Energy Prices

Tim Yeo Excerpts

Wednesday 14th January 2015 Commons Chamber

[Mr Tim Yeo (South Suffolk) (Con)]

It is a pleasure to follow the right hon. Member for Neath (Mr Hain), but he will understand if I do not go down the path of his argument. He knows my views about the enormous cost of electricity generated from the Severn barrage, which were set out in the report of the Energy and Climate Change Committee, which I chair, a couple of years ago.

The Opposition’s proposed price freeze is one of those rare policies whose mere announcement causes even more harm than its implementation would do. My right hon. Friend the Secretary of State comprehensively demolished the price freeze and its complete lack of intellectual coherence, which, incidentally, makes it astonishing that it is proposed by a former Secretary of State for Energy and Climate Change. I will not repeat the case against the price freeze, but simply emphasise that the only absolutely certain consequence of a freeze announced months in advance of its implementation would be to raise prices substantially above where they otherwise would be and to discourage, and possibly destroy the prospect of, much needed investment—two totally perverse outcomes that would substantially damage the interests of consumers.

Instead of repeating my right hon. Friend’s effective attack, I want to suggest four ways in which energy costs could be cut. We must focus on costs not prices. It is false for anyone to claim that Government can control energy prices when the biggest factor in determining those prices is totally outside their control, namely the wholesale price of gas.

The first way to cut energy bills is to pay more attention to transmission and distribution, the costs of which account for almost a fifth of the average bill. They are provided by largely unscrutinised monopolies, or quasi-monopolies. Distribution has been neglected, because most consumers do not have a clue who supplies the power to their homes. The tabloid media regularly attack the big six, whose names appear on the electricity bills, but they ignore the distribution companies, which face little or no competition—even less than the big six experience. For that reason, the distribution companies should face not less but more scrutiny from the regulator. Regrettably, in the past Ofgem has rather let them off the hook. However, I make it clear that I exempt the current team at Ofgem from that criticism. It is recently arrived and it has shown some signs of escaping the torpor that used to overcome its predecessors whenever there were signs that consumers were being ripped off.

Transmission is a natural monopoly, and National Grid does a reasonable job, but it, too, is far too leniently treated by Ofgem, and generously—perhaps over-generously—rewarded for running its monopolies. I hope that the Government will give top priority to bearing down on the costs of transmission and distribution.

[Ben Gummer]

Is my hon. Friend not also concerned about the monopoly on connections to new developments, which sometimes inflates the costs of new developments and housing? That also requires further regulation.

[Mr Yeo]

I am extremely concerned about that. It has a big effect in the area that my hon. Friend and I represent.

The second way to cut costs is to embrace enthusiastically the opportunity of demand-side response. Few people understand the enormous potential benefits of this. It is sometimes wrongly characterised as a way of cutting power off from consumers. It is in fact a chance for consumers to earn some money back by agreeing voluntarily, sometimes at short notice, to reduce their consumption. The evidence from America is that this new technology, developed in the last few years, is unlocking a considerable potential for reducing demand for electricity at peak times. This has two big advantages: it cuts the need to maintain large amounts of expensive surplus capacity, most of which is used only for a very small amount of time each year, and eliminating that surplus would reduce the bill of every consumer. It is also one of the cheapest and most cost-effective ways to cut greenhouse gas emissions. At present, providers of genuine demand-side response, as opposed to the operators of diesel farms, are not being sufficiently encouraged by the capacity market. I urge my right hon. Friend to look carefully at the ways in which next year’s capacity market auction can be tweaked to ensure that genuine demand-side response providers get a bigger share of the market than the 1% that was achieved last month.

The third way to cut energy costs is to seize the opportunity provided by the deployment of smart technology to promote energy efficiency. To get the maximum benefit from this, we need to establish a true market in energy consumption where time of use pricing encourages consumers to move their consumption of gas and electricity away from the hours of peak demand towards low consumption periods. Smart technology makes this easy. Indeed, much of it can be done automatically by ensuring that appliances, such as freezers, switch themselves off whenever prices are high, and warn their users that if they are opened the power needed to operate them will be expensive. That is just a tiny example of the myriad ways in which consumers can save money and the cost of maintaining the system can be reduced. We should accept time of use pricing in the energy market as being as normal as when we buy an airline or a train ticket. I hope that the Government will commit to introducing that.

Fourthly and lastly, regardless of the outcome of last year’s CMA reference, ending vertical integration in the electricity industry must be considered. When the immensely successful privatisation of the electricity industry took place, generation was separated from retail supply. After a few years, a consensus emerged that allowed these functions to be merged within single businesses. When energy prices were low this did not seem to matter, but today the lack of transparency in the operations of the integrated companies in the wholesale markets has destroyed consumer trust. More importantly, it is no longer obvious that vertical integration benefits consumers. There will of course be protests from the industries, but this is an issue that we need to tackle.

The harmful effects on consumers in particular of a price freeze announced months in advance of its implementation are plain to see. Instead of political gimmicks whose consequences are perverse, the next Government should take practical steps to cut energy bills, cut the cost of transmission and distribution, nurture demand-side response, use smart technology to introduce time of use pricing and review whether vertical integration is really still in consumers’ interests. I commend these ideas to the House.