Domestic Gas and Electricity (Tariff Cap) Bill

Stephen Crabb Excerpts

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

[Greg Clark]

I disagree with the hon. Gentleman. As I will go on to explain, part of the problem that we are addressing is that the competition authorities have for some time identified this tendency on the part of companies, and the Bill’s proposals will give Ofgem the power to correct that. He brings me to my next point: for all the progress that has been made since privatisation, it is clear that the market is not perfect. That is indeed why the coalition Government referred the industry to the Competition and Markets Authority to assess how competitive the retail market was.

In 2016, the CMA concluded, following a two-year investigation, that

“our view is that the overarching feature of weak customer response gives suppliers a position of unilateral market power concerning their inactive customer base and that suppliers have the ability to exploit such a position through their pricing policies…by pricing their standard variable tariffs materially above a level that can be justified by cost differences from their nonstandard tariffs; and/or by pricing above a level that is justified by the costs incurred in operating an efficient domestic retail supply business.”

The CMA identified the detriment to consumers—that is, how much consumers are overpaying compared with a fully competitive market—at an average of £1.4 billion a year. This comes from the approach to pricing that is practised by the biggest six energy companies, which for the most part, inherited their customers from previous monopolies. Their approach is to charge their customers on default tariffs much more than those who engage in the competitive part of the market. Currently, the differential for the big six stands at around £300 a year. Those paying the default tariff are much more likely to be in reduced circumstances; 80% of households with an income of less than £18,000 did not switch supplier in the past three years.

From the outset, the UK’s energy market has had a regulator whose responsibility is to act in the interests of consumers. Indeed, if we look back, we can see that Britain has long been a pioneer in not only the privatisation and liberalisation of industries but the regulation of these utility industries, too. Indeed, the British model of privatising state-owned monopolies is to liberalise the market to allow new competitors in and to protect consumers against the power of incumbents—from BT to British Gas—which enjoy an advantage of inertia and loyalty. That has always been recognised in our regulatory arrangements.

[Stephen Crabb (Preseli Pembrokeshire) (Con)]

My right hon. Friend is making a very important point about regulation, but is not part of the context of the Bill the fact that the regulator, Ofgem, was far too slow to respond to the pressures on people, particularly those on low incomes and in vulnerable households?

[Greg Clark]

I agree with my right hon. Friend, and I was making the point that we have long been a pioneer in regulation, which has meant adapting regulation to the changing circumstances. We started with RPI minus X, and that evolved into different models, including looking at the regulated asset base. In my view, it is necessary to keep up with our traditions of acting boldly to protect consumers’ interests, and we should be agile in response to new behaviours, especially those brought on by new technologies.

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[John Penrose (Weston-super-Mare) (Con)]

Thank you, Madam Deputy Speaker; I will try to edit as I go.

Today is a great day. To those who say that politicians never deliver on their election promises, we can collectively send a blaring foghorn reply of “You’re wrong.” Today’s energy price cap Bill is an incredibly rare political unicorn: a pledge that not only has cross-party support, but is being fulfilled. As the organiser of the cross-party letter, which gathered an exceptional and unprecedented 213 MPs’ signatures, I thank my co-convenors, the right hon. Member for Don Valley (Caroline Flint) and the hon. Member for North Ayrshire and Arran (Patricia Gibson), for their help. I also thank every MP who signed the letter and the Ministers who have listened and brought its contents forward. Without their help, we would not be here today.

The Secretary of State has already ably described the problem. It is a two-tier market in which millions of customers are penalised for being loyal. Sneaky price hikes mean that people who have forgotten to switch are gouged on super-expensive rates to which they never agreed. Customers are being taken for granted and taken for a ride. So it is a great day, but in spite of all that we still have some pitfalls to step around. First, it is vital that the price cap is temporary. The long-term answer for most people is not an endless cap; it is making the customer king and putting them in the driving seat, so that the energy industry provides the same good-value and sensible deals that we take for granted in every other walk of life.

[Stephen Crabb]

I pay tribute to my hon. Friend for his hard work in ensuring that the Bill was brought forward. He makes an important point about consumers. He described them as behaving in a “loyal” way, but for many people, particularly the most vulnerable and those on the lowest incomes, this is about inertia. We need to change behaviours and get better engagement from some of the most vulnerable energy customers, which will be key to making this Bill work.

[John Penrose]

My right hon. Friend is a co-signatory to the letter, for which I thank him, and he makes an important point. It is not just vulnerable customers, of course; it is the many of the rest of us who are time poor. This is a far broader question than just vulnerable customers, although they are a key part of it. Many other families, either because they are loyal or because they just have not got round to it, have not switched. We need to persuade them to change their behaviour, and we need to change the market to help them to do so.

