Domestic Gas and Electricity (Tariff Cap) Bill

Lord Grantchester Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 11th June 2018 Grand Committee

Moved by

[Lord Grantchester]

1: Clause 1, page 1, line 3, leave out from beginning to “, the” and insert “By 28 October 2018 or five months after this Act is passed (whichever is the sooner),”

[Lord Grantchester (Lab)]

Good afternoon and welcome to Committee stage. Amendment 1 would ensure that the cap is introduced as soon as possible and proposes that, from the passing of the Bill, Ofgem should seek to bring in its provisions within five months. We all realise the importance that Ofgem attaches to the time it needs to get going with the provisions and the modifications to the licence conditions that need to be in place for this to happen.

The amendment would make sure that there is no drift in that process. It is very important for various reasons. First, fuel poverty is of great importance to an awful lot of people who struggle with their energy bills. The UK has the second-worst rate of excess winter deaths in Europe. Two-fifths of those aged over 65 surveyed by comparethemarket.com said that they would ration their energy use over the winter because of increasing costs.

The other aspect of which we must be cognisant is the change in energy use as British Summer Time comes to an end. First Utility’s analysis of energy usage data around daylight saving from the last three years revealed an average 18.7% rise in electricity use as we move from British Summer Time into Greenwich Mean Time. Cold weather payments are very effective for each seven-day period of very cold weather between 1 November and 31 March. We therefore place great emphasis on Ofgem maintaining the process and having all the necessary conditions in place for the Act to commence. I beg to move.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

My Lords, I hope we shall make rapid progress on the Bill. I thank the noble Lord, Lord Grantchester, for moving his amendment so quickly. I shall just point out that it refers to,

“28 October 2018 or five months after this Act is passed (whichever is the sooner)”.

As it is already June and Royal Assent is unlikely to be before July, whatever happens, the amendment could mean only 28 October because five months from Royal Assent would obviously be after that date. However, I share the noble Lord’s desire to see the cap in place as soon as possible. Certainly, we would like to see it in place before the end of the year so that millions of families have protection for the worst of the winter.

The noble Lord referred to the fact that the nights start drawing in on 28 October. Actually, they start drawing in from the middle of this month, in a couple of weeks’ time, which is rather depressing. As he suggested, that means bills start climbing in those months. That is why we are pressing on with the legislation and I am grateful for the co-operation of all Members in getting this on the statute book as quickly as possible. We are aiming, subject to the will of Parliament, for the Bill to be passed before the Summer Recess.

The Bill already requires Ofgem to put the cap in place as soon as is practicable. Ofgem’s chief executive, Dermot Nolan, has committed to imposing the cap in the minimum timeframe that it can manage without risking the integrity of the process of consultation, notification and modification of supplier licences. Mr Nolan said as much in his evidence to the BEIS Select Committee.

Good progress has already been made. Ofgem has published a number of working papers setting out its emerging thinking. This culminated in a consultation on the design of the cap, which was published recently. The consultation sets out a clear timetable for implementation of the cap by December 2018. Ofgem will be ready, after the Bill is passed, to undertake the relevant statutory consultations and make the licence modifications that the Bill requires.

We appreciate the desire to hold Ofgem to a date by which the cap will have to be in place. However, the amendment potentially risks the integrity of the cap if it means that, to meet that date, Ofgem may have to radically speed up its design and consultation processes. Doing that would hugely increase the risk of a successful legal challenge—something that we will discuss later on—and that is likely to delay the implementation of the cap.

As I said, I agree with the noble Lord that the aim must be to get the price cap in place as early as possible before the cold weather arrives. However, there is nothing to be gained by making this a statutory deadline and it potentially creates new risks for the implementation of the cap. I hope that with that explanation the noble Lord will feel able to withdraw his amendment.

[Lord Grantchester]

I thank the Minister for his explanation of the timing behind the Bill. We certainly agree that the schedule is a very tight timetable for everything—all the consultations—to take place. However, we feel that the Bill has been very well flagged up to all the companies concerned and to Ofgem. I am sure it is making progress even now on what needs to be done to get the Bill enacted as soon as possible. I agree that, looking at the scheduling of the amendment with where we are now, 28 October would be the default. Nevertheless, we are keen that we keep a tight look, as we go through the Bill and when we come back for Report, at all the progress that has been made. With that in mind, I beg leave to withdrawn the amendment.

