Energy Markets (Competition)

Mike Weir Excerpts

Wednesday 26th March 2014 Westminster Hall

[Mr Mike Weir (Angus) (SNP)]

I am pleased to be able to make a contribution to the debate under your chairmanship, Sir Roger.

I congratulate the hon. Member for Edinburgh North and Leith (Mark Lazarowicz) on securing the debate on such a momentous day, when SSE has announced a price freeze until January 2016, which neatly takes us past the next general election. I should declare an interest: I am a customer of SSE and pay by direct debit, so I will benefit from the freeze, with the added advantage of avoiding the annual argument when the company tries to put up the amount of the direct debit, even though use might have fallen.

SSE also announced that it is to split its generation and retail arms. The Labour party is, of course, seeking to take the credit—as good politicians, that is not surprising—but given what the chief executive said on the “Today” programme this morning, the decision is clearly a commercial one, driven by the fact that Ofgem is due tomorrow to announce possible further action against energy companies.

Ofgem has already taken action to force generators to trade fairly with independent suppliers or face financial penalties, and to post the prices at which they will trade wholesale power up to two years in advance, as well as ensuring that more information is given in annual statements. I have not always been the greatest fan of Ofgem, but in this case its actions appear to have borne some fruit. It will be interesting to see how things develop after the SSE announcement and whether others of the big six energy companies will follow suit.

Another competition problem arises, however, in how a price freeze will affect the smaller players in the market—especially in the gas market, where many buy gas on the spot market using the day-to-day price. At a time of international uncertainty, that price can fluctuate wildly. A freeze by the big six may cause problems for the smaller companies.

It has long been a major frustration that we find it difficult to discover the true costs of energy and have to wade through the opaque ways in which it is traded within companies. The Ofgem decision should at least give us some greater information. We have to take care and keep a close eye on how things work.

Last year, the “Dispatches” programme on Channel 4 investigated energy prices and described how E.ON, another of the big six, internally deals with its existing split between retail and wholesale markets. Apparently, its retail arm makes no money, because it pays huge rates of interest on money borrowed entirely from associated companies within the group. Although E.ON is already in theory split between generation and retail, it is far from clear what real profit is being made, because of the accountancy practices employed. Will the Minister assure us that the new Ofgem rules will tackle such abuses and make it clear what is actually being earned by both sides of the company?

We can all welcome a freeze on energy bills, but we should not get too carried away because far from everyone will benefit from such an action. Again on the radio this morning, it was pointed out that SSE has higher charges with some tariffs than other companies, and that it is possible to get a better deal by shopping around even among others of the big six companies. That illustrates another problem with a simple freeze, which is that many customers are on less than great tariffs, especially those on prepayment meters. A freeze will lock in those inequalities within the system. We need to look closely at the inequalities among the different tariffs and ensure that those with the most need get lower energy prices.

It is also worth noting that a simple freeze will produce regional anomalies, because the proportion of people paying by direct debit fluctuates wildly. For example, in the south-east of England it is 63% and in my own area of the north of Scotland it is 56%—curiously, the very two areas in which SSE is the dominant player—while in London it is only 41%, possibly because of the much more transient population and the many houses of multiple occupation in the city. The effect of the freeze will therefore vary greatly.

It is also worth noting in passing that a price freeze comes with a cost. SSE also announced today that it is shedding 500 jobs and pulling out of three of its proposed offshore wind farm developments. It has said previously that it is pulling out of some wind farm developments, but I remind the hon. Member for Warrington South (David Mowat) that although SSE is pulling out, several parties are involved in most of the developments, so that does not mean a development will not go ahead.

Many of us warned that a simple price freeze would have the effect of endangering the investment urgently required to ensure that we have an energy infrastructure that meets our future needs. SSE’s announcement is an indication that that could indeed be a problem. Both Ofgem and the Government need to address that to ensure the correct balance between prices and investment. If SSE’s decision to withdraw from the wind farm development is replicated by other companies, that will pose a real threat to future renewables development. The future is in renewables, and if we are to get prices down and keep them down we must ensure that such development goes ahead.