Choosing a new supplier should be no more complicated than changing our brand of coffee or corn flakes. The big six should have to work a lot harder to attract and keep our business. To be fair, as we have heard and as I think my right hon. Friend was alluding to, the regulator, Ofgem, has made a start. We have more than 50 new competing firms that are scrambling to take business off the big six. Smart meters are coming, and switching is slowly getting simpler, quicker, easier and less scary.

The Bill rightly says that the price cap should die after a couple of years, but what about the other details? Price caps, as we have heard, are dangerous things. They are fiendishly difficult to get right: they drive suppliers away if the price is set too low, and they gouge customers if the price is set too high.

So how do we design a cap that does not make things worse rather than better? Well, the Bill says that the price will be set by an all-knowing committee of Ofgem regulators every six months, but the international price of energy moves around every day. Although I am sure Ofgem is full of clever and well-intentioned people, no one is that clever. Any energy trader will tell us it is impossible to know what the price will be in the next six minutes, let alone the next six months.

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[Albert Owen (Ynys Môn) (Lab)]

The hon. Member for Taunton Deane (Rebecca Pow) is right to say that we have heard many good speeches, including from Members who took part in the pre-legislative scrutiny of the Bill by the Business, Energy and Industrial Strategy Committee. It produced a unanimous report, and I am pleased that the Government have taken on board the recommendations in it, because the Committee did a thorough piece of work.

I have supported and campaigned for an energy cap for many years. I am pleased that it will be introduced, and I will support the Bill tonight, but it would be wrong to say that it is a panacea: it is not. Many other pieces of work need to be done. I hope— I will work with the Government on this—that during the period of the price cap, we will look at other parts of the energy market, which the Prime Minister rightly described as “broken”. People are getting ripped off by, for example, transmission and distribution costs, because we have private monopolies running those sections of the energy market. It is right that we have the Bill, because the market has not worked.

I want to say something contrary to some of my colleagues on the Committee who have blamed the regulator. I have been on the Committee for many years, since it was the Energy and Climate Change Committee, and the regulator has done some good work. The first thing it did, as my right hon. Friend the Member for Don Valley (Caroline Flint) pointed out, was to ensure that consumers had greater transparency in their bills, so that they could see the unit prices. Before, those prices were hidden and people did not really know what they were being charged. The energy companies blamed the fact that wholesale costs had gone up, so they had to put their prices up. There is a new regime in Ofgem that is doing more impressive work in looking after the most vulnerable. When the chief executive gave evidence to the Committee he had the honesty to apologise for not doing enough, and that was the right approach.

Successive Governments have not done enough either. We have a huge responsibility to look after the most vulnerable energy users. As individual Members we must scrutinise the Government, but they must do more. When I was on the Energy and Climate Change Committee between 2010 and 2015, I was fed up of Ofgem coming to one session and saying that it did not have enough powers, and the Government would not give it more powers, and then a Minister—they changed regularly—coming to another session and saying that the regulator had enough powers. It was a missed opportunity, and we are much better placed now.

We put too much emphasis on switching as a panacea. As other hon. Members have said, a low number of people switch. It is not an easy thing to do. People are very busy, and vulnerable people may have two or three jobs. The last thing that they want to do is spend hours and hours on the line to a call centre to switch. That approach did not work, for many good reasons. I remember the Secretary of State in the coalition Government—the right hon. Member for Kingston and Surbiton (Sir Edward Davey)—saying that switching was the great answer. David Cameron, as Prime Minister, accepted that, and the issue was kicked into the long grass. I am glad that the CMA produced its report, but its predecessor, the Office of Fair Trading, held many inquiries and did not do a good enough job of helping people. I am pleased that we are better placed now. The role of the regulator is important, and it is now more proactive and helpful.

My hon. Friend the Member for Southampton, Test (Dr Whitehead) was a member of the Committee that pushed for measures on prepaid meters, which were affecting the most vulnerable. The energy price cap for prepaid meters has worked in helping to reduce their energy costs. There was a fear that the energy companies and suppliers would go up to the highest rate, but that has not really happened. I am therefore pleased to support the cap in the Bill, and I am pleased that there is a sunset clause.

Changing the behaviour of energy companies is essential. In the past, they have been playing the system while blaming others. They have always said that transmission costs are too high and fixed, and that they are vulnerable to wholesale costs. We had a situation, particularly from 2008 to 2014, described as “rocket and feathers”: prices rocketed, but when the price of crude came down there was only a trickling down or “feathering” in the cost of people’s bills. That situation has been exposed through tariffs, which has been important.

Transmission and distribution costs account for as much as 25% of people’s bills. The distribution companies are private monopolies, as is National Grid for transmission. There is no competition in that part of the sector. When we talk about a broken sector and free markets, we must remember that in many areas the market is actually restricted to one company. The hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) rightly talked about the peripheral areas of the United Kingdom, many of which are off-grid, paying more for their energy. People who are off-grid do not have the option of dual fuel payments, so they are paying a lot for either off-mains gas or oil.

