Cost of Living

Lord Oates Excerpts

Thursday 3rd February 2022 Grand Committee

[Lord Oates (LD)]

My Lords, I follow other noble Lords in congratulating the noble Lord, Lord Whitty, on the timely nature of this debate, coming on this day when we have seen a staggering increase in the energy price cap, the Bank predicting inflation at 7.25% by April and the Bank rate rising by a further 0.25%, impacting on millions of borrowers and current mortgage-holders on variable mortgages, plus all the people who will enter the mortgage market in the coming years. It has been estimated that the average rate is likely to rise from 1.6% to 2.5% by the end of this year. So there is a whole series of pressures—not just home costs and energy costs but the knock-on effects on the wider economy. The one thing about energy inflation, of course, is that it feeds through our whole economy and will continue to do so for some time.

Back in 2015, I had a conversation with Stewart Wood—now the noble Lord, Lord Wood of Anfield—who was at the time working for the then leader of the Opposition. He was talking to me about the Labour Party’s proposal for a price cap and what the Liberal Democrats’ view of it was. I gave him my personal view: I lived for some time in Zimbabwe, where the Government thought that they could cap prices. The impact was that there is no decent electricity supply in Zimbabwe anymore. Stewart perhaps thought that I was trying to compare the leader of the Opposition at the time to Robert Mugabe, which was not the point. The point was that, at the end of the day, no Government can insist that a business, or even a public utility, should supply goods in the long term at a lower cost than they cost them. It is just not sustainable.

Of course, this is not the moment to lose price caps, but we have to understand that, in addition to this 54% hike that people are going to see—indeed, for some people it will be up to 100%, because they may be coming off fixed rates—we also have the costs that will be piled on to energy bills to pay for the collapsed energy companies. Some have estimated that it will cost as much as £94 per household to cover the cost of those that went bust. I would be interested if the Minister could shed some light on that.

On top of this, the Government are now proposing that part of the way out of the current situation is a solution that will put further costs—a further £40—on bills later. As the Resolution Foundation said today, it is about slightly smaller bills today for even bigger ones tomorrow. That is no solution in the long term. On top of that even, the Government are proposing, in a Bill that will come into the House on 21 February, something called the regulated asset base model for the funding of nuclear, which will pile yet more money up front on the bills of millions of consumers.

At the same time, as many noble Lords, including the noble Lord, Lord Sikka, have mentioned, we see Royal Dutch Shell and all the oil and gas majors showing record profits. I do not intend to get into a debate about who proposed what first with the Green Party, the Labour Party or anybody else, but as my noble friend Lord Shipley said, the Liberal Democrats proposed a windfall tax—a Robin Hood tax, as he called it—on those oil and gas majors, which would help to provide a doubling of the warm home discount, a doubling of the winter fuel allowance and a £500 million fund to assist energy-intensive industries, which the noble Lord, Lord Jones, mentioned.

However, the truth is that we are where we are because of an abject failure of energy policy on the part of the Government. It starts with their failure on home insulation. My noble friend Lady Scott of Needham Market set out clearly the nature of that failure. We should, however, put that in the context of what the noble Baroness, Lady Bennett, said, which is that the best energy saving is the energy that one does not use. Contrary to much that we have heard from the climate chaos fanatics who, sadly, are not represented here, and who say that it is all about us pumping not enough gas or putting too many green levies on bills, the truth is that the price rises are to do with fossil fuel, not green levies.

Total household expenditure on energy between 2010 and 2019 fell from £27.7 billion to £23.4 billion. One of the main reasons for that was that domestic gas and electricity consumption also fell in that time, from 43,717,000 tonnes of oil equivalent in 2010 to 34,282,000 in 2019—a 21% drop. A huge reason for that was some of the efforts made by the coalition Government, in particular by my right honourable friend Edward Davey as Energy Secretary, to push home energy efficiency. In March 2015, just before the end of the coalition, there were 53,894 monthly installations. In March 2019, that had figure fallen to 13,929. I have used the 2019 figures in all those statistics so that people cannot say, “Oh well, that’s just to do with Covid”. That has been costing households, as my noble friend Lady Scott said, an absolute fortune. In addition, as she also mentioned, the zero-carbon homes standard of the coalition was scrapped by George Osbourne—another one of his mistakes.

