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I remind the Committee that with this we are taking the following:
(1) The Secretary of State may modify
(a) a condition of the licence of section 11A of the Electricity Act 1989 (transmission licences and supply licences) to make provision on energy bills for information on the cheapest tariff available to the customer from their supplier;
(b) a condition of the licence of section 23 (1) (b) of the Gas Act 1986 (transmission licences and supply licences) to make provision on energy bills for information on the cheapest tariff available to the customer from their supplier;
(c) the standard conditions incorporated in licences under those provisions by virtue of those Acts;
(d) a document maintained in accordance with the conditions of licences under those Acts, or agreement that gives effect to a document so maintained..
New clause 18Limit to number of energy tariffs for residential customers
Within six months of the passing of this Act, the Secretary of State shall, by regulation, limit to no more than 10 the number of tariffs which each energy supplier may offer to any residential customer..
New clause 19Publication of energy tariffs
(1) Within six months of the passing of this Act the Authority will publish or cause to be published, at least three times a year, in national, regional and local press a full list of energy tariffs [the consumer energy price list] applicable for the next period of six months.
(2) The dates of the publication of the consumer energy price list shall be during the thirty days before
(a) 1 April,
(b) 1 September, and
(c) 1 January..
We were talking about Ofgem. I was quoting from the Energy and Climate Change Committee evidence session of early December when, among others, the hon. Member for Amber Valley, who is not in her place, was quizzing Mr. Alistair Buchanan, the chief executive of Ofgem. I had just come to the point in their last exchange when the hon. Lady was suggesting that there could be immediate action to deal with the anomaly that the current rules allow energy suppliers to increase their prices but not tell their customers for 65 days. Mr. Buchanan said that he was going to talk to Ofgems consumer panel and that it was to be its first project.
Does the Minister agree that, whatever the history, it is nonsense that people can be told about a price increase three months after it has happened, but have a much shorter periodonly 20 working daysin which to change supplier as a result of that price increase? Does she agree that something ought to be added the Bill to deal with that through licence conditions? What will the timetable be if there is not such a change in the Bill? How long will people who have had increases or are going to have increases have to wait before the law or the policy is changed, so that they get advance notice of any increases?
The amendment is entirely of merit and would be hugely popular among users. It would do nothing adverse to the utility companies. It would, however, give them the advantage of up to three months of increased price and payment from customers, and a reduced chance of the customers changing to another tariff. All the eggs are in the basket of the utility companies and none of the advantage lies with the consumer.
I have covered the amendment in the group. There are also three new clauses, one of which is in the names of Conservative Front-Bench Members. New clause 18 would
Within six months of the passing of this Act, require the Secretary of State to
limit to no more than 10 the number of tariffs which each energy supplier may offer to any residential customer.
When we were questioning the representatives of the six companies, they told us, in general terms, how many tariffs they had and accepted that, historically, they had had a huge number of tariffs. They explained that some were historic and that there were so many because each region in England, Scotland, Wales and Northern Ireland had separate arrangements. We have had helpful responses because we asked them how many tariffs they currently have.
The conclusion is that there are still hundreds, if not thousands, of tariffs. From the point of view of the consumer, the situation is still extremely confusing. The backdrop to the new clause is not only my concern that the current situation is thoroughly confusing, but the not untypical experience of a constituent of my hon. Friend the Member for Kingston and Surbiton (Mr. Davey).
Margaret Erskine has been in a long-running dispute with npower, which I have taken up with npower and Mr. Buchanan. With her agreement, I am going to summarise her complaint, as set out in a letter to my hon. Friend in November. She applied to be an npower gas and electricity customer on 19 May 2006 and an agreement was made that no more than 4,572 units would be charged for gas at the higher unit rate. She was entitled to a discount because she was receiving both gas and electricity from the same supplier and was paying by monthly direct debit.
In her first year as a customer, she was charged 4,432 units, just below the figure that she had been given at the higher rate, and clearly within the rules set out. However, in the following year, to 15 May 2008, she was charged 6,194 units at the higher rate. That clearly did not satisfy the agreement that no more than 4,572 units would be charged at the higher rate.
I am going to pause here, because the issue about the nature of the tariffs and how they are described also relates to the debate that we will have later about investigations and the timetable for investigating. The Minister will be aware of that issue because we have discussed it in general terms before. I am not going to repeat the same facts twice, but I lodge with her the fact that this case has two implications in terms of the transparency of the system and the investigatory process.
