Domestic Gas and Electricity (Tariff Cap) Bill

Lord Teverson Excerpts

2nd reading (Hansard): House of Lords
Tuesday 22nd May 2018 Lords Chamber

[Lord Teverson (LD)]

My Lords, I have been ambivalent about the Bill since it was published some months ago. However, I accept that it is a sticking plaster, as the Government rightly describe it, and that a huge problem needs to be solved.

We have heard some of the statistics: £1.4 billion of overcharging, as estimated by the Competition and Markets Authority, and 11 million households affected, many of them the most vulnerable. As the noble Lord, Lord Stevenson, mentioned, there were an estimated 34,000 excess deaths due to cold weather in 2016-17. I know it is an estimate but it is why this Bill is as fundamental as life and death to many households. People fear turning on their energy supply during winter because they cannot afford the bill, and being confronted by court action and cut off, even if that is not would happen if that occurred.

In a broader context, the title of the Bill refers to a tariff cap, not a price cap. In this country we are obsessed by prices and not by the total of the invoice or the bill. I am not arguing against this Bill, but invoices or bills are more important because our housing stock is so energy inefficient. It is one of the major problems and one of the reasons why we have this issue.

I am the first to agree that there is no option to change that between now and the coming winter, but I am seriously disturbed by the Prime Minister’s speech yesterday on science and modern industrial strategy at Jodrell Bank. She said that,

“in the clean growth grand challenge, we will use new technologies and modern construction practices to at least halve the energy usage of new buildings by 2030”.

Until the Chancellor of the Exchequer got rid of the target after the 2015 election, we were going to have zero carbon homes by 2016, two years ago, and zero carbon commercial buildings by next year. Now, we seem to have moved to a target—which the Prime Minister has crowed about—of halving energy usage only in 12 years’ time. That concerns me because the industry was set to achieve the 2016 target but it was taken away by the then Chancellor, George Osborne.

I understood from both the green growth strategy and the 25-year environmental plan that we were going to be more ambitious in this area and bring back some of those targets. However, if we are talking about half of homes being zero carbon by 2030, then, frankly, this is missing the plot completely. I re-emphasise that this problem cannot be solved overnight, but if we lose that focus I am afraid we will have tariff cap bills for the next 12 years and they will not end in 2020.

Perhaps I may go through some of the issues briefly because the noble Lord, Lord Stevenson, and the Minister have mentioned a number of them. We have the broad outlines but we do not know exactly how the system is going to work, so Ofgem will have to invent it. What we certainly do not know are the outcomes. In some ways, I welcome the fact that this issue will have to be looked at again regularly because it is difficult to understand what the practical outcomes will be. As we know, interventions in markets tend to create all sorts of unintended consequences, so it is important to keep a close eye on this.

I turn first to the green exemption. I have a renewables-only tariff for my domestic electricity supply which I have just been informed will go up by 10%. The year is up and I have to do something about switching again. It seems that this is a particularly uncertain area in the Bill, and I wonder whether there should be a relative cap if we are letting renewable energy suppliers off the hook, if you like, as regards the price cap. Are we sure that there will be no cheating going on in this area? I am also concerned that decisions about the green exemption do not have to be made on the same date as the rest of the cap. Everything should be done at the same time.

I will reflect on the remarks made by the noble Lord, Lord Stevenson, about the safeguarding tariff. It may be absolutely straightforward, but perhaps the Minister could clarify whether the benefits which will come from that tariff continue for those consumers, despite what this Bill is going to do?

Unlike some others, I am less convinced that an absolute cap is entirely right. I am referring to “tease and squeeze” and how we get rid of that. It is the main problem with the way the market and pricing work: getting people on board for the first year and then hoping that they forget about you. I wonder whether having the fixed percentage that is allowed between the minimum or entry tariff and consequent tariffs is a better way to do this, but I could be convinced otherwise.

However, what I would like to see is price comparison sites being obliged to show what the tariff will be after one year if the consumer fails to renew. That would provide real transparency in the growing switching market. We could look at that issue in a potential amendment. The mortgage market is often held up as the example in that regard, but that may have more to do with Financial Conduct Authority rules; it may be that Ofgem needs to be given similar powers.

The timing of the Bill is absolutely crucial and I am sure that the House will not want to hold it up in any way. But my concern, as with all legislation, its implementation and consultation periods—all of which are important—is that we will be too late for a number of consumers, and that there will be excess deaths if the winter weather sets in early. I would like to know from the Minister when he expects the price caps to come in and the benefits to be available, and about the broader issue of improving the efficiency of our housing and commercial building stock. What is the vision after the Bill expires, because I am far from clear about that?