Amendment 1 withdrawn.

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Moved by

[Lord Grantchester]

8: Clause 2, page 2, line 32, leave out paragraph (e)

[Lord Grantchester]

My Lords, in moving Amendment 8, I shall speak also to Amendments 10 and 11.

Clause 2 on tariff cap conditions lays out a number of criteria or necessary provisions the cap conditions need to satisfy. For example, Clause 2(1)(b) specifies that the conditions,

“must set out how the cap is to be calculated”,

and Clause 2(1)(c) specifies that they,

“may make provision specifying how a standard variable or default rate is to be identified”.

While we recognise that tariff cap conditions confer functions on Ofgem to undertake, nevertheless the amendment probes whether Ofgem could be given too wide a power under this clause to undertake further activity. Are there any functions the Minister may be able to foresee that may be necessary and could be enabled by this catch-all provision? If there are further functions that Ofgem may wish to initiate, can he confirm that these would need to follow the procedures already set out in the Bill?

Amendments 10 and 11 are also probing amendments. While we recognise that there must be a level playing field in the electricity market, there are some companies, certainly recognised green supply companies, that only provide alternative energy and often have only one tariff. The Bill is targeted at the SVT or default tariffs of the majority of companies, such as the big six, that have an array of tariffs from which a wide variety of prices can result. Clause 3 specifically relates to exemptions from the cap and the amendment allows green companies, rather than their tariffs, to be exempt. It could be interpreted that green suppliers may be unintentionally penalised, as they could incur additional material costs, such as contracting generators, policy work and research and development, that cannot be directly attributable to a single tariff. Has any consideration been given to a company-level exemption to ensure the survival and continuation of additional green energy projects and investments? Could tariff conditions make different conditions for these suppliers and exempt a supply from the cap’s application? I beg to move.

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[Lord Grantchester]

I thank the Minister for his explanation of these essentially technical clauses. I recognise that we must be careful that companies do not game the market. Nevertheless, we were probing the relationship with the exemptions in Clause 3 and whether there was some way in which we could be helpful to the alternative energy market for the necessary changes that need to be brought about for power supplies, which have meant that these have had to be grant-aided when brought in to be able to be competitive in the marketplace. I understand the thoughts behind the Minister’s reply. At this stage, I beg leave to withdraw the amendment.

Amendment 8 withdrawn.

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[Baroness Featherstone]

This amendment is about context and the prevention of any repetition of a need for a cap. It is again a probing amendment to get the Government to talk about advancing their thinking on how not to allow a broken energy market to arise again. A cap should never be necessary. It is not a good answer but an answer. Everyone agrees that competition and a properly working market should be the effective way to do this. This amendment suggests that a review needs to be carried out to understand the circumstances that necessitated the introduction of the cap. Could the circumstances that heralded that necessity have been avoided had action been taken earlier? Were there warning signs? I would say that there were. With more consumers switching and more competition, I hope we will not be in that situation again, but the big six still have around 80% of the market. Was that a contributing factor? Of course it was. How is it that prices became so high? What measures might be introduced at an earlier and more expedient point to prevent a recurrence? What are the Government going to do to monitor what companies say to customers?

I raised another issue at Second Reading. Recently, some of the large energy suppliers raised their prices. I questioned the rise and the answer I got was that wholesale energy costs were rising and therefore prices had to rise. Shortly after that, E.ON’s profits rose by 41%, which was so far beyond any rise in the cost of wholesale energy that it made one wonder whether there really was cause and effect and whether rising energy costs were the sole arbiter of the rise in price. That is something the Government need to look into. If we do not examine, review and contextualise what brought us to having to introduce a cap to protect people on standard variable and default tariffs, how can we be sure it will not happen again? I look forward to the Minister’s answer about what the Government will put in place to ensure that that never happens again.