Margaret Erskine took up the matter with npower and would, I am sure, be happy to release the correspondence generally. She was told that for the year from 1 November 2007, no more than the published total of 4,572 units would be charged at the higher rate. It was perfectly clear to everyoneher phraseapart from npower and Ofgem, that this was not so for any year that included the six months between May and November. The point that she discovered was that npower effectively changed its tariff year when it introduced a new tariff. Unbeknown to her, the year that ran from when she started, and annually thereafter, did not qualify her for the benefit of a lower tariff charge after the higher number of units.
We have all probably paid bills in which the first set of units is paid at a higher rate, which then diminishes. I think that has always been an unfair system because low users and poor users are inevitably charged at a higher rate per unit than high users, who get a discount once they use more than a certain amount.
I have always felt that there needs to be a system that does not give a benefit for using more energy. It seems a perverse incentive; we should be trying to incentivise people to use less energy, not more. One reason for transparent tariffs is to expose the fact that at the moment there is a benefit to the companies from those who use less and a disbenefit to them from those who use more, given the amount of money that people pay.
A most extraordinary explanation was given in a letter from npower, which states:
We took this (ie the abnormal number of higher units charged in the period 1 May to 31 October 2007) into account when we set our lower gas charges in April 2007.
Miss Erskine, however, says that that is complete nonsense and has shown that the balance for the six months that would have given her the advantage if they had been counted from the beginning, and that for the following six months, were similar. Before setting out the comparative tables that show how unfairly she was treated, she writes:
Since more units were being charged at the higher rate from 1 May 2007 and since the rate of charge for these units was increased, the result was an even higher charge than before. The possibility of gaining from the reduced rate for the balance of the units was remote, in the summer months, for most customers. The hope expressed in the letter that ...its now a bit clearer went down like a lead balloon!
She then states that the seasonally weighted profile is detailed in the letter of 7 July and outlines what actually happened in the relevant year, before concluding very strongly on the lack of action and senseless explanations from Ofgem.
That information has been of use because it has amplified one of the complaints about the system. To be fair to the companies, the general message that they had too many tariffs and that the system was too complicated has been getting through. The companies have supplied us with the summaries of their current tariffs, which we requested when their representatives attended our evidence sittings. A survey of utility companies in a Spotlight article in the August 2009 issue of Call Centre FocusI was not previously familiar with the magazineconcluded that Scottish and Southern Energy Group, to be fair to it, had the greatest customer satisfaction of all the big six utility companies.
Scottish and Southern Energy Group states that it
It then sets them out. The first two are Standard Energy and Standard Energy Onlineone pays less online. There are also energy saving tariffs including Better Plan, which provides discounts for customers who reduce their energy use by 10 per cent. There is also an M&S vouchers option called M&S Energy. There are three discount tariffs, one of which offers 10 per cent. off purchases at Argos and Homebase. Another involves discounted high street vouchers for participating stores, and the other is a social tariff.
There are two time-limited tariffs: Atlantic Online FP and Price Fix 4 August 2011, which fix the price over a longer period. The other three are energyplus Pulse, which provides support for the British Heart Foundation; power2, which is a green tariff involving tree planting and other initiatives; and Go Direct 2, an online tariff with paperless billing and direct debit. There are also regional variations and
a discount available from standard credit for those who pay by direct debit.
That illustration, from just one of the six companies, shows the breadth and range of options available. Anybody interested in our affairs can see the evidence submitted to the Committee outlining the companies tariffs: Scottish and Southern Energy Groups response is in the document entitled EN 10, ScottishPowers is in EN 11, and so on. Colleagues will be pleased to hear that I will not read all of them, although I am tempted to because they show the complexity of the product. [Interruption.] I could indeed read them all, if encouraged.
The conclusion, however, is that there are all sorts of variations. There are discounts for prompt payment. There are still discounts for prepayment meters and monthly direct debit. Then there is a whole range of different types of tariff, sometimes with slightly unhelpful or misleading names: capped deals, fixed deals and tracker deals. Sometimes the deals stay on the adopted tariff, sometimes they revert to a previous tariff.
I am sure the Minister must agree with me that from the point of view of the ordinary consumerthe person who does not have all day to spend weighing things up: who runs a home or has a busy life; who may not be well, or who may be fit but busy; who may not be terribly numerate or literate; who may be poor; or who has other pressureswe could be much stricter in what we require Ofgem to insist on. That is why my colleagues and I have said that it must be reasonable to say that in any part of the country there is an upper limit to the number of tariff options10 for any customer in any product.
