Cost of Living

Lord Whitty Excerpts

Thursday 3rd February 2022 Grand Committee

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[Lord Whitty]

That the Grand Committee takes note of the cost of living, and in particular (1) the rising cost of household energy, and (2) the role of the consumer protection regulatory regime in energy markets.

[Lord Whitty (Lab)]

My Lords, I obviously had great prescience in going for this debate on this day. Unfortunately, it means that Ofgem and the Chancellor have stolen some of my thunder and limelight. I actually had my coat on to come here when the Chancellor was speaking, but I heard most of what he said.

I propose to focus largely on the energy market failure, but let us start by putting it into broader context. Higher gas prices are coming, while shop price inflation rates doubled in the last month, rents are at their highest level for more than a dozen years in real terms, house prices for first-time buyers are at their highest level ever, food prices are rising in the post-Brexit situation and general price inflation is at its highest for about 30 years. That means unprecedented numbers of people are taking out loans, and incomes are not keeping pace. Wages, benefits and pensions are all falling in real terms in the face of this inflation, and all taxpayers are about to be hit by the surcharge on national insurance. As a result of these costs and pressures, according to Which?, more than 2.5 million households in the month of January alone defaulted on at least one regular payment—rent, mortgage, energy, loans or credit cards—placing those families in financial difficulty and often under serious mental stress.

That is the background, but the energy price rises are the most spectacular feature. Another enormous hike in the energy price cap of nearly £700 was announced today. This is before we all have to face up to the very substantial cost of transitioning away from gas heating entirely, and the need for a just transition to a non-fossil-fuel-based home heating system.

I will return to that longer-term issue in a minute, if I have time, but the Government and Parliament need to recognise the stress and hardship that all of this is causing to vulnerable individuals and households, particularly to low-income families. As I understand it from the Chancellor’s Statement an hour or so ago, the Government recognise that the hike in the energy cap is a problem. The Minister will correct me if I am wrong, but the Chancellor intends to offer an offset to the potential £700 rise in household energy bills by giving all bill payers an undifferentiated £200 each, unrelated to household income, energy bills or property conditions. This is to be delivered via a sort of indirect loan to suppliers, which then have to repay the Government. The costs of this will eventually be passed back to consumers, thus adding to potential household cost pressures and indebtedness down the line. In addition, over and above what was rumoured, the Chancellor is announcing a rebate to lower council tax bills.

There are aspects of what the Chancellor said that I welcome. I do not think he has done it in the best way, but he has recognised some of the problems. However, it still deals with only half of the potential impact on households. The £200 is not much of an offset on £700, and, frankly, using council tax is an incredibly bureaucratic and inefficient way of getting help to the most desperate families.

Yet the Government did not need to invent new mechanisms. Fuel poverty groups and, indeed, the Labour Party have proposed a number of immediately available interventions that the Chancellor could have used—for example, post-Brexit freedoms to remove VAT, temporarily at least, from domestic energy prices. He rejected that and I can in part understand the reasons; nevertheless, that was an immediate and beneficial option. He could have expanded the warm home discount to lower-income families. There is a reference to that in the Chancellor’s Statement, and I should be grateful if the Minister could spell out exactly what it means. The Chancellor could have extended winter fuel payments to a further 2.4 million vulnerable households. He did not do that. He could have offered a one-off rebate for low-income households this winter, which could have helped at least 4 million of those households. He could have given more help on rapid repayments of utility arrears; I am not whether his Statement covers that. Of course, he could have moved on the reintroduction by energy suppliers of a social tariff for the long-term benefit of the most vulnerable households—a move I strongly advocate.

In addition, we and campaigners have called for a return to an England-wide programme of effective household insulation and energy-efficiency measures. Over the medium term, that would reduce energy consumption and hence costs to households. There was some reference in the Chancellor’s Statement to that, but it looks pretty miniscule to me, at first sight.

