[Relevant Documents: Fourth Report of the Business, Energy and Industrial Strategy Committee, Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill, HC 517; Fifth Special Report of the Business, Energy and Industrial Strategy Committee, Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill: Government Response to the Committee’s Fourth Report, HC 865.]
I beg to move, That the Bill be now read a Second time.
Virtually every household in the country depends on gas or electricity, or both. They are essential services on which we rely. On average, each household spends around £1,250 a year on energy at home—it is one of our biggest household bills—and for the poorest 10% of households, energy is 10% of their annual household expenditure.
Since the early 1980s, when the industry was privatised, consumers have benefited from a more reliable service. Power cuts are at half the level that they were before privatisation and prices have been among the lowest in Europe. Last year, household electricity prices were 13% below the EU average. In recent years, more than 60 new energy suppliers have entered the market, selling direct to consumers. One in five consumers are now with small and medium-sized suppliers and save significant sums.
Is not the problem with the Bill the fact that it locks the stable door after the horse has bolted? Energy companies have jacked up their prices ever since whispers of an energy cap surfaced, such that there is a nice cushion that they can continue to benefit from enormously over the coming months.
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.
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?
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.
I find myself in agreement with the Secretary of State and shall support the Bill. Indeed, I am in agreement with the Prime Minister that the energy market is broken and that customers are being ripped off. The importance of this legislation will be that Governments of whatever colour and the regulator cannot blame each other when something happens in future. There will be a framework that the Government, the regulator and the energy companies understand, and that is why we need legislation.
I agree with the hon. Gentleman, and I was saying in response to my right hon. Friend Stephen Crabb that I think the regulator should be more agile in responding to the behaviour that had come about. In fact, the energy companies themselves should have recognised this, and one thing that they said to me was that none of them wanted to act individually and that they would prefer to have a consistent approach.
The Secretary of State is making a valid case for the Bill, which, after all, is all about fairness for the consumer, but will he comment on the fact that we do not want the Bill to reduce competitiveness in the industry—I am sure that it will not—and is that not key? Competitiveness has already done so much for the industry, and we want to encourage it, not reduce it.
I quite agree with my hon. Friend. In fact, the Competition and Markets Authority found that, in effect, two markets were operating. There is a vigorous and highly competitive market, but among those consumers who, for whatever reason, trust the company of which they may have been customers for some time to award them for that loyalty, there is an absence of competition. We need to change that, but, as I shall go on to say, the analysis shows that the market is not fully competitive at the moment and will take some time to get to that stage.
As someone who has benefited significantly from changing my supplier a number of occasions, my concern is that by placing a cap we will diminish the competition from which I have benefited in the same way that the provision of a cap on university fees has led to everyone charging the maximum. Can the Secretary of State persuade me that that will not be the case?
My right hon. Friend personifies engagement and activity, so it does not surprise me that he has a good deal. His point is very important, and, as I shall go on to explain, the minority report from the Competition and Markets Authority recommends, and the Bill requires, that the cap should be set at a such a level that competition can take place for active consumers such as him. There should still be an advantage in shopping around, but customers should be protected from an ever-increasing differential that particularly penalises those who are vulnerable.
On protecting the vulnerable, we know that the most vulnerable do not move around, despite having shining examples of people doing that. Will the Secretary of State consider putting a duty on companies, running alongside capping, which is a key part of the Bill, to put their poorer consumers on the lowest tariff, so that it is not up to them to try to match the skills of Sir Desmond Swayne?
The right hon. Gentleman makes an important point. That is not within the scope of the Bill, which is meant to protect those consumers from the excesses that can be visited on them by the market. The Bill is narrow in scope and particular in its effects.
I am pushing the Secretary of State on this, but even if we cannot get an amendment because the long title is drawn so carefully, may I ask him to consider the need to introduce such a measure, so that the poorest constituents are automatically looked after by their company and put on the lowest rate for the range of consumption?
There already is a cap for those on prepayment meters, and that is being extended to some of those who are identified as the most vulnerable. The reason for this more general scope is that not everyone can be identified through the receipt of particular benefits—that does not comprise the whole population of those who are vulnerable—so the Bill proposes a backstop.
I thank the Secretary of State for giving way and I welcome the Bill, which will do a great deal to reduce the energy prices paid by consumers. On the point about helping the most vulnerable customers, one issue that we have is that data about who those customers are is not shared with energy companies. The Cabinet Office already has a consultation on showing this data as part of the Digital Economy Act 2017, and the Department for Business, Energy and Industrial Strategy has announced another consultation. When will the Department get on and give the powers to enable the data to be shared, so that we can protect the most vulnerable customers?
The hon. Lady makes a very important point. The statutory instrument that will allow that data sharing will be tabled shortly, before this Bill, which we hope will make rapid progress, receives Royal Assent. She is absolutely right.
I was explaining that the original RPI minus X model, which required annual reductions in prices by incumbents, was followed around the world, but with new developments in technology and practice, it is vital to keep our regulatory system up-to-date. In recent years, it has become more and more possible for suppliers to have extensive information on the habits and behaviour of individual consumers—often more information than the consumers know about their own habits, which are studied so minutely. Incumbent suppliers can identify which of their consumers do not respond to higher prices and instead display loyalty to what they might think of as a long-standing and trusted supplier. They can then penalise those customers with ever higher prices.
The CMA identified the problem and recommended that certain consumers, those on prepayment meters, should be protected from such pricing behaviour. It also recommended measures to drive up the rates of switching. The roll-out of smart meters in particular can make information that is currently only available to the incumbent supplier available to other potential suppliers, with the customer’s permission, which is what everyone wants to be able to drive up competition.
In its report, the CMA was in two minds about whether that action was sufficient, and a minority report thought that such remedies, including smart meters, would not come soon enough to eradicate this detriment quickly enough. The minority report said:
“The harm which is presently inflicted on households…is very severe…the remedies proposed for the large majority of households will take some time to come into effect. That is why…they must be supplemented by a wider price control designed to give household customers adequate and timely protection from very high current levels of overcharging”.
I agree with the report that the march of technology was not correcting the market quickly enough, but there is no doubt that the arrival of all this technology in the energy system is creating a market that will benefit consumers in the future. Can the Secretary of State reassure us that while the Bill provides a temporary measure to correct the current market, it will in no way impede the arrival of the digitised market that will be so greatly to consumers’ advantage in the future?
My hon. Friend has captured the position very succinctly. That is exactly the point. These remedies will introduce more competition based on technology, allowing consumers to have access to the data that will drive it. However, it will take a few years for that to come into effect, so the Bill is doing what my right hon. Friend Stephen Crabb advocated—it is addressing the current problem with greater agility than the regulator has shown.
In 2016, the CMA’s minority report stated:
“These customers are exposed to the prospect of excessive prices on a scale which might amount of many billions of pounds of harm over the next four years”.
Experience has shown that the CMA was right. In the last few years, prices for customers on the standard variable and default tariffs have not declined; in fact, they have continued to increase, in some cases by double digits. There has certainly been no change in the behaviour of many of the companies.
I support the Bill, but does the Secretary of State not agree that, while it may tackle the so-called loyalty penalty for certain customers, more needs to be done to tackle the loyalty penalty in other markets, which, according to Citizens Advice, costs the most vulnerable and possibly the oldest customers about £900 a year?
The Bill focuses narrowly on a problem that the independent inquiry has exposed as being very significant. As I have said, 10% of the annual expenditure of the poorest households is on energy. I recognise that we need to be agile in our regulatory system, and I hope that the behaviour of companies in other markets will reflect the fact that it is not acceptable to use information to ratchet up the amount paid by vulnerable consumers in particular. This is a regulated market with a regulator that is there to protect the interests of consumers, and I think it right for the Bill to focus on that.
I fully support the Bill, but I have a question about Ofgem. The Secretary of State has mentioned a change in the behaviour of the energy companies, but what about a change in the behaviour of Ofgem in increasing productivity and being more on the ball? So far it has failed consumers miserably in that respect.
I too would like to see greater agility on the part of the regulator. It seems to me that its powers would have allowed these actions to be taken under its existing remit, and it is a matter of regret that we have to introduce a Bill to compel it to act in this way. I concede, however—this was made clear in evidence given to the Select Committee on which my hon. Friend serves—that in recent months the current management of Ofgem have displayed more understanding of the need to act to protect consumers.
Do the Government not already have powers, under section 26 of the Energy Act 2010, to introduce a price cap if one group of customers is treated less favourably than others by an energy supplier? Ofgem fears that if it used its powers, there would be a ruling against it and it would end up in the courts. Our purpose today, and my purpose in supporting the Bill, is to lay out once and for all the powers to introduce a price cap for people who are losing out.
It is true that Ofgem has said that it might be challenged in the courts. I do not think we should be afraid of testing arguments in the courts, and I would have preferred to see that happen. The statute that the right hon. Lady mentions would not enable the gap to be closed in a way that would allow competition to continue in the other part of the market—other Members have raised that matter. It would require a closing of the gap, but that could take place by means of the deletion of other tariffs, which is not what we want.
I fully support the effort to lower energy prices, and competitive markets should be able to do that. Last week we were very short of both gas and electricity. There seems to be a capacity problem, and we are going to close a load of coal power stations. What action is being taken to expand capacity to increase the chance of competitive prices?
The capacity auction arrangements that have been pursued over the last few years have been very successful. We have had a higher margin this winter than last, and the prices of securing that capacity for future years have fallen in successive auctions. My right hon. Friend is right to raise the question, but the framework is actually delivering more resilience than has been delivered in the past.
My hon. Friend is absolutely right. We have already had the pleasure of debating that issue. Dr Whitehead has spent many hours in Committee scrutinising the Smart Meters Bill, which will contribute to making the energy system more interactive and therefore more resilient.
The Bill follows precisely the advice to set a non-renewable price cap for a short period while competition increases. Address the problem was one of the commitments made by the Prime Minister when she entered Downing Street. I recognise the important campaigning work done by my hon. Friend John Penrose and, indeed, by Caroline Flint.
The Bill comes to us today having been scrutinised in draft by the Select Committee on Business, Energy and Industrial Strategy. I am very grateful to the Committee, and to its Chair and members, for their swift yet thorough scrutiny. The Committee took evidence from a wide range of stakeholders and produced a well-considered report. It agreed with the CMA’s minority report and with the Government’s proposed approach.
The Bill has been supported by consumer groups and, indeed, by many energy suppliers. Citizens Advice has said:
“We welcome the…Bill, which will prevent loyal customers being ripped-off”.
Octopus Energy, one of the newer and more innovative entrants to the market, has called the Bill:
“A crucial step towards a fair energy market in which energy suppliers compete to offer their customers the best value and service”.
The Bill constitutes a sensible intervention to address a specific problem in the market. The Government are not setting prices, and this is not a price freeze. Such a freeze could disadvantage consumers by leaving them stuck on high prices when underlying costs fall, or force energy suppliers to face the entire risk of international commodity markets. Subject to parliamentary approval, the Bill will require Ofgem to cap domestic standard variable and default tariffs until 2020. It will be for Ofgem to decide the methodology and the level of the cap, as appropriate. The cap will stay in place until the end of 2020. Ofgem will then be required to assess the conditions for effective competition in the market and make a report and recommendation to the Government, which I am sure the House and its Select Committees will consider as well.
The price cap can be continued for one year at a time up to the end of 2023, when a sunset clause will come into effect. The Government have no wish for the price cap to become a permanent feature of the landscape. The inclusion of the sunset clause relates directly to the point made by my hon. Friend Rebecca Pow that we need to address the problem by increasing competition. Ofgem currently has the power to impose a cap for vulnerable consumers, and is taking steps to do that. When consumers make an active choice to opt for green standard variable or default tariffs, they will be able to continue to pay extra for such tariffs if they choose, to prevent unintended consequences. That was a very helpful recommendation from the Select Committee, and I can confirm that all of its recommendations have been accepted in full and are reflected in the Bill before the House today.
The Government want the market to thrive. We continue to promote competition as the best driver of value and services for consumers.
The Secretary of State talks about the setting of the cap, and setting it at the right level in the Bill is incredibly important. If it is too high, it will not achieve its objectives; if it is too low, there is a danger that some of the new entrants into the market will fail. The power is with Ofgem, but we have already heard that Ofgem has not been exactly brilliant in exercising its existing powers. Is the Secretary of State confident in Ofgem’s ability to set the cap at the right level?
I am. There has been recognition from Ofgem that this role is perhaps more important than was suggested by the attention it has been given in the past. Most observers recognise that the work on setting the cap for consumers on prepayment meters has been effective and that competition still exists in the market.
Can my right hon. Friend assure me that any changes to the price cap will also take into account those on prepayment meters, so that if, for example, the price cap changes every six months, that is taken into account for those on prepayment meters or prepayment cards and they are not disadvantaged?
The arrangements for prepayment meters will continue separately from these provisions, not least because the costs of the prepayment meter are different from those of consumers on normal meters, and that must not be used to the disadvantage of those consumers.
The price cap must be in place as soon as possible, and our intention is that it should be by the end of the year subject to progress in this House and the other place. Ofgem is undertaking preparatory work alongside the consideration of the Bill by Parliament. The Bill will require Ofgem to put the price cap in place as soon as possible after the Bill is enacted.
The whole House wants to help those in vulnerable circumstances in particular. My right hon. Friend alluded earlier to the provisions of the Digital Economy Act 2017, which will give suppliers access to customers in difficult circumstances. At that point, if we do not take action through legislation, will my right hon. Friend work with the industry to develop best practice so that suppliers seek out their vulnerable customers and do whatever they can to get them on to the lowest tariffs?
My hon. Friend makes an excellent point, and my Department will work closely with Ofgem to ensure that those consumers can benefit from these provisions.
I am indeed confident of that, and it is one of the reasons why I am so grateful for the swift attention of the Committee on which the hon. Gentleman served in giving the Bill pre-legislative scrutiny and taking evidence from expert witnesses.
As I said earlier, the Bill has been constructed to be proportionate and to be directed at a particular problem that we expect to be temporary. On that basis, I hope it will enjoy support from across the House and we can swiftly progress it so that we can correct an intolerable situation in which consumers have been exposed to paying £1.4 billion more than they would in a competitive market. That abuse should end. This Bill will give Ofgem not only the ability to do so, but the requirement that it should do so, and I commend it to the House.
I am pleased that the Bill is before the House today, but I must express my exasperation that it has taken so long to get to this point. The 2017 Conservative manifesto committed to implementing an energy price cap that would protect 17 million households. The Government then repeatedly rowed back on that promise, passing responsibility to Ofgem, which made it clear that legislation was required. After months of to-ing and fro-ing, the Prime Minister reintroduced her commitment in her conference speech, and finally, on
As all hon. Members will be aware, the UK experienced one of its coldest periods for decades over the past week, with the Met Office reporting that the UK had officially broken its record for the lowest March temperatures in a 24-hour period on Friday. As a result of this Government’s dithering and delay, the 4 million households currently living in fuel poverty, 1 million of which include a disabled person, will be receiving whopping bills at the end of the month. Startlingly, the latest figures from National Energy Action for the winter of 2016-17 show that excess winter deaths were 39.5% higher than in the year before, with an estimated 34,300 excess winter deaths in England and Wales.
The hon. Lady underlines the fact that the harshness of the recent weather will have increased energy bills for millions of people. Was she therefore as impressed as I was by the speed at which emergency payments were made to the most vulnerable to help them with their additional heating costs?
The emergency payments were certainly welcome—I thank the hon. Gentleman for his comment—but the fact remains that this price cap should have been in place this winter and it was not.
National Energy Action also found that an average of 9,700 people die due to living in a cold home each year. That equates to 80 people per day, the same number of people who die from breast or prostate cancer each year. It has been Labour party policy since 2013 to introduce a price cap on consumer energy bills, and although the principle of this Bill is positive, I remain concerned that, as drafted, it does not go far enough.
The hon. Lady makes an interesting point. I think that both sides of the House have reached something of a consensus on our energy market. People on the right and left—wherever they place themselves on the political spectrum—agree that our energy market is fundamentally broken and needs to be reviewed. It is interesting that the Government put their own commission in place, under Dieter Helm, but we have had no response from them so far about the proposals it made.
I have several issues with the Bill as drafted, but I start with the fact that it does not provide any direction from the Secretary of State on his preferred level of cap, which effectively passes the buck to Ofgem. The Bill merely states:
“The Authority must exercise its functions…with a view to protecting existing and future domestic customers who pay standard variable and default rates”.
In doing so, Ofgem must consider a number of factors, including creating incentives for suppliers to improve efficiency, enabling suppliers to compete effectively, maintaining incentives to switch between suppliers, and the need to ensure that holders of supply licences who operate efficiently are able to finance activities authorised by that licence.
With respect, I dispute the hon. Lady’s claim that we are in accord on energy policy. The Opposition’s stated policy is to proceed with wholesale nationalisation, which Government Members strongly disagree with. Does she not accept that renationalising National Grid and the energy sector would be antithetical to driving down prices, which is what we all want?
I refer the hon. Gentleman to the Labour party’s manifesto, which clearly states that we wish to increase competition in the energy market by creating regional suppliers. We want to promote fair and transparent competition within the energy market, but unfortunately the Government do not advocate a similar position. We hope to fine-tune aspects of the Bill as it goes through the House so that competition in the energy market will be effective, fair and transparent.
Mr Clarke deliberately misinterprets our policy. The shadow Chancellor has committed the Labour party to supporting a doubling of the co-operative sector. Energy co-operatives do not mean nationalisation, but they do amount to democratic public ownership. Will my hon. Friend re-endorse the commitment to see more energy co-operatives in the market?
I wholeheartedly support my hon. Friend’s fantastic point. I think that our manifesto commitments have been misrepresented or, in the case of Mr Clarke, overstated. I again encourage him to read our manifesto, which encourages competition in the energy market while also considering some of its fundamental problems, such as in relation to grid ownership. I will address those points later in my speech.
With regard to the factors that Ofgem must consider, the problem is that although the Opposition are not averse to these principles, at present they are at best ambiguous, and there is no duty to consult on how such measures can be accurately quantified. Perhaps the Minister for Energy and Clean Growth will confirm how these measures will be quantified. Will they form part of Ofgem’s cap methodology consultation? If not, how will Ofgem determine these ambiguous proposals?
Speaking of those guidelines, Energy UK has highlighted the uncertainty in which the provisions are shrouded. Indeed, The Guardian’s financial editor recently commented of the chief executive of Ofgem:
“At best, he is being sent mixed messages by government. At worst, he is being asked to deliver contradictory goals.”
We recognise that Ofgem will consult on the cap methodology to be used, but has the Secretary of State given any indication to Ofgem of the final outcome he wants to see? The Prime Minister promised that £100 would be knocked off 17 million household bills, but nothing in the Bill will ensure that that happens.
