Energy Prices and Profits

Lord Lilley Excerpts

Wednesday 4th September 2013 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

I beg to move,

That this House recognises the importance of the energy industry to the security and prosperity of the UK economy; notes that the average household energy bill has increased by over £300 since the 2010 general election; further notes that the big six energy companies have had a £3.3 billion uplift in profits over the same period; welcomes the recent report on Energy Prices, Profits and Poverty from the Energy and Climate Change Committee (Fifth Report, HC 108) which found that Ofgem is failing consumers; regrets that the Government has halved support for people in fuel poverty, and that as of 20 August 2013 only 132 households had signed up for a Green Deal plan; further regrets the Prime Minister’s broken promise to legislate so that energy companies have to give the lowest tariff to their customers; and calls on the Government to bring forward amendments to the Energy Bill to make the energy market more competitive and transparent by requiring energy companies to pool the power they generate and to make it available to any retailer, to create a tough new energy watchdog with the power to force energy companies to pass on price cuts when wholesale costs fall, and to put all over-75 year olds on the cheapest tariff.

Earlier this afternoon, we heard from my hon. Friends the Members for Leeds West (Rachel Reeves) and for Nottingham East (Chris Leslie) about the full scale of the cost-of-living crisis unfolding in Britain. For 37 of the 38 months in which this Government have been in power, real wages have fallen. At the same time that people have seen their incomes squeezed, the cost of living has also increased sharply. In the last three years alone, the average household energy bill has increased by over £300. It is no wonder that Which? research has shown that 79% of people now worry about how to pay their energy bills. With nearly four in 10 people saying they are likely to have to cut back on their energy spending in the coming months, and with warnings of more price rises coming later this year, I make no apologies for returning to a topic that we have debated a number of times in the last couple of years.

As we know, energy companies claim that there is a whole raft of reasons why energy bills are going up—wholesale costs, network charges and social and environmental obligations. With all those extra costs, one might think that profit margins would have come down, but quite the opposite. It is now clear that, regardless of those costs, these companies have seen a substantial increase in their profits. We know that because since 2009, energy companies have been required to publish information on their financial performance, including their profits. The information shows that in 2009, Britain’s big six energy companies made just over £2.2 billion in profit. In 2012, by contrast, they made more than £3.7 billion in profit—an increase of nearly 70%. Overall, over the last three years, Britain’s big six energy companies have seen a huge profits uplift of more than £3.3 billion. If anything, this is likely to be an underestimate because it excludes their profits on trading and from gas storage.

[Mr Peter Lilley (Hitchin and Harpenden) (Con)]

I noticed that, among the factors affecting energy bills, the right hon. Lady did not mention the cost of moving from lower-priced fossil fuels to very expensive renewables. That is the only item that is directly under the control of this House. Was it not somewhat disingenuous not to mention it?

--- Later in debate ---

[Mr Peter Lilley (Hitchin and Harpenden) (Con)]

It is a privilege to follow my colleague on the Select Committee, whose passion for the concerns of his constituents about their energy bills I share, both because my constituents also rate this the most important issue in their cost of living and because I had the privilege of visiting his constituency at his invitation and meeting many people there. Their incomes are lower—temperatures are lower too—and so it is even more important for him to get the costs down. That is why we have to address these issues objectively and honestly.

The motion is disgraceful in two respects. First, it does not mention the one item of energy bills that is within the control and discretion of the House—the additional costs that we impose on people through the switch from fossil fuels to renewables. It is the only factor that we directly control, but the Opposition ignore it. We know that the least costly renewable, onshore wind, is at least twice as expensive as fossil fuels in generating electricity. Offshore wind is three times as expensive. I suspect that photovoltaics are a multiple of that. Already, the cost of renewables adds 5% to gas bills, 14% to electricity bills and 9% overall. That is a lot and it is expected to rise, but people might be surprised that it is not even higher still, given that wind is so much more expensive than fossil fuels. The reason for that is that the figures hugely understate the extra costs that every household in the country is bearing because of the switch to renewables. I have a letter from the Secretary of State in which he acknowledges that only a third of the cost of renewables falls directly on households’ energy bills, while two thirds falls on the non-domestic sector. In other words, that two thirds leads to a rise in the cost of all the other products that we consume because of the rise in the cost of electricity.