[Lord Hunt of Wirral (Con)]

My Lords, I declare my interests as set out in the register, in particular as a partner in the global commercial law firm, DAC Beachcroft LLP and as one of the Ministers who took through the Gas Act 1986. Introducing price controls into the energy market was indeed included in the last Conservative manifesto and codified in a draft Bill published last year. Today’s debate should therefore focus on how a price cap can be implemented in the most appropriate way, not on whether it should be.

The Bill represents a major intervention in the energy market with significant implications for competition and consumers. It is therefore essential that the Bill provides for strong oversight of how the cap is formulated and introduced. The noble Lord, Lord Stevenson of Balmacara, has already mentioned my noble and learned friend Lord Mackay of Clashfern; I know I am not alone in feeling that the Bill does not include the long-established precedent that organisations should be able to appeal to the Competition and Markets Authority against a price control set by a sector-specific regulator. This right exists in every comparable example of sector-specific regulation, including in the energy sector, and plays an important role in driving better regulatory decisions.

The Bill directs the energy regulator, Ofgem, to introduce a price control on default energy tariffs. It also states that the regulator must have regard to ensuring that the market remains competitive, incentivising switching and allowing suppliers to finance their operations while inducing them to operate efficiently. This will be an extremely complex balance for Ofgem to strike. It is clear that greater competition has been vital to improving this market; Ministers have indicated that this trend should not be reversed. There are now 60 suppliers in the market, compared with just six in 2010. Consequently, there is more choice of tariff than ever before, with 17% of customers switching supplier last year. On a historical basis, these switching rates are better than those of broadband, mobiles and fixed-line telephone markets.

Ofgem will also need to undertake a detailed analysis of the cost of major national infrastructure programmes when constructing the cap, including the smart meter rollout programme, which is central to innovation and future competition. Her Majesty’s Treasury estimates that there will be £100,000 million of investment in critical infrastructure between now and 2021. Ofgem’s approach must ensure that a cap does not impede these large investments. Recent regulatory interventions in the energy market show that meeting this balance of regulation and competition is difficult to achieve. Regulators occasionally err in their decisions. I remember that the CMA concluded in 2016 that Ofgem’s previous attempts to regulate the number of retail tariffs that could be offered by a supplier—the Retail Market Review —had damaged competition and should be removed. We have also seen that the introduction of a prepayment meter price cap led to prices bunching to within £15 of a cap. Like any major intervention in a competitive market, the introduction of price regulation therefore needs a strong system of scrutiny and oversight.

Appeals to the CMA are the long-established way of providing such scrutiny and ensuring that any errors can be corrected efficiently. The CMA is a specialist economic regulator, established to review regulatory decisions and ensure that they are well founded. Price control decisions in every other comparable sector—such as telecoms, water, aviation and post—can be appealed to the CMA, as can other price control decisions made by Ofgem. Price regulation for network companies can also be appealed to the CMA by third parties, including consumer organisations. An appeal to the CMA in 2015 on the level of price control imposed by Ofgem found that Ofgem had made an error. As a result, £105 million was returned to consumers.

There are currently 26 panel members on whom the CMA may draw for any price control appeals. There is also a specialist utility panel within the CMA. The CMA and its predecessor, the Competition Commission, have more than two decades’ experience in assessing such matters across any number of industries. My noble friend the Minister may say that there are specific examples, such as payday loans and the PPM price cap, where CMA appeals are not allowed. I do not believe that those are analogous. The FCA is not comparable to Ofgem and has not been tasked with the same challenges of setting a complex price cap that assesses the cost of the provision of service and maintaining competition. The PPM price cap was adopted by the CMA itself, so its scrutiny had already informed the process.

My noble friend the Minister may add that he has concerns that an appeal could delay or frustrate the introduction of a cap. Ministers have made clear their desire that this legislation should be passed by July and implemented by next winter, but there is no precedent for CMA appeals delaying the implementation of a price control. In the last 11 price control appeals, no delay took place. CMA appeals typically take place while the regulator’s original decision remains in place. Any remedies are then implemented prospectively. The Bill could easily make provision to ensure an appeal could not delay or stop the implementation of a cap—no doubt my noble and learned friend Lord Mackay of Clashfern will have all sorts of ideas about how we might do that, particularly in Committee.

On stopping a price cap being introduced at all, this is not possible in practice, because the Bill imposes an explicit duty on Ofgem to impose a cap. No appeal process could override the will of Parliament. A CMA appeal would be less burdensome, more straightforward and less costly than the alternative route of legal challenge; namely, the judicial review. Since 2000, CMA appeals have taken on average a little under nine months end to end, compared to around 10 months for JR cases. The CMA’s procedural rules and the rules on costs deter litigants from bringing vexatious challenges.

