Energy Prices, Profits and Poverty

Nadine Dorries Excerpts

Thursday 7th November 2013 Westminster Hall

[Nadine Dorries (in the Chair)]

I inform Members that this debate was listed on the Order Paper earlier in the week as finishing at 3.30 pm, but that was removed from the Order Paper yesterday. The transport debate will start at 3 pm, when this debate finishes.

[Sir Robert Smith (West Aberdeenshire and Kincardine) (LD)]

It is a pleasure to serve under your chairmanship, Ms Dorries. I remind the House of my entries in the Register of Members’ Financial Interests involving the oil and gas industry, particularly a shareholding in Shell. In addition, I have a non-financial interest as the honorary vice-president of Energy Action Scotland—a fuel poverty charity.

The Select Committee on Energy and Climate Change is pleased to have been granted this debate on our report. It is timely, given the issue’s high profile and in the context of the price rises recently announced by most of the six largest energy companies. The subject has come to the fore again just as the winter weather has started to set in and people face the challenge of keeping their houses warm. The Prime Minister has made a number of interventions to try to reduce energy bills, by suggesting that environmental levies will be rolled back and, more recently, that transmission costs can be reduced. However, the Energy and Climate Change Committee considered the subject in detail, including profits and poverty, well before the recent spate of interest. Our inquiry was launched on the Floor of the House in December last year, and we reported at the start of this summer.

Our report’s opening conclusion was that energy bills are rising and are likely to continue to rise. The wholesale price of fuel, driven by rising global gas prices, has been the largest contributory factor. Several other factors also contribute, including the need to invest in and finance the UK’s electricity and gas network and energy and climate change policies. The extent to which energy supply companies are actively working to reduce their operating costs remains unclear. The Committee had hoped to uncover the real story behind energy company profits, but alas, that is significantly more difficult than it should be. At the time of the report, the Committee stated its disappointment that

“energy supply companies have not gone to greater lengths to explain to their customers the reasons behind energy price rises”

and highlighted that poor communication by energy companies

“has resulted in deep mistrust from their customers.”

At a time of rising prices, it is crucial that consumer trust is restored if we are to get the investment that we need. Just last week, the Committee held a session with energy companies to find out what was driving the recent price increases. Following that session, we asked the energy companies to set out information about their profits in a standard format. We published that information on our website today, although it still does not provide a complete picture. Bringing forward the information is an ongoing process, and the Committee will continue to consider how to improve the transparency and comparability of energy company prices and profits.

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[Dan Byles (North Warwickshire) (Con)]

According to DECC, average gas and electricity prices have risen by 41% and 20% respectively in real terms since 2007. There has been a lot discussion in the past couple of weeks on the most recent price rises—on average, 10% per company price rises, which we all saw in a very short space of time—and a lot of the debate focused on how much the energy companies could or could not blame the preceding year’s rise in wholesale prices.

The Committee had a discussion with the companies, and there was some disagreement on exactly what had happened to wholesale prices over the previous year. The figures from 2007 show that we should not consider the problems of one year in isolation. We should not consider in isolation an individual set of price rises put in place by the companies because the problem has been ongoing for many years. There are continuing upward pressures on prices.

In some ways, perhaps the Committee has once again demonstrated its prescience by pre-empting this debate by conducting our inquiry before the most recent—perhaps “hysteria” is not the right word—strong interest in energy prices, which is a result of the most recent price rises. The price rises are important because they have crystallised the debate. Energy prices are now a rapidly increasing concern, and energy policy is dominating the news for reasons that those of us who want a coherent, long-term energy policy probably wish it was not.

All sorts of odd things have been thrown into the debate in the past few weeks, from a potential Government-imposed price freeze to a potential windfall tax and, most recently, potential changes to the management of green and social levies. To a large degree, I am concerned that many of those solutions are reactive and potentially temporary. The nub of the problem with energy policy is that, for multiple reasons, we face ongoing upward pressure on prices. For too long, politicians of all shades have not been willing to have an honest debate on why that is and what the implications are.

