Energy Prices, Profits and Poverty

Lord Lilley Excerpts

Thursday 7th November 2013 Westminster Hall

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

Rising energy bills are hurting our constituents; we all know that. The public suspect that those increases in energy bills are driven by rising profits. Politicians and environmental campaigners have a vested interest in fanning that suspicion to divert attention from the increases in the cost of energy that the political elite are planning in the move to increasingly costly renewables, with the added costs that they impose on the transmission network.

The Select Committee’s duty is to investigate the public’s concerns and, if we establish that there are excess profits as a result of monopoly power, suggest ways of bringing the big six energy companies to heel by strengthening competition and through stronger regulation. In the report before the House, the best figure that we could establish for the aggregate level of profit for the energy companies—generating profits, wholesale profits and those downstream—was something like 7.6% of the household energy bill. That is not itself an obviously excessive figure, and it certainly cannot explain the very large price rises. The main factor clearly has been rising fuel costs in the past.

However, before the Committee held our hearings last week, we shared the public’s suspicion, at least as far as the current round of tariff increases was concerned, because we could not see how they could be explained by rising fuel costs; they certainly had not risen by 8% or 10%. We therefore planned to ask the companies forensic questions: if they had raised their tariffs by 8%, how much had their costs gone up by over the same period? When they fudged and prevaricated, we would come back with searing criticisms and indictments. To our surprise, they did not fudge. They gave concrete figures on how much their costs had gone up, company by company, and element by element of their costs. The main factor was not rising fuel and wholesale prices. It was two other factors: rising transmission costs, because the regulator had allowed a 10% increase in transmission tariffs; and, in many cases, policy costs—the costs of social and environmental subsidies as a result of our switch to renewables.

Naturally, the factual conclusions that we established went largely unreported, because they did not play into the prevailing narrative. Of course, the fact that we established what we did does not mean that the profits at the beginning were not excessive and did not contain an element of monopoly profit. Conservative Members are all in favour of profits, as long as they are earned through increased efficiency and increased investment. We are strongly against monopoly profits and if, in our inquiries with Ofgem and the inquiry that my right hon. Friend the Prime Minister has established, we find that there is a monopoly element, we will be the first to support returning that excess profit to the consumer, and we will certainly welcome any steps that can increase competition and reduce unnecessary costs. As the hon. Member for Ynys Môn (Albert Owen) said, that should not exclude our looking at other models for the downstream element—he says that that applies in Wales; it certainly applies in places such as New York—if that could reduce the costs to the consumer.

However, the big factor driving energy costs in the past has been rising fuel costs and, essentially, rising gas costs, which drive up both the cost of electricity and, directly, the cost of gas bills; and the big factor in the future will be the switch to renewables. The hon. Member for Blackley and Broughton (Graham Stringer) is a distinguished addition to our Committee, and his contributions to our debates will be of great importance. As he mentioned, onshore wind will double the cost of electricity; offshore wind trebles it. The figures for other renewables are of a similar order of magnitude. There is no way switching from fossil fuels to renewables will do anything other than increase the cost of energy to both households and industry. We should remember that only one third of the cost of renewables goes on to household energy bills. Two thirds go on to industry, but ultimately those costs, too, are borne by households. The pain that people are feeling from their energy bills is only one third of the total cost that will be imposed on them.

What shall we do about this? Knowing that the main cost driver in the past has been the rising cost of gas, we should be going hell for leather in drilling for and exploiting shale. Over little more than six or seven years in the United States, the shale gas and shale oil revolutions have brought down prices by two thirds. If we do the same in this country and overcome the obstacles that the environmental non-governmental organisations such as Friends of the Earth and so on are trying to put in the way, and the obstacles inadvertently imposed by European law, we can enjoy similar success. Either we will bring down gas costs in this country or, if they remain high because we are linked to the European gas grid, the profit on that gas will generate huge tax revenues, which will enable us to relieve other burdens on households. Either way, we should be doing that, and I urge the Government to tackle that with renewed vigour. I know that my right hon. Friend the Minister is personally keen to achieve that, and to make good the unnecessary 18-month moratorium that Chris Huhne imposed on this country; I think that was a greater crime than his speeding issues.

We should recognise that the transmission costs are going up in large measure because of the need to link up the transmission network to distant places. Huge subsea transmission cables are being built. Some £24 billion is to be spent on renewing and extending the transmission network. That is equivalent to £120 per household every year between now and the end of the decade.

We should go for shale and have a pause—a moratorium —on the switch to renewables; there are still enough costs coming through from that to make life very painful for our constituents. The German Government are thinking of doing that. The Spanish Government have done something like it. We should not be ahead of the field in penalising our constituents and our industry by imposing unnecessary and excessive costs on them. I urge Ministers and the Opposition to think again about a commitment that, whatever they pretend, will be the ultimate cause of problems for our constituents and businesses in the future.

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

As ever, it is a pleasure to serve under your chairmanship, Ms Dorries, and it is a particular pleasure to be here today to discuss the Select Committee on Energy and Climate Change’s report entitled “Energy Prices, Profits and Poverty”, and the responses to it.

