Domestic Gas and Electricity (Tariff Cap) Bill

Michelle Donelan Excerpts

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

[Michelle Donelan (Chippenham) (Con)]

For too long many of my constituents and people living across the UK have been trying to manage overpriced energy bills and have been punished for being loyal customers. In a poorly functioning energy market, all customers would switch between suppliers to get the best value tariff for energy. However, only a proportion of consumers have been doing that, so creating a two-tier, broken system. In fact, according to Ofgem, as of September 2017, 57% of customers with the 10 largest energy firms were on uncapped standard variable tariffs.

I make it clear that I believe in a free market, but I also believe in a free market that is fair—one where the consumer is king and has choice. Currently, loyal customers suffer and we have a two-tier, unfair, broken energy market. This Bill will enable a temporary intervention in the market and will support our manifesto commitment to extend price protection.

Currently, some 11 million households are unprotected and on poor-value standard variable tariffs. The rate of switching is not yet high enough to rectify that anytime soon, so loyal customers suffer. We effectively have a system in which switchers can save around £300 a year but customers of the big six who do not switch and who stay on default standard variable tariffs are overpaying each year. In fact, the Competition and Markets Authority has found that, between 2012 and 2015, customers of the big six collectively paid £1.4 billion a year more than they would have paid in a well-functioning market.

With other initiatives to drive down energy costs and usage, as well as to promote switching, it is easy to question why a cap is needed. Well, it is needed. Those measures will help, but they will all take time, hence the need for a temporary measure. Let us briefly look at the key initiatives.

First, the roll-out of smart meters alone is predicted to take £300 million off consumer energy bills by 2020, giving consumers the knowledge to make informed energy and supplier choices, but that roll-out will take time. In addition, ensuring that properties are energy efficient is also essential, and the energy company obligation “help to heat” scheme will upgrade around 1 million homes by 2020—it will still help only a fraction of the population. The warm home discount scheme provides 2 million low-income and vulnerable households with a £140 rebate each year, but that helps only that specific group. The uSwitch campaign has gained traction over years, and the Government are also working with Ofgem to make switching suppliers even quicker and easier. But the annual switching rate in September 2017 was only 18%, meaning that five out of six households do not switch energy supplier. The number of people actually switching increased by 30% for electricity and 24% for gas. So the proportion of people switching is still far too low but the rate at which switching is increasing is growing dramatically. That indicates that it will become more the norm, but that it will take time.

We can argue today that we need to take responsibility for our own actions and for switching, but we also need to encourage and enable people to do this, and protect the most vulnerable in society. Leaving the system broken and ripping off loyal customers is not the right thing to do. In addition, there is a lack of awareness that switching needs to be done regularly, because as a good-value contract ends, it usually defaults to a single variable tariff. Martin Lewis, founder of MoneySavingExpert.com, has said that we need to make up our minds up between regulating prices, or encouraging competition and switching. However, I do not believe the two are mutually exclusive in this scenario. The regulation is just a temporary fix while we encourage switching and work to reduce energy prices.

Martin Lewis and some others also argue that a narrower price differential will discourage switching. That has not happened in Northern Ireland, and it should incentivise companies to find more efficiencies and reduce prices for switching customers. In addition, Mr Lewis himself warns that the cap will only reduce some customer bills by about a third of what switching would do. That shows the incentive.

I am delighted that the Government have accepted the Business, Energy and Industrial Strategy Committee’s sensible recommendations on the six-month reviews and on the Bill requiring Ofgem to consult on exemptions from the price cap for green tariffs, including the power to exempt them. That will protect green energy providers and give consumer choice. I agree with the Committee that we must also strengthen the definition, standards and checks to ensure that those that qualify as green are green and that this is not just used as a loophole. Good Energy, one of the leading green providers in the UK, is based in my constituency and has in the past expressed its concern to me that consumers select companies thinking they are green when they are actually only partially green. These companies can therefore afford to charge less, so we need to be careful about exemptions to the cap and ensure that the energy market is more transparent to give consumers informed choices. I look forward to hearing from the Minister on that.

In conclusion, I agree with the chief executive of Citizens Advice that this Bill is

“a significant step towards an energy market that works for everyone”.

But it is important that this provision is seen not as a stand-alone measure but as a temporary solution that will encourage switching, work to inform consumers of their energy use and bring energy prices down via a number of incentives.