In particular, through our collective rhetoric, politicians have persistently fuelled the myth that Governments can control the cost of energy to a much larger degree than they can. We are all guilty of that. It is tempting to have a pop at the Opposition for what I believe is an incoherent price freeze policy, but politicians of all parties have tended to point to the other lot and say, “When you were in power, prices did x.” That fuels the expectation that Governments can pull a lever, push a button and control such things.

In some ways, it is hardly surprising that the natural conclusion of all that rhetoric is—I will say it—the incoherent policy of the Labour party, suggesting that it can pull a lever and freeze prices. Neither a price freeze nor a windfall tax would do anything to address the root causes of energy price rises. Both would be short-term sticking plasters to address the symptoms.

Prices have risen for many reasons. In spite of the argument over the past few weeks about what has happened to wholesale prices during the past year, it is true that increasing international wholesale prices are a key medium-to-long-term driver of why consumer prices are rising. It is hard to see therefore how the wholesale price over the past year can justify the large price increases that we have seen in the past few weeks. The UK is now a net importer of gas, so we are a price taker; we have to pay the going rate for the marginal cost of gas—whether for liquefied natural gas or shipped or pipeline gas, whichever is setting the marginal price at the time.

Prices are also increasing owing to significantly rising network and transmission costs. Those costs are getting off scot free, to a certain extent, because we do not talk about the transmission costs as much as we should—up 10% this year. We do not see them discussed in the media or in the House to the same degree as we discuss gas prices and wholesale prices.

Furthermore, some of the price rises are clearly the result of Government levies, which are there for different reasons; DECC, however, has estimated that energy and climate change policies will add 33% to average electricity prices by 2020. It is true therefore that an artificial price rise has been put on bills by politicians. The Government are absolutely right to review the impact of such levies and whether the different policies can be managed in different ways.

I do not want to sound as though I am excusing the big six and saying that they are not to blame, because they have a lot to answer for. In our inquiry, we struggled to pin on them so many of the legitimate questions that we had to ask—Members who spoke earlier have gone through some in great detail, and I will not repeat what they said—but, clearly, a lack of transparency and competition have allowed us to get into the situation in which the big six have such highly complicated structures that they appear to be overcharging themselves. To a degree, the high profits at the generation end and the low profits at the distribution end smack of the big six overcharging themselves and each other somewhere along the line. I urge the Government to reconsider asking Ofgem to implement the BDO recommendations, as the Committee suggested.

For politicians in the House to point at the big six and say, “It’s all their fault,” is dishonest and simplistic, however, because the situation is much more complicated than that. As a matter of policy, we are in fact switching off the cheapest ways of generating power and replacing them with more expensive ways of doing so. We are doing that deliberately, with a large degree of consensus, and for sound reasons if we believe that climate change is a real problem that needs to be addressed. I do believe that, and most people in this place—though not all—probably agree.

In a sense, however, we have not even started on that process. Right now, we are still sweating old coal assets as if there were no tomorrow—burning cheap coal in old coal-fired power stations, for which the capital costs have long since been paid. When those power stations start to come off line over the next few years and are replaced with newer generating assets, we really will see the structural cost of energy starting to rise as a result of many of our policies. The levy control framework, for example, will have risen to almost £6.5 billion by 2018-19, whereas all big six energy companies made a total of £3.7 billion in earnings before interest and tax last year.

There is a growing problem with the cost of what we are doing. I am not necessarily making a plea not to do those things—I will come on to that—but I am making a plea for a honest debate about the impact and the implications. I have said it before and I say it again: I regularly find myself sitting around a table with Government officials, scientists, academics, politicians and the industry to discuss energy policy, but the person who is usually missing from the table and the discussion is Mrs Jones of Acacia avenue, who ultimately has to pay for everything that we are doing.

The Government and politicians cannot simply wave a legislative magic wand and wish into existence the ideal energy mix that we might want to see in 2030 or 2050. We need a credible and investable road map for how to get from where we are now to where we are going. That would include a sensible energy mix, including new nuclear—I strongly welcome the recent decision on Hinkley Point—and we must not be frightened of moving from coal to gas. The Government’s gas strategy has, in fact, demonstrated that they recognise that.

We need to explore shale gas; we have a potentially enormous resource on our doorstep. It must be done safely and with the consent of local communities, but we must not allow fears that are in many cases built on myths to prevent us from exploring and exploiting that domestic resource. We must also have a much stronger focus on carbon capture and storage, because gas will be part of the mix for a long time and we need to mitigate that by moving much further forward on CCS.

