Energy Markets (Competition)

Mark Lazarowicz Excerpts

Wednesday 26th March 2014 Westminster Hall

[Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Sir Roger. I am delighted to have secured this debate, which is even more topical this morning than when I submitted my request last week.

The debate’s background is the rise in energy prices faced by domestic and business consumers over the past few years. Since 2010, energy bills for domestic consumers have risen on average by almost £300, and businesses say that energy bills are their second biggest cost. Many consumers find it difficult to pay their increasing bills and are concerned that they may face further rises. The issue’s importance was recognised by my right hon. Friend the leader of the Labour party when he announced that a Labour Government would freeze energy prices until 2017, thereby making an effort to help people facing today’s cost of living crisis. There is no doubt that that announcement struck a chord with the public, but the freeze was always envisaged as an interim measure to allow time for more fundamental questions to be addressed. It is important to have that discussion here today.

One fundamental question is how far there is effective competition in the energy market, or whether competition is, to a greater or lesser degree, ineffective and whether, as a consequence of any such weakness, lack of competition leads to higher prices for customers. Customers often feel there is lack of competition in the market’s operation. They see that when world prices go up, the price for the consumer goes up; but when world prices go down, the retail price does not appear to go down as far or as fast. That can be seen by comparing the movement of wholesale energy prices over the three years up to the winter of 2013. Wholesale energy prices were relatively stable from the winter of 2011, rising by an average of 1% a year, but during that period large energy companies increased their retail prices by an average of more than 10% a year. That is not just a recent phenomenon, and it is not just a phenomenon under this Government. If we go back to 2008, there was a dramatic rise in wholesale prices for both gas and electricity followed by a substantial increase in retail prices that was roughly commensurate with the increase in wholesale prices, but when there was a dramatic drop in wholesale prices in 2009—a drop of about 45%—it was not followed by a big drop in retail prices, which went down by only 5%.

We have to ask why that is the case. What does it show, and what needs to be done? Various reasons have been suggested for the apparent lack of effective competition in the market. It has been suggested that one factor might be customers’ lack of willingness to move from their traditional regional supplier, and it is certainly true that in most parts of the country—although in some parts more than others, with Scotland being one such example—most customers still stick with their traditional regional supplier. The dominance of the big six has barely shifted. The figures from the Department of Energy and Climate Change show that, until the end of 2012, at least, SSE, E.ON UK and RWE npower held exactly the same market share in gas as they did five years previously. British Gas’s market share dropped from 44% to 40%, and EDF’s share rose from 7% to 9%. Similarly, there were no real changes in the share of the electricity market held by those companies over that five-year period.

Some suggest there is inherent weakness in a system dominated by vertically integrated companies—that is what we have for the most part—in which both the supply and generation businesses are closely linked. Others point to the unwillingness of consumers to move because of the complexity of tariffs. Until recent changes, by some counts there were more than 400 tariffs across the various companies.

Of course, the companies point to other factors as being the principal reason for the gap between wholesale and retail prices and for the system’s apparent difficulties and shortcomings. I accept that it is a complex world and that the market is influenced by many factors, but important questions need to be asked, and it is certainly not just the Labour party that is asking those questions. As hon. and right hon. Members know, the consumer organisation Which? recently published material estimating that the flaws in the market, as Which? describes them, have left consumers paying almost £3.9 billion more than they ought to have paid since 2010.

Businesses are also concerned. Along with Which?, the Federation of Small Businesses wrote to the competition authorities a few days ago saying:

“We all want to see a transparent market where consumers and businesses alike can understand their bills, compare prices and switch easily. We want to see the presence of strong competition right across the industry drive affordable pricing that gives everyone the confidence they are paying a fair price for their energy.”

Small businesses, consumers and the Labour party are raising those concerns and questions.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I congratulate the hon. Gentleman on securing this debate. Does he agree that, in addition to the lack of competition, there is widespread concern that millions of customers are making complaints, particularly against the big six?

[Mark Lazarowicz]

Indeed, and the figures have been rising, as the hon. Gentleman knows.

