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Energy Suppliers and Prices

Volume 541: debated on Tuesday 28 February 2012

It is a great pleasure to serve under your chairship, Ms Osborne. As co-chair of the all-party group on fuel poverty and as Britain’s first Green MP, I am very happy to have secured this debate on a cause that is very dear to my heart: how do we help the poorest in our society and deliver social and environmental justice at the same time?

The balmy weather of recent days cannot mask the fact that our newspapers have been filled with chilling stories of yet more excessive profiteering by Britain’s big six energy companies, coupled with stories of big pay awards for the companies’ top executives. Last year, EDF’s UK profits were up by 8.5%, on the back of a 15% rise in bills; just last week, Centrica reported overall profits of £2.4 billion; and Scottish Power has reported profits of just under £1 billion.

I have been inundated, as I am sure many other hon. Members have been, with letters and e-mails from constituents complaining about their energy bills and expressing their fears that they will be unable to afford to stay warm. Although a few energy executives are wondering what to do with their gigantic profits, the stark reality for many Britons in the difficult economic circumstances that we are currently in is that they are wondering how they will pay for this winter’s gas and electricity bills. Indeed, it is estimated that more than 5.5 million households in the UK are now facing fuel poverty, leading to an estimated 3,000 premature winter deaths. Average annual household bills for gas and electricity increased from around £600 in 2004 to around £1,200 in 2011, and uSwitch has predicted that such bills could rise to a massive £3,202 by 2020.

Of course it is not just households that are finding energy bills difficult to pay. Small businesses with tight overheads are also feeling the pinch from the increasing cost of energy. More than 94% of businesses have seen an increase in energy costs, according to the Forum of Private Business.

The energy regulator has said that although fossil fuel price rises—the wholesale price of gas, and so forth—are clearly the driving factor pushing up energy bills, on top of those rises the big six are increasing their margins on our bills. Although some people might argue that those margins have now been reduced slightly, given the gigantic profits that have been reported, it is clear that energy companies could comfortably reduce their prices even further and still make a reasonable profit. At the weekend, the Institute for Public Policy Research, a think-tank, released a report that found that as many as 5.6 million people are probably being overcharged because of pricing policies by the big companies. The IPPR believes that such overcharging prevents new companies from gaining a foothold in the market.

Clearly, something is going wrong, and it is about time that we, as elected representatives, did more about it. That is why a number of organisations, such as Compass, which launched the new “End the big six energy fix” campaign a few weeks ago, Friends of the Earth and The Independent newspaper, alongside myself and many colleagues from all parties in the House, have been campaigning for fair energy prices, greater energy efficiency measures and a better deal for consumers.

We believe that it is time to tackle the predatory behaviour of the energy companies. By overcharging their customers, who include the most vulnerable people in society, those companies are driving people into fuel poverty. In addition, they are not fully meeting their social and environmental responsibilities and obligations, whether by investing in insulation and other energy efficiency measures or protecting the poorest and most vulnerable from the impacts of bill rises. That is why we are calling on the Government to stand up to the powerful vested interests of the big six energy companies and to act to end the energy rip-off.

I will set out three simple steps that could help to tackle this problem effectively. First, the Government could respond to the excessive profiteering of the big six energy suppliers by imposing a levy similar to the one imposed in the past on the North sea oil companies and the big banks. Such windfall taxation was used by the Conservative Government back in 1981 to claw back the excessive profits of the high street banks and in 1997 by the Labour Government in relation to the privatised utilities.

In 2012, nearly two decades after privatisation of the energy sector and despite the efforts of the regulator—Ofgem—to create a fully competitive market, the big six still control more than 99% of the retail market. Although we may not have a state-owned monopoly any longer, what we now have is an out-of-control private oligopoly that urgently needs to be reined in and better regulated.

While the energy sector remains an oligopoly, it is quite legitimate that the big six are made to pay a premium for their privileged market position. Indeed, a levy would be one way to address what is essentially a market failure. The revenues raised by such a levy should be ring-fenced to kick-start and support a mass programme of home insulation and energy efficiency measures, starting with the homes of the fuel-poor. That programme could be part of a genuine green new deal and it could help to create thousands of new skilled jobs in the process. There would be a win-win situation: the programme would help the Government to meet its commitment to eliminate fuel poverty by 2016; it would create many new jobs; and it would help to meet emission reduction targets. So a levy on energy companies is my first demand today.

