Energy Bill [HL]

Lord Davies of Oldham Excerpts

Monday 31st January 2011 Grand Committee

[Lord Jenkin of Roding]

I was a member of the Treasury team when VAT was first introduced in 1972. It was one of the principles of the then Government that it should be as simple a tax as possible. There were of course some major exclusions from VAT, for instance all food and children’s clothes, but I well remember my noble friend Lord Higgins, who was dealing with the Finance Bill, saying that it was a simple uniform tax to be extended across the range of products and services, apart from those that were specifically excluded.

Since then Governments, no doubt of all persuasions, have found themselves led down a path of adding more complications to VAT. I have sympathy with what my noble friend has suggested, because these are clearly energy-saving and carbon-saving measures, which one would wish to encourage. However, to use VAT and the tax system to do that seems to me to go against the principle of keeping VAT as simple a tax as possible.

VAT is now substantially higher than it was when it was first introduced, for reasons that we can all understand, although that is not within the competence of the Committee. Wisely, my noble friend’s amendment places this firmly in the hands of the Chancellor of the Exchequer, although it could not be with anybody else, as my right honourable friend the Chancellor is the Minister in charge of the tax system. However, I sound a note of caution on beginning to extend lower rates of VAT to other services and products, notwithstanding that one might have some sympathy with what is being sought. Having said that, I should be interested to hear what the Minister has to say in reply.

[Lord Davies of Oldham]

My Lords, the noble Lord, Lord Jenkin, is right to remind us that exempting certain goods from the normal rate of VAT is a matter for the Treasury. We are all too well aware that the Treasury looks at these issues with a sharp eye and intensive scrutiny at any time, but in this age of austerity that position is likely to be intensified. As the noble Lord indicated, the noble Baroness, Lady Maddock, is seeking to build on the 5 per cent reduced rate of VAT that already applies to a number of installations that relate to energy conservation, both to encourage householders to install energy-saving facilities and as a clear earnest of the Government’s intent that these issues are significant enough for us to look at them in this regard, albeit not quite as we do food and children’s clothes, which attract no VAT. Nevertheless, the 5 per cent rate relates to a clear priority area; it is an exclusive area. In her amendment, the noble Baroness wants to extend that area.

I am not in the slightest doubt about the merits of doing that and I think that, in the framework of the Bill, we should indicate that we think that this will give substance to the Bill’s principles. However, like the noble Lord, Lord Jenkin, I acknowledge—no doubt the Minister will also indicate this to the Committee—that it is difficult to write Budgets in the framework of energy legislation when that is the preserve of the Chancellor of the Exchequer and the Treasury. I would not be at all surprised if we had a somewhat guarded response to the amendment. However, we already have provision of the reduced rate in this area and the amendment would not add a great deal, although the Treasury might argue that the cost would be significant. Nevertheless, the amendment fits in with the pattern of reduced rates of VAT in this area and I hope that the Minister will indicate that, at the very least, the Government have an open mind on the issue.

[Baroness Northover]

My Lords, the purpose of Amendment 32 is a perfectly understandable aim. However, we have been advised that this proposal would not fall within the scope of the Energy Bill, since taxation can only be amended in a Finance Bill. Therefore, as my noble friend Lady Maddock anticipated, I can confirm that taxes are indeed a matter for the Treasury and that the Chancellor keeps all taxes under review and announces any changes as part of the Budget process. We understand the thrust of what she is arguing, but I hope that on the basis of what I have said, my noble friends will feel able to withdraw the amendment.

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[Lord Whitty]

My Lords, the noble Lord, Lord Teverson, is to be congratulated: he has really put his finger on what is utterly wrong with the whole structure of tariffs in the energy market. It is an object of public policy to reduce fuel poverty, and it is an object of public policy to reduce consumption of energy, yet we have a structure of hugely complicated tariffs for households—2,500 tariffs, or whatever it is—the net result of which is that the poor pay more, and that the more you use the less you pay. That is an absurdity arising from a combination of an oligopolistic market, a history of the standing charge, and a sort-of ideology behind the Ofgem intervention about cost reflectivity. If you were really trying to achieve the outcomes that successive Governments have declared, you would restructure and regulate the market in the direction proposed by the noble Lord, Lord Teverson.