As I said at the start of my remarks, the Opposition see energy prices not just as the first step to reduce pressure on customers but as part of a much more fundamental reset of the energy market. In summary, we propose to get the energy companies to separate the generation and supply sides of their businesses, and we want to see all energy companies trading for energy in an open market by selling into a pool. We want a simplified tariff structure and a new, tough energy watchdog with new powers to police the market, including the power and remit to force energy companies to cut their prices when there is evidence of overcharging. All those proposals would make the market more transparent, and no doubt my hon. Friend the Member for Sunderland Central (Julie Elliott), our Front-Bench spokesperson, will refer to those proposals in more detail.

The proposals in the Labour party’s consultative document are welcome, and I note with interest the response to the consultation published today by SSE, although I have had only a brief opportunity to look at it this morning. I suspect that the Minister will say that, yes, there are weaknesses but they are being addressed. He will no doubt point to increased competition and to the new entrants into the market. Indeed, there has been an increase in the role and market share of new entrants, but they still represent a fairly small proportion of the market as a whole.

There is a long way to go, and we all know that many customers are reluctant to switch for all sorts of reasons. They might be uncertain about how to go about switching, for example. Some of my constituents switched and found that, after an apparently attractive offer, within a few months they were paying even more than they did under their previous supplier. The tariff simplification introduced by the Government, which on paper seemed a good idea, has in practice led to a number of difficult consequences. Many of us know of cases in which people have ended up paying substantially more following the tariff changes because those changes are in some cases biased against people who use little energy, either by choice or by lack of income or resources.

A much more fundamental change is needed, which is recognised across the industry. I also recognise that the weakness in the market is not the only reason for higher prices. World supply and demand is a major factor, and taxes and support for energy efficiency and renewables have an impact. There is certainly a need for changes there as well. Like many Members, I am concerned that the changes the Government have introduced so far will mainly result in the watering down of energy efficiency measures, which are the single biggest way of enabling consumers to cut energy waste and cost.

[Albert Owen (Ynys Môn) (Lab)]

Another factor in the increase in prices and the high prices is distribution cost. In the distribution areas, there is no competition at all. That monopoly contributes somewhere between 19% and 24% of a bill. Does my hon. Friend agree that we should look for greater competition in that area?

[Mark Lazarowicz]

Absolutely. That is one of the areas where a fundamental investigation is needed, with fundamental questions asked and fundamental changes made. I recognise that businesses have to make a profit for their shareholders and future investments. They are big businesses, so the profits will have big numbers in them. Nevertheless, there are fundamental questions. Today, SSE has made an announcement that promises an energy price freeze until at least 2016 and it is preparing to separate legally the retail and wholesale sides of its business. Those changes are in line with the policies announced by the Labour party last year.

[David Mowat (Warrington South) (Con)]

This debate is indeed timely, given the SSE announcement. The hon. Gentleman will also be aware that SSE announced this morning that of the four offshore wind farms it was planning, three will not now go ahead.

[Mark Lazarowicz]

I see that that is how it has been described by some in the media. I have not had a chance to look at the SSE comments in great detail, but I am not sure that the causal linkage that the hon. Gentleman suggests exists. It was interesting, given the various comments on the Labour party proposals, that SSE has welcomed the need for long-term stability in the framework for investment. Perhaps the single biggest problem for long-term investment in offshore wind has been the confused and mixed messages sent by the Government recently.

[David Mowat]

rose—

[Mark Lazarowicz]

I will draw to an end, because I know a lot of colleagues want to speak in the debate, including the hon. Gentleman. There is an increasing focus on price, the customer, the structure of industry, long-term prices and long-term investment, and that focus comes from many quarters. If it had not been for the intervention of my right hon. Friend the Leader of the Opposition and our policies last year, we would not have seen this welcome concentration of minds on the issues. That has encouraged many to bring forward their proposals for change. I hope that this debate will contribute to getting the changes in the industry’s structure that are so desperately and urgently needed.

[Several hon. Members]

rose—