The argument for moving some of the levies, which are social as well as green, from energy bills into general taxation is a sound and interesting one. I welcome the review, because I want to see more analysis of the figures and numbers for what that might mean for the average energy bill, for the average income tax bill and at the different bands. We can do a lot of what we are doing much more progressively; the regressive nature of how we do things—through energy bills—has been a problem.

We also need much greater focus on energy efficiency, which is always called the elephant in the room. Interestingly, when I go into a room to talk about energy policy, someone will say, “The elephant in the room is energy efficiency.” I am sorry, but it is no longer an elephant, because we all know it is there and we all talk about it.

[Nadine Dorries (in the Chair)]

Order. I am sorry, Mr Byles, but I have been working out the timings. For everyone to have a reasonable amount of time to speak—seven minutes—is it possible for you to wind up in the next few minutes? That will allow for the Front-Bench speakers as well.

[Dan Byles]

No problem at all—I will wind up in less than a few minutes, Ms Dorries. Thank you.

We have an enormous challenge in keeping our energy costs down, in decarbonising and in attracting the huge amount of investment that we need. The fourth part of the trilemma—the right word should be “quadlemma”—is the investment needed. We must come up with a way of keeping energy costs down and decarbonising without frightening away the investors we need to put hundreds of billions of pounds into our energy infrastructure in future to keep the lights on.

My plea to politicians on all sides of the debate is that, although we can discuss and hold each other to account, we should not allow energy to become a political football or a party political issue—I see a smile on the face of the Opposition Front-Bench spokesman, so he will not be making energy a political football, I hope—because it is far too important for that.

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[Christopher Pincher (Tamworth) (Con)]

I am grateful, Ms Dorries, to have the Floor. I was not planning to speak—

[Nadine Dorries (in the Chair)]

You are on the list of speakers.

[Christopher Pincher]

As I am on the list, I will take the opportunity to speak briefly about the report, which I commend. I also commend my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith), Chairman pro tem of the Select Committee, for bringing its report to the Chamber.

The issue is not so much a quadrilemma, whatever band that may be—my hon. Friend the Member for North Warwickshire (Dan Byles) referred to it—but a dilemma. It is how to keep bills low for our constituents while ensuring that investment flows into our energy infrastructure, which is in dire need of replacement. That is not an argument between political parties; it is a fact.

Our discussions over the past few weeks have been fuelled by this report and the decision of the big six energy companies to raise prices. They have been about fixing prices, and the Labour party’s proposed price freeze. That would take us down a path that is dangerous for energy infrastructure investment. I made that point yesterday during the Opposition debate on energy prices.

During that debate, my fellow member of the Select Committee, the hon. Member for Southampton, Test (Dr Whitehead), who is not in his place, said that the big six energy companies invest significantly in energy infrastructure. The fact of the matter is that at our Select Committee sitting of a week or so ago, Tony Cocker from E.ON made the point that E.ON has invested more than £7 billion in that infrastructure over the past five years. If we are to invest something like £110 billion over 10 years in infrastructure, we can work out that E.ON is spending about 10% of that cost. Extrapolate that over the other energy companies in the big six, and we are talking about £60 billion’s or £70 billion’s worth of investment from the total of £110 billion that is required to build our new power stations, put in our pipelines and build pylons to keep our lights switched on.

We have to be careful in our energy proposals that we do not spook the markets or frighten off the private sector investment that we need in our generating capacity and downstream piping—otherwise, the poor old taxpayer will have to foot the bill. I simply make this plea, which echoes what my hon. Friend the Member for North Warwickshire said: we want to keep prices low, but let us not do anything that ends up costing the taxpayer and consumer more in taxpayer-funded infrastructure investment as a result of the private sector’s being frightened off by Government policy or pronouncements by would-be Governments.

I have made my plea, and with that, Madam—I was going to say “Madam Deputy Speaker”. With that, I commend you, Ms Dorries, for so admirably calling me to speak when I did not think I was going to be called. I hope that Mr Speaker and the Deputy Speakers start to do the same.