[Lord Grantchester]

I shall speak to Amendments 21 and 24, which are in my name. Under Clause 4, Ofgem must undertake various actions by way of notice of proposed modifications, including giving notice that it proposes to make modifications. Amendment 21 specifies that Ofgem must provide reasons in a narrative that explains why it is making modifications—ideally, an assessment of why modifications are being proposed.

We all recognise that energy bills soared 20% between 2007 and 2013 and that the average household pays around £300 more today than it might otherwise do in a more competitive market. However, in the interests of transparency it is imperative that Ofgem outlines its reasons for setting the price cap at any given level for the benefit of suppliers and customers alike. That would help set parameters when undertaking later reviews and assist greater scrutiny.

Amendment 24 has been proposed following the debate last week in your Lordships’ House on the European Union Committee’s report Brexit: energy security. In its report the committee portrayed how the UK and the EU are already increasingly interconnected on energy. Already, high levels of gas are being piped from Norway and over 5% of electricity demand is being met from the EU, with estimates that this source of electricity supply is likely to increase to over 25%. At present the UK is a member of the internal energy market and the committee’s report underlines the risk should the UK not remain within the IEM. From evidence received, it is universally argued that the UK could be more vulnerable to supply shortages or challenges, making supply less efficient, with the result that retail prices to consumers could rise. Amendment 24 specifies that the consequences of Brexit must become part of the review of the market and the application of the cap.

In the Government’s response to the Select Committee, they failed to address this point while being pressed to undertake an assessment of the consequences of the UK leaving the IEM. How do the Government propose that Ofgem should assess the situation in its review? The effect should be recognised for the application of the cap and, hence, included in the Bill.

[Baroness Vere of Norbiton]

My Lords, I will speak to Amendments 20, 21 and 24, which relate to the reasons for this cap and the details of its implementation.

The noble Baroness, Lady Featherstone, proposes a review of the energy market, in particular setting out the reasons for the cap, whether it could have been avoided and how a price cap can be avoided in the future. The Bill follows on from an extensive two-year investigation undertaken by the Competition and Markets Authority. This reported that there was, in effect, a two-tier market, with good value tariffs for those who engage in switching suppliers but for those who do not, the market was uncompetitive and these consumers were being charged an unjustifiably high price for their basic energy needs.

The CMA also found that the significant market share of the largest energy companies and the use of the standard variable tariffs had led to a situation where customers, including some of the most vulnerable in society, are simply paying too much, They are also paying for the inefficiencies of the larger companies to the tune of around £1.4 billion a year. The noble Baroness, Lady Featherstone, mentioned E.ON and its 41%. I was not quite sure what she was referring to and whether that was a return on capital. A profit increase of 41% would depend on its starting and end points; it is not hugely relevant, depending on the leverage of the company. Potentially, we should look at its return on capital, which is far more instructive.

It was as a result of this very detailed, two-year report that the Government and Ofgem undertook to protect those on the poorest-value tariffs on a temporary basis until the conditions for effective competition are established. In addition, Ofgem is actively considering the future of the energy retail market. This work is looking at barriers to innovation and whether the current market model needs to be reformed. Another review at this stage would simply tell us what we already know and take resources away from the vital work being carried out to support the necessary reforms of the market.

On Amendment 21 proposed by the noble Lord, Lord Grantchester, I am sure he is aware that, as part of the licence modification process, Ofgem will be required to state that it proposes to make the modifications and their effect. Subject to the will of Parliament, it is clear that this action is going to take place; indeed, suppliers and other interested parties are actively involved in the consultation being conducted by Ofgem. The amendment is therefore not necessary.

The noble Lord’s Amendment 24 relates to those matters which Ofgem should consider during its review of the level of the cap, which must take place at least once every six months. It is incredibly important that Ofgem, as the industry regulator, be allowed to consider what it feels matters the most. He may be pleased to learn that Ofgem has published a consultation paper which sets out the matters it proposes to review when considering the level of the cap. That will of course include wholesale prices and many of the factors raised in the debate of last week, which he mentioned. Hence, the amendment is unnecessary at this stage.

I hope that the noble Baroness and noble Lord are content with my explanations and will be willing to withdraw or not move their amendments.