Labour has confirmed that we would introduce an immediate emergency price cap to ensure that the average dual fuel household bill remains below £1,000 a year. Had that policy been in place since 2010, the average customer would have saved more than £1,000 on their bills by now. Will the Minister confirm whether the final cap will go anywhere near Labour’s proposals, or indeed anywhere near the Prime Minister’s promise?
Just as ambiguous is the mechanism for deciding whether to extend the cap beyond the end of 2020. The Bill merely states:
“The Authority must carry out a review into whether conditions are in place for effective competition for domestic supply contracts.”
It does stipulate that the review must include an assessment of progress made in installing smart meters, but unfortunately that is as good as it gets. The industry has expressed concern that this provision is unclear—I agree. For example, Energy UK says that there is an absence of a
“clear and realistic definition of effective competition”.
“the criteria for effective competition are not defined so it is not certain under what circumstances the cap will be lifted or how its success will be judged.”
Will the Secretary of State issue any further guidance on what the conditions for effective competition might be, or are we simply deferring to Ofgem to determine that without question?
The hon. Gentleman makes an important point, and I will refer to this later in my submission. The Bill does not provide an answer to the broken energy market; it is simply a sticking plaster while the energy market is reformed. We would not expect the provision to be in place for a prolonged period. We are not openly against sunset provisions, although we might dispute how they are drafted, which we will explore in Committee.
In considering the cap removal, I must raise an issue that was highlighted recently by the Business, Energy and Industrial Strategy Committee. It found that vulnerable and low-income people were especially affected by poor-value tariffs, with 83% of those living in social rented housing, 75% of those on low incomes, 73% of those with no qualifications and 74% of disabled customers on a standard variable contract. It was clear from the Committee’s findings that, even with the advent of smart meters, those groups will still require protection from overcharging. I therefore urge the Government to consider representations by charities such as Scope, which has called for clause 7 to be amended to ensure that Ofgem, when it considers “effective competition”, has regard to the impact of removing or extending the cap in relation to vulnerable and disabled customers.
Finally on the drafting of the Bill, I am concerned that there is no guarantee that the price cap will be in place this winter, despite the Secretary of State’s earlier assertions. The Bill states that Ofgem must introduce a cap “as soon as practicable” after it is passed, but Ofgem has already said that it would take around five months after a Bill receives Royal Assent to enact a price cap because it has a statutory duty to consult power companies. This morning Ofgem has said that it
“will look to set the level of the cap over the autumn and bring the cap into effect at the end of this year”.
It therefore seems that the cap will not even be in place when the weather turns in autumn this year. I think that the Bill would be greatly improved by the inclusion of a hard deadline by which the cap must be in place, and Labour will be seeking to include such a deadline in Committee.
Given that the Government have already set the date for Committee consideration as
The shadow Secretary of State is kind to give way to me a second time. Does she agree that another option she might consider to help to introduce the cap as quickly as possible would be for her party to pledge its full support in helping to get the Bill through the House and the other place as quickly as possible?
I thank the hon. Gentleman for that very helpful comment. I have not opposed the Bill in any of my comments so far; I am providing helpful advice. We support the principle of a price cap and want it to be introduced in the most efficient and detailed way possible.
I think that there is consensus across the House that the energy price cap is no more than a sticking plaster, and that much deeper problems within the UK’s energy market need to be addressed. The market is fundamentally broken. Electricity bills soared by 20% between 2007 and 2013, while in the past year alone, every household in the UK paid £120 for dividends to energy company shareholders. Over the past few months, report after report and news story after news story have detailed the unfairness of the current system, but it must be noted that the final bills that consumers face are not simply a consequence of manipulation by some supply companies. As the Business, Energy and Industrial Strategy Committee has highlighted, network costs make up the second highest element of a duel fuel energy bill.
The Energy and Climate Intelligence Unit found last year that the six distribution network operators made an average profit margin after tax of 32% a year between 2010 and 2015, equating to £10 billion over six years. At the same time, shareholders received £5.1 billion in dividends. In a subsequent report, the ECIU calculated that electricity network companies’ exceptionally high profits are set to add £20 to household energy bills this year. Moreover, analysis by Citizens Advice last year calculated that network operators, including National Grid, had made £7.5 billion in unjustified profits, which it thinks should be returned to consumers. Quite frankly, that is the exploitation of a natural monopoly. It is not a market and there is no effective competition, and I want to hear how the Minister will deal with competition within this element of the energy market.
I am grateful to my hon. Friend for giving way a second time. Is it not a problem—and deeply ironic—that Conservative Members should defend an energy system in which foreign nationalised companies have more control and earn more income and wealth from the distribution and supply of British energy than the British citizenry?
My hon. Friend makes a fantastic point. Many people across Britain find the situation absurd.
As I said, I welcome the Minister’s comments about how she will tackle network exploitation but, along with the BEIS Committee, the Opposition are closely monitoring the next phase of network regulation. We also wonder whether the Minister will shine a little more light on what that might entail, what benchmark the Government have set as their acceptable level of regulation, and what actions she will take if Ofgem’s proposals are insufficient, as was the case with the initial price cap proposals.
The Labour party has been clear that it will not allow the exploitation to continue. We will radically reform the UK’s energy system, not just tinker around the edges, and if the Government are serious about reforming the market and protecting consumers, it is about time that they keep up. Sadly, however, the Secretary of State’s opening remarks were rather thin on proposals for long-term market reform. Reform of the market is not just critical in order to instil fairness and affordability, but vital to ensure that Britain has an energy system fit for the future.
We are experiencing a pace of technological change within the energy sector that has never been seen before. Batteries, storage and smart systems are transforming demand and supply. There is a move to smarter, more decentralised forms of energy generation and supply, emulating many of the models we have seen established across Europe, along with the potential of accessing a low-carbon market that is, according to Goldman Sachs, worth over $600 billion.
Dieter Helm, who was commissioned last year by the Government to conduct a review into the cost of energy, said:
“The corporate structures and policies designed for the 20th-century world no longer work well.”
That review had two main findings: first, that the cost of energy is significantly higher than it needs to be to meet the Government’s objectives and, in particular, to be consistent with the Climate Change Act 2008 and to ensure security of supply; and, secondly, that energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market as it undergoes profound technical change. Dieter published his report in late October. It echoed our calls for a change in ownership of the electricity network; unsurprisingly, we heard little from the Government.
Following the report’s publication, the Government launched a call for evidence to gather the views of stakeholders. That process closed on
The hon. Gentleman makes an interesting point. We would expect all stakeholders to be engaged in the process, because the Bill must suit the entire energy market and deal effectively with competition. As I set out earlier, the Bill, as drafted, does not provide sufficient clarity on what is meant by “effective competition”.
My hon. Friend makes a fantastic point about the need for a fundamental root-and-branch look into how our energy market functions and what we will expect to see from it if it is to suit our needs.
The Opposition are pleased that the Government have caught up and finally brought forward legislation to ensure that a price cap is implemented, but the Bill is frankly too little, too late, for millions of people who will not feel benefit this winter and nor, it would seem, for half of next winter. This sticking plaster is only guaranteed to be in place until the end of 2020, so the Government need urgently to bring forward radical proposals for long-term reform of the energy market. We have already set out a clear plan, and it is time that this Government started to catch up.
Order. As Members can see, many colleagues are trying to get in on this debate. If Members could stick to eight minutes, we will be able to get everyone in without having to impose a time limit. I call John Penrose.
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, Caroline Flint and 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.
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.
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.
Some 5 million people are already benefiting from the price cap for those on pre-payment meters or on the warm home discount, and Ofgem is in charge of that. Why cannot it be trusted to extend its skill to a wider group of customers?
The right hon. Lady is one of the co-organisers of the letter, and I thank her again for her help. No matter how clever, good and high calibre the committee, people are just not as good as the market at price discovery, provided the market runs properly. When she was shadow Secretary of State for Energy and Climate Change, I heard her talk about having to get a better energy market with better price discovery and having to re-establish an energy pool precisely because of that point. Ofgem, no matter how hard it tries or how well intentioned it may be, just will not get it right a large proportion of the time.
My hon. Friend knows a great deal about this issue. Is not the point that this is not a price freeze but a price cap? Those two things are different and allow a sensible regulator, as Caroline Flint suggests, to set a ceiling rather than an absolute price.
I agree that there is a difference between a freeze and a cap, but there are a couple of things that, none the less, make it an extremely risky and dangerous proposition to go down that road. For example, what if Ofgem picks a number and the international price of energy falls the very next day? What then? Switching customers in the ultra-competitive part of the market would find their prices drop quickly as energy firms react to the news, but Ofgem’s capped prices for loyal, non-switching customers on default tariffs—that is the example my hon. Friend talks about—would not move at all for another six months, when the cap can be reset according to the terms of the Bill. In that situation, the cap would be ineffective at protecting the customers it is designed to help and, because it is officially blessed by Ofgem, it would embed and legitimise high prices. Things would get worse rather than better.
It is not just me who is worried about that. Which? says it is
“not certain that customers on a capped default tariff will benefit as market conditions change in future”.
As my hon. Friend knows, I have some sympathy with his arguments. Does he recognise that, as drafted, the Bill enables Ofgem to set the cap by formula, which could be related to wholesale prices and have the flexibility required to overcome the problem he describes?
I wish I shared my right hon. Friend’s confidence in Ofgem. All the discussion of the Bill so far from Ministers, from comments on the Bill and from people inside Ofgem is not what he describes. They are talking about an absolute cap in which people sit in a room and come up with a number, which stays that way until it is reset after six months—that is the way the Bill is drafted.
If the Bill can be amended in a way that allows it to be far more flexible—that is one of the things I hope to encourage both Members here present and Ministers at later stages to consider—we might be able to iron out some of these issues, but I do not share my right hon. Friend’s optimism in that regard.
But as my right hon. Friend will know, it is also stated elsewhere, particularly in the guidance and in many of the other documents on this, that we are looking at an absolute cap. The word “absolute” is used repeatedly, and it has been used repeatedly to me in conversations with Ministers. If we can remove those other points as well, so that they are not going to push us in the direction I worry about, many people here would be a great deal more reassured. We will have to come back to this on Report—
I certainly will not press the point beyond this. Does my hon. Friend not need to distinguish between absolute, which means not relative—to offer tariffs—and formulaic and flexible, which the drafting certainly does allow, as opposed to a point that is set by a Committee for six months?
We will need to come back to this matter, but it would be tremendously helpful if Ofgem came up with some clarifications on it, because that might reassure me and others. So far I have had nothing to reassure me in that direction—in fact, quite the opposite.
As I was saying, it is not just me who is worried about this: both Which? and uSwitch worry it will mean cheaper fixed deals will be withdrawn from the market; and leading challenger energy firms such as Octopus Energy, Utilita Energy, Utility Warehouse, Ebico and Good Energy are all worried that Ofgem’s price-fixing efforts will inevitably get it wrong. The lawyers and lobbyists for the big six are licking their lips at the prospect of all those fat fees from legal challenges and persuasive lunches. It is no coincidence that they are already demanding the Bill should allow expensive and time-consuming appeals to the Competition and Markets Authority whenever Ofgem’s committee sets a price.
If all these people think the Bill’s details create problems, what is the alternative? What needs to change? The thing to remember is that default tariff prices are just a symptom of a much deeper problem. The moral flaw at the heart of this market—the thing that sticks in the throat —is the mark-up loyal customers are charged compared with competitive switching deals. I am talking about the enormous, unjustified, sneaky price hike the big six hit people with, without their consent, just because they are loyal or simply too busy to switch. That is the unfairness, the burning injustice and the thing that drives customers—our constituents—to write to each and every one of us demanding, “This must change”.
If the problem is the mark-up as between the competitive deals and the default tariffs, why does the Bill only address half the problem—the price of the default tariffs—rather than the gap between the two? If we are really serious about solving the problem, why not cap the gap instead? A cap that creates a maximum mark-up would deal directly with this moral underlying problem—the cause of the rip-off—rather than only half of it. It would mean default tariffs would have to move in tandem with the ultra-competitive, consumer-friendly part of the market. People who took the trouble to switch would still get the best deals, but customers who forgot or did not want to switch would get protection, too.
Capping the gap is future-proof as well. If the international price of energy fell suddenly, as we were discussing earlier, it would not just be the competitive switching deals that would get cheaper; the price of capped tariffs would fall, too, and people would not have to wait for six months for Ofgem’s all-knowing committee to meet and change it. Capping the gap would not dilute or derail the all-important underlying market changes which are going to make energy feel competitive and normal either. Customers would still have plenty of incentives to start switching. That is why this Bill and its introduction make this a great day— I meant it when I said it. This Bill is important, even though it is only temporary. It will save millions of customers hundreds of pounds on an essential product. Although it is not perfect and it could be better, it is a very important step. So for the moment, for the principle of the thing, for the Second Reading debate today, let us just celebrate the fact that it is here at all and support it.
It is a pleasure to follow John Penrose. He has clearly done a lot of work on this and is revelling in the fact that the Bill is here today, but I thought for a moment near the end of his speech that he was starting to argue against the principle of a cap. Clearly, I, too, welcome the principle of the legislation, which is intended to limit the amount of money paid by consumers stuck on tariffs above the market rate. It is usually those from the lowest-income households who suffer in that way.
I pay tribute to the ongoing cross-party work by Caroline Flint and my hon. Friend Patricia Gibson. They have garnered massive support from all parts of the House, and the cross-party letter to the Prime Minister, which was signed by more than 200 Members, helped to build the momentum to get us to this stage, with the Government introducing a Bill to the House.
When in October 2017 the Secretary of State initially announced the Government’s intention to introduce a cap, he stated:
“Over the past 15 years energy prices have risen by over 90% in real terms.”
He also said:
“Customers of these firms have seen their energy bills increase by between 7% and 10% within the past 12 months, increases on prices the CMA had already concluded were too high.”—[Official Report,
In the same speech, he acknowledged that despite action by Ofgem to protect a further 1 million households, there would still be
“13 million families paying more than they would in a competitive market.”—[Official Report,
The Secretary of State’s justification not only illustrates the need for the Bill but confirms that it has taken too long to get to this point.
The headline figure for customer overpayment was £1.4 billion in 2016 alone—that is the poorest and most vulnerable customers subsidising the more wealthy. It is therefore no surprise that the Business, Energy and Industrial Strategy Committee has criticised Ofgem and the energy suppliers for failing customers. The fact that intervention and protection is required for some 17 million to 18 million households is a stark illustration of the current market failure. In addition, the fact that there has been a debate between the Government and the regulator about whether primary legislation is even required to introduce a price cap is perhaps a further indicator of a market that is not fit for purpose. With all that said, I acknowledge that the Bill represents progress and welcome the fact that the Government are taking steps to make sure that a cap is going to happen, rather than having an ongoing battle with Ofgem.
Customers have an innate suspicion of energy companies, especially when it comes to their profit announcements, or the fact that when wholesale prices drop, they feel they never see a corresponding drop in their energy bills. There needs to be greater clarity on the operation of the market. I understand that energy companies buy in advance and hedge against future wholesale costs; that there are many components to an energy bill; and that profits make up a relatively small part of energy bills. However, unless there is greater clarity on all these matters and an easy-to-understand bill format, customer suspicions will remain. Generic pie charts are fine for showing the make-up of a bill, but customers really need to know what is going on with the relationship between wholesale prices and the buying power of the big six, and how locked in companies really are to higher-than-market-rate prices at a given point in time.
I accept that a 5% profit cannot be classed as excessive profiteering, but we have to acknowledge that 5% of huge turnover sums still equals a huge profit in terms of actual numbers and the bottom-line figures that the public see. An absolute cap should protect some customers, but if the companies aim to maintain the same profit numbers, there will clearly be losers elsewhere in the system. If the average saving between a big six company’s cheapest tariff and its standard variable tariff is £300 per annum, somebody other than me can do the maths to assess the sort of amounts that these companies will seek to recover from other customers. Arguably, if those other customers were the people who should be able to afford to pay a bit more money, that would mean that any possible cross-subsidies would be working in the right direction, but there is a risk that the companies will just recover the money from elsewhere.
Given that profits, along with VAT, are the joint second-lowest component of a bill, if we are looking to get lower energy bills, the only other way for there to be substantial savings is if the wholesale cost of energy comes down or if the network costs, which are estimated to account for 26% of energy bills, are reduced. I therefore suggest that the market mechanisms for network costs should be reviewed and considered.
On the back of the Government’s intention to introduce this Bill, we have now seen three of the big six—E.On, SSE and Centrica—announce a move away from standard variable tariffs, and Scottish Power has indicated that it will do likewise. Those companies are now using this strategy as an argument against a cap, but of course they need to acknowledge that it was their inertia on standard variable tariffs that actually led us here in the first place, so they are having that argument once the horse has bolted from the stable.
None the less, we must be careful that the unintended consequence of the cap is not an equalisation effect that drifts towards the higher end of the scale. I understand that that is why the hon. Member for Weston-super-Mare is calling for a relative cap. However, even a relative cap can have an equalisation effect, eliminating lower level tariffs. I note that the Business, Energy and Industrial Strategy Committee and Citizens Advice, among others, support an absolute cap, which is what is proposed at the moment. However, this strategy needs to be reviewed. With a requirement on Ofgem to consult on the cap methodology, I hope that we will be able to flesh out the risks and thrash out mitigations.
Not surprisingly, the big companies are against the Bill, and, intuitively, that is quite a good thing. However, some of the concerns that have been raised possibly require consideration by the UK Government. There is a suggestion that appeals to the CMA should be allowed, as happens for every price control and every price-regulated sector in the UK. I can see the logic of that, and if appeals to the CMA are allowed, consumer groups, as well as the suppliers, could make representations, so that is not necessarily a concession to the energy companies. Additionally, the companies argue that there needs to be clarity on the conditions on which a cap may be removed or extended in 2020. From the point of view of the investor and of a tariff setting policy, I can understand the argument for further clarity on this matter.
Even the consumer group Which? wants to ensure that there are no unintended consequences that limit the success of the cap and eliminate future competition. It has suggested that Ofgem must: set out clear criteria for effective competition that the price cap will be reviewed against; monitor and evaluate the success of the price cap before, during and after the period it is in place; publish monitoring reports, detailing actions to be taken to mitigate any adverse impact on competition; and test how the price cap is communicated to consumers and report any negative effect following that engagement.
Hopefully, the Minister will explain how the concerns of both suppliers and, importantly, consumer groups can be mitigated. On energy bills, we must remember that to lower bills and eliminate fuel poverty, the UK Government’s wider energy strategy and welfare strategy have to be correct as well. The smart meter roll-out, which we have heard about, is seen as an enabler for smarter, lower tariffs, but that is still unreasonably linked to a 2020 deadline forcing a roll-out of SMETS1 meters rather than a longer roll-out period with more appropriate updated technology that allows for better and easer switching in the future.