My second demand is that, to prevent energy companies from passing the cost of any levy on to consumers and to make energy prices fairer, I want the Government to give the regulator more powers to cap prices and—crucially—to mandate Ofgem to actually use those powers. A number of options are available. The regulator already has the power to cap prices if it chooses to do so—it has threatened to use that power if the energy companies do not reduce prices—but it is simply no good to make empty threats. The regulator should have the confidence to intervene actively and to use its capping powers in the face of consistent overcharging by companies and persistent market failure.

May I give an example of such overcharging from the Heddon-on-the-Wall women’s institute, which is in my constituency of Hexham? The Heddon-on-the-Wall WI is being harangued by npower to pay more than £5,000 in back entitlements of power, dating from 2006. In other words, the company got the bill for the WI wrong, and demanding that money now will effectively put the local WI village hall out of business; it would have to go into administration. Npower has not answered my letter on this subject, which I will also raise with the Minister. Is this story not a good example of the sort of haranguing power of the big companies, which are overpowering individuals and small organisations?

I thank the hon. Gentleman very much for that intervention, because that example clearly demonstrates the kind of power that the energy companies can wield. The implications of the story that he has just told are absolutely outrageous, so I hope the Minister will take on board that kind of story. As the chief executive of Ofgem concluded in October 2011, and I hope the Minister agrees:

“We do not have a fully competitive market.”

That was the phrase that Ofgem’s chief executive used.

Another option would be for the Government—working in collaboration with Ofgem—to legislate for new price-capping powers, potentially based on a new mechanism. Any price capping could be linked to the wholesale price of energy, to make energy costs fairer. It would be a kind of energy price escalator.

Ofcom, the telecoms regulator, has made clear its intention to cap the cost of BT line rental charges, in response to BT’s over-dominance of the land-line rental market. Why not apply the same logic and principle to the energy market? Perhaps we could suggest that Ofgem pick up the phone and call Ofcom to ask for advice; after all, we are always told that “It’s good to talk.”

Thirdly, the Government should now launch an independent public inquiry into the big six energy companies. In much the same way that we have had an independent commission on banking, led by Sir John Vickers, and an ongoing investigation into the media, led by Lord Leveson, we urgently need a public inquiry into the energy industry, to get to the root causes of the problems. To be crystal-clear, I must point out that I am not calling for a Competition Commission inquiry. Instead, we need an independent public inquiry with a broader remit than just to consider prices and competition, because more fundamental issues are at work here.

Those fundamental issues include trust. It seems clear to me, from talking to the constituents whom I meet when I go around my constituency, that many people do not trust the energy companies. Therefore, it would be in the interests of the energy suppliers themselves to ensure that these issues are fully addressed and that all the facts, figures and arguments are discussed in the light of day.

I am listening carefully to the hon. Lady’s argument that there is a market failure in the energy sector. If there is a market failure and therefore a de facto cartel is operating, that would be a very serious issue that would need to be fixed. However, what I genuinely do not understand—perhaps she can help me with this point—is why EU figures from November last year showed that UK gas prices for the consumer were 25% lower than those in Italy, France and Germany. Indeed, UK gas prices are the 21st lowest of the 27 countries in the EU. Those statistics do not imply that a cartel is operating in our country; alternatively, they show that, if a cartel is operating here, it is not operating very well.

I cannot help the hon. Gentleman directly on the figures that he has just quoted. The bigger issue is the amount of power that those players have in our markets. My constituents in Brighton do not much care about the price of fuel in Italy, but they care passionately about the price of their own fuel here at home. It looks as though the big six are coming together. A public inquiry would find out whether any collusion is going on. Even if there is no collusion, it is certainly the case that excess profits are being made off the backs of constituents who are struggling with very high fuel prices. When they are urged to swap tariffs, the whole process is so deeply complicated that it is not surprising that, essentially, they are mis-sold the energy that they need.

I completely agree that we need transparent energy prices, and I hope that the Minister will talk about how we will simplify the tariff structure and all that goes with it. However, my point is the same. I understand that the hon. Lady’s constituents do not care about energy prices in Italy, France, Germany or Sweden. My point is that if there is a cartel operating, it is surprising that our gas prices are so much cheaper than in those countries. I will leave it at that.