Of course, the figure 10 is arbitrary; it could be 12, eight or six. I am not seeking to argue that there cannot, for good practical reasons, be different tariffs in different parts of the country. However, for one user in one place I would like the Minister to say whether she supports the range and variety of options that exist now, or whether she agrees that Ofgem has been a paper tigera toothless wonderin trying to ensure that the utility companies serve their customers rather than themselves. There are many people, as Margaret Erskine discovered, who pay more than they should pay because they could not work their way through the minefield of options and come out safely on the other side.
That leads us to new clause 19, which is consequential on the other new clauses. It requires that
Within six months of the passing of this Act
will publish or cause to be published, at least three times a year, in national, regional and local press a full list of energy tariffs...applicable for the next period of six months.
We have chosen three months. It could be two months, twice a year or quarterly, because there are, for most people, three times a year when they think of a new start and new beginnings: the new year, when people plan for the year ahead; the new financial year at the beginning of April; and, for a lot of people, there is the new school and academic year, which also precedes winter. We are not so bothered about that. It could be quarterly, but I hope the Minister will agree that it is about time that people were able to find, in one place at one time, in an easily accessible way, a league table that gives the up-to-date informationjust a grid and a list of suppliers and optionsso that they have the best possible chance, in a way that is directly comparable.
I have listened carefully to the hon. Gentleman and I understand his point. What strikes me as one of the problems for consumers is not so much the number but the complexity of the individual tariffs. Even if presented with the choice of two, it is often very difficult to work out which tariff suits a persons circumstances and is the best one to go for. I am just a bit concerned that new clause 19 would not be able to determine the best tariff for an individual person.
I understand that point, and the hon. Gentleman is right. I would like a combination of both, to be honest. In its memorandum to the Committee, Ofgem told us that it requires all the energy companies to have best practice that should advise people about the cheapest tariff. However, that does not go far enough. Out of fairness to Ofgem, I want to put its policy on the record, to pick up on the point made by the hon. Gentleman, and add another about where it ought to go next.
Document EN 13, a memorandum submitted for our deliberations, states that, following its energy supply probe,
Ofgem has put into place a package of reforms to make it easier for consumers to understand their bills and engage with the energy market...From 1 September 2009 Ofgem introduced two new licence conditions which stop suppliers charging more for one payment than another. The first requires that any difference in the terms and conditions offered in respect of different pay methods must be cost reflective.
We have already touched on that debate. It continues:
The second prohibits undue discrimination between terms and conditions offered to different groups of customers.
I am still not persuaded. I understand the argument that if people have a prepayment meter, which is a bit of kit they receive only if they ask for one, it costs a bit more. There is therefore a differential cost to such customers and it is proper to reflect that. That is still unfair because the people who have prepayment meters are generally those who are most strapped for cash. Either they are paying more themselves or the burden is spread over everybody else.
In this market where the choice of suppliers is so limitedunlike the telecom market or groceries, where hundreds of options are availableI can see no justification for a differential unit price, according to whether one pays by cheque or direct debit or prepayment meter. A fair system would not give advantages to people who are, bluntly, the most affluent, the best off, the most organised and who run their lives by direct debit because they know there will always be enough in their bank account. It is unreasonable that the charge should be higher for those who are not in that position and who have things like prepayment meters, either voluntarily or forced on them. Ofgem has not gone far enough to get rid of the unjustified price differences.
Under the heading Clearer information on bills the memorandum from Ofgem states:
From July 2010 energy suppliers will be required to make significant improvements to bills to aid customer understanding and help them compare tariffs. Under the new rules each bill will need to display:
The tariff name
The customers consumption for the past 12 months in kilowatt hours
The projected cost in pounds per year if the customer remains on the same tariff and uses the same amount of energy
Suppliers will also have to supply customers with an annual statement containing this information plus the principal terms and conditions of the tariff. It will also:
Point out any premiums or discounts that apply to the tariff compared to standard monthly direct debit with the same supplier
Contain a reminder that the customer can switch along with advice on how to do so
To underpin these rule changes, from September 2009, Ofgem also set out over-arching standards of conduct that set out how we expect suppliers to behave. For example, suppliers should not sell a customer a product that they do not fully understand or is inappropriate for their needs and they should not offer products which are unnecessarily complex or confusing.
We also looked into the issue of the large number of tariffs that are currently available and decided that, at this time, any restriction would have negative effects on customer choice (eg there are currently a variety of different payment methods available, green tariffs, capped rates and social tariffs) and the ability of suppliers to innovate. However we recognised the issue of customer confusion which our remedies sought to address.
Given the detailed investigation that has been undertaken, Ofgem believes it is appropriate to allow the remedies that have been imposed time to take effect. Ofgem will closely monitor the impact of the new measures and remains willing to amend the remedies should they prove insufficient in addressing consumer concerns.