The UK Government’s nuclear obsession must end. The National Audit Office has already confirmed the impact that Hinkley will impose on electricity bills. Therefore, looking at additional nuclear and a whole raft of micro reactors makes no sense, especially when costs for offshore and onshore wind are now at an all-time low. Energy policy must be consistent. We cannot have a repeat of the debacle of the removal of the £1 billion of funding for carbon capture and storage. Transmission charges have to be considered, particularly when we have opportunities with renewables and energy storage.
On other mitigation measures, further work needs to be done on home energy measures, and that needs direct Government intervention. All energy companies agree on that, and the Scottish Government lead the way in taking direct intervention. The Scottish Government have committed to a warm homes Bill and a statutory fuel poverty target as well as the roll-out of an ongoing further energy efficiency programme.
This Bill imposes a welcome temporary cap, but during the period that a temporary cap is in place, the UK Government must not only review its effectiveness, but explore other strategies and develop that consistent energy strategy. They could also follow the lead of the Scottish Government and look at a not-for-profit public energy supply company, otherwise, there is no doubt that this Bill will take a classic sticking plaster approach. It might represent a quick political win, but, in the long term, we need to have a solution to high energy bills and fuel poverty.
I apologise for having to leave soon after I have spoken, but I am hosting another event elsewhere in the House of Commons.
High energy costs are felt most significantly by the vulnerable and those on lower incomes, which is why I strongly support the Bill and congratulate both the Business Secretary and the Energy Minister for what they are doing. Those who pay the most for energy are the ones who can least afford it. Eight out of 10 people on high-cost standard tariffs earn £18,000 a year. Scope, the charity for disabled people, found that households with disabled persons make up 38% of all fuel-poor households in England. More than a quarter of households with a disabled person—over 4 million households—spend more than £1,500 a year on energy bills, which is why this is a matter of social justice. The Government’s emphasis on the cost of living is incredibly important. I welcome that more than 4 million households are on prepayment meters. I also welcome the freeze in fuel duty for eight consecutive years, meaning that the average motorist has saved £850 since 2010.
The truth is that our energy market is fundamentally uncompetitive. The six largest energy providers focus on cheap introductory offers and leave loyal customers on poor-value tariffs. These standard tariffs earn the big six an average of £1.4 billion more than they would earn if the market was working well. The lack of competition means that suppliers can charge what they please. We have seen in recent weeks how increasing wholesale energy costs have had a knock-on effect on tariffs in smaller providers and those in the big six.
I urge the Minister to look at other issues hitting energy consumers. For example, those who do not pay by direct debit face an extra bill. I had an email only yesterday from someone telling me that they refuse to pay by direct debit, so they have to pay the electricity company—the Co-operative Energy—£200 a year more than if they had signed up by direct debit. We know that the vulnerable often do not pay by direct debit and sometimes do not have bank accounts. Some are paying up to £390 extra a year. This charge is unfair. I urge the Minister to look into these cases.
I also have concerns about the huge wages and the way in which profits are used by the big six bosses. Now, I am not against high wages or profits, but I do not think that these wages are linked to performance. For example, top staff in Centrica get £13.1 million a year, and the chief executive officer of E.ON UK said that his company had £235 million in profits. Although I am not against profits or high wages, wages should be linked to performance and we should ensure that those profits are ploughed back into helping the most vulnerable consumers.
We need a consumer Bill of rights to bolster the position of all energy consumers. It should be easily digestible and understood. To get cheaper tariffs, everybody should know what their energy bills should be and what rights they have. A consumer Bill of rights should ensure access to the lowest possible cost for loyal customers who decide not to switch and end up on the standard tariffs.
I would normally be pleased to take interventions but, if the hon. Gentleman does not mind, I will not give way because of the demands on time. There are a lot of speakers and Madam Deputy Speaker has asked us to cut down our contributions.
My next point is about injecting competition into the market that is currently dominated by the big six. We have a problem because, although this is very much about competition in the private sector, energy is actually a public good. The Government need to do much more to support not-for-profit providers. Gareth Thomas mentioned co-operatives, of which I am very supportive. Robin Hood Energy, launched by Nottingham City Council, is an example of a not-for-profit provider. Although we need market competition, we need to look much more at the co-operative model when we are talking about a public good. I do not believe in nationalisation, but I do think that we should have not-for-profit models in essential services, because energy is the lifeblood of our country and, without it, we would be in the dark ages. For too long, to use a well-known phrase, the market has been dominated by the few, not the many.
I very much support the Bill because it is the right thing to do symbolically. It sets the tone of what this Government are about—helping the most vulnerable. It is also the right thing to do practically. To me, this is not an argument about big government or small government; it is simply an argument about good government.
It is an honour to follow Robert Halfon.
I welcome the Bill and look forward to its clauses becoming law in due course, with the impact that will have on energy bills. Of course, Labour first proposed action to tackle excessive energy prices in 2013. I look forward to hearing shortly, I hope, from my right hon. Friend Caroline Flint, who was the architect of that policy. As my right hon. Friend Edward Miliband put it at the time,
“When wholesale prices go up, people pay more. When they come down, they still pay more.”
Between 2010 and 2015, energy bills went up by £300 on average, so in the 2015 Labour party manifesto, we committed to cap energy bills until 2017, ensuring that bills could fall but not rise. That same winter, we committed to giving the regulator the power to cut bills and then to reform the energy market to deliver fairer prices and a better deal for consumers. Like all good ideas that Oppositions have, it has now somewhat belatedly become Government policy. I congratulate the Secretary of State and the Minister on that.
The fact that the energy market is broken is undeniable. It is a feeling shared by Members across the House and, indeed, by all our constituents. The Business, Energy and Industrial Strategy Committee’s report showed that it is a two-tier market in which customer loyalty is not rewarded but punished with excessive prices. It is totally unacceptable that nearly 60% of customers pay up to £350 more a year for their energy, on average, especially when those customers are the most vulnerable: 83% of those living in socially rented housing, 75% of those on low incomes and 74% of disabled customers are on standard variable tariffs, which we know rip consumers off. It is unacceptable that the exploitative behaviour of some energy providers exacerbates the financial woes of customers who were already facing difficult financial decisions. I do not want to live in a country where so many people are priced out of heating their homes in the winter, or having to choose between sitting in a freezing cold flat or putting food on their table. This Bill is a step in the right direction in addressing some of those concerns.
The big six energy companies insisted in evidence to our Select Committee that the market was already competitive and delivering fair outcomes and that this action was excessive and unnecessary, but our report showed why that is not the case. The CEO of E.ON told us in evidence that it is fair that customers who do not engage in the market pay more for their energy. We found that this kind of discriminative pricing is unfair on customers who cannot engage with competition, as opposed to those who can take advantage of it. Centrica admitted in its evidence to making the majority of its profits on expensive standard variable tariffs. It is not alone in that position, as a large majority of all big six customers are on standard variable tariffs, including 68% of Centrica’s customers.
The big six have lobbied intensely to get appeal rights to the Competition and Markets Authority because they want to try to stop this cap happening by dragging the process through the courts. I am pleased that this Bill rules out that action by those companies. Some argue that switching is increasing and so a cap is not necessary. Although the number of customers switching suppliers has improved recently, it is not improving nearly fast enough, with only a third of customers having switched in the past three years. It is time to try a different approach —one that puts the onus on suppliers to do the right thing. The big six energy companies have brought this cap on themselves by their discriminative pricing practices.
The BEIS Committee held four evidence sessions and analysed 44 pieces of written evidence as part of our pre-legislative scrutiny of the draft Bill. We welcome the Government’s Bill and the intention to put an end to the overcharging of 12 million households on poor-value standard variable and default tariffs.
One of our key recommendations to the Government was that they seek Royal Assent for the Bill before the summer recess, allowing Ofgem time to consult and then set the cap, so that customers do not spend another Christmas facing excessive prices. I welcome the letter from Ofgem today saying that it will be able to meet that timetable, so that we do not go through another winter of excessively high bills. My only disappointment is that this legislation did not come sooner. Last week, temperatures dropped significantly across the whole country. If there had been a price cap in place, families would not have had to worry about rising bills during this unprecedented drop in temperatures.
Following our Select Committee’s work, the Government have accepted all the recommendations that we made, including excluding the possibility of a relative price cap—something that John Penrose advocated, but which I believe would push up prices for customers who switch, rather than reducing the standard variable tariffs. It seems obvious that that is what would happen. For the big six energy companies, 70% or 80% of their customers are on standard variable tariffs and that is where they earn their profits, so they will not unilaterally drop those prices. Instead, they will increase prices for new customers, to cling on to their profits. That is why excluding the possibility of a relative price cap is the right thing to do.
I thank the hon. Lady for giving way; I will try to keep this brief. Does she accept that that criticism about a potential rise in competitive switching deal prices is being levelled by others at the absolute cap? When such a course as she described was experimented with last summer by Centrica, it lost market share hand over fist and was really hurt commercially, so it is unlikely to try that again.
When we took evidence from the big six companies and probed them on where their profits came from, they were very clear that their profits came from the standard variable tariffs. Centrica has a £287 difference between its standard variable tariff and its best tariff, while Scottish Power has a £333 difference between those tariffs. They are earning their profits on the higher tariffs, and I just do not think that they will unilaterally reduce those tariffs, because that will be a hit to their profits, not a slight reduction in the number of new customers they get. The Government are right to exclude that cap, and that is why our Select Committee recommended that.
The Government have also accepted our recommendation to continue encouraging consumer switching. I believe that competition and regulation can co-exist effectively.
We heard a lot of evidence from the challenger companies. There are 60 suppliers in the energy market now, and while switching rates are not increasing fast enough, they are increasing. Does the hon. Lady share my concern that with a cap, there will be precious little incentive for people to look at alternative suppliers and change and that the rate of switching we have managed to get in recent years will start to fall back?
I hope that does not happen. Ofgem and the Competition and Markets Authority are putting the cap in place to make it easier for customers to switch. Northern Ireland, where there is a price cap, has as much switching as we do. The international examples suggest that we can have switching in a market that also has a price cap.
There are two areas where the Government need to take action to ensure that, once the price cap is over in 2021 or 2023, we do not go back to business as usual. First, they need to give greater clarity about what will happen to things such as the energy company obligation and the warm home discount once the price cap goes away.
Secondly, I welcome the Secretary of State’s commitment today that the statutory instrument on data sharing to allow energy companies to know who their vulnerable customers are will be tabled before the Bill receives Royal Assent. We need to see that SI and those changes, because the energy companies do not know all the customers who are vulnerable and experiencing financial difficulties. Our Committee is convinced that those two issues will be key in ensuring that, both during and after implementation of the price cap, those who need it most get the protection they need.
The time for action is over-ripe. These rip-off practices cannot be allowed to continue. There is cross-party support for this legislation, and both the Labour and Conservative manifestos at the last election included a commitment to cap energy prices. Now the Government must make that cap a reality before next winter. I strongly urge colleagues across the House to support the Bill, to deliver some fairness to all our constituents.
In the interests of brevity, I want to make one point about the rationale for the cap that I do not think has yet been stated in this debate, and two points to reassure my hon. Friends about issues that have arisen.
On the rationale, it is true that Ramsey pricing—the gouging of so-called loyal or, in other words, inertial customers—is a major issue, but predatory pricing on the other side of the balance sheet is equally important. As Rachel Reeves said, large suppliers are making uncovenanted surpluses out of the default tariffs, which they are using to cross-subsidise their competitive tariffs to exclude entrants from the market to the greatest possible extent. Once they are deprived of the ability to generate oligopolistic returns from the default tariffs, as my hon. Friend John Penrose mentioned, they will have to do what they are very reluctant to do —namely, recognise more closely the true cost of their own inefficiencies in their more competitive tariffs, thereby allowing much greater penetration of the market by small challengers.
That is why I celebrate the fact that the Government have made the cap a temporary one with reviews. The shadow Secretary of State, when she was engaging in what sounded on this side of the Chamber suspiciously like scraping the barrel to find things to object to, asked the question: how will we know that the time is ripe for the cap to be removed? The answer is when the challengers have actually been able to move into the market in great numbers, because the cross-subsidy in the predatory pricing model has faded away and we therefore have a proper energy supply market.
Of my two crumbs of comfort, I want to offer one directly to my hon. Friend the Member for Weston-super-Mare. We all owe him a great debt of gratitude for banging on about this for a very long time and thinking about it deeply. I assure him that the Bill, whatever anybody may have said about it, clearly allows for a cap that, far from being a freeze, will never be a freeze, as he recognises, and will also not be an absolute point tariff either—or need not be an absolute point tariff. It is entirely in Ofgem’s gift to decide how the cap varies or does not vary depending on circumstances in the external supply markets for energy.
Knowing the current personnel in Ofgem, and having talked to them about this—I am grateful to the Minister for Energy and Clean Growth for facilitating some of those discussions—I am absolutely convinced that they will in fact make this a calculated, formulaic cap that properly reflects the changes in external international circumstances. It will therefore be miles away from the lunacies, although they were politically attractive lunacies at the time, of the Labour party’s original proposal for an absolute price freeze, which, incidentally, would have crippled customers at a time when energy prices were falling.
The second point I want to make to my hon. Friends is that this is the right kind of structure.
I seek a little further reassurance from my right hon. Friend. He seems to be coming up with an elegant mechanism for redefining an absolute cap to encompass relative caps, but just relative to the wholesale market rather than relative to other tariffs. If so, that would be incredibly elegant. Does he believe that that would allow repricing within the six-month period before the Ofgem committee sat again?
Who knows? The point I was just about to make is that the Bill will hand the whole thing over to Ofgem. This is basically an “Ofgem—you get to decide it” Bill, so we will only know when we see what it produces. However, I would bet my bottom dollar—not that I have very many bottom dollars—that Ofgem will actually produce a formula, not a number, so the cap will vary continuously, or pretty much continuously. Ofgem is pretty sophisticated economically and it knows perfectly well what happens in the wholesale markets. I do not think it will lock itself in to an unvarying cap.
My main point is structural: the Bill will hand the issue to Ofgem. The good news is that that is not nationalising the pricing of the energy markets. It is not taking it into the hands of the Government. What my right hon. Friend the Secretary of State said is true—one of the great achievements of the last 30 or 40 years of the evolution of our utilities markets as a whole is that we have reinvented what the Victorians once had, which we lost in the early and middle part of the 20th century, which was the whole idea of the Government establishing a set of technocrats who are not politically motivated or driven by electoral dynamics, and so are not inclined to do things that are stupid in the long run but look good because they win votes in the short term. Instead, they try to get economically rational results.
Ofgem is such a case. It is not perfect, no regulator is, but it will be a hell of a lot better than politicians at setting prices over time. The Bill therefore has the right structure. It is not a Marxist takeover, a price freeze or a recipe for point tariffs. It is a recipe for allowing a regulator to set an economically rational means of preventing a combination of Ramsey pricing and predatory pricing, and as such those of us who believe in the purities of markets can perfectly well subscribe to it.
I agree with Sir Oliver Letwin that we collectively owe praise to John Penrose and my right hon. Friend Caroline Flint for bullying the Government into bringing the Bill before the House. Nor do I completely reject the right hon. Gentleman’s final assertion about the importance of having an effective regulator to regulate the market. What he missed, however, was the need to shake up significantly the way in which the market operates at the moment, to fundamentally challenge the power of the big six and the way in which regulation works between the transmission provider—National Grid—and the various distributor companies, given the impact that that has on bills.
As other hon. Members have said, while the Bill is good in that it will finally introduce an energy cap, it does not address the full scale of concerns across the House about how the energy market operates. E.ON put up prices last week on the coldest day of the year. Experts are increasingly concerned that the lights will go off at some point in the future. Gas capacity is another fear, and the energy ombudsman is unable or unwilling to enforce rulings in favour of consumers. Those are just some of the concerns about how the energy market works. It would have been good to have a far more comprehensive energy market reform Bill, of which the energy price cap was only part.
I fear that Ministers’ reluctant acceptance that a wider price cap is needed confirms the failure of regulation as it stands, and specifically confirms concerns about the powers and practices of Ofgem and its ability to keep the big six energy companies honest, along with National Grid and the distribution companies.
The Competition and Markets Authority, in its landmark investigation of the industry some four years ago, said that customers had essentially been ripped off to the tune of £1.4 billion—and that was since 2012. The only reason the Government referred the energy market to the CMA for investigation was the pressure from shadow Ministers and the then Leader of the Opposition. In the circumstances, and given the scale of overpayment by consumers, an energy price cap is hardly going to fundamentally change the dynamics of the energy market. Therein lies the problem with the Bill. It does not address the issues of ownership and the lack of accountability of those who currently own and distribute our energy. I therefore suspect that it will be of limited benefit to customers.
When the energy market was privatised, the country was promised the chance to have a stake in the new market. There was the famous “Tell Sid” campaign, which offered everybody a chance to own a stake in the energy market. Many mergers and acquisitions later, all we have seen in practice is that centralised unaccountable decision making has shifted from a series of Government Departments to six privately owned companies that control pretty much the whole chain from power station to customer. At the time, we were promised that unleashing competition would bring considerable benefits: prices would be driven down alongside an increase in innovation and efficiency. It is difficult to see exactly where those benefits are. Dissatisfaction with the energy market is so great that it is ranked bottom of all UK industries by the Institute of Customer Service. Part of the reason why people do not switch from one supplier to another is that they do not think they will get much benefit from switching, given the time and hassle it takes.
Six years ago, a very impressive ten-minute rule Bill was brought forward by the hon. Member for Harrow West, which I commend to the House, proposing that customers should be given the right to own the grid in their area, and that more people should be given the right to help control who benefits from the energy market. In effect, it proposed the sort of democratic public ownership that at the time was less fashionable on the Labour Benches, but which has become a bit more fashionable of late. I very much welcome that.
I am sure the author of the Bill would agree with me that one model is the not-for-profit Welsh Water, which runs the utility and competes against others where necessary, but has competition in its tendering process so that it meets European competition rules for utility companies. It also invests in its customers, which is what is missing from the private monopolies that run distribution and transmission.
My hon. Friend makes a very good point. If I may, I commend to him and the whole House the Co-operative party report on the reform of the energy market, which contains several proposals. One suggestion is that Welsh Water and the energy distribution model of similar mutuals in New Zealand might be the model for future of energy distribution in this country.