There are a whole set of complex reasons why energy markets are different in various member states. If everything is completely clean and above board, with no excess profits being made, that can be examined in a public inquiry. That is exactly why we need a public inquiry. I can assure the hon. Gentleman, as I am sure that he knows from his own constituents, that that is not the perception of the vast majority of ordinary people who are faced on the one hand with rising energy bills and on the other hand with stories in the newspapers about rising energy company profits.

Does the hon. Lady agree that, irrespective of what is happening in other countries, the truth is that many ordinary working families and small businesses are finding it hard to survive, and the increase in energy costs is certainly putting some under?

I certainly agree with that. That is much of the motivation for securing the debate this morning.

I thank the hon. Lady for giving way in a short debate. I know that she shares my concern that the average household now spends £1,345 on its dual fuel bill and that profits last year were on average £125 per household, which is why this issue urgently needs attention. I listened carefully to what she said about competition. Does she agree that one of the key things that we need to do to reform the energy market is to encourage and ensure that the big six pool their energy, so that we can increase competition and allow more entrants into the market?

I absolutely agree with the hon. Lady. If I speak a bit faster, I will make that point shortly. We need more players in the marketplace. That is the way to drive down prices. It is also the way to ensure that we have individuals as co-generators of their own energy, rather than simply sitting back as consumers. I want to let the Minister know that, should he be minded to go down this route, he would have enormous support from the public.

A YouGov poll commissioned by Compass and Friends of the Earth found that 71% of voters support a levy on the profits on the big six; 77% support the money raised from such a levy being ring-fenced for home insulation and energy efficiency, particularly to remove people from fuel poverty; and an overwhelming 86% of voters support an independent public inquiry.

I am also encouraged that 70% of people support a move away from fossil fuel to renewables. That indicates strongly that we need to kick-start a national debate on energy that not only focuses on price and competition, but more fundamentally on the kind of energy industry that we want for the future, recognising that energy provision should be viewed not merely as a market commodity, but as a public service that we all rely on.

If we do not use less energy or successfully make the transition to renewable energy, bills will keep going up, because the cost of gas is projected to rise, even allowing for highly controversial shale gas extraction as well. We need to work hard to protect the vulnerable as much as possible from those price rises and ensure that the effects are not exacerbated by the greed of the energy companies. Instead, we need an energy industry that helps to deliver social and environmental progress, lifts people out of poverty and helps to bring about a good society.

On the point made by the hon. Member for Liverpool, Wavertree (Luciana Berger), I am interested in drawing on best practice from countries such as Germany, where community ownership of the grid has played a pivotal role in allowing renewables and energy efficiency, for example, to flourish—unlike here in Britain, where the grid is privately owned and controlled. Many citizens in Germany see themselves as owners and generators of their energy, not simply as consumers. That is the kind of shift that I want to encourage, so we need to challenge the unacceptable power exerted by some of our big energy companies.

Local authorities potentially have a major role to play here, too, in relation to both insulation and to local, decentralised energy supply. The more we make it easy for communities and councils to generate their own, the less we rely on the big six. The more we cut energy waste and get off gas, the better protected we are in relation to bills. Of course, we urgently need to tackle the complex domestic rates and charging system that has been the subject of so many debates and motions in the House and that serves time and again to disadvantage consumers, especially those who use the least energy.

The hon. Lady referred to the big six main energy companies. Does she agree and acknowledge that the problem is also off-grid in terms of liquefied petroleum gas and heating oil? Millions of consumers up and down the country are affected and their position is just as bad.

I thank the hon. Gentleman for that intervention, because he is exactly right. Indeed, in many rural areas, people living in poverty are off-grid and therefore completely hostage to whatever the energy suppliers choose to charge. They do not have much option.

On the complex set of tariffs, we are sometimes urged to shift tariffs to another supplier or to shift within the same energy company if we do not like what we are getting. However, it is difficult to compare tariffs, like with like. It is so difficult to understand what kind of tariff we need to be on that it is not surprising that not many people take up that opportunity.

I will bring my remarks to a close, because I want to give the Minister time to respond. I will summarise three key points. First, will the Government start drawing up plans for a levy on energy companies in time for the forthcoming Budget in March? Secondly, will they instruct the regulator Ofgem to use existing powers to cap prices, or will the Government work with the regulator to introduce new powers in the forthcoming energy market reform Bill? If the Minister thinks that that might be too much to ask, my third demand is reasonable: will the Government commit to an independent public inquiry into the big six energy companies?