Equally significantly, the CMA is able to make changes immediately, while a court would need to remit the matter to the regulator, potentially extending the process by a number of months. Based on my experience, judicial review does not seem the appropriate standard for an assessment of a price control. A judge would be focused primarily on the process through which a price control was set and not on the type of complex considerations relating to the level of the cap that should be taken into account. Additionally, judges are not adequately equipped to assess this type of decision. The CMA was established and equipped with the appropriate resources and specialist expertise to undertake such work. It must be better and more helpful in alleviating the burden on the courts to have a specialist body looking at these technical issues.

In summary, the Bill introduces a significant intervention into the energy market, and recent history shows that care is needed to support competition and consumers. Price interventions are complex and should not be taken lightly. It is our responsibility to ensure that the appropriate checks and balances are in place to provide for a fair measure of legal and regulatory certainty, which is essential to underpin vital confidence and investment in the energy sector. I do not believe the usual mechanism for such oversight, CMA appeal rights, would delay, obstruct or frustrate the implementation of a price cap—on the contrary. I hope the Government will reconsider to ensure that a more proportionate, efficient and appropriate form of intervention is achieved.

[Lord Teverson]

My Lords, although it is a non-financial interest, I should have declared that I am a trustee of Regen SW.

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[Viscount Ridley (Con)]

My Lords, I fear that the Bill is flawed. I accept that we may need to tackle the “tease and squeeze” culture and that this is a manifesto commitment, but price capping and rent controls often turn out to be ineffective or even counterproductive, especially with respect to the most vulnerable. They tend to treat symptoms rather than causes and in this case I fear that they pass the blame for energy costs from the Government to scapegoats.

The pachyderm in the parlour here is that the costs of government policies vastly exceed any aggregate saving to the consumer that might come about from a price cap. Policies deliberately introduced, mainly under the coalition Government, with the full knowledge that they would push up energy prices are now coming home to roost. Telling the industry to cap prices is like fattening a pig and then demanding that it weigh less. Like worrying that in crossing the Rubicon Julius Caesar might get his feet wet, it lacks a sense of proportion.

Even if we restrict ourselves to the official data from the Office for Budget Responsibility by consulting its Economic and Fiscal Outlook from March 2018 and go to tab 2.7 of its spreadsheet, “Fiscal supplementary tables: receipts and other”, we find that in the current year, 2018-19, environmental levies will cost £10.4 billion. That is more than seven times the “customer detriment” found by the Competition and Markets Authority inquiry on which the Government are relying. It is seven times as large as the sum that my noble friend the Minister described as huge. Subsidies to renewables account for £8.9 billion of that annual sum, or 86%.

The total cost of subsidies to renewables, according to the OBR, from the current year to 2022-23 is an almost unbelievable £52 billion, as the table that I referred to confirms. It is appropriate to look towards 2023 because, under the Bill, the price cap could be extended till then. Domestic households will pay for all of that £52 billion. About one-third of it, £17 billion, hits them directly in their electricity bills, but they will pay for the rest through increased cost of living. If a supermarket has to pay more to refrigerate milk, it must recover that cost at the check-out.

Remember: none of these subsidies for renewables is actually working very well. These technologies are not market ready; they are manifest failures, still begging for subsidy after decades of public largesse. As suggested by the Dieter Helm review, to which the noble Lord, Lord Stevenson of Balmacara, referred, we are not getting emissions reductions at a reasonable price.

[Lord Teverson]

I will not argue with the noble Viscount, although I disagree with him. But one thing I would specifically point out is that a number of onshore energy companies are trying at the moment to operate subsidy free. They are being prevented in doing that largely by government policy, but they are looking for subsidy-free onshore wind.

[Viscount Ridley]

I shall come to that point in a minute.

The recent low bid prices for offshore wind were, frankly, a bad joke. They were a play on the optionality that the Government have created and tell us nothing about what is really happening in the market. Onshore wind, far from being the lowest cost generator, remains one of the most expensive when its systems costs are taken into account. That is the key point: going subsidy free, to which the noble Lord, Lord Teverson, refers, did not include the systems cost of adding wind in remote areas. Systems cost contributes to these energy prices.

Here, the Government are proposing an ineffective and probably counterproductive price cap to save, at best, £10 billion on bills up to 2023. It is probably more like £3.5 billion and may even be a negative number, when their own failed policies are already stinging the consumer for £50 billion over that period. I am sorry, but I think this makes no sense. In effect, the Government have asked the energy suppliers to be their tax collectors and are now, in an incoherent gesture, forbidding their tax collectors from collecting the revenue. The energy suppliers would be acting entirely reasonably if they were to tell the Government to collect their own taxes and take the consequent blame.

Yet I believe the situation is even worse than that because the estimate of £1.4 billion a year detriment that the CMA identifies is almost certainly an overestimate. As the former electricity regulator Stephen Littlechild put it in a letter to the BEIS Select Committee in the Commons, Oxera argued that the correct figure could be anywhere between £0.7 billion, which is half of the CMA’s estimate, and minus £0.7 billion. Adjustments of £1 billion were made after the data room closed, so they could not be scrutinised by anyone. This point has not been rebutted.