I do not hold the dogmatic view that public ownership through nationalisation might be a sensible way forward. I can see that there might be a case for some of the transmission network to be publicly owned, and I can see the argument for some public ownership of crucial, strategically important power stations to keep the lights on while a broader transition process is taking place. Fundamentally, however, I would like to make the argument for more co-operative, community-owned not-for-profit energy companies. They would own and supply energy, help to decarbonise our existing energy supply, be properly regulated, and, crucially, help to keep in the local community some of the wealth that is generated by energy, which I gently suggest should be strongly encouraged and allowed to emerge. Robin Hood Energy in Nottingham is a great example of that, as are Bristol Energy and Westmill Solar Co-operative.
I finish by gently saying to Government Members that I understand why they are tempted, for political reasons, to attack Opposition Members for looking again at public ownership, but when so many of the energy businesses in this country are owned, or part-owned, by state-owned companies from other countries, it prompts the question why public ownership by the British Government, or by the people of this country, could not be given a bit more encouragement by Ministers.
I pay tribute to my right hon. Friend the Secretary of State for Business, Energy and Industrial Strategy for bringing forward the Bill and for his hard work on delivering what the Conservative party promised—dealing with unfairness in the energy market. His dedication, and that of my right hon. Friend the Minister for Energy and Clean Growth, to ensuring that the most vulnerable customers are not left behind to pay extortionate prices for their energy should be commended by Members on both sides of the House.
However, I cannot escape the fact that, as a Conservative, I question it when any Government seek to intervene in markets. I accept that on occasion markets need some interference. Many require regulation, and unfair practices need to be tackled robustly, but the question is whether the level of market interference is necessary and proportionate. As we consider this Bill, we must ask whether energy companies are in fact employing unfair tactics against their customers. If so, can those customers avoid paying over the odds for electricity and gas? Is introducing a price cap on certain tariffs the only and/or best way to deal with this issue?
I point to significant increases in the number of new energy suppliers—their market share has risen from 2% in 2012 to around 18% in 2017—and the increasing number of customers who are now switching suppliers regularly. I would argue that that shows an improving picture, thanks to the measures that this Secretary of State and his predecessors have implemented to ensure that the energy market is open to new and smaller companies and to encourage switching. As a result of that success, I would argue that the Bill is unnecessary— I would argue that, but I cannot. We committed to introducing the Bill in the Conservative manifesto, and introduce it we shall, but that does not mean that I would wave it past without considering whether its provisions are entirely proportionate or if there are opportunities for improvement. I have marked reservations about a key part of this Bill—or, more to the point, a lack thereof.
No part of the Bill allows energy providers to challenge the level at which Ofgem sets the price cap, other than by judicial review. I have asked a number of written questions on this point, and it appears that the Government are simply not prepared to admit that this is an inadequate means of appeal against the cap. As a non-lawyer, I am always very suspicious of matters that are settled in the court, so let me explain why it is so important to get this aspect of the Bill right, why judicial review is inadequate, and why the right for energy companies to appeal to the Competition and Markets Authority must be written into the Bill.
In January, prior to the Government publishing the Bill, I asked them to name the countries that they had looked at that currently regulate retail energy prices. In reply, my right hon. Friend the Minister for Energy and Clean Growth stated that Canada, the United States, Spain and New Zealand had all been studied. However—this is hugely significant—as their markets were not previously liberalised, or had only recently been liberalised, all are in very different situations from that in this country.
The Government are clear. They accept that what the Bill seeks to do in this country—to impose a price cap in a long-standing liberalised energy market—has never been done before. We are sailing into completely unchartered waters. Should we not therefore proceed with some caution? The Bill does not; it sails off with abandon, trusting Ofgem to set the level of the cap. This major new power has the potential to alter the UK energy market with as yet unknown consequences, as the Government have effectively admitted through their decision not to release quantitative data in their impact assessment, but the Bill provides no check nor expert oversight of Ofgem’s decisions.
Judicial review provides a remedy when Ofgem is acting unreasonably. If it is acting reasonably, it would not be possible for the energy companies to review the matter, but what they would do, as evidence given to the Business, Energy and Industrial Strategy Committee suggests, is to seek to delay the process through endless appeals to the Competition and Markets Authority.
My hon. Friend makes a valid point. We would not want a situation in which energy companies, especially big energy companies, seek to delay the implementation of the measure for that reason through appeals to the Competition and Markets Authority. Perhaps the Government could consider having a time-limited window of appeal lasting for a matter of weeks in which any appeal could be looked at by the CMA. I am not sure whether recourse to judicial review, with a case tied up in court and argued by incredibly expensive lawyers, is the solution to the problem. I am not sure where the transparency is in that, and I am not sure that judges are the best people to make a determination. I shall say a little more on that as I proceed.
Appeals on price controls are always to the Competition and Markets Authority. This is consistent with every other comparable sector, including telecoms, water, and aviation, and there are very good reasons why. Energy suppliers, just like National Grid and distribution network operators, invest huge sums into our energy infrastructure. The Treasury has estimated that approximately £250 billion of projects are in the pipeline in the coming years. All companies require certainty to deliver these projects and they only get this if Ofgem sets a fair and accurate price.
In most cases, if Ofgem gets it wrong, National Grid, DNOs and their shareholders can make their case to the economic experts at the CMA. They know that they have effective recourse against Ofgem’s decision and they have certainty that the CMA will not allow any price cap that places these billions of pounds of investments into our vital energy network at risk. Under the Bill, however, retail suppliers are being sent out on to the high wire only to find that this effective and long-standing safety net has been removed from beneath them. Should Ofgem fail, the Government believe that judicial review will adequately cushion their landing—it will not.
As I have mentioned, the CMA is designed precisely to consider such appeals. As an expert appeals body, it has specialist panels with experience of deciding whether price controls have been set properly through consideration of the economic merits of each case. In contrast, a judicial review would consider only whether Ofgem reached its decision reasonably and in accordance with the relevant procedure. A judge with legal—not economic —training and with no specialist expertise would be asked to assess whether these deeply technical price control issues were fair and accurate.
If we follow through with this and allow such uncertainty to fester, even if only in the minds of our major energy suppliers, what assessment has been done of the impact of that on investment in our energy market? What assessment has been done of the impact that the initiative will have on the prices that consumers on non-default tariffs will be asked to pay? I have asked to be furnished with that information, but the Government do not have it. They answered that this calculation will depend on the methodology employed and the ultimate decision taken by Ofgem when setting the level of the cap.
I can be persuaded to agree that the Bill should pass without considering the future supply in this country—at least for this afternoon. I can be persuaded to agree that Ofgem sets the methodology. I can be persuaded to agree that Ofgem sets the level of the energy price cap. However, I cannot be persuaded, because it defies simple logic, that Ofgem has the sole preserve of wisdom in these matters. I cannot be persuaded that there should be no possible recourse to the Competition and Markets Authority.
My hon. Friend raises reasonable questions about whether the approach that is taken will be fair. That is why Ofgem will have to consult on the methodology. Applying it in particular cases is simply the mechanical application of something that has already had the degree of scrutiny that he is looking for.
I will not, as I want to make a bit more progress.
I would struggle to support a Bill that does not address that crucial point. I ask the Government to reconsider and amend the Bill accordingly in Committee. Before I sit down, if Geraint Davies wishes to do so he can intervene. He does not.
Today is a political lesson in never giving up. Despite all the lobbying noise of vested interests, constant denials of market failure and numerous attempts to persuade energy bill payers to shop around, the Government could no longer ignore the fact that the majority of energy bill payers were—and are—being ripped off.
The Bill has a virtuous purpose: to protect customers from unfair energy prices in a market which, sadly, has failed to deliver. Its greatest shortcoming is its timing. In October 2011, I first raised the failings of the UK energy market—the overcharging and the poor value for money offered by the big six. In that year, energy prices had risen by 20%. Data required by the last Labour Government had become available to those with an “anorak” interest in tracking what was happening to prices. It was becoming clear that they did not reflect wholesale costs, and that those on standard variable tariffs were paying over the odds.
The coalition Government of Conservatives and Liberal Democrats attempted reform, but they had little to offer to affect the pricing structure of the failing retail market. They opposed Labour’s energy price freeze—a proposal to cap prices for 20 months while the energy market was reformed—but they knew that they were on the back foot as evidence of overcharging mounted. David Cameron’s agreement to a Competition and Markets Authority review in 2014 was an attempt to take pressure off the Government and kick the issue beyond the 2015 general election. That worked, but it delayed action further.
It must have come as quite a surprise to some in government when the CMA’s findings vindicated Labour’s concern about unfair energy prices. It took two years to reach a conclusion that some of us had already exposed: customers were being systematically overcharged. Between 2012 and 2015, people were overcharged by an average of £1.4 billion a year, and the detriment had increased to £2 billion a year by 2015. By the time the CMA reported the damage, overcharging since 2012 amounted to more than £8 billion. Delay has cost consumers dear.
Some may have thought that the introduction of a price cap for pre-payment meter customers would lay the matter to rest, but that was never going to be the case. Ministers and others on the Government Benches were now keen to talk about market failure and systemic overpricing, using language for which my party and I had been condemned only a few years earlier. Progress has been too slow by half, but now the Government are taking action that has cross-party support, and we have an opportunity to serve notice on injustice and legislate for price protection for consumers, which I believe should take the form of a protected tariff. In fact, I argued for such protection after the 2015 general election. Consumers need nothing less than a regulated maximum charge based on wholesale prices, network costs, and an acceptable level of profit set by Ofgem.
To expose market failure is not to be against all markets. Despite privatisation, energy has always rightly been a managed market when it comes to changes in our energy generation, contracts for difference and capacity markets, and that is the case today. I believe that, across the House and across British society, it is recognised that certain products, such as energy and water, require a different level of Government intervention and regulation.
Even today, with record levels of switching—about 5 million people switched in 2017—many of the criticisms that I levelled at the energy market in 2011 still apply. The market is still dominated by the big six. Between them, they control 78% of the market. The biggest new entrant has just 1% of market share. Movements in energy prices bear little relation to the movement in wholesale prices. The majority of customers have little faith in switching and have not changed supplier for a decade or more, and, as we all know, the majority sit on expensive default standard variable tariffs. More than 5 million people have been helped with a safeguard tariff. The Bill addresses the 11 million households who are overcharged year in, year out.
So what should we do? Let us build on the cross-party support and, through the Bill, defend the principle of a short-term cap on a failing market. We should not be cowed by the self-interested propaganda that we have heard from opponents of the price cap. At the extreme end, we have Centrica linking its plan to shed jobs up to 2020 with the cap. That is outrageous. Centrica has lived off its nationalised legacy—a sticky customer base that it has treated badly. Business analysts observe that British Gas’s businesses supplying energy to business have been performing poorly and that Centrica’s US operation, Direct Energy, has underperformed. They note that almost 80% of those employed by Centrica are abroad—just one in five are in the UK. While those UK jobs are important, it is little surprise that trade unions representing Centrica employees—Unite the union, GMB and Unison—are rightly sceptical about why UK employees might bear the brunt of the effect of corporate failures internationally under the leadership of Iain Conn.
A cap does not mean an end to competition. A reasonably set upper limit on unit prices that is reviewed every six months allows lots of opportunity for competition beneath the cap. It is not a difficult concept. The cap is a maximum; it is not a requirement to charge prices at that level, and the industry knows that full well. It also knows that it will put a bar on unfair prices, and not before time.
I am listening fascinated to my right hon. Friend’s speech. She is aware that there has been a history of oligopoly abuse in terms of delays in changing prices for customers when world commodity prices change, meaning that there are excessive differentials. Does she think it is possible to have a relatively simple system that takes those two factors into account, but also takes the opportunity to encourage renewables?
Absolutely, and I am going to come on to renewables. Ministers should beware of any proposal to exempt green tariffs or low-carbon tariffs from the price cap, and let me be clear why. In 75% of days in 2017, wind power supplied more energy than coal power in the UK. Nuclear and renewables are central to our power output in the UK energy market and the generators are well rewarded for that. The notion that any energy provider should charge a premium for so-called green tariffs does not stand up to scrutiny. Consumer support for 100% green energy is welcome, but the idea that they should pay the most expensive tariff cannot be justified. I therefore hope that the Secretary of State will rule that out and deliver a comprehensive cap.
I am listening with increasing admiration to the right hon. Lady’s speech, which reminds me of why there was once a Labour party with which I had a great deal more sympathy than I do at present. I strongly agree with what she says about green tariffs. We want to promote green energy, but to do so on a basis that is economically rational.
I welcome the cross-party support that continues to blossom on this issue.
I urge Ministers to ensure that Ofgem is equipped with all the powers it needs to act as a consumer champion, and to deliver both a price cap and penalties for corporate misbehaviour. I have not been uncritical of Ofgem. For too long the regulator did not hold the big six to account for poor customer service. Where fines were issued, companies were allowed to strike a deal to use the so-called fine to subsidise tariffs for new customers—there was nothing for their loyal customers stuck on default tariffs. Thankfully that has changed.
We saw last week the CMA having to rule on a challenge by SSE and EDF against Ofgem when they tried to modify industry rules. Ofgem determined that those modifications would have led to consumers paying a £120 million rebate to generators and said no. Ofgem was immediately challenged. In this instance, the CMA backed Ofgem and the consumer interest was protected, but let us be under no illusion: there is a constant veiled threat that the energy giants will contest its decisions. We need to be certain that Ofgem has the powers and remedies it needs under the Bill so that it can do the job this House expects and does not become a scapegoat for failure.
Finally, may I urge Ministers to use the period of the cap to review the structure of the energy market? Good regulation, fairness and innovation from existing and new players must all be part of a reshaped energy market of the future. Let us get on with it. The Bill has my support; let us give Ofgem the power to act and cap unfair energy bills.
This is an important Bill that comes from a very good manifesto commitment. Our energy market is undoubtedly broken, with millions of consumers stuck on the most expensive tariffs. Many are taken for granted and, arguably, even exploited for their loyalty, and it is right that the Government have intervened to protect them.
In many ways, in delivering this cap we have accepted that we failed over the last few decades to create the culture of switching that we hoped for. That is not to say that impressive progress has not been made; it has been, and we have seen further progress in the last few months, but even if that recent improvement in progress were to continue, we would still have far too many people—disproportionately concentrated among the most vulnerable and the lowest income consumers—left on the most expensive tariffs.
We should also note that some of the biggest energy suppliers have changed the way they operate SVT-type products over the past nine months, which is very welcome. One suspects that they saw what was coming down the tracks. None the less, I know that they will feel aggrieved by the Bill after voluntarily acting to tackle the problem of those stuck on rip-off SVTs.
The progress on switching and the improved behaviour of the big suppliers underlines why the cap need only be temporary. My hope is that the Secretary of State will encourage the industry to respond quickly to the cap so that tariff structures become fairer for the most loyal consumers. Clear criteria for ending the cap would be most welcome. While the cap is in force, let us not take our foot off the accelerator in encouraging more people to start switching. In short, the cap must be regarded as a means to an end, not—I suspect this is the view of some Opposition Members—as an end in itself.
Does not the Bill show the Government’s general approach to intervention in markets, which we have heard a lot about this afternoon, which is about markets not as a means in themselves, but as a means to an end, which is good, cheap and reliable energy for the British people?
My hon. Friend is indeed right. To resort to my former career as a soldier, I hope that the Government see this as a raid into the energy market, rather than an occupation.
In her opening remarks, the shadow Secretary of State made the important point that an amazing energy future is emerging in the margins of our current broken market, although I disagree with her analysis that the Government are not embracing that, because the clean growth strategy is a passionate embrace of those opportunities. Insurgent companies such as Octopus Energy are relishing bringing the new time-of-use tariffs to the market, giving consumers the benefits of fluctuating wholesale energy prices. Others are looking at how localised generation or aggregated shifts in demand might allow consumers to access cheaper energy or monetise their flexibility. Others still are looking at delivering heat and power as a service, often enabled by clean tech provided by the supplier for free, with the supplier then monetising the customer’s flexibility in order to make their margin. These and countless other innovations are accelerating our decarbonisation, increasing system flexibility—and therefore our energy security—and will mean lower bills for consumers.
We must also create an energy system that allows the full price-reducing power of clean technologies to bring down prices for the consumer. This will require significant regulatory change in order properly to unlock storage, demand-side response and the advantages of generating and consuming energy locally. We must also encourage the deployment of more renewables, no longer because they are the cleanest method of generation, although they still are, but because they are now so obviously the cheapest.
My hon. Friend has great knowledge of this subject. Will he comment on the fact that we need to concentrate not only on energy efficiency, but on cutting energy waste, particular in our domestic systems, because there is a lot of great new technology that could be harnessed?
I very much agree. Let us be clear that energy efficiency measures are no longer simply barrier technologies—in windows, walls and roofs—but digital technologies that ensure that we use less energy, or that devices immediately stop working when we no longer need them, rather than being left on unnecessarily.
Ofgem has a key role in delivering the Bill, but that work must be no more of a priority for it than ensuring the much-needed regulatory change that will be delivered through the unlocking of wholesale disruption of our energy system and market. Let us be clear that the real prize is not the correction of the old, analogue, broken market system of today, but the arrival of a digitised, decentralised, dynamic and disrupted energy system with a market that allows consumers to benefit fully from the price reduction that these technologies will deliver. A cap that saves consumers £100 or £200 is very welcome, so I support the Bill wholeheartedly, but not at the expense of the much greater savings that await consumers with the green, clean energy system of tomorrow.
I have lived my whole adult life under the liberal energy market —an oligopoly—that was created by the Conservative party in the 1990s. I have personal experience of prepayment meters and of having to feed 50p pieces into the meter and then often having to sit in the dark when the 50ps ran out. I support the principle of the price cap but, as my hon. Friend the shadow Secretary of State said, we do not know when it will be in place, what the level will be or by how much bills will be reduced.
As all my hon. Friends have said, a price cap was Labour policy during the 2015 election, and I pay tribute to our Front-Bench team at the time, to our continued support for the policy and, latterly, to the Government. I also pay tribute to Which? for its campaigns to reform an energy market that is failing the majority of consumers. In 2014, the “Fix The Big Six” campaign called for the energy market to be referred to the Competition and Markets Authority. The subsequent CMA investigation found that weak consumer engagement and competition allowed energy suppliers with unilateral market power to exploit approximately two thirds of customers through excessive prices on default tariffs, leading to £1.4 billion consumer detriment a year, which is what the price cap will attempt to resolve.
Ofgem is now implementing a package of remedies recommended by the CMA to improve consumer engagement and encourage customers to switch to better value deals, to which James Heappey referred. However, nearly 60% of consumers remain on default standard variable tariffs. In February 2018, the difference between the average price of an SVT offered by the big six and the cheapest tariff in the market was £3,051—a huge difference for consumers. Are the Government choosing to act, or has the failure of the CMA and big six to provide customer value forced the Government to act?
