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Energy Price Cap

Volume 626: debated on Monday 3 July 2017

(Urgent Question): To ask the Secretary of State for Business, Energy and Industrial Strategy if he will make a statement on the Government’s intention for an energy price cap.

Following a two-year inquiry, the Competition and Markets Authority found that energy customers on standard variable tariffs were paying on average £1.4 billion a year more than would be the case in a competitive market. That is completely unacceptable, so my party’s manifesto committed to introduce a safeguard tariff to extend the price protection currently in place for some vulnerable customers—those on pre-payment meters—to more customers on the poorest-value tariffs. The energy regulator, Ofgem, has the powers necessary to impose such a price cap without delay, and I wrote to its chief executive on 21 June to ask it to use its powers to do so. Today, the regulator has replied and announced that it will work with consumer groups to take measures, including extending the current safeguard tariff for those on pre-payment meters to a wider group of consumers, and move urgently to implement these changes.

I welcome this initial proposal—it is a step in the right direction—but I will wait to see the actual proposals turned into action to cut bills, as the test of whether the regulator’s changes go far enough is whether they move sufficiently to eradicate the detriment to consumers that the CMA identified. I remain prepared to legislate if they do not, and I hope that such legislation would command wide support across the House.

I thank the Minister for his response. Does he recall that during the election his party placed the promise of an overall cap on energy prices at the centre of its manifesto? Indeed, does he recall the Prime Minister stating:

“I am making this promise: if I am re-elected on 8 June, I will take action to end this injustice by introducing a cap on unfair energy price rises. It will protect around 17 million families on standard variable tariffs from being exploited with sudden and unjustified increases in bills”?

Does the Secretary of State accept that Ofgem’s response to his letter of 21 June on energy prices falls far short of implementing that promise and that, although there are welcome suggestions on safeguarding tariffs and capping warrant charges for the installation of pre-pay meters, those measures would affect only 2.5 million customers, leaving more than 14 million SVT customers completely unprotected from price rises over the next period? Will he confirm that his letter did not ask Ofgem to consider introducing a general price cap? Will he tell the House why it did not, even though the chief executive officer of Ofgem confirmed earlier this year that it would have the discretionary power to implement an energy price cap?

Does the Secretary of State intend to pass legislation to require Ofgem to introduce a price cap, or is he now content to let his firm election promise of a cap fall by the wayside? If so, what does he have to say to the 17 million people on standard variable tariffs who thought that relief from rip-off price rises was on its way but will now feel completely betrayed by this policy U-turn?

I am grateful to the hon. Gentleman for his questions. I hope he will see that I answered many of his points in my initial response to the urgent question. He will share my view—indeed, I think it is his view, too—that we should act as soon as possible to provide relief to consumers. That will require Ofgem to use its powers. It has powers that it can use immediately, and I have encouraged it to do so.

The hon. Gentleman mentioned my letter. I am sure that, as he was hoping to come into government, he studied the prospective use of the powers, so he will know that legislation requires me to ask Ofgem for advice. I did so under exactly those terms and Ofgem has responded by saying that it will work with consumer groups to identify how far the protection should go. I have been clear that I want the detriment of £1.4 billion a year to be eradicated. It is a test of Ofgem’s responsiveness that it should use its powers to that end. The constituents of Government and Opposition Members will look to the regulator to make use of its powers to prevent the continuation of such an unacceptable situation, which involves more than £1 billion a year.

To build on my right hon. Friend’s most recent answer, some 17 million families are being ripped off by expensive standard variable tariff deals. Ofgem’s proposals will deal with at most 3 million of them, leaving 14 million still being preyed on by the big six energy firms. Does my right hon. Friend agree that Ofgem’s proposals will be viewed as a great betrayal of those 14 million households? If we are going to create an economy that works for everyone, will he distance himself from this big six stitch-up and pledge to help the millions of households that Ofgem seems set to ignore?