Domestic Gas and Electricity (Tariff Cap) Bill

Lord Grantchester Excerpts

Report stage (Hansard): House of Lords
Wednesday 27th June 2018 Lords Chamber

Moved by

[Lord Grantchester]

11: After Clause 8, insert the following new Clause—
“Ongoing relative tariff differential
(1) The Authority must, during the term of the tariff cap conditions being in place, develop, ready for implementation, a relative tariff differential.(2) A relative tariff differential is a requirement on supply licence holders that the difference between the cheapest advertised rate and the most expensive standard variable or default rate shall be no more than a specified proportion of the cheapest advertised rate.(3) The Authority is responsible for setting the proportion referred to in subsection (2). (4) The relative tariff differential takes effect on the termination of the tariff cap conditions.”

[Lord Grantchester (Lab)]

My Lords, Amendment 11was previously moved in Committee. It may be the last but it is certainly not the least of those being debated today. Perhaps it is the most crucial, because it proposes an on-going condition in the energy market that the electricity and gas suppliers will always operate fairly and proportionately between customers and tariffs.

Labour is in favour of the Bill. The energy market has been broken for some time. My right honourable friend in the other place, Ed Miliband, first proposed that price caps should be in place to protect consumers from excessive gas and electricity prices. Customers have been paying on average up to £300 more than they would have paid if the market operated more competitively. The excess weighs more heavily on more vulnerable households—those less able to bear it.

While it is flattering to see our policies recognised and implemented by the Government, they have to be implemented right, and preferably right first time. While accepting and applauding what the Bill achieves, it is nevertheless not quite there. It does not tackle the scourge of “tease and squeeze” by the utility companies. This amendment calls out the behaviour of energy suppliers where they tease customers to nominate a cheaper, more attractive tariff in the first instance, only to move them slowly over time to a higher tariff when the customer will be squeezed again.

This feature of the market has been operating for some time. The effect is that those customers who do not ceaselessly monitor and challenge what is happening, once again move back to being in a more disadvantaged position vis-à-vis the more nimble and fleet of hand and foot customers. Those whom the Government call disengaged are protected by the price cap mechanism on the standard variable tariff and default tariffs of the Bill, while it is in operation. Once these mechanisms are withdrawn, ultimately no later than 2023, this protection will fall away. The loyalty penalty is a self-perpetuating dynamic of the market. This is perverse.

The Bill is only a short-term measure. It professes that whatever happens, however competitive the market may or may not be, the price cap will cease in 2023. Clause 8 provides for this to happen at an even earlier date should the Secretary of State be advised that effective competition has returned to the market. However, the default mechanism of 2023 does not mean that competitive conditions will be operating at that date. Indeed, under amendments proposed by the noble Baroness, Lady Neville-Rolfe, the default date would be sooner.

It would be risky and optimistic to expect competition to return. We do not know whether the Bill will be enough. Notwithstanding that, Labour wants to outlaw tease and squeeze from the market, which could generate a more competitive market altogether hereafter. Under Ofgem’s determination of a relative tariff cap operating in relation to the lowest price tariff, this behaviour can be removed from the market.

This measure does not indicate that Ofgem must look both ways. By this I mean it cannot be claimed, if it is determined that the market is operating competitively and therefore that the cap may be removed in 2020, 2021 or 2022, that the amendment is contradictory—that the market is operating competitively. There is no contradiction as the competitive market would be operating within a relative price differential: the more competitive, the narrower the differential would be. It would be up to Ofgem to determine that differential.

The market could look very different by 2023. The House has just passed the Smart Meters Act, in which the Government gave strong assurances that the UK’s infrastructure will have been transformed by that date. The Government are on notice to make those changes. Here, we have the means to outlaw tease and squeeze for all time without the need for new legislation at some later date. It is a priority now and we cannot be sure that it will remain a priority under whatever market conditions might pertain at a later date, or even should the market move away again and back towards a less competitive environment where this kind of behaviour thrives. Not only must it be clarified that Ofgem will have the power through the amendment; Ofgem must act to underline that tease and squeeze behaviour will not be tolerated. It is an open goal for the Government to score. I beg to move.

[Lord Redesdale (LD)]

My Lords, while I understand where the amendment is coming from, it is not one I can support. The problem is that while we are asking the authority, Ofgem, to set a maximum price, we are now also specifying that there must be a minimum price. It would then be almost impossible for the authority to have a competitive marketplace to operate with.