The Bill only proposes a temporary price cap, and I am concerned that energy providers may use that to offset initial price reductions with increases once the cap is removed. It is also not certain that customers on a capped default tariff will benefit as market conditions change in the future. The Government are relying on future digital technology to solve the problem, but I am concerned about a long-tailed digital divide lasting decades, a point lost on many Conservative Members, as cheaper fixed-term tariffs may be withdrawn from the market, an effect which was observed following the introduction of the prepayment meter cap in April last year.
In 2016, 4.4 million customers paid for electricity using a prepayment meter, which is 16% of all electricity customers, and 3.5 million prepaid for their gas, which is 15% of gas customers. That marked a slight reduction in the number of customers on such meters after a long-term increase. Customers on PPMs cannot easily switch to credit meters, which would give them access to a wider range of market tariffs, including the cheapest. In 2016, just 4% of PPM consumers changed to credit meters. That is an increase on previous years, but there continues to be a substantial number of cases in which the supplier refuses to let the customer switch or sets a condition, such as a credit check or security deposit, that the consumer does not meet, and I have experienced that in the past. In 2016, 14% of electricity customers and 18% of gas customers who requested a change to a credit meter were prevented from doing so. Indebted PPM customers—about 10% of all PPM consumers—generally cannot switch to a credit meter, but those with a debt below £500 have the right to change supplier, which gives access to cheaper PPM tariffs. The number of successful switches by indebted PPM customers remains low at fewer than 3,000 in 2016, which is just 5% of the consumers who applied to switch supplier, but that has risen following an increase in the debt threshold for customers to be eligible. And I have to say that much of that debt has been caused by Government welfare policies.
Concerns about competition led the CMA to introduce a transitional safeguard tariff for PPM customers, which was introduced last April and is administered by Ofgem, so we have a model for the cap. As a result, the average price fell by around £60 for a typical dual-fuel PPM consumer. That is great, but it is nowhere near the level that PPM customers need to reach to be anywhere near where credit customers are. The cheapest available prepayment tariffs remain consistently more expensive than the cheapest tariffs available to those using direct debit, and that is a scandal. The growth of smart metering should increase tariff choice for prepayment meter customers by lowering the technical and structural barriers to competition. By the end of 2016, prepayment meter customers were slightly more likely than other customers to have smart meters—14% of electricity prepayment meters and 16% of gas prepayment meters were smart—but that indicates how long it will take us to move to smart technology, which many Conservative Members are ignoring.
I am concerned that standard variable tariff customers will have the same experience as people on prepayment meters, and also that the energy companies, particularly the big six, will try to force people on standard variable tariffs to go on to prepayment meters. The Government need to be mindful of that during the passage of this Bill.
My hon. Friend Gareth Thomas and others have referred to municipal energy companies and co-ops. Robin Hood Energy has been mentioned, and White Rose Energy has been started by my local authority in Leeds—I declare an interest both as a customer and having been the deputy executive member for climate change and sustainability when White Rose Energy was launched.
Both White Rose Energy and Robin Hood Energy have worked to take people off prepayment meters and to ensure that customers are on the best possible tariff—I looked at my bill this morning, and it told me that I am on the best possible tariff for both electricity and gas. That is a model of great practice implemented by a great local authority in Leeds.
I am concerned that the Bill does not provide an effective and holistic solution to the problems facing people on standard variable tariffs. Utilising technology to ensure faster switching, and utilising mechanisms to ensure more people move off prepayment and to ensure greater market choice should all be central to the Bill, rather than just the sticking plaster of a temporary cap that may penalise some customers. Before Third Reading, I hope the Minister will investigate the effect of the unintended and potentially perverse consequences of the Bill as it stands.
It is a pleasure to follow Alex Sobel. Unlike him, I do remember the time before privatisation took place in the 1980s and 1990s. It is worth remembering some of the objectives of the privatisation led by the then Conservative Government.
The first objective was to spread ownership, which has happened—ownership is much more diverse now. It is a little concerning when we hear Labour Members oppose private investment in our utilities and infrastructure, from wherever it may come. A serious message is coming from the Opposition, one that they need to think long and hard about before it goes out more broadly to overseas investors who want to come and invest here in the UK.
That is a concern, but let us not forget who owned these businesses at the time. In many instances, shares in the utilities were bought by the customers, some of whom have since disposed of their shares—some utilities have been acquired by larger corporations. I agree that the ability to change supplier is important.
The other reason for privatisation was to make the industry more efficient. There is no question but that that happened in the immediate aftermath of privatisation. There were dramatic falls in price. I accept that there has been some consolidation, and it is now important that there is some intervention.
I am a member of the Business, Energy and Industrial Strategy Committee, which has taken evidence on this subject. I am probably the most sceptical member of the Committee, and I needed some persuading of the merits of the Bill. I accept that the market could work better, and other interventions could be made to improve it. I have concerns about the long-term consequences of the cap, and I know the Minister will address some of those concerns in her summing up.
The Select Committee has drawn attention to two key issues: the lack of activity by the regulator in holding the big six—the legacy companies of those that were privatised—to account; and, more importantly, the “feeble” response of the big six to the threat of a cap. It may be that the industry did not take the Government’s remarks to heart and that it thought it would get away with it. It is a shame that this legislation has had to be introduced.
As for the market, all customers receive the same product and it is therefore entirely wrong that so many of the big six have a large proportion of their customers on standard variable tariffs—the most expensive rates. I understand that 57% of big six customers are on those tariffs. Of course, it is wrong that those companies should use the high standard variable tariff price to subsidise low prices to attract new customers—we hear of a £300 difference—and in that respect the energy companies have not done the right thing in recent years. One thing they could have done easily was change the description of a “standard variable tariff” to an “emergency rate tariff”, so that consumers were clear that they were on a default rate and that a better rate would be available to them if they were to change tariff. It is wrong that the big six have taken advantage of inertia in that way.
The other innovation that could have been introduced, at the instigation of the regulator, would have been to have a fixed-term contract for the supply of energy, in the same way as people have a fixed 12-month period for their insurance, be it for their home or their motor. If people receive a renewal that is significantly different from the price they have been paying, that in itself is a trigger to shop around. It is a great shame the regulator has not identified and done this, and instead has been far too slow and too reluctant to use the powers it has had.
Switching rates are a useful measure of the effectiveness of the market, and it is great that more and more people are switching. We hear that about 20% switched in the past year. The rate is increasing, but I accept the point that the Minister will make that the figures we see are affected by super switchers. Like my right hon. Friend Sir Desmond Swayne, who sounds as though he is a super switcher, these people are changing very regularly. We do not need huge numbers of super switchers; we need people to look at and understand their bill, and change when they see themselves at a disadvantage.
I also hope the Minister will address the issue of the detriment that the CMA found—the £1.4 billion. We are looking at a transfer of that sum from companies to consumers, in many cases rectifying the wrongs done to those on standard variable tariffs. One concern is that that detriment exceeds the profits of the energy companies, so the question we might want to ask is: where is that money going to come from? I hope that the action of Government will drive efficiencies, but are those going to be able to be generated sufficiently quickly?
Alternative measures could have been implemented, and one of the first things I would have liked to have seen the Government consider is extending the existing protections for vulnerable customers. We have had protection for those on prepayment meters for some time, and that has been extended to those on the warm home discount. It should not have been difficult to look at Department for Work and Pensions data in order to identify other people who we might consider as being vulnerable and extend those existing protections to them. I am disappointed that we have not looked at doing that.
I am also disappointed that we did not look at more effectively turbo-charging the marketing programme to encourage people to change their supplier or tariff. Some 5.5 million people switched in 2017. If more people exercised the power to which Caroline Flint just referred—the ability to switch—this legislation would not be necessary.
The third issue I wish to raise is that of smart meters, which will empower consumers. It is a great shame that we have not managed that process more successfully and we have not got SMETS2 meters out into the market more quickly, so that people are also provided with the tools to be able to change their supplier swiftly and easily. It is important that the Bill is a short-term measure. It is vital that the sunset clause is in place, and I know that the Minister will be keen to state why that is there. Like other Members, I hope she will address how we are going to identify whether the market is working sufficiently well to make the second term unnecessary. I hope that it will not be necessary and that the action the Government are taking now will cause the energy companies to address the issues and deal with standard variable tariffs.
I wish quickly to address one concern about the possible consequences of the price cap. I am worried that we will see the same as what happened with tuition fees, with suppliers congregating around the cap and there being less incentive for people to change. I am worried that in the short term some of the work we have done to encourage people to switch will be lost as things stabilise. As I have mentioned, I am also worried about the difficulty of removing the cap, and, as I said in my intervention on the Secretary of State, I am concerned about how we can set it at the right level.
As other Members have said, there is currently lots of change in energy generation. I hope that the dynamic nature of the market in generation can be replicated in the market in supply, and that the temporary measure in the Bill will be exactly that so that we can return to an effective, competitive market as quickly as possible.
I have long expressed concern and alarm at the way the energy market simply does not seem to work for consumers. I have worked with Members from other parties, most notably John Penrose, to try to ensure action is taken on this issue.
The fact that the Bill will impose a cap on the price of the standard variable and default tariffs, at least until 2020 and possibly longer, is good news for consumer, particularly those who do not switch for a whole variety of reasons. The Competition and Markets Authority’s investigations found
“a lack of engagement in the markets on the part of many customers, which suppliers are able to exploit by charging high prices.”
Indeed, some 34% of domestic energy customers had never considered switching supplier, with 56% saying that they did not know whether it was possible or did not know whether they had done so in the past.
As we have heard, consumers on standard variable tariffs are much more likely to be older, disabled, on low incomes, living in rented accommodation or without internet access. Those on standard variable tariffs have not seen their bills fall by much when the cost of providing energy has fallen. Such savings as are available are passed on only to consumers who were active switchers, as we have heard. We have to understand that not all consumers can engage in the switching process, so suppliers clearly need to do more to ensure that customers are not trapped in poor deals. The poorer someone is, the more likely they are to be on the more expensive standard variable tariff, subsidising cheaper electricity deals for the better-off. That cannot be right, and is essentially what has brought us to this point.
People in my constituency of North Ayrshire and Arran are overpaying on energy bills by £5.5 million a year. That illustrates the need for action in the market, but that action is much more urgent than the mooted timetable of winter 2018 would suggest. I absolutely welcome the cap, but I am extremely disappointed that Ofgem has said it will need five months to implement it. We have been told that the cap will be in place for winter 2018, but why not sooner? I am afraid that the perception again raises its head that Ofgem is dragging its feet.
The Bill is indeed welcome, but the focus hereafter must be on fixing this broken market. We must have easier and faster ways to switch suppliers, for those who can and do; we need more transparent energy bills for consumers; and we need to create the conditions for a much more competitive market. Some people propose that we should consider scrapping standard variable tariffs altogether and prohibiting all tariffs without an end date, as they inhibit consumer engagement. But that prompts the question what energy suppliers can and will do to increase consumer engagement, because the figures for switching and the CMA investigations have shown that consumer engagement is severely lacking, for a whole variety of reasons.
Is it not interesting that, since there has been political focus on this matter, with a commitment from all parties to tackle the standard variable tariff rip-off, we now see some energy companies withdrawing this tariff, or seeking to introduce new measures to prevent customers from languishing on it. That shows that, so far, there has been a lack of will to deal with this issue on the part of the bigger companies in particular. However, it is clear that political focus in itself can help to drive change.
I echo the view that was expressed earlier: we must take care that the action taken in this Bill, welcome as it is, does not lead to higher prices in the longer term. We cannot have a situation in which energy providers offset initial price reductions with increases once the cap is removed. We also need to ensure that consumers who are on a cap default tariff do not lose out as market conditions change in the future. When the cap is lifted, we need to ensure that we know what the conditions and criteria for doing so are and that, in the end, we are left with a more competitive and fairer market for consumers. We need to know what the impact of this cap is and to ensure that there will be no adverse impact on a competitive market.
What is done by the Government and the regulator for the period during which this cap is in place really matters. I am keen to hear the Minister’s thoughts on this, as we cannot begin too early to prepare for what comes after this cap—whenever it is lifted. We need to know how we can continue to protect consumers and ensure that they have energy deals that are right for them and that they are not ripped off as they have been. We cannot go back to business as usual after the cap is removed. We need real and lasting change, and this period when the cap is in place is an opportunity to make that change happen.
It is a pleasure to follow Patricia Gibson. I agree with many of her comments.
It is quite clear that gas prices fell in the period between the early 1990s and 2001, and bills were down by about £102, but they rose in the period from 2001 to 2015 by about £408. Electricity prices rose 44% between 2003 and 2007. Although I agree that we need to take action, I argue that it this Government who are acting when the previous Government failed to do so. Why do we have to act? As my right hon. Friend Sir Oliver Letwin pointed out, it is because of predatory pricing by the big six companies.
I accept that we are talking about decades—I do not think that the market we ended up with was one that Margaret Thatcher thought that she was creating. The truth is that it was only after 2010 that we had any transparency and could access the data to tell us what was going on with these prices and why the mark-ups were so high. That is an important lesson from all this: transparency in this market is absolutely key.
I agree that transparency is key, but I do not think that the price rises would have been hidden in the period between 2003 and 2007. Ordinary consumers would have seen—as we all did—what was happening in their bills at that time. I also agree that evidence-based policy making is the best way forward. In instituting the CMA review, David Cameron was not kicking the matter into the long grass; he was getting the evidence that proved that consumers have had a detriment of £1.4 billion. This is the action that is coming out of that inquiry, which reported in 2016. It is right that we are taking action. Which? shows that energy prices topped the list of consumer worries— 64% of consumers were worried about their energy prices. I find it puzzling that switching rates are so low—only 18%—given the way that consumers worry about their bills.
On the Select Committee, it was very shocking to hear the high numbers of people on the standard variable tariffs. Some companies had more than 80% of their customers on standard variable tariffs, which is simply unacceptable. It is that predatory pricing by companies where they are using those so-called sticky customers on the higher rates to offer switching rates that new entrants to the market cannot compete with and are therefore squeezed out. The Bill will address that practice, and I welcome that.
There is another area where we need to act. I follow on from the hon. Member for North Ayrshire and Arran in saying that switching is biased towards the A, B and C1 social groupings. Some 29% of those earning over £16,000 have never switched, but this figure rises to 39% among those who earn less than £16,000. As others have said, if people are not switching, they are not able to access the best deals. This cap is needed to protect those on the lowest incomes, but we must also encourage people in those groups to take advantage of the market. They can do so through Citizens Advice. Many libraries have computers that people can use to look up deals on the internet. It is important that, as well as the cap, the Government look at how they can reach out to the more disadvantaged social groups—groups D and E—that have never switched and at how they can take advantage of the market.
The hon. Lady is making an important point. Does she agree that it worth looking at how we could regulate independent brokers who could switch customers—on the customers’ behalf and under their authorisation—to the best deals? That might help these customers, and it could apply not only to energy, but to broadband, mobiles and insurance.
We are already seeing those kinds of mechanisms with MoneySuperMarket.com and other organisations. However, some are incentivised, getting payments for switching. The Government have given Citizens Advice £100,000 to provide transparency regarding the rates offered and to help those who come to it with debt problems or other problems to switch.
I am cautious not to make too many interventions because Members are making great speeches, but I am worried that there will be so many questions that I will not have time to respond to them all at the end. I just want to reassure Caroline Flint and my hon. Friend Antoinette Sandbach. The midata trial is really important, as it enables people to allow their data to be ported to a third-party website that will then automatically come up with the best deals for them. Ofgem is working on that tool and it should open the way to much more innovative third-party switching services, which we all desperately need.
We have seen that the cap works for the vulnerable customers who have had their energy prices capped. Although some have gone on to less advantageous tariffs, most have benefited, as shown in the evidence received by the Business, Energy and Industrial Strategy Committee. I agree with others that smart meters will revolutionise how we deal with not only energy, but perhaps other services. The cap is a temporary measure and is only needed as one. I add my voice to the others who called on the Government to ensure that loopholes on green tariffs are not used to game the legislation. The Bill has expanded the exemptions to include the safeguard tariff and those explicitly chosen by consumers, and the Government have strengthened the language relating to green tariffs.
I, too, call on Ofgem to act. I am afraid that I do not take the view that we needed this legislation. I would argue that Ofgem had the right to protect consumers without it, but I welcome the fact that the Government are acting to ensure that we address the clear problems in the market, particularly predatory pricing. This is about getting access to tariffs and the switching mechanism for those who need it. We should encourage those people and reach out to them, whether through Citizens Advice or how they sign on for their benefits. We clearly need to enable data sharing, so that energy companies can quickly identify vulnerable customers.
I must sit down soon; I have taken many interventions.
We must make data far more available to allow more competition in the market. That is where the Government’s policy differs from that of the Labour party.
It is a pleasure to follow my Select Committee colleague, Antoinette Sandbach, who made a number of important points, not least about reaching out to those who are not in the AB group. My hon. Friend Alan Brown covered many of the aspects of the Bill in detail. My hon. Friend Patricia Gibson also picked up on many of the issues.
One of the great pleasures of such a debate is that there is great consensus around the Chamber, but when we speak late in the debate, we find ourselves saying, “There are some things I want to repeat.” I will try to avoid that, because while welcoming the proposals, I want to highlight how much more there is to do to protect people with regard to energy costs.
I speak as a member of the BEIS Committee, and it was very clear to us that there are significant failings in the consumer energy sector and that intervention is needed, as consumers continue to get a raw deal. The alternative proposals from the consumer energy players were quite simply too little, too late, and it has become necessary to take action. Ofgem and the energy companies should not continue to make the same mistake on issues affecting consumers.
One of those issues is particularly important to constituents in the highlands and islands—distribution charges. In the highlands and islands, consumers pay 4p per unit more on restricted meters, so the average consumer is about £400 worse off. The need for the price cap, as with distribution charges, highlights the failure of the big energy companies to take positive action to protect vulnerable customers in constituencies in the highlands and islands and in other rural constituencies. The costs for people there are already higher. Many are off the gas grid. Many have to use much more electricity. The weather is colder. Income is often lower. There is a continuing, deepening crisis of fuel poverty, putting a weight on the backs of those already suffering straightforward poverty, especially those having to claim universal credit. We have seen some of the most severe cold weather in the past week. Who suffers more when it is cold? The poor, the vulnerable and the disabled. Although the cap is welcome, it is not a panacea, and much, much more needs to be done.
Order. Can I just help a little bit? We have asked Members if they can do up to eight minutes, and some people are stretching that, but the hon. Lady has just spoken and is intervening again. I know it is part of the debate, but I want to make sure that those wanting to speak at the end have not been sitting here for no reason.
Yes, absolutely. There needs to be an acceptance that this is just one measure and there are many more measures—including on energy efficiency, which should have had much more attention from the Government.