[Mr Davey]

My right hon. Friend is not correct when he talks about 9% of bills resulting from support for renewables. The majority of that is made up of support for tackling fuel poverty, dealing with energy efficiency, the warm home discount and the carbon price floor. A much smaller part is due to support for renewables.

[Mr Lilley]

That is the total impact of Government policies. Whatever the figure is, my constituents and the constituents of the hon. Member for Glasgow North West (John Robertson) are paying it. Overall, if one third of the cost of renewables is falling on households directly, the other two thirds also falls on households. There is no such thing as industry in this case. All costs are borne by individuals: by consumers and employees, and by pensioners through the impact on the value of shares and profits that are held largely by pension funds. We should not allow the costs we are imposing on people to be ignored or understated.

The second disgraceful aspect of the Opposition motion is the pretence that the rise in energy bills we have experienced in recent years is largely or entirely due to a rise in profits. I wish that were true. If it were true that the rise in profits accounted for the 41% rise in gas prices and the 20% rise in electricity prices, undoubtedly those profits would be excessive and we could bring down profits and prices by greater competition or better regulation. Sadly, however, it is not true. Table 6 of the Select Committee’s report records that the average profit margin of the big six is 7.6%, which cannot account for the massive 20% and 41% increase in prices.

[Caroline Flint]

Will the right hon. Gentleman clarify what aspect of the profit margins he is basing those figures on?

[Mr Lilley]

That is the average of both generating profits and distributions profits. It is in table 6 of the report, which I am sure the right hon. Lady has read assiduously. She can check it if she wishes.

The right hon. Lady refused to answer a question about what a correct level of profit would be, but I cannot believe that she thinks profits are more than twice as high as they need to be. Even if we were to halve the profit level from 7.6% to 3.8%, the effect on prices would be very small compared with the huge increase we have seen. As we all know, the increase is largely the result of the increase in fuel prices, which is outside the control of Governments.

The suggestion that all energy companies have seen massive rises in profits is also dispelled by table 4, on page 27 of the report. Indeed, the Committee referred to the figure given in the Labour party’s motion of an increase in profits of £3 billion, which I think comes from Consumer Focus. The report states:

“Table 4, however, doesn’t appear to support this.”

Table 4 shows what has happened to companies’ profit margins from 2007 to 2011. For EDF, the average profit margin was 15.7% and went down to 8.5%. For SSE, it went from 4.2% to just 0.8%. For British Gas Centrica, it has gone down from 7.3% to 5.6%. For Scottish Power, it has come down from 11% to 4.4%. For E.ON, it has come down from 6.8% to minus 2.2%. For npower, it has come down from 12.2% to minus 5.5%. Therefore, the idea that there is huge scope for us to bring down excess profits, and thereby prices, through regulation or improved competition is sadly not correct, and it is dishonest to pretend that it is.

[David Mowat (Warrington South) (Con)]

I think we are using the term “profit” quite loosely, particularly the Opposition. What matters in judging the profitability or effectiveness of these companies is return on capital employed. That is how they measure themselves for the investments they make and the returns they get. I do not believe there is any evidence that the return on capital employed has increased in the last five or six years. If it had, those on the Opposition Front Bench would put that to the House.

[Mr Lilley]

My hon. Friend, as always, is absolutely correct. People would do well to note what he has said.

The most important issue to our constituents is the cost of living, and within the cost of living it is energy prices. Energy prices have largely been driven up by factors outside our control. The one factor within our control is the cost of renewables. We are hypocritical if we shed salt tears for our constituents while we, through the only area where we have discretion, are driving those costs up higher and are set to do so much further still in future.