I say to the noble Lord, Lord Young, who thinks that somehow if there were more fracking or we were pumping more gas from the North Sea it would solve our problems, that I am afraid the truth is that it would not. The astonishing fact is that between September and November 2021, the latest period for which figures are available, the UK exported 31,975 gigawatt-hours of gas. Between September and November 2020, the figure was 15,830 gigawatt-hours—less than half. In case people say that that was just because of Covid, the figure for the same period in 2019 was 19,633 gigawatt-hours. The truth is that we are operating in a market, and all that would happen if we pumped more gas is that we would export more of it. The idea that whatever we could pump would materially bring down prices, unless we somehow seized those assets and nationalised them, is for the birds.

The inflationary impact of energy is massive, but it comes amidst so many other inflationary pressures. The impact on the lowest paid, as we have heard from my noble friend Lord Shipley, the noble Baroness, Lady Crawley, and many others, will be particularly acute, and I join him in calling for a realistic price index that really reflects the impacts on the lowest paid.

In conclusion, we must have a radical overhaul of our energy system and economy, so that we can get to a stage where the Government are not boasting about the funding they are giving to food programmes and holiday activities, but are ensuring that we have an economy in which people can earn a decent wage and have a decent life.

--- Later in debate ---

[Lord Callanan (Con)]

My Lords, I thank the noble Lord, Lord Whitty, and admire him for his prescience in selecting such an appropriate subject for debate today. He must have had more advance notice than even I had of when the Government’s announcements were coming, so congratulations to him on a very timely and informative intervention. Of course, I am grateful to everyone who has contributed today on this topical but also extremely vital subject. I will try to address as many of the points as possible that noble Lords raised, but this has been a wide-ranging debate and, if I do not manage to cover everything, I am sure that we can catch up in writing.

The Government of course recognise and understand the pressures that people are facing with the cost of living and we will continue to listen to people’s concerns, as we have done throughout the pandemic. I agree with the noble Lord, Lord Monks, and many other speakers in recognising that this is a timely debate, with the energy regulator’s announcement just a few hours ago and the Chancellor’s announcement on the back of that. The regulator’s announcement was for the period April to September 2022.

In a recent debate secured by my noble friend Lady McIntosh, I set out that wholesale energy prices have been rising, as we all know, due to increases in the price of wholesale gas, to which multiple international factors have contributed. I start by reiterating that energy security remains an absolute priority for the Government and we are confident that our energy security will be maintained. We continue to work closely with key industry organisations, including Ofgem and National Grid gas, to monitor both supply and demand. In response to the point made by the noble Lord, Lord Sikka, we meet around half of our annual gas supply through domestic production and the vast majority of our imports come from reliable suppliers such as Norway.

As I have said before in the House, the energy price cap has, for the last six months, protected millions of households during the winter period from the volatility seen in wholesale gas prices. The Government have committed to retaining powers to implement a price cap beyond the current long-stop date of 2023, should that prove necessary. However, as noble Lords will know, sadly, the rising wholesale costs of energy have now fed into the price cap’s methodology, leading the independent—I emphasise that—regulator, Ofgem, to increase the level at which the price cap is set. Recognising the impact that this will have on households, I am pleased to update the House, as the Chancellor did this morning in the other place, that the Government are taking action on the back of this.

Today the Chancellor announced a £5.6 billion energy bills rebate, which will help households to deal with the unprecedented increase in energy bills that we have seen this year by helping to smooth the costs over subsequent years. The rebate, which will shortly be consulted on by my department, will provide households with a payment of £200, which will be credited to their energy bills by their current energy supplier. This rebate will likely start issuing payments to energy suppliers to pass on to their household customers from autumn this year, which of course is when households will need it most as we head into the winter period next year.

In response to the point from the noble Baroness, Lady Bennett, let me make it clear that while the mechanism will be subject to consultation, this scheme is not a loan. No interest will be charged on the upfront funding provided by the Exchequer. The Government will seek to recoup the funding at a later stage, smoothing out the cost increases we have witnessed in the wholesale energy markets. The department will work closely with industry and consumer groups on how we can best deliver this policy, with a consultation planned for the spring.

This is an important and timely measure, which will help households at a time when they need it most. In addition, the Government have announced further support for delivery outside of the energy system to help with the wider cost of living. We have also today announced a £150 payment for the 80% of English households in council tax bands A through D. This measure will be worth the equivalent of more than 2.5% of net income in 2022-23 to the poorest 10th of households, compared with less than 0.5% to the richest 10th. In addition, there is £144 million of discretionary funding for local authorities to support households who need support but for some reason are not eligible for that council tax rebate. The combined package could see some households receive £350 over the coming financial year to help them with the cost of living. This is worth some £9.1 billion.