Five former energy regulators—Littlechild, Callum McCarthy, Eileen Marshall, Stephen Smith and Clare Spottiswoode—have argued, in a strongly worded criticism of the detriment calculation, that:

“In our view this is a very misleading calculation. It is not, as might be thought, an estimate of excess profit. Rather, it is an estimate of how much lower prices could be if all suppliers in the sector were hypothetically more efficient than any actual supplier in the sector today. Such an approach seems to be without precedent in investigations by any UK competition authority”.


These former regulators warn that the Bill could result in increases in lower prices as suppliers remove offers from the market to offset the cost to them of the cap, and could be harmful to competition and customers generally, a point made by the noble Lord, Lord Stevenson. So even on its own terms the Bill might well be taking a non-problem and turning it into a likely one, and it ignores the real reason why Britain’s electricity prices are so high and are hurting our competitiveness.

What does the Minister propose to do about the real £10.9 billion a year detriment to customers instead of the specious £1.4 billion? What is his estimate of the cost of renewable subsidies to the British consumer over the next five years? What does he think is the risk that this price cap will drive prices up rather than down? What weight does he put on the criticisms of the five former energy regulators?

If I have failed to do so, I declare my interests in energy, including mainly coalmining.

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[Lord Henley]

I appreciate that that is the case and I have been on various websites that have offered me the choice of going either for a cheaper deal or what is termed a greener deal: that is an option for individuals to make. What we are looking at in this Bill is obviously to provide a cap to provide safeguards for people.

The Bill places a duty on Ofgem to consult on exemptions to the cap for green tariffs—those tariffs that support the production of gas or the generation of electricity from renewable sources. Having consulted, Ofgem will then have the power to implement exemption from the cap. That is for it; we are not opposed to green tariffs being exempt.

Moving on, network costs was another concern of the noble Lord, Lord Stevenson, and others. He asked, while being tougher in the future was all well and good, were customers being ripped off now? One could say that this is a matter for Ofgem: it is the independent regulator and responsible by law for setting the price controls. Ofgem reports that its assessment of network company business plans and the benefit-sharing arrangements in place in the price control is expected to save the consumers yet another £15 billion in the current price control Bill.

The seventh point the noble Lord raised was about timing. I repeat what I said at the beginning: it is important that we make good progress with the Bill, that we get it through to Royal Assent before the Summer Recess, and then we—or, rather, Ofgem—can get on with the process of bringing in a price cap, so that we will be ready with everything in place for the coming winter.

Lastly, I will touch on some of my noble friend Lord Ridley’s points. He referred to the “pachyderm in the parlour” and blamed the Government for putting up energy costs by imposing greenery, as I think he would put it, on household energy bills. I say to him that government policy costs make up only a relatively small proportion of the household energy bill—around 8% on average, according to Ofgem. Last year, as he will be aware, we published our Clean Growth Strategy, which outlined our commitment to supporting the growth of clean and renewable energy for all. Action to cut emissions can be a win-win for consumers: better insulated homes and more efficient vehicles mean less money spent on gas, electricity and other fuels. Our policies have helped reduce energy bills and costs overall: for example, my noble friend will be aware that we have seen the cost of solar cells come down by some 80% since 2008 and, as I said earlier, the cost of offshore wind has declined by about 50% over the past two years.

[Lord Teverson]

Does the Minister agree—I am sure he does—that when it comes to vulnerability and all the issues around keeping warm, it is important to note that the gas and oil that I have to use as a rural dweller to keep warm are not charged any environmental costs and so do not incur those additional costs?

[Lord Henley]

I am not aware of how the noble Lord heats his house—unless he was the Liberal who confessed the other day to having an Aga run on oil, which always struck me as a good Liberal policy: it is a thing others are accused of. I will find out about that in due course. I will look carefully at the noble Lord’s question and come back to him in writing in due course. I was trying to make clear that our policies have helped reduce energy bills for households in efficiency savings—

[Lord Teverson]

I am sorry to interrupt the Minister again, but I was trying to be helpful. I apologise that I clearly was not. Environmental charges are only on electricity: they are not on gas and oil. He can take it from me. I do not want a reply from him. I apologise for having put him off his stride when I was trying to be helpful.

[Lord Henley]

The noble Lord is always helpful, as are the Liberal Democrats. I look forward to the help they will be offering and providing in Committee and at later stages. I will end by making it clear—as I was trying to do before the noble Lord interrupted me twice—that our policies have helped reduce energy bills for households as, on average, energy efficiency savings have more than offset the cost of supporting the low-carbon investment. The Bill will help consumers in due course. I look forward to an interesting Committee and Report thereafter, and I hope that all noble Lords will bear with me in what I said about the importance of timing in relation to the Bill. I beg to move.