Obviously, there are complications. There will be winners and losers. I disagree with the climate change committee and, to some extent, with my noble friend Lord O’Neill—the bulk of the fuel poor are fuel poor because of the price that they pay for electricity, not because they have to use more of it, even though it is true that a programme of improving the energy efficiency of buildings would ideally predate any change in the tariff structure. A sub-group of the fuel poor have to spend to use an enormous amount of energy to meet minimum comfort levels, but the majority are hit because of the prices that they have to pay within the properties that they occupy.

There would have to be some sophistication of the proposition made by the noble Lord, Lord Teverson. The crude definition is a rising block tariff, but it is not necessarily the only way in which to act. The Government would be well advised to ask Ofgem, the energy companies and everybody else in the field to look at the whole concept. Until we effectively reverse the structure of tariffs, we will not achieve those two objectives and—via the objective of using less energy—the energy-security objective of energy policy. The noble Lord, Lord Teverson, has a big idea here. I suspect that the noble Earl is correct that the Minister will not leap overboard and grab this amendment, but we need to think radically here and ensure a proper analysis of how the restructuring could be done effectively with minimum collateral damage.

[Lord Davies of Oldham]

My Lords, I am going to offer a word of solace to the Minister: I recommend that he suggests that the noble Lord withdraws his amendment, not that the Government should accept it. I doubt whether the Government will accept it, not least because although this has been an interesting and informed debate, the cross-currents have been very sharp and very obvious. In seeking the objectives that we all seek, the question of strategy is difficult. I doubt whether this Bill can stand the strain of carrying an amendment which indicates that the whole of the tariff position should be restructured as far as the electricity companies are concerned, particularly given that we are short of information.

First of all, the companies are short of information about which households ought to have preferential treatment. I very much enjoyed the thoughtful and considered speech of the noble Earl, Lord Cathcart. He took us with him in terms of the objectives, but council tax will not do as a measure of the relative strength or weakness of household economies. We are in the historic position—as the noble Lord, Lord Oxburgh, identified—that this initial tariff is the old standing charge written into a new pricing framework. Now there are elements of a standing charge which companies have to meet.

However, our consideration with this Bill is, how do we make the Green Deal effective? I listened very carefully to my noble friend Lord O’Neill, who indicated the difficulties of both ends of the spectrum in this argument. In terms of making the Green Deal effective, it would complicate matters enormously if we were also saying that in a short period of time, we would be changing the nature of the pricing policy. There is enough of a problem with pricing anyway. We all know that we have a terrifying situation at the moment with world energy prices and the issues faced by consumers. None of us knows what lies ahead, but it is unlikely that energy will become significantly cheaper in the foreseeable future. Therefore households treat energy bills with great seriousness.

Can this be solved along the lines of this amendment? In due course, I think it would probably need to be. We have to get away from the issue of why the pricing policy is as it is. The Bill has to deliver the drive towards the Green Deal. The priority has to be to emphasise to households that they must pursue strategies to reduce the consumption of electricity. It is consumption that we have got to reduce or, more accurately in many cases, we have got to reduce waste, given that our houses are so ill-equipped for the circumstances.

We have to deliver the Bill’s objectives before we move, and expect the industry to move, to that dimension identified by the amendment of the noble Lord, Lord Teverson. This has been a very useful debate, but I fear that if the concept in that amendment was put into the Bill, we would complicate matters enormously in terms of the impact on households. We would therefore fail with the main strategy to which we are all committed under the Bill. I hope the Minister will take a similar view.

[Earl Cathcart]

The noble Lord, Lord O’Neill, said that there were inconsistencies in my argument. What I was doing was reporting from the letter that my noble friend had sent to me, where there may have been inconsistencies. I said in my remarks that putting rising block tariffs in this Bill would be like putting the cart before the horse. I agree with the noble Lord, Lord Davies; I am not expecting to have an amendment to get rising block tariffs into the Bill. I am asking the Minister to assure us that this will be looked at, so that the Green Deal can take effect first, and then the whole issue will be considered after the Bill is done and dusted.

