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Energy Policy and Living Standards

Volume 589: debated on Wednesday 10 December 2014

Government energy policy, put in place by Ministers of all three established parties, is pricing people out of being able to heat their own homes. The cosy consensus over energy policy here in Westminster is squeezing living standards across the country. According to the index of domestic fuel and light prices, helpfully reproduced by the House of Commons Library, prices have changed fairly dramatically over the past 40 years. From the early 1980s through to the early noughties, there was a slow, gradual fall in prices; it was a 20-year period of customers getting what they tend to get in a free market, capitalist economy—more for less.

Suddenly and dramatically, that picture changed in the early noughties. Since then we have seen a rapid rise in prices—sharper, indeed, than that experienced during either of the two oil shocks of the 1970s. Dual-fuel household energy bills in 2014 for the average home are forecast to be almost £1,400. That represents a real-terms price increase of over 50% in a decade—a decade during which average household incomes stagnated and during which, by some measures, the UK’s per capita income has fallen. Fuel bills have gone up sharply, but income has hardly changed. Living standards have been squeezed as a consequence. Pensioners and those on low incomes tend to pay a disproportionately high proportion of their incomes on energy. The definition of fuel poverty may have changed, but one stark fact cannot be overlooked: a large number of households—4.82 million households—now spend over 10% of their income trying to keep warm.

Why have energy prices gone up so rapidly? Why did the historic decline in energy prices suddenly turn around in the early noughties, and why have costs gone up in this way? Is it because there is not enough of the stuff? Are we perhaps running out of gas? Not at all: wholesale energy costs have actually been falling as a proportion of the total. According to Ofgem, for every £1 we pay on domestic fuel bills, only about 44p goes to meet the wholesale price. People might think, “Is this all the fault of those beastly energy companies? Are they the ones to blame?” About a fifth to a quarter of the bills that we pay covers the cost of the energy companies distributing and supplying what they sell us. People might think, “If only energy companies were forced to lower their prices, perhaps we could have cheaper energy for everyone.”

I am very grateful. I welcome the fact that the hon. Gentleman has secured this debate. I guess that his party is now an established party—now that they are here, they are part of the establishment. The serious point is that distribution prices vary considerably across the 14 regions and contribute to between 19% and 25% of the bill. Does he agree that it is possible to have a leveller so that across the United Kingdom—or certainly in Great Britain—those prices could be the same? Does he also agree that it should be possible for people off-grid to get a better bargain? He mentioned dual fuel, and many people in deprived and rural areas are not on the grid, so they do not get the benefit of dual fuel discount.

The hon. Gentleman argues in favour, I think, of Government price-fixing and making it illegal for suppliers to charge different prices in different parts of the country. I think there are a number of flaws in that approach. For a start, it could quite possibly mean that some areas would have to go without supply at all. Generally speaking, if we try to fix prices, we interfere with the allocation of resources and we have to be prepared for black-outs. That is not something that I would want, but he is absolutely right to say that a fifth to a quarter of the bills that we pay cover the cost of the companies distributing and supplying energy. The hon. Gentleman then makes the leap that many have made, which is that if only we could force energy companies to lower their prices, we could have cheaper energy for all. That, at least, seems to be the level of logic from the right hon. Member for Doncaster North (Edward Miliband). However, a prices and incomes policy for energy in 2015 will no more work than a prices and incomes policy has worked for anything in the past. Prices and incomes policies do not work.

Energy prices are not going up because of a shortage of energy or because of beastly energy companies; public policy is driving up the cost of household energy bills. The renewable obligation requires energy companies to increase the proportion of energy they generate from supposedly renewable sources. That basically means that we have to pay more in order to subsidise the construction of wind turbines. The Government’s own estimate suggests that fuel bills have gone up by 7% to refund those renewable obligations. However, the Renewable Energy Foundation, for example, has pointed out that the methodology of the Department means that the figure of 7% is, by many ways of analysing it, an extraordinary understatement. If we measure the increase in terms of price per kilowatt-hour, the increase in prices is likely to be far greater.

