundreds of billions of pounds. This investment is needed for generation, transmission, distribution and supply. If we do not have that investment, to believe some of our journalistic forecasters, we are likely to get power cuts with all the economic and social tragedies which that might involve. This investment cannot be provided by the government. It has to be provided by the private sector; that is, you and me or, rather, our pension funds in most cases.

The other issue on which anyone reading our newspapers in recent days and weeks will have come to a conclusion is that the oligopoly of the big six is not the political flavour of the month. While being aware that the root of the problem is the rise in the price of gas—I was going to say feedstock—there is something to be said for the fact, which I read in a newspaper, that this oligopoly has some sort of stranglehold. We have a vertically integrated oligopolistic situation within our electricity industry, as the noble Lord, Lord Jenkin, has pointed out. If you wish to deal with this stranglehold, it is crucial that you stick to the golden rule of in no way deterring investment in the panoply of the electricity industry. Investment is crucial. Either freezing electricity prices or putting a windfall tax on the big six does not conform to that rule.

What would conform to that rule, which you have to do, is to increase competition, which ensures that everyone can compete. As the noble Lord, Lord Deben, has said, that could involve very small competitors at every stage and in every sector of the electricity supply chain. Competition is vital to the success of the Bill and to the entirety of electricity market reform. The Bill will be judged on its long-term effects on the security of supply and on the decarbonisation of the electricity and, above all, on how effective it is attracting competitive investment.

[Lord Berkeley (Lab)]

My Lords, I support Amendment 4 and will speak to my Amendment 5. Both concern competition. We had a good debate in Committee on Amendment 5, and there is a lot of support around the House for requiring the big six to divest themselves of their retail section and keep it completely separate. I found that to be a very good solution in many discussions on the European railway market, which is some way away, but separation seems to bring growth, competition and efficiencies. That is what we have in the UK, whereas looking across the Channel to France, the traffic in the rail freight and passenger sector is falling badly and the quality of the network is pretty bad, too.

I believe in fair competition and transparency in all the dealings. I liked the idea of the noble Lord, Lord Deben, of local generation. I remember visiting Denmark with a Select Committee about 10 years ago, to see how each village has its own little grouping of windmills. Of course, the villagers got a reduction in their electricity price and felt a sense of ownership; that is terribly important. They exported the surplus to the grid and imported it when there was no wind.

I am very pleased that the Prime Minister has announced the review of the regulation. According to the Daily Telegraph, this will cover,

“prices, profits, barriers to new entrants and how easy it is for customers to get the best deal”.

I hope that they will add “fairness and transparency”. It is an excellent review, but my worry is that the big six welcomed it with such open arms. Is something going on which we do not know about? Ofgem probably needs a strong review. It has recently come up with some interesting figures addressing the price rises which we have all seen in the press, showing that the wholesale costs contribute only about an additional £10 to household charges. This means that that element of the average annual bill has gone up from £600 to £610. The regulator therefore estimates that the companies’ average net profit margin has more than doubled. The regulator is therefore doing something right; that is of course why the big six do not like it.

I do not think that competition is working for the smaller generators, as many noble Lords have said. A DECC analysis shows that 98% of the domestic supply market is dominated by the utilities; that is not quite the same figure as that given by the noble Lord, Lord Jenkin, but it is in the 90s which is, at any rate, much too high for any kind of competitive situation. The fact that there are eight small suppliers active in the market is a bit paltry if they each have only 0.25% of the market share.

I have had several meetings with people from the big six. Their response to these arguments is quite interesting. They say that there are many synergies upstream and downstream, with vertical integration. I wonder whether this gives them an unfair advantage in the market, and whether the consumer sees the benefits. They then say that it enables them to engage in wider dialogue. Well, of course, it does; but they have three representatives on each of the Ofgem working groups while the small independents are lucky to be able to field one. Yes, it is engaging a wider dialogue—in aid of their commercial advantage. As several noble Lords have said, the managing of uncertainty and hedging is one of the big problems.

Do the Government want the independents there, or are they happy to see what you would almost call a “cartel” of six as a fully functioning market? How would that market work? I am pleased that the Labour Party and Caroline Flint, MP—our shadow Secretary of State—are now supporting this. I know that the party has changed its view on this over the years but, if we have seen the light, that is very good. Caroline Flint is saying that separating the energy companies into the different parts of the business is a good thing, requiring energy companies to trade their energy in an open market by selling into a pool, with transparency. That is also fundamental. Then there is the introduction of a simple tariff structure so that people can compare prices; back to transparency again.

I expect the Government to welcome these two amendments since they both put the issues of competition into the Bill. They are necessary to ensure that competition is transparent and fair, and the lack of that, I am sure, contributes to rising prices.

Several noble Lords have mentioned the independence of the regulator. There is always a debate about to what degree Ministers should instruct regulators, to what degree regulators should be seen to be independent and to what degree they should act totally independently; we could have a big debate about regulatory capture, which I do not intend to have tonight. It is important for Ministers to be able to give this kind of guidance to the regulators in the next few years. We have the big six involved in these working parties while controlling 98% of the market. Having a duty to promote competition in the Bill seems to be a necessary protection for the smaller independent operators.

I would like to see the split of retail from generation. If the Government want real, transparent and open competition, they will either accept these amendments or possibly come up with their own similar ones at Third Reading.