I commend the Select Committee on producing such a thorough and authoritative report. On behalf of the Opposition, I welcome the tone and tenor of the conclusions and recommendations. They mirror our criticisms of the energy market and reflect our desire to see that market improved for the benefit of British consumers and British businesses. The conclusions were ably set out by the Chair of the Committee, the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith), in his opening speech. The Committee is fortunate to have on it a number of hon. Members who possess real expertise on, and insight into, energy policy in the UK, and who command widespread respect in the House. We have heard from many of them today, but unfortunately I do not think that I will be able to go through each of their speeches, because of the short time that we have to wind up the debate.

As is well known, the Labour party is not satisfied with how the energy market is functioning. We have therefore laid out plans for ambitious reform of that market, involving separating the generation and supply sides of the big six energy companies, establishing a new regulator and, crucially, freezing prices for 20 months while we get that job done. The evidence for the need for that reform package is visible to all of us in our constituencies, day in, day out, but this report has added to that list of evidence. I would like, in the remainder of the debate, to draw the House’s attention to some of the conclusions that I feel are particularly relevant.

One thing that comes across very starkly from the report’s conclusions is the dissatisfaction with the regulator, Ofgem. Several recommendations demand more activity from Ofgem, but conclusion 16 on page 73 seems particularly frank. In it, the Committee states that it is “astonished” at how long it has taken Ofgem to act on improving wholesale market competitiveness to ensure that customers are paying a fair price for their energy. In the rarefied language of parliamentary reports, that stands out as particularly hard-hitting, and it is our belief that Ofgem needs to be replaced with a much more effective regulator that has powers to force energy companies to reduce their prices when the wholesale cost of energy falls.

Yesterday, in the Opposition day debate, the Secretary of State attacked the Labour party over its plans to reform Ofgem before claiming, in a somewhat contradictory fashion, that he himself was seeking to reform Ofgem. Some people would say, “That’s the Liberal Democrats for you,” but I would never think of being so cruel.

Much of the Government’s response to the problems of the energy market has been to encourage people to switch their supplier. Of course people should ensure that they are getting the best deal that they can, and of course we should ensure that switching supplier is as simple as possible. However, from the consumers’ perspective, there is little point in making the effort to switch supplier when they are just switching from one company that is overcharging to another that is overcharging.

As is noted in conclusions 8, the low-level of switching between suppliers is a symptom, not a cause, of a lack of competition. It is difficult to see how any policy to make switching easy could have a significant effect if underlying problems in the market are not addressed. The Government seem to be deliberately ignoring the fact that switching has actually halved in two years, with only 340,000 people switching in June this year; that is down from almost 800,000 in summer 2011. The Government have to accept that fundamental flaws in the market have caused that lack of competition. Structural reform to break the stranglehold of the big six and introduce transparency into the market is the only way to fix those problems.

On the subject of green levies, I agree with recommendation 4 that there needs to be

“a full and frank conversation about the contribution that consumers are being expected to make”,

and many speakers today echoed that point.

There was a moment in the Opposition day debate yesterday when an MP on the Government Benches—I do not wish to embarrass them by name—gave a speech praising the Government’s subsidies for nuclear power and low-carbon generation, which they said had an effect on power stations in their constituency. They also praised the ECO scheme and the Government’s efficiency measures. However, they then said, very directly, that green levies must be rolled back. If MPs do not have a sound understanding of what these green levies are, it does not make things easier for the public.

[Mr Lilley]

Will the shadow Minister explain how rising green levies would be coped with, were he ever to get the opportunity to freeze tariffs?

[Jonathan Reynolds]

I am about to discuss a part of those green levies in which I am very interested: the ECO, particularly as it relates to fuel poverty. I was pleased to see that the Committee’s report focused on that in some detail. I know there will be widespread agreement among Members that fuel poverty, whatever measure the Government use, is far too high in this country. The news that, in the whole of Europe, only Estonia has a higher proportion of households in fuel poverty than the UK should set all our alarm bells ringing.

From our exchange at the Dispatch Box yesterday, it seems that the Minister of State, Department of Energy and Climate Change, the right hon. Member for Bexhill and Battle (Gregory Barker), and I have substantially different views on the performance of the Government’s flagship ECO scheme. I simply do not believe that the ECO is ambitious or effective enough to meet the fuel poverty challenge in this country. In answer to the right hon. Member for Hitchin and Harpenden (Mr Lilley), the chances are that the ECO’s cost will rise out of proportion to the success of the measures being delivered.

The Government’s objective is to try to lift one in 10 —or, in the worst-case scenario, one in 20—of the households in fuel poverty out of it. That is not a sufficient response to the scale of the crisis. To that end, I especially welcome the Committee’s recommendation 24 —the recommendation that ECO expenditure be focused more heavily on fuel-poor households.

I will not have time to go into the detail I had hoped to. In relation to the green deal, it is clear that only Government Ministers believe that the scheme is still working. If we were to focus the ECO more heavily on the fuel-poor, as the report requests, the green deal would need to work far more effectively to tackle carbon reductions, which could be paid for by people who would be willing to pay if there was an attractive enough package.

In conclusion, the Select Committee should be commended for producing a report of this quality. All of us who want to see the energy market reformed and a better deal secured for consumers and businesses need to engage with its recommendations. We believe that the report endorses our case for serious structural reform, a tougher regulator, the reform of the green deal and the replacement of the ECO. I thank the Committee members for their diligence and insight, which is a credit to their constituents, to the House and to the public debate on these issues.