According to data that the Department recently put out following a freedom of information request, in the central fossil fuel price scenario for 2020, low-carbon policies will result in a 50% increase in energy costs for small business. In the low fossil fuel price scenario for 2020, low-carbon policies will cause a 77% increase for medium-sized companies, which would rise to 114% by 2030. Whitehall officials have gambled on the price and cost of fossil fuel and they have got it spectacularly wrong. I wonder whether the Minister, with an ambitious eye on the world beyond May next year, is willing to defend those policies.

The Minister’s colleague, the Secretary of State for Energy and Climate Change, has pledged to treble the amount of electricity derived from renewables. Will the Minister defend that, too? Energy prices are increasing because we are switching off perfectly good gas and coal power stations while pouring billions of pounds into windmills. It does not make sense.

I am intrigued by what the hon. Gentleman has had to say, but his analysis has missed out the fact that the price of oil has been dropping. That can have an impact on the cost of living and on energy costs, particularly for poorer families in this country. How does he think we could get the oil producers to pass on that decrease to the consumer?

The hon. Gentleman is absolutely right and makes a very valid point. For a number of reasons—not least because of technology and innovation in the United States and the shale gas revolution—the cost of fossil fuel is being driven down. Unfortunately, we have a Government whose officials banked on the cost of fossil fuels being relatively high, so we are now locked into a position where people will have to pay higher costs for years, despite the potential for a great reduction. It is extraordinary that a Government who once pretended to believe in the free market are presiding over that. It is quite remarkable. We should be benefiting from the lower oil costs, but we are unable to because we have a Department that is committed to price-fixing.

Does the hon. Gentleman accept that not only have the Government pushed up the price of electricity because of this infatuation with wind turbines, but that that in itself has led to distribution costs going up because the grid has to be reinforced, and that the carbon tax that is now imposed on the fuel used by the cheapest types of power stations is adding to people’s bills as well? The whole policy is directed towards high energy prices, which have reduced people’s standard of living and have furthermore chased industry out of the United Kingdom.

The hon. Gentleman is absolutely spot on. It is irrational and uneconomic on so many levels. The irony is that the Government talk about windmills and wind turbines, using the language of sustainability, but the truth is that without the subsidy, it simply would not be sustainable. Unlike solar, it simply will not make economic sense to generate electricity through 13th and 14th-century windmill technology.

I congratulate the hon. Gentleman on securing the debate. Does he accept that the Government’s policy is very illogical in this area? For example, we are spending taxpayers’ money in order to enhance the setting of a world heritage site at Stonehenge, while at the same time using taxpayers’ money for subsidies for offshore wind turbines that are going to wreck the world heritage site on the Jurassic coast?

The hon. Gentleman makes a brilliant point. He is extremely sound on this issue, as on so many other things. There are things on which it is good to spend public money, and securing the future of something like Stonehenge is wonderful, but one of the downsides of subsidising windmills is that they damage the countryside. It is not good conservation practice to industrialise the countryside with these subsidised wind turbines. It is not good for the environment or our heritage sites. It is not good, either, for people in Jaywick and west Clacton in my constituency, who are deliberately being priced out of being able to heat their home. Why? Because an out-of-touch elite in Westminster and Whitehall believes that that will somehow save the planet from excess carbon dioxide emissions. It is the Alice in Wonderland world of SW1 that has come to believe that. Ministers are competing to be the mad hatter, but it is a ridiculous state of affairs.

The Climate Change Act 2008 was a mistake. I should have listened far more carefully to the late, great Eric Forth MP and voted against it. My failure to do so is my biggest regret as a Member of Parliament. My new party looks to help me to right that wrong, or rather I look to help it to right that wrong.

Government schemes promising to insulate homes have been a flop. In Jaywick and west Clacton, in my corner of Essex, thousands of householders were led to believe that they could get free home insulation. For all that, it has happened only for a handful. The green deal has failed, and alongside it the Minister who presided over the scheme. Should we now follow the right hon. Member for Doncaster North, who has declared that he wants energy prices to be fixed and a prices policy for energy? He may have committed his party to a price freeze, but that will not mean lower energy prices for everyone. If we hold down the price of something by Government fiat, we end up constraining the supply of it. That policy will lead directly to black-outs.