I am, to be fair to Ofgem, aware that it has said that the situation is still confusing. We have taken some measures and others will be taken. To deal with the point made by the hon. Member for Angus, unless a customer can be told on their bill, over the phone or both what is the cheapest tariff for them, often, they will not avail themselves of it and will pay over the odds.
I think that gets to the point. As the hon. Gentleman quoted, Ofgem says that suppliers should not sell a customer a product they do not fully understood or that is inappropriate for their needs. My slight worry with his amendment is that if we are publishing simply a list of tariffs, it will be very difficult to look at individual needs within that. There needs to be more contact between the supplier and the customer to discuss these individual needs, rather than a simple table for a customer to stick a pin into to choose a tariff.
I absolutely agree. A good consumer world would be one where, three times a year, there was a table, a contact phone number, an e-mail address and a website for those who wanted to check all the implications, but also a little explanation of the particular characteristics of a tariff, together with the price. Then there would be the good practice referred to in the conversation, What is good for you? However, a person would also be told about the cheapest option on offer from ScottishPower, npower or whatever.
New clause 4 has been tabled by the hon. Member for Tunbridge Wells (Greg Clark) and his colleagues, and signed up to by my hon. Friends and me. It would implement an additional measure to do what we have been talking about and ensure that the cheapest tariff is available on bills sent out by companies. A person should receive a bill and, in addition to the things they are now going to be told, they should be informed of the cheapest option.
We are on the way to improving the system, but it has been terribly slow and people have paid hugely over the odds. The poor have been greatly disadvantaged, and I hope the Government will be at least as robust as they have sounded recently, and indicate either that they will accept the amendments and new clauses, or that they will insist that Ofgem implement those measures later this year, unless there is a marked improvement in the ease with which customers can choose cheaper and clearer tariffs. This is an important issueit is one of the biggest energy-related issues in the countryand I hope the Minister will be responsive.
The amendment and new clauses are bound together by the desire to give more information to consumers. There is a growing sense that consumers do not have enough information to make real choices, and the Bill provides us with a vehicle for making the necessary changes that would give people the opportunity to make informed choices and ensure that they receive the best deal available.
Amendment 36 has significant validity. A consumers only being notified three months after a tariff has changed is something we would simply not accept in any other aspect of our lives. I hope the Minister will come forward with a positive response. If she will not accept the amendment, I hope she will indicate how the matter could be addressed in another way.
The background to the legislation is the perception on the part of consumers that they are not getting the right deal from their energy companies, although they cannot tell. There is too much opaqueness and a sense that although retail prices go up quickly after wholesale prices rise, they do not come down as quickly once those wholesale prices decline. We know that Ofgem held an investigation into that, but it looked only at whether there was a general market failure across a range of companies; it did not look at the behaviour of specific companies. Together with the Liberal Democrats and others, we are keen to ensure that consumers are given as much information as possible in order to choose.
Companies are already beginning to go down the route of giving people more information. They recognise that there are some aspects of peoples bills about which they would like greater clarity. For example, companies are now providing details about the extra charges in bills that have nothing to do with the actual electricity bills. ScottishPower is incorporating elements that state that wholesale energy costs account for 54 per cent. of peoples bills; delivering energy to their homes accounts for 19 per cent.; looking after the energy account accounts for 18 per cent.; and the VAT and Government obligationsrenewable energy, social incentives, the carbon emissions reduction target, profitability of retailers and other aspects accounts for 9 per cent. Companies are telling people that they should be aware of how the bill is broken down. Centrica uses a rather effective radiator symbol to indicate how the different elements stack up in peoples total gas bill, and it uses an energy efficient light bulb symbolI am glad to sayto show how they apply to its electricity bills.
First Utility is perhaps the company that has led the way. Its starting point when taking on a new customer is to equip them with a smart meter. It believes that a smart meter can be used properly only if people understand what they are paying for, and what the opportunities and options are elsewhere. The bill shows people how many kilowatt-hours they have used per month, and the cost for each of the previous four months. It gives a breakdown of the hours of the day when consumption is high and when it is low, so that people can begin to understand what might cause that, and react to any surprise elements. It gives an hourly-spend figure and considers the four-week usage elements as well. The consumer can therefore look at that bill and say, I understand why I am paying this much money. I understand why I am using more energy at this time of day, or I am surprised by that. What is running in my house that is using up so much electricity? What can I do to address that issue and further reduce my bills?