We need also to look at the underlying reasons for and effects of the price rise, and the role of the Government and the regulator in consumer energy prices. Of course, the immediate cause of the increases has been the indirect effects of the dramatic rise in world gas prices. But, frankly, the British economy of all economies ought to have been more resilient and insulated from the effects of Russians playing politics and the Qataris controlling the shipment of LNG. Storage and flexibility measures have not been adopted or invested in. That is partly due to a failure by Ofgem to provide suppliers and the system with the means to do so, but Ofgem has also failed in its role as regulator on behalf of consumers, particularly vulnerable consumers.

About three years ago, I chaired a group convened by Energy UK, the industry’s trade body, to identify means through which to provide a better service and more appropriate pricing structures for vulnerable consumers. To be fair, a lot of larger energy companies have adopted some of those recommendations but there is much more to be done. That has been at the behest of the companies themselves, not Ofgem. Over the past decade, Ofgem has regarded the main means of improving service to consumers as being an increase in competition. That helps significantly in most circumstances, but the way in which it has been done has actually caused more problems than it resolved for consumers, the Government and the regulator.

Obviously, the old oligopoly of the big six was rightly challenged but the number and variety of challenger companies that were nodded through and licensed by Ofgem, thereby relieving some of the obligations regarding poorer consumers, meant that, over a period of about five or six years, the oligopoly moved to becoming a cut-throat market of some 70-plus companies, many of which were new and untested. The sustainability of many of the rest was also suspect. It is clear that in this vital part of its obligations, Ofgem just allowed the establishment of dozens of novice companies through the licensing system, with totally inadequate financial resilience tests, superficial checks—if any—of the management structure and investment sources, and no stipulations on customer service in general or in particular in relation to vulnerable and low-income groups.

Citizens Advice has provided us with a litany of those failures and Ofgem’s failure to meet even the basic requirements. Yet in recent years, there has been only one Ofgem formal customer service investigation. It made no use of its powers to stop a supplier taking on customers when there were customer service concerns about the company. In the four years before the gas price crisis, the number of people working at Ofgem on consumer service had fallen by a quarter.

As Citizens Advice says:

“Regulatory failings led to a culture of non-compliance”


among many of these new companies and the rush of company failures has duly followed, with dire consequences and uncertainties for consumers and messy transfers of customers to the larger companies, increasing the pressure on consumers and the recipient companies.

It is true that early last year Ofgem introduced a new supplier monitoring and checking system, yet only one of the 20-plus companies that failed last year had any sort of customer continuity plan in place to protect their consumers in the event of financial collapse. That is a serious failure by the regulator and one which the Government and the regulator need to address to decide the size of the market we can cope with. The big six was clearly wrong but a market of 70 or 80 small companies, poorly based, is also not the right answer.

The other thing is that, if we have not been able to cope with a traditional gas price rise and preserve and increase customer service during that period without hitting consumers and without the Government having now to bail them out through the interventions the Chancellor announced today, then there is something seriously wrong in the regulatory system. I have it in mind that we will have to cope shortly with a much bigger issue—the transition of the 80% plus of our households which are on gas supply at the moment to as-yet-unknown forms of alternative low-carbon or no-carbon fuels. That is a massive operation, and it needs planning now. Yet, we still need key decisions from the Government and industry, and key questions are likely to be asked of the regulator.

That is going to be a massive transformation. The last time we did it, when we replaced town gas with North Sea gas, it was organised in every household that used gas by employees of a nationalised corporation —most of whom were members of my union—who went into every household. That took time and it needed planning, but it was a simple structure. We no longer have those simple structures. We no longer have the clear strategic decisions, and yet we are going to place on top of this system, rightly, in order to meet our carbon obligations, a whole new system of heating for pretty well four out of five households in the land, and many businesses and offices as well.