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[Baroness Noakes]

My Lords, we are still dealing with Clause 70, which deals with energy performance certificates. My Amendments 33B and 33C do not concern the substance of the regulations that will be produced but the parliamentary procedure to be applied to them. At present, by virtue of Clause 70(6), only the negative procedure applies to any regulations made under Clause 70. That includes regulations made under subsection (2)(e), which allows sanctions for non-compliance. Here we return to the eighth report of the 2010-11 Session by the Delegated Powers and Regulatory Reform Committee, which pointed out that where sanctions could include financial penalties, the Bill should provide—as a minimum—for the affirmative procedure. That is what my amendments would provide. The committee went on to say that the Bill should also provide for a maximum, which my amendment does not provide. I hope the Minister will be able to satisfy me on how the Government intend to respond to the report of the Delegated Powers and Regulatory Reform Committee. I beg to move.

[Lord Davies of Oldham]

My Lords, it will not surprise the Minister to hear that I agree entirely with the case made by the noble Baroness, Lady Noakes. The sanctions are a different and important dimension, which is why the Merits Committee referred to the issue. The Minister will know only too well that regard for the Merits Committee is such that, when it recommends the affirmative procedure rather than the existing negative procedure, Ministers normally agree, as I hope the noble Baroness will.

[Baroness Northover]

My Lords, the Bill does not intend to create any new criminal offences or impose financial penalties. However, we hear what the noble Baroness, Lady Noakes, says and we are indeed happy to look at this again on Report.

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Tabled by

[Lord Davies of Oldham]

34ZB: Clause 75, page 55, line 29, at end insert—
“( ) the impact of supply on consumer prices”

[Lord Davies of Oldham]

I think that the noble Lord, Lord Jenkin, if he is not careful, is going to have to rise again and make exactly the same speech, although he made it in such a convincing fashion that he convinced me. It will be seen by the Committee that we were interested in making sure that these issues were very much to the fore. Following the intervention of the noble Lord, Lord Jenkin, we got the assurance from the Minister that the consultation that is going on includes these issues. That is all that I have to say.

[The Deputy Chairman of Committees]

Does the noble Lord wish to move his amendment?

[Lord Davies of Oldham]

Probably not, my Lords.

[The Deputy Chairman of Committees]

I think that we will regard that as not moved.

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[Lord Oxburgh]

My Lords, I briefly add my support to this amendment. The noble Lord, Lord O’Neill, is right that our dependence on gas will undoubtedly increase over the coming decades; as renewables and other sources of low-carbon energy come in, gas will be very important. It is equally true that the amount of storage that we could get away with when we had the North Sea producing at full rate could be relatively small, but it is also clear that the storage that we have today is inadequate. I will not go into the details, but something like 10 to 20 days’ supply is what we should be thinking of today. This will not happen without regulation of some kind. The supply companies have no incentive to do it, and what both industry and the consumer need is gas, not compensation.

[Lord Davies of Oldham]

My Lords, all that needs to be said about this amendment has been said by informed Members of the Committee. I congratulate the noble Lord, Lord Jenkin, on his amendment, which was supported so strongly by my noble friend Lord O’Neill, who also knows energy issues so well. It reinforces the case.

I am always worried when this issue of days crops up. The noble Lord, Lord Jenkin, indicated that France and Germany are different from the United Kingdom. They have been massively different historically because we have had our own indigenous resources. Our needs for storage are therefore very different from the needs of those and other countries in Europe. When I was charged with responding on energy matters for the previous Government, I always used to shudder when the “Today” programme would say, “The French have 90 days’ security of supply and we have four”. One felt the shudder go round the nation because of a colossal risk that we were all taking with energy. That is not so, and we must not spread alarm, but we must make provision for the future in a significantly changing situation, and we need to adjust to it. As the noble Lords, Lord Jenkin and Lord O’Neill, indicated, we are talking about a significant increase over present storage capacity. However, we are different from those other countries.