The real reason for higher energy prices is the public policies that were put in place by the right hon. Member for Doncaster North when he was the Energy Secretary, and which all three parties now support. All three parties have had a say on energy policy and all three parties have got us to this sorry state of affairs. We need a return to the idea of an honest energy market. The Minister might pay lip service to the idea of a free market, but where it counts—when it comes to what he actually does in office—he is cheerfully defending a system of energy production that is anything but free, so let me remind him of what an honest market in energy production might look like.

If we had an honest energy market in this country, suppliers would compete to supply householders with energy at a price that they were willing to pay. There would be no requirements on them to produce a particular mix or quota of energy. Innovation and competition would mean giving customers more for less. Capital and technology would come together to satisfy customers. Instead, we have a system in which lobbyists and quotas meet in Government Departments in pursuit of renewable targets. It is a corporatist racket, not an energy policy that is remotely competitive or free. Coal, gas, fracking, nuclear—who knows what mix we might get if we had innovation, capital and a free, honest market in energy?

If the Minister finds it hard to imagine what a free market in energy might look like, may I suggest that he look across the Atlantic? Gas prices for domestic consumers have fallen by 26% in five years in the United States. As our prices have risen, over there they have fallen. It is not that the laws of physics are any different on that side of the Atlantic. The laws of physics are the same. It is public policy on this side of the Atlantic that is so fundamentally flawed and needs to change.

Voters who struggle to pay their heating bills this year should rightly blame those on all three parties’ Front Benches, who put this dreadful scheme in place. We need to make a change. We need to scrap the subsidies. We need to love the new technology, but subsidies must be abolished.

On a point of order, Dr McCrea. I have permission from the hon. Member for Clacton (Douglas Carswell) to make a short speech in this debate. Can I just confirm that that is the case?

Yes, you have permission to make a speech, but it needs to be short, because we have to give the Minister time to respond.

Thank you, Dr McCrea; I will speak for three minutes or so. I am very grateful to the hon. Member for Clacton (Douglas Carswell) for giving me permission to make a speech, and I congratulate him on securing this important debate. I will focus on different areas, but I do think that the Government have done good things—in particular, providing a rebate to every domestic electricity customer and reducing bills by £130 for 2 million of the poorest households through the warm home discount. And of course the hon. Gentleman will know about the huge fuel duty freeze that the Government have pledged to maintain across the Parliament, so that the price of fuel is 20p lower in tax terms.

As I said, I will concentrate on a number of areas. The first is the difference in the cost of energy depending on which payment method a customer uses. I have worked with the hon. Member for Ynys Môn (Albert Owen) on this issue. Earlier this year, I conducted a cross-party campaign, with the support of more than 100 MPs, against the practice by energy companies of charging customers extortionate amounts for not paying by direct debit. My right hon. Friend the Prime Minister ordered an investigation into that, but all that Ofgem has said to me is that although there were some anomalies, such as the £390 extra that Spark Energy customers were paying, those cases were exceptional. However, Department of Energy and Climate Change figures show that the average person who does not pay by direct debit pays £114 more each year. That is just not good enough.

One elderly lady in my constituency of Harlow, who always paid on time via the post office, received a letter saying that she would have to start paying an extra £63 a year if she did not start paying by direct debit. That is unacceptable. Charges such as that are excessive and harm the most vulnerable in our society, particularly the 2 million people who do not have proper banking facilities, which makes payment by direct debit almost impossible. I hope that my right hon. Friend the Minister will clarify what the Government are trying to do on that.

Secondly, there is a problem, which has been raised, regarding prepayment meters. The cost of using those is often significantly higher than of using any other method. Traditionally, that was justifiable: companies had to pay people to go and empty the meters of coins. But there are now prepayment cards. Those who use prepayment meters are charged extra even though they are the least able to afford it. That needs to be looked at urgently.

Thirdly, there are other ways in which energy bills are increased, often through no fault of the consumer. The example has been mentioned of the 4 million households who are off the gas grid and will never be able to get the best deals as they cannot get a dual-fuel discount. It would be helpful if standard criteria could be introduced across suppliers to allow families with children clearer guidance as to whether they will qualify for the warm home discount.