Ofgem and the department are going to face a much bigger problem than a global gas price rise. They are right to face it because we need to change our whole heating system, but we need to know how we are going to do it. We need to know that consumers’ interests will be protected in doing it. We need to know who is going to deliver it. We need to know some basics, such as what kind of fuel we are going to use and whether there be one system in different parts of the country. The Minister will know that I have asked questions on this before, but we still have no clear answers. If we postpone decisions on how we will heat our buildings in future, the chaos we are facing in relation to one big world problem is going to be compounded as we try to implement a change to meet our carbon objectives.

I am very worried about the immediate situation, and thousands of households are extremely worried and unable to meet the costs implied, even allowing for the Chancellor’s claim that he is going to cover half of the system—in a way that I do not regard as optimal. But even if he does that, there will be cost increases which thousands of households will be unable to meet.

The Government face a serious economic crisis in the form of the energy price, and a serious social crisis in terms of the impact on families and households. There is also a serious strategic and political crisis, in that we have to change the system of regulating this market and make clear to the industry and consumers the way we are going. I hope the Minister can give a few answers today, and that the Government as a whole can address these problems in the coming weeks.

--- Later in debate ---

[Lord Whitty (Lab)]

My Lords, I genuinely thank the Minister for that comprehensive reply, in which he gave some additional information about the Chancellor’s announcement, which I shall look forward to reading in detail, and made some other points that we need to take on board in this context. It is an extraordinarily complex issue that we have been addressing today but, at the end of the day, the immediate problem, as well described by my noble friend Lord Jones, is that of families living in cold and in debt. We have an opportunity, if we can get this right, of making sure that what has happened today does not make their situation worse but begins to ameliorate it.

The bigger point that I am making—big and emotive though that is—is that there are three different things that we need to address. We need to address the immediate impact of the gas price rise on the poorest families and on all families, in many respects, and on our economy. I hope that the Chancellor has gone a little way towards that, although I do not think that he has gone far enough and I think that some of the means that he is proposing are very odd. It is very odd to use council tax as a way in which to give back money; it is similar to using national insurance in the way that the Government have done to raise money for the health service and social care. There is a tax system that we should be using for these purposes, which would be much more progressive than what he proposes and much better targeted. However, he has done something and I appreciate that.

The second crisis, of course, is the one that the noble Baroness, Lady McIntosh, and others clearly outlined: the present regime with Ofgem is not effective in creating a market where competition really works, as distinct from one that is very vulnerable, or one that protects the more vulnerable consumers. I am glad to hear that we are having an assessment of consumer regulation under Ofgem, but we need to make that serious and effective. I look forward to seeing progress on that as rapidly as possible. The Minister made a pointed remark that Ofgem is independent; it is sort of independent, in the sense that it is at arm’s length, but it works within a framework defined by government and by legislation. I am looking forward to the next White Paper and energy Bill—I am not sure that the Minister is, but I am.

The third issue is that we need to ensure that our energy system and its interrelationship with consumers and industry prepares now for the transition away from fossil fuels. Given the failures that we have had recently on the relatively easy part of protecting consumers, the way in which we take the economy and consumers through a massive change in energy supply, in every house and flat in the land that uses gas, will have to change. We do not at this point know how it will change or what it will cost. The immediate answer put on the table by the Government is to have air pumps, which is putting people off because of the current cost of air pumps, and particularly putting off those who may have to adopt them early, such as the rural consumers that the noble Baroness, Lady McIntosh, mentioned.

Energy efficiency is a vital part of this, as the noble Baroness, Lady Scott, and others emphasised, and as the Minister accepts, but the intervention to change how we heat our homes and provide basic warmth for our children and elderly people will have to be much more substantial than the inadequate response from the industry and regulator to the gas price hike. It is a much bigger issue and we need to make sure that we have a regulatory system that is capable of taking it on and taking consumers with it. The Minister has a big task to resolve all those issues, but at least he has given us some indication of how the Government are thinking today and I thank him and everybody who has contributed to this debate.

Motion agreed.