[Stephen Crabb]

The hon. Gentleman is making an important point about rural consumers who rely on off-grid gas and liquefied petroleum gas supplies. There have been inquiries into how that market functions. Is he satisfied that it is working fairly for rural consumers in Wales and the rest of the UK?

[Albert Owen]

No. I think more has to be done. I hope that the energy cap sunset clause will enable us, working with the Government and the regulator, to consider greater reform of the energy market so that we can prioritise helping isolated communities. I want to highlight the excellent work of Citizens Advice and many other groups. In my constituency and, I am sure, in the right hon. Gentleman’s, energy costs are a big issue in the citizens advice bureau’s casework, because of the price of oil in rural constituencies.

There is an answer to the monopoly status of the transmission and distribution companies: greater competition from not-for-profit organisations that reinvest in infrastructure. Welsh Water is a not-for-profit organisation. It has competition within it, because it puts its contracts out to tender. It is not a monolithic public monopoly, but a not-for-profit organisation that values its customers first and foremost. I know that the Minister will refer to the Government review of transmission costs. We have not had a response to that yet. I will support the Bill, because I have been campaigning for it for years. I do not think it is a panacea in itself, but together we can help vulnerable and non-vulnerable customers who have been ripped off for too many years.

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[Stephen Crabb (Preseli Pembrokeshire) (Con)]

I am very grateful to be called to say a few words in support of this useful piece of legislation, Mr Speaker. I was pleased to be asked by my hon. Friend the Member for Weston-super-Mare (John Penrose) in the early autumn to sign a letter with him to Ministers and the Prime Minister calling for this legislation to be brought forward. So I join him and others this afternoon who have given a strong cross-party welcome to the fact that we are here today debating the Second Reading of this important Bill.

I believe in a successful, strong, profitable energy industry. We need a successful industry, given the asks we are making of these companies in terms of our wider energy objectives. We are asking these companies to invest in new capacity—in resilience—to make sure that our lights stay on and to give us security of supply. We are also asking them to invest in decarbonisation efforts and do the heavy lifting in creating a low-carbon economy. We want them to do this all the time, while giving consumers the lowest possible prices. There is a duty on Government and on regulators here. When any piece of this industry—any of the individual markets that go towards creating this strong and successful industry—is not working perfectly, there is a duty to step in. That lies, first, with the regulator, but when it is slow to act, the duty then falls to Government. That is the point we have reached with this legislation today.

It is estimated that 23,000 consumers in my constituency are overpaying on their energy bills, by an average of around £275 per year, so the Bill will be strongly welcomed in Preseli Pembrokeshire. In fact, south Wales is estimated to be among the regions of the UK with the largest numbers of consumers overpaying for their energy.

With respect to the comments made by the hon. Member for Ynys Môn (Albert Owen), I wish to put on record that there is a group of energy consumers who will not be protected by the legislation: people who live in small, isolated rural communities and rely on off-grid liquefied petroleum gas or off-grid heating oil supplies. Over the years, concerns have been expressed repeatedly about how well the markets are functioning for those consumers. Those concerns perhaps go beyond the Bill’s immediate scope, but I urge the Minister to keep them on her radar and to ensure that those consumers get the full protection that they believe they should be entitled to.

I have some other concerns about the legislation. We are looking for a change in behaviour on the part of the supplying companies and on the part of consumers. Although the Bill is a necessary condition, it will not be the final answer to the challenges. We need energy companies to behave in a way that demonstrates that they really value their consumers. We have seen a lot of lazy, inefficient practices on the part of the big six and some excellent behaviours on the part of some of the emerging challenger companies. They have entered the market and had to scrap and fight for every single one of their customers, unlike the big six, which have largely inherited their customer load from the old nationalised system. The Bill will be a helpful stepping stone, but it will not be the final story in respect of prodding the big six to model some of the best behaviours we see in the industry.

In respect of consumers, we heard a great example earlier in the debate from my right hon. Friend the Member for New Forest West (Sir Desmond Swayne), who described his own experience of being able to benefit from being a switching customer. As so many Members have pointed out, the truth is that a great many consumers just do not behave like that at all. I think the Bill will be a helpful stepping stone to encourage more switching in the marketplace, but a wider body of work needs to be done, particularly for the most vulnerable, the disabled and the people who perhaps are not readily using the internet for a lot of their day-to-day consumer needs. We need to get them better engaged, so I encourage Ministers to keep that on their horizons.

We need to consider the ongoing support for the vulnerable. I agree with Citizens Advice that, after the sunset clause has been reached and the cap has been and gone, and when hopefully we have seen some positive reforms in the marketplace, there will still be an ongoing need for measures to protect the most vulnerable energy consumers. I would welcome the Minister’s thoughts on that. I wish her well as she takes the Bill through Committee. She has a lot of support from all parts of the House, but this debate has shown clearly that Ministers will need to address a number of specific concerns.