There were one or two occasions in the past when the United Kingdom’s position at the end of that supply line cost us and we paid higher prices for gas in some circumstances. One remembers that enormous row with the Germans, who had to go to the European Community over the extent to which German companies seemed rather better at availing themselves of the available gas from Russia than we were. So this is an immensely serious issue, and there is no doubt that storage is the key issue. We have a range of suppliers, but a range of suppliers is no good if we do not have the storage capacity to deal with potential interruptions. There will always be limited supplies as far as gas is concerned, and it is obviously the case that we have issues regarding our own supplies.

I hope the Minister will accept the crucial point made by the noble Lord, Lord Jenkin, in his amendment—that this is in addition to what is in place at the moment. It is an empowerment that we might need. We might not need it, but if we do not, then it will not be utilised. However, it would be remiss of us if we did not guarantee that this power was in this Energy Bill. I therefore hope the Minister, who I know has to wrestle with all sorts of difficulties in responding to even the most constructive of amendments, will appreciate that the Committee expects a positive response.

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[Lord Jenkin of Roding]

My Lords, I am conscious that we are nearing the usual time for the Committee to adjourn so I will try to be brief. I just make a point by way of introduction. Nobody reading this amendment could have a clue what it was about. The reason for that is that it is a striking example of the Bill adopting the process of legislation by reference to earlier Bills. I am sorry my noble friend Lord Marland is not here. I have raised this matter with the Law Commission because the gas and electricity Acts are now virtually indecipherable; it is impossible to find one’s way around them. It is high time that there was a consolidation. Having said that, I will move on.

The real problem that the amendment addresses is that one of the provisions of the Energy Act 2004 that is being applied to this Bill is Section 157. Section 157(2) established three grounds on which an energy supply company can be put into administration. One is that the company is unable to pay its debts. Another is that it would be just and equitable, under Section 124A of the Insolvency Act, to wind up the company in the public interest—for instance to stop fraud or criminal activity. The third ground—this is what the amendment is about—is that the court must be satisfied that the company is likely to be unable to pay its debts. The 2004 Act applied to network companies; this Bill would apply it to supply companies. My amendment would delete that third ground—of a company being likely to be unable to pay its debts—for administration as it would apply to supply companies.

To put it in layman’s terms, this means that the petitioner for a special administration order must be able to convince the court that, while the company in question is currently quite solvent, it is at risk of becoming insolvent, perhaps because the scale of liabilities that it faces looks excessive in relation to the foreseeable value of its assets. How far ahead? It is a very uncertain test. The reason for the third test was that it enabled a company’s directors, who after all should have the best view of the likely future circumstances, to apply for insolvency administration. That cannot possibly apply here because the only people who can apply for administration under this Bill are the Minister or Ofgem. The directors cannot do so.

There is another reason why the test should not apply here. Those who followed closely the tangled affairs of Railtrack in 2001 can recognise that it is open to political abuse. I do not propose to go into the long and tangled story, which was reported the other day in the Times, but it was the very looseness of test, which was in reality just a call by an accountant, that enabled the Government of the day to put Railtrack into special administration, even though the company was at the time solvent. It was only on the basis of cash flow projections over a lengthy future period that the Government could proceed.

A test that requires that kind of assessment to be made is quite different from the other two tests. It is inherently inappropriate, particularly here where we are dealing with energy supply companies which are operating in volatile, competitive markets. It is made doubly inappropriate by the fact that the tests can be abused for political purposes.

My amendment would simply remove that test altogether as it would apply to energy suppliers. My noble friend may have better ways of doing this, but I do not think that that test is appropriate in such a case as we have here, where only Ofgem or the Secretary of State—not the directors of a company—are able to use it and where it would be inherently very difficult to apply. I beg to move.

[Lord Davies of Oldham]

My Lords, like the noble Lord, Lord Jenkin, I served on the Committee that produced the 2004 Act. It went on at least twice as long as we are destined to do. The noble Lord indicated that he has found a slight impediment in that Act. All I can say is that I did not see it at the time and I do not understand it now, so good luck to the Minister.

[Baroness Northover]

My Lords, I must say that I am incredibly impressed at the thoroughness with which my noble friend Lord Jenkin has read this Bill and that I hope that he very much liked Clause 78, which indeed consolidated and hopefully improved existing provisions.