Finally, I believe that the only way in which the situation can be improved is not by imposing an energy price freeze, which will only hike prices up in the long term, but by scrapping the existing regulator and creating an energy version of Which?, a consumer regulator that stands up for the customers, not the energy companies, and that has real teeth. As pointed out in The Sun newspaper today and as mentioned by the hon. Gentleman, The Sun is running a campaign for fuel companies to cut their prices following a significant fall in the international price of oil. I have previously handed a petition to the Office of Fair Trading with FairFuelUK calling for an inquiry into the rocket and feather effect, but there has never been a full inquiry.

In conclusion, stopping the premium on non-payment by direct debit, action on additional and hidden costs and turning Ofgem into a genuine consumer body would make a huge difference to residents of Harlow, and to energy bills and the cost of living for millions of people across the country.

One hon. Gentleman is standing, but convention demands that a Member has the permission not only of the Member who has secured the debate, which is Mr Carswell, but of the Minister, and he needs time to respond, so is the Minister willing to give a couple of minutes to the hon. Gentleman?

Thank you, Dr McCrea; I am grateful to the Minister. I congratulate my hon. Friend the Member for Clacton (Douglas Carswell) on securing this debate on energy policy and living standards. This is a key issue for our party, and I think that this is the first debate that we have secured in the Commons.

Energy costs are being driven up through a levy control framework that shows the cost rising from £2.3 billion in 2012 to £9.8 billion in 2020. Much of that money is going on offshore wind. Rather than trying to develop leading, cutting-edge technologies, or some of the areas that have been improving in cost-efficiency such as solar, we are seeing the roll-out of absolutely masses—almost half the world’s production—of offshore energy, which costs about three times the market energy price. That is an absolutely extraordinary imposition on our constituents.

At the same time, we are bringing in a capacity market that even Mr Huhne, who was the Energy Secretary, did not want to see. At least he was an economist and realised, as I would have thought the Minister would also recognise, that as soon as a capacity market is announced, people will not build capacity until they start qualifying for the subsidy. That subsidy now seems to be available to almost everyone, rather than just those who have capacity that can be switched on reliably and immediately. That is going to be yet another imposition that drives up costs for our consumers.

Perhaps the most significant cost is what is happening to coal. The European Union is shutting down coal plants, including Kingsnorth in my constituency. Demolition of Kingsnorth has just commenced under the large combustion plant directive, and various pieces of successor legislation are even worse. The Government did not apply for a derogation that could have got us through a period in which there was a particular crunch in our energy demand. Why did not the Government at least try to obtain such a derogation? The Government, not the EU, are banning the construction of new coal-fired plant. E.ON, which owns Kingsnorth, would have liked to build a new supercritical plant, which would have provided much more efficient energy production, but the Government have banned it because of the emissions performance standard, I believe. Such projects are going ahead in Germany and other countries, but we are unilaterally driving up costs for our consumers, reducing the competitiveness of our industry and holding our country back.

I congratulate the hon. Member for Clacton (Douglas Carswell) on securing the debate and on choosing energy as the subject for his first Westminster Hall debate in his new iteration in this Parliament. My central response to his argument is that it is important to look at the facts and have a rational debate about the matter. Central to his big-picture hypothesis was the argument that energy costs have been rising since the early 2000s, before which they had gradually declined. He went on to say that wholesale costs were falling as a proportion of the total cost. However, the wholesale price has risen sharply during that period, and the wholesale price—the amount that is beyond the control of any Government—is a central driver of energy costs. Without acknowledging that core fact, it is difficult to have a rational debate on the subject, which I think we would all value.

The Minister says that the price is beyond the control of any Government, but Saudi Arabia has had quite a big impact on price by not increasing its oil production, and the US has done likewise by allowing and facilitating exploration for shale gas and oil, which we have held back so badly in this country.