The second problem inherent in this—a problem with the whole Bill—is that, while I understand the problems the bigger companies have because they do not have some of the obligations of the small companies, it will be an issue for Ofgem to try to work out where the cap will be in the first place. That will cause problems. We are also in a period where wholesale prices are rising. Therefore, there might be a slight problem if the companies, for different financial reasons, have to raise their prices. Would Ofgem then have to set a date at which all the companies raise their prices at the same time so that they do not break the cap? At that date, would it also then say that the minimum price has to be raised at the same rate?

I understand the idea that vulnerable customers should be protected. However, we are ending up with a marketplace in which there will be one default tariff that every single supplier will have to put forward. If there is a vote, I will vote against this, which is very much against my views—obviously my Front Bench will have a different view on this. This, however, is an area where what we want to happen and the reality on the ground vary substantially.

I should also declare an interest as the CEO of the Energy Managers Association. We represent all energy managers. It is rather unfortunate that while we are looking to protect vulnerable customers, we are not doing the same to protect SMEs and micro-businesses. There is an enormous amount of bad practice in the industry, with TPIs that have no code of practice, and Ofgem failing to enforce or even to have the power to protect SMEs in this marketplace. We are looking at protecting one sector of the marketplace while non-domestic customers will be hammered under bad practice. I raise this as this is the tail end of the Bill, although I spoke at Second Reading. I hope the Government can bring forward a Bill further down the line to regulate the whole third party, intermediary and energy broker marketplace for the non-domestic, but obviously it might be beyond the Minister’s ability to bring that forward.

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[Lord Grantchester]

I thank all noble Lords who have spoken on this amendment. I am very grateful for the support of my noble friend Lady Kennedy of Cradley, who has underlined most forcefully how egregious this behaviour is and how widespread it has become, with the effects landing on those least able to counter it.

I certainly understand the remarks of the noble Lord, Lord Hunt, that we must get the Bill right. However, I did rather think that his remarks might be more pertinent to the appeals section amendment that had already been debated. Nevertheless, I agree with him that we must get it right, which means, I take it, that he is looking for further improvements, such as this amendment, to be brought forward.

I suggest that the noble Lord, Lord Redesdale, has perhaps misunderstood the relative price mechanism, in that the relative price mechanism will not be applied across the piece; it applies only to the standard variable tariff and default tariffs, as the Bill does. Ofgem would not necessarily apply a minimum tariff; it is setting a differential that will apply between tariffs. In that regard, I am grateful to the noble Lord, Lord Teverson, for correcting his noble friend in his explanation of the amendment.

I also thank the Minister for his response, to which I have listened most carefully. However, I do not believe that it will cause any delay in the implementation of the Bill, as this proposal would come in only at the end of the price cap conditions.

I wanted to understand more how this tariff would operate in practice and how much work Ofgem had put into examining how it could be brought in. In this regard, I am very grateful to David Gray, chairman of Ofgem, who responded so promptly to our request for a meeting, following an invitation from my noble friend Lord Lennie. It is my understanding that Ofgem already has the power to set a relative cap mechanism via individual licences. It is often, though, perceived that in these licensing caps Ofgem fails to take action—to the dismay of so many, especially consumer bodies.

Britain’s consumer regulations are some of the best in the world, but here we have opaqueness that can be remedied immediately by this amendment. Not only must Ofgem be assured that it can do this, but it must implement it at the end of the price cap conditions, within which competition will thrive.

I stress once again that, the more competition there is, the narrower the gap will be. Against the charge that the market would move up in tandem, I suggest that the market is then not working competitively and that Ofgem would have the power, by this setting of the differential, to counteract that behaviour. I understand that Ofgem has begun to look at the various measures needed to be implemented.

I repeat again that, as the noble Lord, Lord Hunt, said, we must get this right. The Bill is before your Lordships’ House today, and I am very grateful to the Minister for the triple commitment he outlined in his remarks, but I stress that it is somewhat vague at this stage and nothing that could not have been done in any case. That being so, I beg leave to test the opinion of the House.