This new support package is on top of the existing set of measures in place to support families, worth around £12 billion a year. These include energy-specific measures targeting the fuel poor. The noble Lords, Lord Whitty and Lord Oates, and my noble friend Lady McIntosh mentioned the warm home discount scheme which provides support with energy bills through rebates, helping households stay warm in the winter months. The scheme currently provides over 2 million low-income and vulnerable households with a £140 rebate off their winter energy bills. I am pleased to confirm to noble Lords that BEIS has already consulted on proposals which would expand the scheme from around £350 million to £475 million per year, at 2020 prices, which will help the scheme reach 3 million households from winter next year onwards.

On the very important subject of energy efficiency, I am afraid I have to tell the noble Baroness, Lady Scott, that she is simply wrong. The energy company obligation has already installed 3.3 million measures in 2.3 million homes. We are increasing, not cutting, the amount energy suppliers invest in energy efficiency measures for low-income households. From April this year, the start of the next financial year, this will be extended until 2026 and we are boosting its value from £640 million to £1 billion a year, helping the poorest households to install the energy efficiency measures that many noble Lords referred to.

In addition, for the benefit of noble Lords who raised the issue, such as the noble Lords, Lord Oates and Lord Shipley, and the noble Baronesses, Lady Scott and Lady Bennett—amazingly I agree with one point the noble Baroness, Lady Bennett, made—the best form of green energy is indeed not using it in the first place, through energy efficiency measures. This is precisely why we are investing over £2 billion a year in energy efficiency schemes, through projects such as the home upgrade grant, the local authority delivery scheme, the sustainable warmth competition and the social housing decarbonisation fund. All of these are helping to provide long-term solutions by improving the energy efficiency of the homes of the poorest people in society—exactly those who should be deserving of our support.

In addition to all that, the Department for Work and Pensions has a set of measures to support households with their energy bills. The £500 million support fund was announced last autumn to help those most in need this winter. This includes provision for utility costs, including energy. The DWP also continues to provide support for vulnerable users and pensioners through its winter fuel payment and cold weather payment.

Picking up on some of the points made by noble Lords, the debate was well introduced by the noble Lord, Lord Whitty, who asked a number of questions, as indeed did the noble Lord, Lord Oates, about the retail market and supplier failures. As a result of high gas prices, some 26 suppliers have exited the market since the beginning of August 2021. The current situation has been precipitated by unprecedented conditions. In the vast majority of those cases, the Government and Ofgem have utilised the supplier of last resort process, which has been set up to protect customers when their supplier fails to ensure that they do not suffer any disruption or lose any of their credit balances. Ofgem and the Government will continue to look at ways to reduce the costs that arise from a supplier of last resort process, but it is clear that it is a vital safety net that has protected millions of consumers. Last October, Ofgem published a letter to industry setting out the actions that it will take to reform the retail market. This includes reviewing licence conditions to strengthen the financial resilience of suppliers and help restore stability to the sector.

I was also asked about retail market reform. The Government want a retail energy market that continues to protect consumers now and as we transition to net zero, while engaging them with positive choices about their energy supply. We want a competitive market whereby companies invest in innovation and offer products and services that help us in our drive to decarbonisation.

The noble Lord, Lord Whitty, talked about retail market regulation to support progress to net zero. In considering these reforms, the Government will take account of the lessons of the current market. In fact, we published a call for evidence on the future of the retail energy market. A strategy will be published as soon as possible once the current market situation has stabilised.

The noble Lord, Lord Oates, raised the issue of funding our future policy costs to deliver net-zero policy. He will be aware that, as set out in the heat and buildings strategy, we will publish a fairness and affordability call for evidence to set out the options for energy levies and obligations to help rebalance electricity and gas prices and to support green choices, with a view to taking final decisions in 2022. Consumers will be at the heart of those decisions.

[Lord Oates (LD)]

The one question that the Minister has not answered is what the Government’s estimate is of the added cost to bills as a result of the 26 energy company failures that he mentioned. Citizens Advice estimates that it has put £93 on bills. Do the Government have a figure?

[Lord Callanan (Con)]

I do not have a precise figure in front of me. It is a complicated issue because it depends on exactly where the costs fall but if the figures are available, I will write to the noble Lord with as much information as I am able to provide.