There remains a need to remove legislative obstacles to data sharing for vulnerable customers to give them better consumer protection. There also remains—
I will make a very brief intervention if I may, Mr Deputy Speaker. As I said in my speech, we are having this debate because of the loyalty penalty that people pay. We see this in the energy industry, the insurance industry and a whole range of industries. Does my hon. Friend agree that we need more Government regulation across industries to stop people being punished for being loyal to their providers, whatever the market?
I absolutely agree. To assist, Mr Deputy Speaker, I will take no more interventions during the rest of this speech.
As I said, we need data sharing for vulnerable customers to give them better protection. There remains a risk, as was highlighted by Mark Pawsey, who is still in the Chamber, that suppliers may just increase their lowest prices to maintain profit. We will all be watching carefully to see how they react.
So what must now be done? In Scotland, the SNP Government are providing resources for financial health check-ups to help pensioners and those on low incomes to make the most of their money and to secure the best energy tariffs. The UK Government will, I hope, follow suit.
We call on the Government to place a new duty on energy companies to set out a clear timetable for reducing the number of people on prepayment meters, to implement the Competition and Markets Authority’s call to reduce the costs for households and to introduce a requirement for energy companies to prioritise the roll-out of new-generation smart meters to households at risk of fuel poverty. That can all be done in short measure.
When it comes to disabled people, even more action is needed. Disabled people face higher energy costs because of issues related to their impairment or condition. Those extra costs have a detrimental impact on disabled people’s financial resilience and ability to fully participate in society. The price cap goes some way, but the UK Government must now put in place longer-term plans alongside the price cap to improve support for disabled consumers, including increasing accessible communication and digital inclusion and, as I mentioned earlier, building on more effective data use.
The challenges for disabled people are that they have no choice but to consume more. They have limited mobility, use more heating to stay warm and run additional technology and equipment. Over a quarter—27%—of households with a disabled person spend more than £1,500 a year on energy, and nearly 800,000 households across the nations of the UK spend more than £,2,500.
There must be a different way to deal with this. In Scotland, the Scottish Government have announced a publicly owned energy company, supporting efforts to take fuel poverty and climate change targets seriously. We will provide people, particularly those on low incomes, with more choice and the option of a supplier whose only job is to secure the lowest price for consumers and who looks after the wellbeing of those who lack the confidence or ability to engage effectively in complex energy markets. That will also allow us to deliver on broader energy ambitions for renewable generation and the maximisation of community benefit. By the end of this parliamentary term, the conditions will be in place to meet the set-up challenges.
In welcoming the Bill, I once again stress that this action comes too late in the day for many. Progress on helping hard-pressed consumers must now be much more rapid and effective, especially for those who are hurting the most.
I am pleased to follow so many eloquent speakers, almost all of whom agree that this is a very sensible Bill.
I would like to begin with a question: can it be right that customers purchasing energy from the big six for some of the most basic things in life—simply keeping warm, making a cuppa, cooking the supper or running the washing machine—collectively paid some £1.4 billion more than they ought to have done between 2012 and 2015? In 2016, that figure escalated to almost £2 billion. As we have heard, that was the conclusion of the Competition and Markets Authority’s energy investigation. I am pleased to say that the Bill is intended to rectify that, which I am sure you will agree, Mr Deputy Speaker, is eminently sensible. Why? Because it is in the interests of fairness, of delivering for the customer and of giving better value to many people who quite frankly have been taken for a ride and have been paying over the odds for the self-same energy supply that others have got cheaper. In reality, they have been taken advantage of, as Albert Owen said.
We would not think that it was possible, but how has it happened? What we might call “active customers” are on the ball and save money by switching continuously, according to the prices on offer. Those people can save up to £300 a year by hunting out the cheapest deals. However, as we have heard, not everybody does that. Indeed, five out of every six households did not switch energy supplier in nearly a year between October 2016 and September 2017. That adds up to a cool 11 million households, although I am pleased that 4 million vulnerable households have been helped with an absolute price cap on prepayment meter tariffs.
The people in these 11 million households are on standard variable tariffs. They do not chop and change, but stick with the initial supplier. How are they rewarded for their faithfulness? By paying over the odds by up to £300 in a six-month period. That is itself a far from fair state of affairs, but it is even more scandalous that many of those staying on standard variable tariffs are those who can ill afford to do so. A high proportion of them are elderly. That is especially pertinent in a county such as mine, Somerset, where there is an ageing population. Between 1984 and 2014, the number of people aged 85 or more in Somerset increased by an incredible 170%, which is more than 18,000 people. The number of people aged 75 or more is projected to double in the next two decades, and the fastest-growing group is men aged 80 and over.
Those people should not be targeted and taken advantage of because they are not au fait with modern technologies such as surfing the internet to find cheaper energy deals. I am standing up for the elderly in particular—I run an older generation fair in Somerset, where I talk about these and many other things—and I believe that the Bill will definitely benefit elderly people in rural areas. We have a very high proportion of elderly people: two thirds of people in Somerset are over 65, and I believe that many of them will benefit from the Bill. Picking up the phone or checking on the internet is just not on many people’s agenda. A lot of them are already struggling to make ends meet, so we need to do everything we can to help them.
At the other end of the scale, the many young people who are renting accommodation also fall into the category of those on standard variable tariffs—they are often restricted from swapping energy suppliers by their landlord. I believe that the Bill will benefit them as well.
There is another category of people who are affected, whom I call the “mid-rangers”—my hon. Friend John Penrose mentioned them—and I put myself and my family in that category. These people are really busy: they are working all day, and when they get home they are caring for their kids and they have to cook the dinner, take the dog for a walk and do all those other things. Are they really going to say, “I know what I’ll do tonight—I’ll pick up the phone or go on the internet to see whether I can get a better energy deal”? Truly, they do not do that, and they are the ones on SVTs.
I really believe that setting an absolute cap is a very sensible way of helping people in all those categories. It is not a price freeze, but a cap, as has been well pointed out. Ofgem will be given the task of making it work effectively, with a formula, and it will be responsible for setting the cap. I urge it to be transparent in doing so, because there must be no loopholes for big companies to game the system. It is absolutely imperative that companies do not take advantage of the cap and then raise all their bills to the top level; we have also heard much about that.
Ofgem will have a duty to report regularly on whether the whole system is to be expanded. The system is meant to be temporary, which is absolutely right. It is an artificial lever to control the market for a short while, and it is being applied in the interests of the consumer. I believe that this is the right way to go, as it will still enable competitiveness in the market, which is absolutely essential. We want the market to work better for everybody by continuing all the advances that are under way, such as smart meter technology and data-driven technology. If the market is made to work more efficiently, there will be more money for all companies to invest in renewables and to achieve our clean growth strategy.
On that note, I want to say that if we are talking about fairness in energy and better deals for customers, new technologies will play a very important part in the future direction of travel. Focus needs to be placed not just on energy efficiency, but on cutting the energy that is wasted, because a real concentration on such things could save consumers half their winter energy bills. I will give a couple of quick examples of gadgets that could be used. There is a small device—1.5 square inches in size—called Margo, which I saw only yesterday at the sustainable energy event in Parliament.
I believe the Minister opened the event. This gadget listens to the amount of gas in one’s meter and can hear how much gas is being used, and it has shown that customers are being overcharged by £40 to £50 a year because they are not being metered corrected. That is £1 million for all the people in Taunton Deane. The other gadget is a stored passive flue device, which uses waste heat from the boiler to heat water before it goes into the boiler so that it does a lot less work. It can provide a whole tank of hot water that can be used for other things. Overall, it will save the consumer money. [Interruption.] People are coughing to get me to wind up, but those new technologies are incredibly important and will play a part in the good work the Government are already doing on their clean growth strategy, cutting our emissions, reducing fuel bills and giving consumers a better and fairer deal. At the heart of that is the Bill, which I fully support.
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 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—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 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. 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.
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?
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.
Order. There are 10 speakers left, so I suggest that they speak for six minutes each.
It would be prudent at this time for me to thank the Business, Energy and Industrial Strategy Committee for its hard work and its contribution to the Bill. I wish to refer to what Alex Sobel, who is no longer in his place, said earlier about paying with meters. He appeared to think that they came along with privatisation, but I can go back to the 1950s and 1960s, when meters took a shilling, which is the equivalent of 5p today. Prepayment meters have been with us for quite some time.
When competition works, it delivers the best for consumers, shareholders and the Government alike, and over the past two decades, energy utilities have secured significant investment. It would be a mistake to damage the market that has evolved in recent decades or distort it unnecessarily by introducing state-owned or publicly owned suppliers. That would jeopardise public investment, cost the taxpayer significant sums and lead to the loss of corporate tax receipts. That approach would, in my view, be folly, given that this Conservative Government have already worked hard, and continue to do so, to ensure that the market is more competitive.
The number of energy suppliers has increased fourfold, from about 13 to 50, since 2010, giving the consumer a much wider range of options should they choose to take them. The advent of smart meters will in due course make energy bills more accurate and pricing more transparent, although I concede that there is some way to go to secure the installation of about 53 million such meters by 2020, which is an ambitious target. By working with Ofgem, which has rightly come in for some criticism this afternoon, and by harnessing the power of the internet, the Government will make it quicker and easier for consumers to switch suppliers, which should reduce their energy costs.
There is a large of group of over 5 million active consumers who are willing to use their options to secure the best deal, as was referred to earlier in the debate. Almost one in five United Kingdom households are switching supplier each and every year. The big six are having to work much harder and offer better deals to retain that group of important customers and to compete for their loyalty. However, there are people who, for whatever reason, still do not switch. The non-switchers, who include some of the least well off and the most vulnerable in society, remain for the most part a captive market for the large and dominant suppliers. A form of two-tier market has inadvertently emerged, and those households tend to be on high-cost tariffs.
Our aim as Conservatives must be to create a competitive market that is fair to consumers and to the suppliers, and in which the big six cannot rest on their laurels and prosper—and they have prospered—by inflicting higher charges on those who can least afford it. Encouraging switching does go some way towards achieving that, and we should certainly continue those efforts, but in the meantime we also need to protect the very large group of non-switchers.
The Conservative manifesto proposed the introduction of a safeguard tariff that would protect consumers on the poorest-value tariffs, and I am pleased to support this Bill, which honours that commitment. Indeed, I commend the Government for driving forward their promise to deliver lower fuel bills for millions of customers. This temporary cap, which is not a freeze, as has been said often today, will ensure that 11 million or so customers on a standard variable tariff will, delightfully, no longer have to pay an inflated price for their gas or electricity. That can only be good news for constituents in Ayr, Carrick and Cumnock and throughout the United Kingdom. It is not a distortion of the market, but a corrective measure.
In 2015-16, it was estimated that domestic customers in the UK supplied by the big six paid almost £1.5 billion more than they would have done in a properly functioning marketplace. It is clear that the marketplace is not working, but it will work better, because the Bill will help to reduce that figure and bring prices into line with what they should be in a properly functioning market, while letting the market continue and even flourish within the confines of the cap.
In conclusion, as a Conservative, I believe in the free market, but like many, I recognise that there are times when it can fall short, and this is one of those occasions. It is then the Government’s responsibility to listen, step in and make the necessary reforms and regulations to ensure that the market works well for as many people as possible. The Bill will ease the unfairness and yet allow the market to prosper. I am pleased to support it and, in doing so, note that the cap will cease by the end of 2023 at the latest, but there is the opportunity for it to end in the near future, in 2020.
It is a pleasure to follow my hon. Friend Bill Grant. I support the Bill, because the energy price cap will help to ensure that overcharging for energy use is brought under control, which will support some of the most vulnerable people in our society and in my constituency.
Allowing the independent regulator, Ofgem, to cap energy tariffs until 2020 will mean that an absolute cap can be set on poor-value tariffs. That will help to protect the 11 million households on low standard variable or default tariffs who are not protected by existing caps. As hon. Members have said, the difference between the cheapest tariff and the average standard variable tariff from a big six supplier is about £300 a year, and it has been at about that level for the past six months. That is an awful lot of money for constituents in some of the poorest parts of our region, as well as others in the UK. The Competition and Markets Authority’s recent investigation into the energy market found that the domestic customers of the big six energy suppliers pay on average £1.4 billion a year more than they would in a truly competitive market. I do not think that there is any argument in the House about the fact that the market is not truly competitive.
Although I believe that promoting competition is generally the most effective way to ensure that customers receive the best value in their service, I welcome the fact that the Government are prepared to act when it becomes apparent that markets are not working for consumers. As colleagues have said, the technological advances that will improve the market are not happening fast enough to support vulnerable people now.
The Government made a manifesto commitment to extend the price protection that is currently in place. I welcome Ofgem’s commitment to protect a further 1 million families from expensive standard variable tariffs for the first time, taking those protected to a total of more than 5 million people. Despite that, however, not all consumers on the most expensive tariffs are helped. As my right hon. Friend the Secretary of State suggested, it is not enough just to support people who have ticked the right boxes for vulnerability on paper. We must support all vulnerable people and others who are being overcharged to the detriment of their standard of living.
The Bill strikes the right balance by protecting those on standard tariffs while ensuring that energy customers who shop around and switch suppliers can find the best energy deals. I am confident that the Bill will also ensure that Ofgem can set a cap that will enable suppliers to compete effectively. It is obviously vital that that is set at the right level, and that the outcomes are measured and reviewed. There is an interesting discussion to be had about how that will work, which I shall come on to later.
It is right to highlight, as many colleagues have, that this is a cap, not a freeze. Companies will still be expected to compete below the cap to attract customers, just as they were before. Nobody will be prevented from reducing their bills by switching supplier or changing tariff, and energy companies will still be able to pass savings on to consumers when possible. It is also important to acknowledge that the price cap is intended as a temporary measure while innovations such as smart meters and more reliable switching are fully rolled out. It is not always easy to switch. Even in my own house, my wife and I are trying to work out why the bills are so high—is it an appliance, are we doing too much washing, are we drinking too many cups of tea, or is it my tariff? That is not easy to work out without a smart meter, but my energy supplier will not give me one, so it all gets very complicated.
It is important that we take steps now until such services are available so that people can switch quickly and easily. There are provisions to ensure that the cap is set at a sensible level and reviewed regularly, and Ofgem will have to consult on how to calculate the level of the cap. The cap will also have the flexibility to go up and down depending on market conditions, and I agree with my right hon. Friend Sir Oliver Letwin that it should be a formula, not a number.
I support initiatives that help to encourage consumers to switch energy suppliers and, of course, I support a competitive energy market. The number of suppliers has increased from 13 to more than 60 since 2010, which can only be a good thing. My right hon. Friend Robert Halfon mentioned Robin Hood Energy in Nottinghamshire, which is a great local example of a new, competitive company delivering lower prices.
It is people who do not have the means to call around asking for different energy quotes or do not have access to the internet, including elderly people who perhaps do not feel confident using price comparison websites, who suffer the most under the current system, as well as families who have too much on ever to get around to switching. Ofgem’s recent survey found that vulnerable consumers were the most negatively affected by the market, and I am sure that no one in the House supports that situation.
The number of consumers switching energy suppliers continues to be notably low. It would be great if that was because everyone was happy with their bills, but I am not sure that any of us believes that that is the case. Citizens Advice assisted more than 74,000 people with issues related to fuel last year, which again shows that the market is not functioning as well as it should, and it is great news that that organisation has offered its support to the Bill.
The Bill has huge potential to benefit the most vulnerable customers. If it achieves Royal Assent by the summer, the cap can be in place by next winter, providing protection for my constituents in Mansfield and millions of customers across Britain. It is therefore very important that we crack on and deliver it.
I am grateful for the opportunity to make a few brief remarks in a debate that has been, perhaps, the most consensual in which I have participated since my election last summer. I pay tribute to the Minister, and also to my hon. Friend John Penrose, who has done so much to ensure that the Bill is indeed a reality. It is certainly needed. In a winter in which we have been reminded of just how bad the British weather can be, and just how much we rely on our ability to heat and light our homes, too many of our constituents are being taken for a ride by their energy suppliers. Millions of so-called sticky customers, many of them elderly and on low incomes, are stuck on poor-value default tariffs and, as a result, pay more for their energy than they need to. In a deprived constituency such as mine, the case for change is clear. In June 2016, the Competition and Markets Authority found that consumers were being overcharged by about £1.4 billion a year. That is not fair. It is bad for consumers’ finances, and it is bad for trust in the energy market. I was therefore pleased to see this measure included in our election manifesto last year.
It is important to understand how the Bill will work, and it is also important to understand what it is not. As was pointed out by my right hon. Friend Sir Oliver Letwin, it is not the crude measure proposed by Edward Miliband in the good old days when he led the Labour party. He proposed a straight-up freeze on energy tariffs: a blunt proposal with insufficient scope to deal with natural price fluctuations. In contrast, the Bill will implement not a freeze but a cap: a cap set on standard variable and default energy tariffs.
Competition still lies at the heart of our vision for the energy market, and that must be the right way forward. However, those who are less able to switch will no longer be at the mercy of rip-off merchants. This is not a permanent solution, but it will buy time for the ambitious programme of reform that the Government are delivering to take effect. The provision of faster, cheaper and more reliable switching, backed by smart meters and simpler, clearer energy bills, is an essential step that was proposed by the Competition and Markets Authority and is now being introduced by Ofgem. In the meantime, a temporary cap must a good idea. It will promote choice while also ensuring that the energy market works for everyone.
That is an infinitely more progressive approach than the one proposed by Labour Members. The Centre for Policy Studies has shown that Labour’s plans to renationalise our energy network would cost up to £185 billion, exploding the deficit and leaving every household in our country facing a bill for thousands of pounds. Putting the cost aside, however, I challenge Labour Members to tell us where is the evidence that the state would suddenly develop the all-seeing wisdom that would enable it to know how best to price what is an immensely complex and fast-changing market. We know from the Government’s reforms of the way in which we produce our energy that it is far better for Governments to set an enabling framework, and then to let the market shape itself according to innovation and demand. If we relied on the state to direct how we generate our electricity, we would still be relying on dirty coal today, rather than enjoying subsidy-free solar and offshore wind. Of course, as we noted from their shameful early-day motion, tabled a few weeks ago, too many Labour Members would rather like that, but at best we would have a series of Hinkley Points. I will not take lessons from Labour Members about embracing the merits of outright state control and the direction of prices.
1s the Bill perfect? I must say that I wish it were not necessary. I did not come into politics to cap prices, and I do not believe that the state is generally particularly adept at doing so effectively. However, we are where we are. We have a market that is not working for some of the most vulnerable people whom we serve. I am a great believer in not making the best the enemy of the good. A price cap is what my constituents need and want, a price cap is what we promised to deliver, and a price cap is what I will vote for tonight.
As a number of Members have said, the issue of domestic gas and electricity supply is particularly pertinent following the recent extreme weather. The cost of that supply is always hugely important to our constituents, not least because when the mercury drops and blizzards swirl, it an absolutely necessary and unavoidable cost.