Nobody has direct control over wholesale costs, although I entirely take the point that Government policy that has an impact on the supply of energy, particularly hydrocarbon energy, can have an impact on price. I share the hon. Gentleman’s enthusiasm for shale, and the Government’s proposals will ensure that exploration for shale gas can happen as long as it is done carefully and within a regulatory framework that ensures that it is safe. I hope that he, his colleague the hon. Member for Clacton and all colleagues in his new party will support the local extraction of shale gas; his view is not shared by members of his party across the country. I welcome the support of the new establishment party for shale gas.

It is absolutely essential to ensure that we have security of supply at the lowest possible cost, while living within our international climate obligations. Perhaps there is a point of difference, because the risk of climate change is real and must be taken seriously, but the question is how we deliver on that in the lowest-cost way. On that, I think that the hon. Member for Clacton and I share some analysis. For instance, ensuring that taxes remain as low as possible is an important element of the Government’s programme. Even with the incredible deficit that we inherited, we have managed to keep petrol and diesel prices 20p lower than they would have otherwise have been. I pay tribute to my hon. Friend the Member for Harlow (Robert Halfon) for the work he has done on that, which is widely recognised. As oil prices fall, I support him in the call for those reductions to be passed on to the motorist at the pump now, not later. The work that he has done, including on the front page of today’s Sun, is an important contribution to this debate.

How will the Minister persuade oil producers to pass on the reduction in oil prices to the consumer? Price rises hit a lot of poor families because of their impact on public transport and the cost of living in general. Have the Government had any discussions about that, and how do they intend to achieve it?

The Government have had discussions about that. Ultimately, those changes can be best driven by competition. I share the disdain of the hon. Member for Clacton for prices and incomes policies in energy. Indeed, I think that he has missed some of the changes that we have made over the past couple of years, not least in the Energy Act 2013. For instance, he argued for more competition between different technologies so that those with the most potential can drive down costs and improve the situation for consumers. By switching from a regime in which, as he described, subsidy is given out to whatever renewable technology was brought forward to a regime in which a controlled pot of subsidy is auctioned to ensure that we get the best possible value for money, we have made a change towards a market-oriented system.

In the United States over the past five years there has been a 26% reduction in wholesale gas prices and gas prices to consumers. Does the Minister have something to learn about public policy from America?

I have no doubt that the massive expansion of the extraction of shale gas in America has had a downward impact on gas prices. Allied to that is the fact that America did not have many export terminals—it is now building them—which meant that it had a relatively closed market. We are working hard to get shale gas extraction going in the UK, where I think that it has huge potential. The Infrastructure Bill, which is currently before the House, proposes changes to make it easier to get shale gas out of the ground in a carefully regulated and safe way. I welcome the hon. Gentleman’s support for that.

The capacity mechanism and the changes to make our energy system more driven by competition are designed to ensure that we get that security of supply as well as the cheapest possible cost. That is best done through a market mechanism, but the market must have a strong framework around it, because we must ensure continuity of supply in order to keep the lights on.

Will the Minister make a brief comment about the continued problem of the big energy companies charging a premium to vulnerable people who do not pay by direct debit?

That is something that I am actively looking into, and I look forward to working with my hon. Friend to take it forward.

One area in the energy market where there is no competition at all is distribution. The regions have monopolies, and the differential between them is some 6% of the bill. Does the Minister welcome Ofgem’s review of that subject, so that we can have proper, fairer pricing across the United Kingdom?

Of course I welcome Ofgem’s review into the matter, and I think it is an important question. If we simply socialise prices across the whole of the UK, somebody has to pay those prices. The key question is how we can sort that out in a way that represents the best value for money. We have always had a relatively market-based approach, but the central point of Government policy is to move even more in that direction. The other important point is that without the action that the Government have taken, the average household dual-fuel bill would have been £100 higher this year.

Energy efficiency is the most effective way to drive down costs while cutting emissions and to bring down electricity bills for people, families and households. I am focused on that, and on ensuring that we get the best possible value. The Government have expanded energy efficiency enormously. Home insulation has been expanded and the green deal has reached hundreds of thousands of people. Those changes will ensure that we get the best possible value for money and that people pay lower bills, as far as is consistent with security of supply and our international obligations. That is the Government’s goal and we have made progress, but I have no doubt that there is more to do.

Question put and agreed to.

Sitting adjourned.