Irrespective of whether the Minister agrees with the analysis that I have presented this morning, we can all agree that this issue is the subject of much controversy in our constituencies. Many people feel that they are being ripped off by the big six. If that is the case, action should be taken. Let us look into it with an independent public inquiry. Let us learn the lessons so that, once and for all, we can move to a more sustainable and fair energy system without all the question marks that currently surround it.

It is a pleasure to serve under your chairmanship this afternoon, Ms Osborne. I congratulate the hon. Member for Brighton, Pavilion (Caroline Lucas) on securing this debate. It is a shame that we did not have a longer debate—an hour and a half—because we have had an unusually large number of interventions, which shows the interest that the subject attracts. I hope that all hon. Members will understand that I want to use the remaining time available to respond to the debate, rather than take further interventions.

The hon. Lady has secured this debate at a time when we have started to see some prices coming down. In recent weeks we have seen price reductions, which will see around a 2% weighted average decrease in retail prices. Prices on wholesale markets are beginning to reduce and companies recognise that they can start to take some of the pressure off consumers. We all share the hon. Lady’s ambition that consumers should be supported at a time when they are inevitably extremely worried about the level of energy prices.

I will talk about some of the measures that we are taking to address the issues. First, it is important to state that we need a market that operates and functions better. Some of the measures that the hon. Lady has set out would make the situation worse. We need to get £200 billion of new investment in our energy infrastructure over the next 10 to 15 years. The more that we make this an unattractive place for people to invest—they are mostly international investors—the greater the likelihood that we will see energy and electricity being rationed, because of a lack of investment in new supply and a lack of investment in the other associated areas of energy efficiency. The consumer will therefore end up picking up the tab.

I was also disappointed that we did not hear any recognition of the global issues that must be addressed. We are having this debate at a time when oil and gas prices are at their highest levels in recent years. The increase in wholesale prices is being driven partly by instability in the middle east and partly by other geopolitical measures. We therefore cannot divorce the issue of energy prices from what is happening globally. However, we can do and are doing a significant amount to assist consumers in paying their bills.

I will not. I hope that the hon. Lady will understand. She has raised many issues, and I want to try to respond to them comprehensively. I am more than happy to meet her separately to discuss the ideas behind her initiative and campaign.

We are already requiring energy companies to provide help to 2 million of the poorest and most vulnerable households through the warm home discount, at a cost of £250 million this year, an increase of 40% over earlier arrangements. Over the next four years, suppliers will provide support worth £1.1 billion. Citizens Advice and Ofgem have received their highest level of funding yet from suppliers for the Energy Best Deal campaign, which helps vulnerable consumers shop around for the best deal. We have extended the carbon emissions reduction target until the end of the year, which we expect will benefit 600,000 of the most vulnerable low-income families, including those with elderly people and people with disabilities, and suppliers will be investing some £400 million in heating and insulation measures to help those households. In addition, the community energy saving programme, CESP, is expected to deliver about £350 million in energy efficiency measures to 90,000 households.

Looking forward, we are introducing the energy company obligation, which will include support to provide affordable warmth to low-income vulnerable households through heating and insulation measures. The ECO will provide £1.3 billion in support each year to householders who cannot achieve significant energy savings without additional support, and will have a specific target to provide heating and insulation to the low-income vulnerable households at greatest risk of fuel poverty.

We are also spending £110 million through Warm Front on heating and insulation to help households make their homes warmer. During the current winter, the winter fuel payment, worth £250 for households with members aged up to 79 and £400 for those with members aged 80 and over, will help 12.7 million older people in 9 million households with their fuel bills.

As I hope the hon. Lady will understand, significant support is going into measures to mitigate the effects of high energy bills, and particularly to ensure that we do not just help with this year’s bills but provide support in addressing the issue year on year in future through greater emphasis on energy efficiency, for which she called in her comments.

I thank the Minister for his response. He says that the Government are tackling the problem by, for example, providing the new ECO, but we know that the amount of money in the ECO is £1.3 billion and that by the time we subtract the money being ring-fenced for hard-to-treat homes, there will be far less money left for tackling fuel poverty than came from CERT, CESP and Warm Front. We also know that the money is being raised by a levy on all householders, which will push more people into fuel poverty, whereas Warm Front and the other programmes were funded by taxpayers’ contributions. In the rest of his remarks, will he address the issue of a public inquiry? I do not think that what he is saying addresses the key point, which is about profits, not prices.