Like all other Members, I receive letters and surgery visits from people who struggle with their bills, struggle to understand the tariff choices available, or struggle with access to the internet and the comparison websites that might help them to reduce their domestic fuel bills. I recently hosted an energy-switching surgery with our local citizens advice bureau to help more people to switch to the best deal.
According to the latest figures available, the Office for National Statistics considered 12.3% of households in my constituency to be fuel-poor in 2015. Thankfully, that was a great deal less than the 23.3% of households who were fuel-poor in my constituency back in 2010, but there is clearly still more work to do. Similarly, while the Office for National Statistics reveals that the percentage of households in Great Britain with internet access has increased dramatically over the last decade—from 60% to 90%—there are still in Stoke-on-Trent, according to the city council’s digital inclusion strategy, about 15,000 households without internet connection and 7,000 without a mobile phone. That matters, because one of the driving forces behind the need for the temporary tariff cap under the Bill is the reluctance of consumers to switch, or the inability to do so with ease and convenience. The Bill matters to Stoke-on-Trent’s digital inclusion strategy because a temporary cap would give us the breathing space that we need to take the measures planned locally that will get the market for energy functioning more freely online than at present.
Great efforts have been made to ensure the domination of the market by Blair and Brown’s big six does not mean that new entrants are perpetually crowded out. They demonstrated what Labour does in power: it quashes competition. It now wants to go further, as we have heard from the Leader of the Opposition, by nationalising the energy market at huge expense to taxpayers, eliminating all consumer choice that would allow people to shop around and get the best price. It is greatly to the credit of this Government and their coalition predecessor that the number of suppliers has increased from just 13 in 2010 to 60 now, and that the dual fuel market share of independent suppliers now runs at 22%.
The nudges towards greater competition are not working for everyone, however. The £1.5 billion premium—the difference between what people would be paying in a fully functioning market and what they actually pay—identified by the Competition and Markets Authority in 2016 is a shocking figure. Just as we are taking measures locally to improve consumer engagement in a competitive market—not least with my own free energy guide for constituents, which I recently published—it is right that the Government continue to roll out measures to increase competition in the breathing space that a temporary tariff cap can and will bring.
As a consumer, the rigmarole of changing an energy supplier involves psychological barriers that everyday retail markets—like going to the shops—do not share. The sclerotic consumer side of the energy market also effects psychological disinhibition on the producer side, by which I mean that energy suppliers feel able, and indeed entitled, to take their customers for granted in a way that suppliers in fully functioning free markets do not. As Octopus Energy puts it in its briefing for this debate, in a healthy market, consumers who shop around for the best deals keep prices low for everyone.
I would go further than Octopus Energy: in healthy markets, consumers who are loyal are rewarded, not ripped off. In the very healthy market of coffee houses, for example, suppliers might well attract new customers with flyers or vouchers, but they also tend to take care to reward loyalty over caprice. That point is well illustrated by the fact that even the House of Commons has a loyalty card for tea and coffee. Huge energy corporations with loyal customers have no excuse for treating loyalty with contempt.
My tests for this Bill are that it should motivate more consumers to be confident switchers, that it will require suppliers to provide the customer care that loyal consumers would expect in a fully functioning market, and that it will spur the regulator into action as the consumers’ champion. I am confident that it will.
I will be glad to receive assurances that the long-term ambition for energy policy is not just a reliance on short-term caps. The long-term interests of consumers are best served by the freest possible markets with the greatest possible competition. Looking to the future, there is great potential for new energy sources and new firms in the market. In the renewables sector, costs are coming down. In the nuclear sector, innovative new technology promises unthought-of energy security if we get the policy framework right, taking pressure off the gas network as our primary source of energy. An energy tariff cap cannot become a comfort blanket against embracing sectoral change in the decades to come, even if a temporary cap is a necessary safety net in the immediate months ahead.
In conclusion, the market for household fuels does not function as well as we would hope. It needs to become more competitive, more consumer-focused, and easier to enter for new firms on the block. The Bill will provide temporary respite from the more egregious excesses of the big energy firms that fail to reward loyal customers. It opens a clear window of opportunity for further action in boosting market information, digital access, competition and security of supply. I support the Bill in principle and as part of a wider approach to fixing the problems in our wider energy market.
What a pleasure it is to contribute to the debate, because there is so much to respect about the process by which Ministers have guided the Bill forward. It starts, of course, with the crucial truth that many of our constituents feel strongly that their energy bills are not fair. From there, similar solutions were set out in the two largest parties’ manifestos. We had the report from the Competition and Markets Authority, the letter from my hon. Friend John Penrose, which I supported very early, and the Business, Energy and Industrial Strategy Committee’s report and pre-legislative scrutiny. Today we have seen an unusual cross-party consensus, echoed among Opposition Members by Rachel Reeves, Frank Field, Albert Owen, Caroline Flint and Gareth Thomas, and by all my colleagues on the Government side of the House. This has been a model of how to build support, not least because we all want to do something to help so many of our constituents.
Interestingly, the Bill does not target the most vulnerable, because broadly speaking they are already on fixed or pre-payment tariffs, which are already capped. The Bill provides for a temporary, absolute cap for 20 months, starting in time for the winter of 2018-19—I know that it feels as though we are still in the winter of 2017-18—which will affect a slightly different category of our constituents: the 11 million who are on standard variable tariffs, many of whom have been on them for many years, paying roughly £300 more a year than they need to. There are twice as many of our constituents on such tariffs as there are switchers.
I wish we had the data on standard variable tariffs. I believe that the Government’s statutory instrument will make the data available—I hope that the Minister can confirm this—so that we can see what the details actually are in our constituencies. My guess is that in Gloucester, which is part of the huge west midlands energy region, about 25,000 of my constituents are on standard variable tariffs. What we do know from the west midlands energy statistics is that 20% of electricity customers and 34% of gas customers are actually served by their legacy supplier, and have therefore been on a standard variable tariff for a very long time.
I also guess that many of our city’s hard-working residents—we have the fourth highest employment rate of any city in the country—who are on relatively modest salaries, with an average salary of around £25,000, do not have enough time to switch. The Bill will therefore have the greatest impact on hard-working families and individuals, and it will enable them to budget for their family’s biggest cost after council tax. It is to them that the Bill is effectively dedicated.
There is a bit of an urban myth among Opposition Members that nationalisation is the real answer, but that is simply not backed up by history. We know that when energy companies were owned by the state, there were twice as many power cuts as there are now, and we know that energy prices fell after privatisation, only to rise between 2000 and 2008—we know which party was in power then—due to lax control of the regulatory environment.
What is needed today is for the balance of interests between the Government, the regulator, energy companies and customers to work above all for customers—our constituents. The Bill sorts the one major issue for 11 million people—the standard variable tariff—for now, and allows the Government and the regulator to focus on how in the longer term we use innovation, better smart meters, better and easier ability to switch, and a greater use of renewables to ensure that the energy market works as best it can.
Going through the briefings that I have received from various organisations representing both consumers and suppliers, it is quite clear that there is universal recognition of the problem that the Bill seeks to address: market failure. There is almost universal support for the Bill on those grounds, and for that reason I am also extremely supportive of it. However, as we have heard, it is important to say that this Bill is not a panacea for all our ills and that the hard work does not stop here.
Citizens Advice is supportive of the Bill and sees it as a vital first step towards ensuring that consumers on default tariffs are no longer ripped off. Scope highlights the fact that disabled customers face higher energy costs for reasons related to their impairments and conditions, and it is of the opinion that the Government should also put in place a long-term plan to address the barriers that disabled customers face. First Utility, a challenger supplier, is also supportive, but it highlights the need for serious consideration of the level at which the price cap is set, for a level playing field for all suppliers and for consumers to become more active players in the market instead of them sitting back and becoming more passive. uSwitch has concerns in principle and believes that any price regulation should be light touch and in place only for the minimum time necessary.
I sense that we are moving in the right direction, but I do have one concern nagging me at the back of my mind about the possible unintended consequences. I hope that the Minister will be able to address my worry about a negative knock-on impact on investment in the energy supply sector. While I recognise that there is a strong element of “They would say that, wouldn’t they?” I take note of the worry raised by both the CBI and Centrica that the CMA should consider appeals against Ofgem’s decisions, rather than them being pursued through the courts by way of a judicial review, as the Bill currently proposes.
A revolution is taking place in the energy supply sector as it is decarbonised and decentralised and as more renewables come on stream. That welcome process requires an enormous amount of investment, and the Treasury has identified over £250 billion of energy investments that will be made in the early 2020s. We need to ensure that that investment keeps taking place in the UK. Such investment is beginning to bring significant benefits to East Anglia and my Waveney constituency, with numerous projects planned in the southern North sea, including the opening up of marginal gas fields and decommissioning. In offshore wind, 11 wind farms are either operational, under construction or planned off the East Anglian coast, with a total capacity of 8.7 GW. As I chair the all-party parliamentary group on energy storage, I should also highlight the exciting opportunities emerging in that sector that will help to decarbonise not only the energy sector, but the transport sector, that will empower British households to become generators of their own electricity and that will help to make our industrial base more competitive as cheap renewables are more easily deployed.
We are on the cusp of an exciting future that could bring significant benefits to the UK and create thousands of jobs, often in parts of the country where regeneration is badly needed. That requires enormous investment and, up to now, Britain has been an attractive destination for such investment due to its straightforward regulatory framework and limited state intervention. Everyone knows where they stand, and it is vital that we do not lose that hard-earned reputation.
The appeals process needs to be carefully designed and implemented to allow for continued investment and consumer engagement. Proper appeals are important to ensure that regulatory decisions are well founded. The appeals processes in sector-specific regulated industries show that regulators make errors. Ofgem is a regulator with wide-ranging powers that can make decisions that have significant consequences both for consumers and for companies operating in energy markets. Robust checks and balances are needed to ensure that the regulatory decision-making process is both rigorous and careful.
In making decisions, investors are mindful of the overall integrity of the regulatory process, which includes a proper right of appeal. There is a worry—as we heard from my hon. Friend Mark Menzies, who is currently not in his place—that the Bill, as drafted, is damaging from that perspective. That said, I recognise and take on board the significant amount of work that the Select Committee carried out in its pre-legislative scrutiny. The research and evidence it received suggests that this is not a problem.
I have a slight nagging doubt about unintended consequences. I am mindful of an article in the Financial Times yesterday that painted a scenario of increasing investor uncertainty that, in turn, could lead to higher costs of capital and, ultimately, higher costs to British energy bill payers.
I would welcome from the Minister, either in her summing up or later in correspondence, an assurance that there has been due diligence and an impact assessment confirming that the Bill will not lead to a downturn in the investment that is currently being unleashed in the energy supply system and that is beginning to bring significant benefits to many parts of the UK.
For too long many of my constituents and people living across the UK have been trying to manage overpriced energy bills and have been punished for being loyal customers. In a poorly functioning energy market, all customers would switch between suppliers to get the best value tariff for energy. However, only a proportion of consumers have been doing that, so creating a two-tier, broken system. In fact, according to Ofgem, as of September 2017, 57% of customers with the 10 largest energy firms were on uncapped standard variable tariffs.
I make it clear that I believe in a free market, but I also believe in a free market that is fair—one where the consumer is king and has choice. Currently, loyal customers suffer and we have a two-tier, unfair, broken energy market. This Bill will enable a temporary intervention in the market and will support our manifesto commitment to extend price protection.
Currently, some 11 million households are unprotected and on poor-value standard variable tariffs. The rate of switching is not yet high enough to rectify that anytime soon, so loyal customers suffer. We effectively have a system in which switchers can save around £300 a year but customers of the big six who do not switch and who stay on default standard variable tariffs are overpaying each year. In fact, the Competition and Markets Authority has found that, between 2012 and 2015, customers of the big six collectively paid £1.4 billion a year more than they would have paid in a well-functioning market.
With other initiatives to drive down energy costs and usage, as well as to promote switching, it is easy to question why a cap is needed. Well, it is needed. Those measures will help, but they will all take time, hence the need for a temporary measure. Let us briefly look at the key initiatives.
First, the roll-out of smart meters alone is predicted to take £300 million off consumer energy bills by 2020, giving consumers the knowledge to make informed energy and supplier choices, but that roll-out will take time. In addition, ensuring that properties are energy efficient is also essential, and the energy company obligation “help to heat” scheme will upgrade around 1 million homes by 2020—it will still help only a fraction of the population. The warm home discount scheme provides 2 million low-income and vulnerable households with a £140 rebate each year, but that helps only that specific group. The uSwitch campaign has gained traction over years, and the Government are also working with Ofgem to make switching suppliers even quicker and easier. But the annual switching rate in September 2017 was only 18%, meaning that five out of six households do not switch energy supplier. The number of people actually switching increased by 30% for electricity and 24% for gas. So the proportion of people switching is still far too low but the rate at which switching is increasing is growing dramatically. That indicates that it will become more the norm, but that it will take time.
We can argue today that we need to take responsibility for our own actions and for switching, but we also need to encourage and enable people to do this, and protect the most vulnerable in society. Leaving the system broken and ripping off loyal customers is not the right thing to do. In addition, there is a lack of awareness that switching needs to be done regularly, because as a good-value contract ends, it usually defaults to a single variable tariff. Martin Lewis, founder of MoneySavingExpert.com, has said that we need to make up our minds up between regulating prices, or encouraging competition and switching. However, I do not believe the two are mutually exclusive in this scenario. The regulation is just a temporary fix while we encourage switching and work to reduce energy prices.
Martin Lewis and some others also argue that a narrower price differential will discourage switching. That has not happened in Northern Ireland, and it should incentivise companies to find more efficiencies and reduce prices for switching customers. In addition, Mr Lewis himself warns that the cap will only reduce some customer bills by about a third of what switching would do—that shows the incentive.
I am delighted that the Government have accepted the Business, Energy and Industrial Strategy Committee’s sensible recommendations on the six-month reviews and on the Bill requiring Ofgem to consult on exemptions from the price cap for green tariffs, including the power to exempt them. That will protect green energy providers and give consumer choice. I agree with the Committee that we must also strengthen the definition, standards and checks to ensure that those that qualify as green are green and that this is not just used as a loophole. Good Energy, one of the leading green providers in the UK, is based in my constituency and has in the past expressed its concern to me that consumers select companies thinking they are green when they are actually only partially green. These companies can therefore afford to charge less, so we need to be careful about exemptions to the cap and ensure that the energy market is more transparent to give consumers informed choices. I look forward to hearing from the Minister on that.
In conclusion, I agree with the chief executive of Citizens Advice that this Bill is
“a significant step towards an energy market that works for everyone”.
But it is important that this provision is seen not as a stand-alone measure but as a temporary solution that will encourage switching, work to inform consumers of their energy use and bring energy prices down via a number of incentives.
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 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 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 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.
I rise to make a short contribution to the debate on this important Bill. I pay particular tribute to Caroline Flint and my hon. Friend John Penrose for their persistence over time to get us to this point.
The Bill will make a real impact on the day-to-day lives of the people who elected me, which is why it matters very much to me and why I have been pleased to sit here listening to the debate for several hours. When it comes to such important issues, we are talking not about academic abstractions or economic theories, but about reducing the energy bills of my constituents. That really does matter to me, as it matters to them, so I support the Bill and wish to make a few comments on it.
The price cap in the Bill is not, as some might fear, a corruption of the free market, but a market intervention to protect consumers from the worst excesses of a market that is not working. On a related note, I shall quote the words of a very famous Scotsman, which I am sure that you, Mr Speaker, will recognise instantly:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
I am not laying the charge of corruption against the big six, but their activities might be described as a contrivance to raise prices.
The price cap is a blunt object—
Order. I was rather hoping that the hon. Gentleman was going to furnish us with the page reference in “The Wealth of Nations”.
I am unable to furnish you with the page number in “The Wealth of Nations”, Mr Speaker, but you are absolutely right that it is, of course, the famous Scotsman, Adam Smith, to whom I was referring. He was a great soul indeed.
The price cap can be a blunt object if it is left in place too long: it could cause stagnation; it could cause a reduction in competitiveness; and it could reduce the scope for investment in innovation in the sector. The effect of the price cap is not intended to result in that end; it is to lead to something far subtler. I am talking about a market intervention that is consumer-led and that is about empowering consumers. I am glad that the cap is time limited. It gives us time, as has been said by many Members in this debate, to fix the market, but what does the fix look like? My contention is that the Government, Ofgem and the industry must work harder to create this consumer-led marketplace. New technology is becoming available to empower consumers—to give them more control over their energy consumption and supply like never before. It gives consumers the data they need to optimise their energy consumption and to give them control over their energy costs.
The idea of this technology is the start of something that is unstoppable—I am talking about the idea of the smart home. In effect, what it does is give power to consumers, which, ultimately, is what this Bill is all about. The average household energy bill—if someone is on a standard variable tariff—is between £1,200 and £1,300 a year. It is incredible how little interest many consumers pay to that kind of expense going through their households. Part of the remedy to this disengagement, or lack of interest, must be to give consumers the confidence to feel empowered to deal with those costs. At the heart of all this is the smart meter. I do not have time in this debate to talk much about smart meters, but they can create data, display data and give uses to data that help consumers to optimise their energy bills.
We need to make it easier for people to switch. There is a great fog that comes over many people’s minds when they are given the opportunity to switch suppliers. If we can make it as easy to switch supplier as it is to open an app on a smartphone or press a button on a smart meter, the game is on. I remain convinced that this technology can fix the market in time—and “in time” is the key phrase. We need a real national effort to install smart meters in every property across the country. There is a Bill, which has gone through this place and is now in the other place, that is about smart meters. There are issues about smart meters that demand the urgent attention of anyone who has an interest in seeing this vital national infrastructure installed in this country. There are technical issues, but that is not what we are here to discuss.
What are we discussing? Why am I standing here in the first place? Frankly, it is because we have a broken market. I wish to apportion blame for that: I put the blame firmly at the door of the regulator, which has been around, in one form or another, since the 1980s. I firmly believe that the regulator already has the power to do what this Bill will give it the power to do, but it lacks the will to use that power.
As a member of the Business, Energy and Industrial Strategy Committee, I was astonished to hear the leadership of the regulator, who was in front of us, admit in effect that they had the power to set the tariff cap, but that they were too frightened of litigation from the companies that they were supposed to be there to regulate in the first place. As we say in Sterling, why have a dog and bark yourself. That seems an apt expression for a regulator that has failed to protect the free market and has allowed itself to be sucked into the game of special interests. It is almost protecting the very businesses that it was supposed to be there to regulate. It is now time to question Ofgem and its fitness of purpose. If the leadership of Ofgem will not take these powers that will inevitably pass through Parliament and become law and use them to protect the customer and to build and create a proper, free and competitive market in energy, that leadership will need to be changed. It is time that we were better served by that regulator.