In response to the point made by the noble Lord, Lord Whitty, on national insurance rises, the lowest earners will, of course, be protected from the levy. The highest-earning 15% will pay over half the revenue and 6.1 million people earning less than the primary threshold or lower profits limit will not pay the levy at all. Regarding the rebate adding costs to bills further down the line, the aim of the policy is to reduce energy bills for households in Great Britain in 2022-23; it is to be paid back automatically and interest-free over the next five years. This is a fiscally responsible approach that helps customers to manage the unprecedented increase in energy bills by spreading the increased costs of global prices over time.

My noble friend Lord Howell of Guildford, as he normally does, made some good points about our overall energy strategy. He will be aware that the energy White Paper set out a vision for transforming our energy system, backed up by practical action. We will address the decarbonisation of the power sector on a whole-system basis so that we deliver low emissions and maintain high levels of reliability and resistance, while ensuring that the cost of the transition is fair and affordable. The Government are taking a range of important steps to decarbonise the power sector, while establishing business models to support hydrogen-fired generation, new nuclear and CCUS-enabled generation, and to support the development of flexible storage.

I agreed with many of the sensible comments made by the noble Lord, Lord Young of Norwood Green, from whose expertise in this area we have benefited. He reminded us—it is worth making this point—that these are difficult, complicated issues, which need long-term holistic solutions. Of course, we are all searching for a simple, easy answer, but many of these issues take decades to come about. One issue that I could highlight is that of new nuclear. The noble Baroness, Lady Blake, criticised us for not developing new nuclear, but these projects take decades to bring about. The main reason for the decline in the nuclear industry in the UK was that Labour abandoned our nuclear programme when it came to power in 1997. For the whole of its period in government, no progress whatsoever was made on new nuclear. We are now reversing that and proceeding with new nuclear developments, but it takes many decades to bring them online. I believe that, in considering our energy system, that decision will prove to be one of the biggest mistakes in energy policy over recent decades.

The noble Lords, Lord Shipley, Lord Monks, Lord Sikka and Lord Oates, the noble Baroness, Lady Crawley, and other noble Lords raised the issue of a windfall tax. It is worth pointing out that the UK Government already place additional taxes on the extraction of oil and gas, with companies engaged in the production of oil and gas on the UK continental shelf subject to headline tax rates on their profits that are currently more than double those paid by other businesses. To date, the sector has paid more than £375 billion in production taxes. We are always considering a full range of options to support consumers and businesses through the current high price challenges, but it is important to remember that any action that we take must not have broader negative consequences for the economy.

All Peers have referred to the importance of attracting investment and achieving our energy goals, which will require vast investment from the private sector in our energy system. If the Government woke up one morning and imposed windfall taxes, however attractive that might sound, that would massively impact the amount of inward investment that we attract into the country. While the dividends of those companies have been criticised, we should never forget that many of those dividends go into paying the pension funds that help to pay the pensions of the many pensioners that noble Lords highlighted who might be suffering from fuel poverty this winter. There are never any easy, simple or straightforward solutions to these problems, however much we might want to think that there are.

My noble friend Lady McIntosh raised the important issue, as she often does, of off-gas-grid consumers. The Government believe that it is essential that consumers of LPG and heating oil get a fair deal. In our view, the LPG and heating oil markets do not share the monopoly characteristics of network utilities and are therefore not subject to price regulation under Ofgem. However, I can tell my noble friend that the energy rebate announced today is being passed through to suppliers to pass on to domestic energy users, including off-gas-grid consumers, who are, of course, electricity customers.

The noble Lord, Lord Jones, asked for estimates of the number of homes struggling. We regularly publish updated fuel poverty statistics, including projections for 2022, taking into account the price cap increase and the measures announced today. We will publish those on 24 February. In addition, Ofgem regularly publishes its statistics on vulnerable consumers and indebtedness through its consumer protection and vulnerability reports.

Lastly, the noble Baroness, Lady Blake, spoke about the important subject of hydrogen. We are committed to the development of hydrogen as a strategic decarbonised energy carrier for the UK. We are currently taking a twin-track approach, covering both electrolytic hydrogen from renewables and methane reformation with carbon capture, usage and storage. Both methods of production are covered by innovation schemes and policy development.

As I have set out, the Government have listened, recognised and acted on the concerns of families struggling with the cost of living. As I said at the start, the energy bills rebate will provide over £5.6 billion of support to households later this year, ahead of the next winter period, while the additional support for English homes in council tax bands A to D will further help households with the cost of living—a total package worth £9.1 billion. Of course, the Government will continue to engage with industry, consumer groups and other stakeholders as we progress these measures and I am sure that we will have further debates as these policies develop in the coming months.