I will of course address those issues, but it is important to provide the context of what else is being done. A tremendous amount of help is being given, more than ever before, to insulate hard-to-heat homes and direct support to people to pay their fuel bills. That is part of the overall energy picture, and it is important to take a holistic approach and understand the issue that way.

In addition, it is important to highlight the impact that the green deal will have. Through the green deal, we are determined to move this country from being one of the least energy-efficient in the whole of Europe to being one of the most. That is an extraordinary challenge, and one that we are determined to address. We recognise that we as Government should be trying to create an environment in which we can make lasting changes to our households so that people can reduce their bills over time.

To come directly to the points raised by the hon. Lady, I think that we all recognise that energy companies need to make a profit and invest in infrastructure for the future. They must also make a return for their shareholders. We have considered pricing here and elsewhere carefully. As my hon. Friend the Member for Warrington South (David Mowat) said, prices here for both electricity and gas are some of the lowest in Europe. However, that is not the same as having the cheapest bills. Our bills are often higher, because our energy efficiency is less good. Again, that reinforces the hon. Lady’s point that we need to make much more progress on energy efficiency in order to contain those bills.

It is also worth considering how suppliers’ profits here stack up against other countries. Their profitability in the United Kingdom is worse than in almost any other jurisdiction where they operate. If we want suppliers to continue to invest the £200 billion necessary, they must see the UK as a good economic area in which to invest. The more measures we put in place to make ours an unattractive investment regime, the worse we will make things in the longer term for consumers in this country.

This is not a case in which one must be on the side either of consumers or of industry. In the longer term, we can only be on the side of the consumer by creating an environment in which businesses want to invest. Through our market reforms and other measures, we are trying to make the UK an attractive jurisdiction and ensure that the regulator, Ofgem, takes strong action to prevent excess profiteering in the sector.

The hon. Lady discussed having new entrants into the market. We are absolutely committed to making that happen. One measure of the success of our market reform proposals will be whether we increase liquidity by bringing more companies into play in the market, but we should be clear that six is already an unusually large number, larger than in any other European country. Most other European countries have one or two dominant players and low levels of switching. Levels of switching here are three or four times higher than in countries such as Germany, which she held up as a good example. There are many aspects of our market that create better opportunities for consumers, and we must be determined to protect those aspects as we go forward.

It is essential for Ofgem to monitor the market closely. My concern about the sort of public inquiry that she suggested involves the consequences. The companies looking to invest in Britain are exactly the companies with the funding and expertise to invest in renewables, which she says—and I agree—are important. However, if we hold an inquiry, they will defer, making it much more challenging to get new investment during the two years of that investigation. Our scope for meeting our renewables targets will therefore start to slip away. The approach that she suggests would have consequences, and I believe that there are better ways to protect consumers in the short term rather than the long term, as her approach would do.

Part of our approach is boosting competition. We have already gone a long way to cut red tape for smaller suppliers, and have increased from 50,000 to 250,000 the number of customers that companies must have before being required to participate in environmental and social schemes. We are making it easier for small companies to get a foothold in the market.

In December, Ofgem published for consultation radical proposals to require suppliers to simplify their tariffs and billing information so that consumers can compare supplier deals much more easily in order to decide whether they will be better off switching. Currently, more than 400 different tariffs are available—that is the scenario that we inherited when we came into Government—which inevitably leads to great confusion and makes it much more difficult, as the hon. Lady said, for consumers to make an informed choice when they are looking for the best deal.

Progress is being made on simplifying the approach. British Gas and SSE have announced that they intend to simplify their tariff structures; SSE has pledged to reduce the number of tariffs that it offers from 68 to just four. Once we get into a world where people can understand much more clearly what they are paying for and see more effectively how it compares with what other companies are offering, consumers will be in a much better position to exercise choice. The big six still cover about 99% of the domestic retail market, so it is important to have additional suppliers and players in the retail sector to ensure that we get the best deal for consumers. I am pleased to see that significant work is happening.

I also welcome the move towards collective switching, an issue taken up by Which? in the past few weeks, which brings together a range of consumers to give them much more confidence and to buy on their behalf. There is more liquidity, more companies are coming into the market and the market will operate better. A tougher regulator is taking action to ensure that comparison between companies is easier and that profitability is not excessive. Above all, we are creating a market in which businesses will be keen to invest, in order to ensure, in the most affordable way, security of supply and low carbon in the longer term.