My hon. Friend has done great work with many Members from various parties to establish that there is an appetite and need to tackle the problem exposed by the CMA, which has been going on for too long. In response to my letter, Ofgem has said today that it will work with consumer groups and come forward with a range of responses. I will look at them closely, as I know my hon. Friend will, and I am sure that the Business, Energy and Industrial Strategy Committee will, too. I have said clearly that the test of the adequacy of the responses is that they address the clear detriment that the authorities have identified.

The UK Government really lack strategy right across the energy sector. The £20 billion Hinkley Point C project will add to future household bills, mention of energy was sadly lacking in the Green Paper that was published before the election, and now there is this lack of a joined-up approach to an energy cap. Will the Secretary of State confirm the Government’s plans to protect the 14 million people who will not be covered by the current proposals? Of the £1.4 billion that the CMA has said is going to the big companies instead of staying in consumers’ pockets, how much will be returned to consumers under the measures that are being introduced? He said that he might consider legislation, but what is his timescale for reviewing what is happening and deciding whether there is a need to act? Will he ask Ofgem to determine what the true level of a cap should be?

The hon. Gentleman talks about energy strategy, and it is right that the Government have taken a decision—this was ducked by previous Governments for decades—to renew our nuclear power stations that are coming to the end of their lives. He will know that the SNP Government in Scotland agreed to extend the lives of nuclear power stations there, and he will also know about the impact of our success on renewable energy, specifically offshore wind, in Scotland. I have had fruitful discussions with colleagues throughout Scotland, especially in the remote islands, about the future possibilities for that.

On Ofgem’s response to my letter, I have set out clearly that it has said it will work with and consult consumer groups, and come up with a range of options. The £1.4 billion detriment has to be eradicated, and that is the test of whether the proposals are acceptable. I am sure that the House wants to scrutinise them as much as I do.

My right hon. Friend inherited a system that relies increasingly on dear energy, which drives up household bills. Is there anything that he can do to bring a greater amount of cheaper energy into the mix so that bills reduce in five or 10 years’ time?

My right hon. Friend makes an excellent point. We need to ensure that we meet our important climate change commitments at a competitive cost—for consumers and for businesses—and that we obtain the industrial benefits from having a supply chain in this country. That is exactly why we devote a chapter of the industrial strategy Green Paper to future plans to make the most of the clean energy transition in all respects.

Having seen the recent report, surely it is safe to say that wind and solar will be the future for low-cost energy, but there was a Duke Ellington song called “How long has this been going on?” The fact is that this has been going on too long—this exploitation of people who cannot avoid paying above the price. Is it not about time that we moved away from botched privatisation and inadequate regulation to an answer that puts money back in people’s pockets, rather than taking it out?

In response to the first part of the hon. Gentleman’s question, I welcome, as he does, the huge progress that has been made not just in the deployment of renewables, but in the cost reductions that we have seen. That process has created jobs across the UK, especially in coastal towns. I had the pleasure of opening the Siemens wind blade factory in Hull, which created 1,000 good jobs. However, he is right that the detriment has been going on too long, which was why the Government asked the CMA to investigate the industry root and branch. It has identified £1.4 billion of detriment, and I have made it absolutely clear that that detriment needs to be returned to the pockets of consumers.

May I tell the Secretary of State that the latest data show that 2,687 households in my constituency are estimated to be in fuel poverty? That is 6.6% of all households. What more can be done to identify these vulnerable groups and ensure that they have the best advice and information about switching tariffs? The suggestion that people search online is not the way forward. Perhaps it would be more helpful to have a better dialogue between the consumer and the energy provider.

I agree with my hon. Friend. One feature of the energy market is that the poorer someone is, the larger the proportion of their income that they spend on energy. That is why it is imperative that vulnerable consumers should not be required go on the internet every few months to check that their tariff has not defaulted to a much higher one. That was the reason for my letter to Ofgem, and it is why I want its response to be vigorous. My hon. Friend is absolutely right that an aspect of the wider set of policies is to make it easier for consumers to know the price of energy and how much they consume, and smart meters are being introduced to help more people to do that.