The energy suppliers are benefiting from this lax regulatory regime. By creating a situation in which they charge rip-off prices for standard variable rates, the big six suppliers have broken the covenant that all companies have with their customers. They have lost the trust of the people. They may use the period of the tariff cap to restore and rebuild that trust by working to create this proper functioning marketplace.
Let us not forget what these companies have done. They have used profits from standard variable tariffs to subsidise their cheaper tariffs. Unengaged consumers have been punished harshly because of their loyalty, to the tune of at least £300 per household per year—much too high. According to the Competition and Markets Authority, the country has overpaid a total of £1.4 billion. Consumers have been ripped off for years at the hands of companies that should have known better and at the mercy of a regulator that has proved ineffective. It is time for us to take action and to work pragmatically to solve this problem for our constituents. It is a time not for economic dogma or ideology, but for proper pragmatism. The Bill is a superb example of the pragmatism that this Government pursue, and I am proud to support it.
I welcome this important debate because it is the role of the Government to step in when markets do not work effectively. Although I am instinctively a small state Conservative, I know that it is important that the Government recognise when markets have not worked effectively and take appropriate action, as we propose in this legislation, which I support. Caroline Flint, who is not in her place, said that to expose market failure is not to try to weaken or be against all markets. That is a key point. Exposing market failure is vital for Government Members. Markets exist to improve people’s lives and make things more efficient. They provide outcomes and ensure that we can deliver things for consumers. If they are not working, it is important that those of us who stand up for free markets and capitalism point that out and take action accordingly.
I am instinctively cautious about caps, as are some of my friends, given their comments today. I support the statement of my hon. Friend James Heappey, who said that he hoped that the cap was an incursion into this area, rather than a wholesale annexation. He espoused my view much more pithily that I can. I do, however, accept the need for temporary measures to find ways in which we can make the market more competitive, and my right hon. Friend Sir Oliver Letwin spoke so eloquently about that in his speech.
It seems that there are two issues: supporting vulnerable customers, and the general stickiness of a market that is lacking in energy, vigour and the ease to switch. I hope that we can continue to put in place more support, protection and cover for vulnerable people, as we look to make the market more competitive. However, we have to recognise that there is an element of agency. People have the right to make and not make decisions, and we have to find that balance carefully.
There are some signs of improvement in the market. There has been a large increase in switching over the past year or so. The market share of the big six has reduced from over 95% in 2012 to around 80%; it is just not happening quickly enough. There is no doubt, however, that the market is broken. There are too many people on standard variable tariffs who do not benefit from the other tariffs as they could do. The price differential of £300 between the highest and lowest tariffs—or between the highest average and other averages—is too high. There is a clear disconnect between wholesale prices and the retail prices that people pay.
There is a strong suspicion of tacit co-ordination between the big six. Anybody who looks at the graphs in some of the briefings that we have all received will see how the price movements of the big six over a decade have so closely mirrored one another. There are clearly high barriers to entry. There is a real stickiness of customer movement, as well as stubbornly high market shares, which happily are slowly starting to float down. There is a clear problem.
I welcome the opportunity, in the next few years, for this competition and change to take place. I hope that some of the things that are proposed on improving communication, getting better data and improving the switching process also take place. I accept the interim changes, but hope that we can reboot the industry over the next few years, so that we do not need a cap in future. I hope that we can ensure that there is a competitive and successful energy market that serves the needs of its customers, so that we do not have to do some of the other things that none of us wants to do.
This afternoon we have witnessed the House at its best. I think it is fair to say that we have had not a single stupid contribution to this debate. [Hon. Members: “Yet!”] We are getting there. On the contrary, we have had a series of informed and thoughtful speeches, which, as Richard Graham said, have been overwhelmingly supportive of the Bill.
I particularly emphasise the contribution of my hon. Friend Rachel Reeves, who informed us that loyal customers are not rewarded but punished with high-price tariffs, and that energy companies have effectively brought this event on themselves with their discriminatory pricing—a theme that a number of hon. Members echoed. We heard a number of first-rate speeches by members of the BEIS Committee, which my hon. Friend chairs and of which Antoinette Sandbach, Drew Hendry, my hon. Friend Albert Owen and Stephen Kerr are all members. The quality of the Committee’s report is underlined by the quality of its members, who have so informed our debate. I congratulate the Committee on its report, which was really illuminating in the context of the Bill and what Committee members have said about their work.
My hon. Friend Gareth Thomas pointed out that the price cap itself is not going to change the nature of the market, that other forms of ownership are available, and that a lot more has to be done on changing how the market works in the longer term. I salute my right hon. Friend Caroline Flint for her long campaigning on and intense interest in the price cap. In her view, we are at the end, not the beginning, of a long campaign to get action taken. My hon. Friend Alex Sobel reminded us particularly of the transition that we are making towards a locally disseminated energy economy and the importance of fair pricing to the longer-term issues. If I have missed out other hon. Members’ contributions, it is merely for the sake of time rather than a lack of estimation for what they have said. Overall, we have had a high-quality debate.
Because the contributions were as supportive of the Bill as they were, it would be particularly churlish of me to spoil the atmosphere by saying anything other than that we will not oppose the Second Reading of this Bill. We agree with the important points that have been made about the reasons for the cap, the consideration that has gone into it and what we need to reflect on with regard to its future.
Indeed, why should we oppose the Bill’s Second Reading? After all, if we look closely at the Labour party’s 2013 proposal for a price cap, we see an almost identical proposal: a temporary cap lasting a specified period and then removable based on an understanding of how the market was working. I am afraid to say that, as my right hon. Friend the Member for Don Valley pointed out, when that cap was put forward in 2013, it was roundly condemned by the Conservative party in trenchant terms. In that light, it is not surprising that the Government did nothing about a price cap for an extended period, during which action could have been taken to sort out energy market prices and create a fairer deal for customers—which, in the end, this is all about.
“On the road from the City of Skepticism, I had to pass through the Valley of Ambiguity.”
I cannot give you a page reference for that, Mr Speaker, but that is what Adam Smith had to say about his route, and I think it rather sums up what the Government have gone through to get to this point.
A price cap was suggested in the last Conservative manifesto, then apparently reneged upon by the incoming Government, then rather weakly pushed away by the Department as the responsibility of Ofgem, then once again affirmed as a target idea at the last Conservative party conference, and then finally introduced as draft legislation. It is now being pursued in a hurry, in order to get the necessary legislation through in time for a cap to come into force by next winter.
That is quite a daunting timetable, but it is one for which we can have only limited sympathy, bearing in mind the time that the Government have wasted by opposition, then vacillation, then confusion and finally some degree of determination to introduce a price cap, which I applaud, and to do so in a way that is reasonably proofed against judicial review and other devices that displeased energy companies might decide to throw against it.
We have limited sympathy for the Government in the difficulty they have got themselves into with the timetable ahead, but I give a clear understanding that we will not oppose the Bill on Second Reading or be party to any slowing of the legislative timetable if it means a price cap is not in place before winter 2018. Indeed, as my hon. Friend Rebecca Long Bailey confirmed, we want to see that cap in place well before the winter, if possible, and are minded to seek to place an absolute start date on the face of the Bill.
It should be clear that we want this price cap to come in. We believe it should be an absolute and not a relative price cap, and we broadly support the cap’s mechanisms, particularly the reference arrangements relating to changes in wholesale prices. However, there are a number of points in the Bill that we want to see amended, and we will pursue those amendments in Committee with a central purpose of strengthening the Bill and not weakening or disabling it.
We want to see a clearer definition of the circumstances in which Ofgem might lay a report indicating that market circumstances suggest that the cap can be lifted. We want to see a better definition of which tariffs can be exempted from the cap—for example, those for supplying green electricity to customers.
We believe that a price cap is necessary now, rather than, say, an intensification of switching as a remedy for unfair price treatment by suppliers, because as hon. Members have said, we know that 65% of customers simply do not and probably will not switch. They deserve better protection for their tariffs—particularly the large number who are on standard variable tariffs—than being told that they are somehow bad customers if they do not switch and that they have to put up with whatever comes their way if they stick with their energy companies.
We want to see better arrangements in the Bill for what comes next, after the cap has ended, when people will continue not to switch and will need continued protection for their position as customers. We were clear in 2015 and are clear today that a price cap should not just be introduced for, as it were, punishment purposes, and then when it is lifted business as usual carries on until someone else suggests that the market distortions and failures require another temporary cap.
Instead, the cap needs to function as a carapace under which work is undertaken to put in place checks and systems to ensure that these circumstances do not recur, that we subsequently have a supply market that is fair to the customer and the supplier at the same time and works well to ensure fair competition, and that customers of energy companies have reasonable and firm expectations of how their energy supply company should deal with them over and above the recourse of switching. We remain to be convinced that the Government really have a set of measures, prepared and ready for implementation as the cap progresses, to produce such a long-lasting result for energy markets, and we certainly intend to seek amendments to the Bill that will allow the process to happen better.
It is in that context that we want to cast the proposals we have heard about today from, among other Members, John Penrose. I commend him for his long battle to make sure that we now have a Bill before us. He has proposed a relative price cap, rather than the absolute price cap set out in the Bill. We do not support the introduction of a relative tariff range limiter as the instrument of a relative price cap. Among other reasons, it would not necessarily be a price cap at all.
However, such a cap would or could be an important device to ensure that customers who we hope will come off SVTs are not subject to equally disadvantageous practices in the long term through being placed initially on a low tariff, only to find themselves subsequently hoisted on to a very disadvantageous tariff, perhaps at levels similar to those of SVT customers, as soon as their initial contract has ended. Placing a piece of elastic between the best tariff and the highest tariff would substantially address such a practice, which is, as we know and have heard today, an area of bad behaviour by some energy companies now, and may well be in the future if we do not act to ensure that it does not happen.
At the beginning of my remarks, I gave the game away about whether we would support or oppose the Bill to provide some clarity of purpose about where the Bill should go not just tonight, but in its whole passage through the House. We already feel that we own the legislation, albeit in a form that has taken a mightily long time in arriving. We hope the Government will think carefully about our proposals to strengthen the Bill as it goes through Committee. If they want to introduce amendments that further reflect both those proposals and the commendable work of the BEIS Committee in carrying out pre-legislative scrutiny, I will not be precious about whose idea they were.
I want a legally watertight, effective price cap arrangement on our statute book as early as possible, with an equally effective regime in place to ensure that we will not be here doing exactly the same thing in a few years’ time. If between all of us in this Chamber we can achieve such an outcome, I will be well satisfied with our endeavours as we start out on that road today.
I thank my opposite number, Dr Whitehead, for his characteristically calm and sensible remarks. Indeed, it has been fantastic to listen to the level of calm and intelligent debate we have had today, with so many very well-considered views.
There is really strong consensus across the House both on the need for the Bill and, broadly, on the scope and structure of the proposed legislation. For that, I want to thank several groups of people. I thank my civil servants, who have done a good job in producing the current draft. I also very much thank the BEIS Committee, which is ably chaired by Rachel Reeves and has several extremely committed members from both sides of the House. Giving evidence to the Committee was a terrifying experience, but their scrutiny and suggestions, which we have fully incorporated into the Bill, prove the excellence of such a method of pre-legislative scrutiny.
I thank colleagues on the Conservative Benches and, indeed, on the other side of the House, who have helped us to improve the legislation prior to this point with their very considered suggestions. I thank in advance those Members who will serve on the Public Bill Committee and will contribute to our further debates, because we all want the cap to be in place well before the year-end, and it must have a smooth passage through the House of Commons to achieve that aim.
I need to single out two Members. The first is my hon. Friend John Penrose, whose campaigning championship in this regard has really electrified the parties on both sides of the House about the need to act. As we heard today, Caroline Flint has brought the best of her wisdom and experience to this debate. It was a pleasure to listen to both Members’ speeches.
I want very quickly to recap the purpose of the Bill and to refute the growing idea that we have in any way dragged our feet. I was struck by what my hon. Friend Antoinette Sandbach said about how the best form of legislation is evidence-based. We have had the CMA review, and we have taken the time to consider the fact that freezes do not work terribly well, and to have the regulator bring forward reasonable and welcome improvements. For example, we saw only this week the ending of the back-billing problem whereby people could be back-billed over many months, ending up owing thousands of pounds. The regulator has got the message strongly.
The Bill is a time-limited, intelligent intervention that will help to accelerate the transition to a more competitive market. It will give more powers to the regulator, which is right. The market has changed significantly since the original days of liberalisation. We have some extremely empowered customers, and we also have a large pool of customers who are less engaged and have ended up on poor-value tariffs. The cap has to be set to maximise investment, competition, innovation, switching and improved efficiency, and it will be accompanied by a whole package of other measures—the so-called carapace that the hon. Member for Southampton, Test mentioned—such as smart meter roll-outs, same-day switching and so on.
The Bill will also be a doughty defence of consumer rights. Indeed, my hon. Friend Stephen Kerr, my right hon. Friend Robert Halfon, my hon. Friends the Members for Chippenham (Michelle Donelan), for Mansfield (Ben Bradley) and for Stoke-on-Trent South (Jack Brereton), and the right hon. Member for Don Valley really stood up for their constituents and what the Bill will mean for them.
The Bill is not an attempt to extend political control over the industry. I champion the fact that since privatisation we have seen more than £80 billion invested in the industry, with power cuts halved and network costs down 17%. As my hon. Friend James Heappey said, we need billions of pounds more of investment to drive forward an exciting low-carbon, distributed energy future. The last thing we would want to do is to scare off that level of investment.
I will say something gently to the Opposition, because they could not resist a poke, about the idea that their policy is for a cosy array of mutual companies. The shadow Chancellor has said, “We want to take these industries back.” We know what that means: borrowing billions of pounds, raising taxes for millions, and none of the further investment that we need. It would be entirely the wrong thing for the industry. The Bill is a clear signal that we believe in well-regulated competitive markets as the best way to deliver service and value for all customers, and that we will act on market failures to give regulators more power to improve market conditions.
I thank the Minister for the way in which she has engaged with me and other colleagues who had concerns about the Bill. She has made time to meet us, with her officials, and addressed many of the concerns that we have raised with her in private. I want to put my thanks on record.
I thank my hon. Friend. I would also like to put on record my thanks to Patricia Gibson, whom I omitted to thank as one of the original campaigners north of the border.
Eight main issues were raised that I want to address. The first, which was raised by many hon. Members, including the hon. Members for Leeds North West (Alex Sobel) and for Ynys Môn (Albert Owen), and my hon. Friends the Members for Mansfield and for Eddisbury, was what will happen to vulnerable customers once all this has taken place. Of course, we have seen the safeguarding tariff that is now protecting 5 million people, saving them on average £120 compared with what they would have paid. That has been brought forward. We expect a whole package of additional improvements—smart metering, next-day switching, the midata project, the CMA policies about engagement with those disengaged customers, and an expectation that Ofgem will continue to scrutinise and actively monitor tariffs to make sure that any gaming creeping into the system is knocked on the head.
Many good comments were made about ensuring that the Bill will not disincentivise competition, including by my hon. Friends the Members for Wells, for Rugby (Mark Pawsey) and for Middlesbrough South and East Cleveland (Mr Clarke). We know the level of investment that we have to maintain, which is why the Bill will introduce a time-limited, intelligent cap. The powers given to Ofgem have to ensure that we do not disincentivise competition, while ensuring that companies have an incentive to improve the efficiency of their operations. Too many companies are still stuck in the operational methods of the past and customers are paying the price for that.
Interesting points were raised by my hon. Friends the Members for Fylde (Mark Menzies) and for Waveney (Peter Aldous), and Alan Brown, about an appeal to the CMA, which is something for which the big six are lobbying. I firmly believe that given the level of transparency and scrutiny that will happen when setting the cap, there will be opportunities to ensure that that is robust. Ofgem’s decision on the cap can be judicially reviewed. Courts can consider these issues more quickly than the CMA, and a whole range of evidence can be taken in such a case, whereas with CMA decisions, the range of those who can comment is very restricted. I do not want anything that slows the introduction of the cap.
I pay tribute to the Minister and the Secretary of State for honouring their commitment to take this measure through as speedily as possible. Will she look at other reviews? We await a Government response to the Dieter Helm review, which, by looking at transmission and distribution, could complement the price cap.
The hon. Gentleman anticipates a point I was going to make about many contributions about the calls for additional market reviews. The call for evidence on the excellent Helm review, which was commissioned by my right hon. Friend the Secretary of State, has only just closed, and I think we need to take the time to consider it. I was struck by the speech made by my right hon. Friend Sir Oliver Letwin. What we want is a rational, functioning economic regulator in a market that is so vital in keeping the lights on, keeping investment going and keeping people warm in their homes, not a political rush to do things.
The right hon. Member for Don Valley raised the issue of green tariffs and gaming the system. Ofgem has never been required to scrutinise existing green tariffs. It will have to scrutinise carefully and consult during the process of the design of the cap to ensure that it is fit for purpose. As we heard from many Members, the expectation will be that customers should not have to overpay to be on a green tariff. We are now buying subsidy-free offshore wind and I opened the first subsidy-free solar farm only last year.
There were many questions about the structure of the cap, including whether it should be variable or fixed. My hon. Friend the Member for Weston-super-Mare has campaigned on this matter very strongly. I was again struck by what my right hon. Friend the Member for West Dorset said. The structure of the cap should be able to take into account changes in the wholesale system. Clause 6(1) states that the period of consideration has to be no greater than six months, but it is entirely within Ofgem’s powers to change the cap more frequently. Of course, as we know, standard variable tariffs are currently updated only one or two times a year. Companies buy forward and hedge their energy prices, so it is not usual for very strong changes in wholesale prices to be incorporated. We will get to see the structure of the cap and its sensitivity to those prices going forward.
There were concerns about ensuring we allow co-operative energy providers to be in the market. My right hon. Friend the Member for Harlow, who is such a doughty consumer champion, made that point, as did Drew Hendry, Gareth Thomas and others. We already have co-operative energy structures—White Rose Energy, Robin Hood Energy and so on—and there is no barrier to those companies coming forward and delivering.
My right hon. Friend Stephen Crabb and my hon. Friend the Member for Rugby asked about the removal of the cap. We will have a series of tests, and we have set out clearly in the Bill what those tests will be. Ultimately, we want loyal customers to be treated as well as, if not better than, new customers who are being attracted by cheaper deals. That will be the absolute test.
In conclusion, we know the Bill is necessary. We know we need to get it through Parliament. I have been really encouraged by the tone of the debate, with so many Members having really scrutinised the Bill and being absolutely determined to see it through. I am confident that we can pass this vital Bill and our constituents expect us to do so, as they do not want to be overpaying on their bills. I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read a Second time.