Has the Secretary of State seen the analysis and evidence of former independent energy regulators who say that the consumer detriment pointed to by the CMA in this market was based on seriously flawed methodology? If he has not, will he look at that and report back to the House?

I have seen that. This two-year inquiry conducted by the CMA identified £1.4 billion of detriment, which is a huge amount of money. When our constituents see the difference—it can be up to £100 a year—that they pay for a dual fuel bill by being on a dual fuel tariff, they know that that is significant amount.

The CMA said that suppliers have “unilateral market power” over their inactive customer base and could exploit their position by pricing their SVTs above a level that could be justified. That cannot go on.

Does my right hon. Friend agree that it will take more than easier switching to encourage a fairer energy market in this country?

A response is required from the regulator; this is a regulated industry. The development of modern markets means that it is possible for suppliers, especially dominant ones, to identify the customers who are the least likely to switch. As my hon. Friend the Member for St Albans (Mrs Main) said, they are often among the most vulnerable. It is unacceptable to use that information to sting them, and regulation has to catch up with that.

It is my lucky day today, but I am sure it will not continue. I refer the House to my entry in the Register of Members’ Financial Interests.

As much as we welcome the attempt to deal with fuel poverty, the Secretary of State must realise that there is an adverse effect on renewables at the margins, which will now not come forward because of this fairly blunt pricing structure. Will he look into that and ensure that there is still a drive forward for renewables?

We are seeing a big increase in the deployment of renewables as the price comes down, as the hon. Member for Huddersfield (Mr Sheerman) said. The effect of the overcharging—the abuse—is not a return to consumers, and this is not about the increased deployment of renewables. In the analysis of the CMA, the practice results in profits that are higher than they would be in a competitive market and relative inefficiency on the part of the suppliers. Consumers should not be paying for either of those.

Many energy consumers, particularly those on low incomes, do not pay their energy bills by direct debit, but they get huge increased charges from many of the energy companies when they do pay, even when they do so on time. Will my right hon. Friend look into this and make sure that people who do not pay their energy bills by direct debit get a fair energy bill?

My right hon. Friend makes an excellent point. As I said, the poorest 10% of households spend 10% of their household expenditure on energy, whereas the richest 10% spend 3% of theirs on it. We need to look particularly at the conditions of more vulnerable consumers to ensure that they are not disadvantaged. My right hon. Friend mentioned one of the ways in which they are.

Are we not tinkering at the edges and doing a little bit of window dressing? I think that we all agree that the energy market appears to be dysfunctional. We saw that best at the beginning of this year when there was an increase in tariffs across the board that bore no relation to wholesale prices, but had everything to do with the exchange rate, particularly that with the euro, as most of our domestic companies are actually based in France or Germany. The big six are essentially operating as a cartel, not in the interests of the consumer.

I am not sure that I would give them the excuse of exchange rate movements. The Competition and Markets Authority has said that suppliers have unilateral market power over this part of their customer base. This is a regulated market. Ofgem has the powers to introduce and extend the price gap, and my view is that it should use those powers now.

Going back to switching, does the Secretary of State think that more needs to be done to make it much easier to switch, particularly for our more vulnerable constituents?

I agree with my hon. Friend. While there should certainly not be barriers in the way, it also should not be necessary for people to spend every evening on the internet checking whether their bill has gone up by an outrageous margin. If people are loyal to a brand, it is not unreasonable for them to expect to be treated reasonably, especially as that brand may be a trusted brand. The regulator should enforce that.

We produce far more electricity in Wales than we use, yet we pay the highest electricity prices in the British state. More than a third of our households are in fuel poverty. Does that not suggest that Westminster control over Welsh energy policy is not working?

No, it is one of the reasons why this investigation was commissioned and why what I have asked Ofgem to consider and enact will be particularly important to the hon. Gentleman’s constituents in Wales.

Will my right hon. Friend join me in welcoming Ofgem’s proposal to consult on more measures to help microbusinesses?

I do welcome that. We have talked about household consumers, and for many very small businesses, their energy bill is also an important component of their costs. In my request for advice, which it was technically necessary to make to Ofgem, I asked for that advice to apply to microbusinesses as well.

The usual vested interests—the big six—were on the airwaves this morning advising consumers to switch their energy supplier, but if consumers really want to see a change to this rip-off of energy prices, do they not have to switch Governments?

No, it was this Government who referred the whole industry to the Competition and Markets Authority. When the right hon. Member for Doncaster North (Edward Miliband) was Energy Secretary, I urged this measure on him, and he rejected it flat, so it is this Government who have exposed the level of the detriment, and it is this Government who are acting to put a cap in place to prevent this abuse—that did not happen under Labour.

As welcome as a price cap will undoubtedly be, does the Secretary of State agree that the real key to bringing down prices for consumers is the liberalisation of the energy market through the digitisation of the energy system, storage in front of and behind the meter, and a demand-side response?

My hon. Friend, who is well informed about such issues, is absolutely right. The opportunity that smart meters bring is that people can have much more knowledge and control of their energy use, and use that to get the best deals available. That is why the roll-out of smart meters is such an important part of our reforms to the energy market.

But does the outcome of the CMA inquiry not tell the Secretary of State, as a reasonable man, that this is the end of the road for the system? Privatisation did not work, the regulatory system has not worked, and we have had to have a CMA inquiry. What is needed is a fundamental reappraisal and change of this whole energy edifice?

I am surprised to hear implicit support from the hon. Gentleman for the programme of nationalisation of this sector that the Labour party stood on. The billions of pounds that that would cost would not be the most important use of funds. This has been a regulated industry since privatisation many years ago, and the regulation needs to function better than it has.

I have been listening carefully to my right hon. Friend’s answers. Am I right to understand that he would not be satisfied with a final solution from Ofgem that continued to cross-subsidise some customers out of a kind of loyalty premium paid by those who, even if not vulnerable, did not switch?

This is a wake-up call for the industry. A model in which consumers who are known not to switch can be milked to pay a subsidy for other consumers in an unfair way—the CMA identified “unilateral market power”, which enables firms to exploit their position—has to come to an end.

While I welcome proposals to make it easier to switch away from poor deals, does my right hon. Friend agree that Ofgem needs to go much further than it suggested in its letter to him this morning to protect consumers from exploitation?

There is a clear expectation that I want the detriment that the CMA has identified to be tackled once and for all. Ofgem has said that it will consult consumer groups, and I hope and expect that those consumer groups will share my hon. Friend’s analysis.

Will my right hon. Friend join me in welcoming Ofgem’s acknowledgment regarding the ability to put a cap in place? Should we not urge it to use the power fully?

My hon. Friend is right, and the proposal to consult consumer groups and to go beyond the CMA’s remedies—at least what the majority report of the CMA recommended—is welcome. As I said, that is a step in the right direction, but I would want to see this put out in detail and implemented before I would be satisfied with it.

Speaking as someone who represents an industrial town, has my right hon. Friend, as part of the wider debate on these issues, had the opportunity to assess what impact nationalising the energy companies would have on household and commercial energy bills?

I have indeed. The impact of finding the billions of pounds necessary to take these industries into public ownership would not only be a disaster for our public finances, but the destruction of investor confidence in a whole range of industries that we need investment in.

I was a BBC News consumer affairs reporter for five years, and during that time I saw the havoc that can be wrought by pre-payment metering. Does my right hon. Friend agree that practices such as rip-off emergency credit, which makes a payday loan look reasonable, need to be brought to heel, and that we should welcome Ofgem’s proposal to extend the current safeguard tariff for consumers on pre-payment meters?

It can only be a matter of time before my hon. Friend enjoys the position to which you referred, Mr Speaker.

My hon. Friend is absolutely right. It has been the practice of this Government to intervene when there are abuses, especially of vulnerable people in the way in which he describes. That has happened with pre-payment meters, but the approach needs to go much further.