It is said that smart meters will not necessarily reduce peoples bills, but they will if consumers chose to use them intelligently. They give the power to the consumer. Other things such as smart grids will in time reduce demand but the key element of the smart meter is that it will ensure that consumers are in charge of their consumption patterns and tariffs.
We are keen to push things further. The new clause is straightforward. It simply says that consumers would be told on their bills what tariffs they were on, which would be the cheapest tariff available to them and how they would go about switching to it. The hon. Member for North Southwark and Bermondsey referred to changes that Ofgem is bringing in, but the annual statement does not provide the up-to-date timely information that consumers require and would find helpful. It shows the comparison only between the consumers tariff and the standard direct debit rate, not between their tariff and the one that would be the cheapest and most appropriate for them.
The new clause is a starting point, and we have tabled it in a way that we hope will be extremely easy for Ministers to accept. We would like to go much further, but by going for a modest initial approach we hope that the Minister will say yes, and that we can then explore further. I realise that that is a vain hope, but there is no reason to lose hope this early in the afternoon.
We think that other things should happen in due course. Consumers should be empowered by having information on their bills about how their household consumption compares with that of similar households in their area. First Utility will be doing that shortly, so it is clearly technically possible. It means that the consumer can make an active comparison between the electricity and gas they use and what would be expected for a house the size of theirs.
They should also have information about the environmental charges, because if we want to engage people in a real debate about climate change and energy efficiency, they will need to know what they are paying for those things. That information is hidden away rather opaquely in their bills, which means that we cannot have this important and honest debate with the public. If they know what they are contributing to the costs of the renewables obligation certificates, the European Union emissions trading scheme and the carbon emissions reduction target, they can say, Okay. I think Im getting value for money. I think this is important. Otherwise, we will have an abstract debate about moving in the right direction, without the public ever understanding what amount they are contributing.
I also hope that the levy for carbon capture and storage will be a clearly explained part of the Bill, rather than something tucked away in the figures, so that people can see what their direct personal contribution will be. I hope that that will enable us to have an honest debate about pricing. Those measures put the consumer in charge and enable them to make the right choices about the right pattern for them.
I understand the appeal of new clause 18 and why the hon. Member for North Southwark and Bermondsey has chosen to table it, but we have to beware of perverse consequences, as the hon. Member for Angus mentioned. If we were to go down the route proposed in the new clause, it would be possible that a company wishing to introduce a new tariff could do so only by removing an existing one that might be popular. The wording does not make it clear whether historical tariffs would be allowed to be maintained, or whether when a new tariff was introduced people would be forced to migrate from an existing one that they might have opted into, to something that may or may not be as good for them.
Many of the tariffs on offer are clearly time-related; they are linked to people committing to a certain price over a period of months. That may make it more difficult, according to when the time scale is to be introduced and the particular publication point at which it could happen. We understand the principle and thinking behind itit is intended to enhance simplicitybut we need to be persuaded that there will be no perverse consequences.
The driving point is to give consumers more choice. A key area in trying to deal with fuel poverty is to ensure that consumers actively consider their opportunities to switch. In an earlier debate on the Bill, we heard about the range of issues and how complicated it can be to switch. Many people start the process but do not continue to the final act of switching, because it seems too complicated and they cannot be certain that they will be better off. We want to ensure that consumers have that information, so when they try to make an accurate comparison they can be in no doubt as to what is the best tariff to suit them and their circumstances.
This has been a very interesting debate. We have heard a lot of suggestions about what is best practice, and the hon. Member for North Southwark and Bermondsey has raised many cases of the very worst practice.
First, I need to look at the technical details of amendment 36. It seeks to amend clause 18, to extend the list of provisions in the Secretary of States powers to include the ability to set a minimum notice period for suppliers to give consumers of changes to their energy tariffs. Clause 18 is designed to prevent the exploitation of market power, which leads to generators obtaining excessive benefits. The notification of tariff changes is therefore out of the scope of the clause.
In any event, clause 18 applies only to generation licences. The amendment would require the modification of supply licences and would therefore need to be a self-standing provision to be effective. I suggest that the amendment makes no sense in terms of the clause against which it is tabled. Having said that, I have every sympathy with the sentiment behind the amendment. Both the Government and Ofgem recognise that energy tariff changes are a matter of concern and, of course, action is being taken to address those issues.
I will deal with the issues, even though I am making the case that the amendment is out of the scope of the clause. Following its probe into the energy retail markets, Ofgem highlighted the need for suppliers to notify customers of a price increase as soon as possible, and preferably in advance. It also announced a number of licence modifications effective from yesterday. Those modifications included an extended period of 20 days for customers to notify their supplier that they wished to switch tariffs following a price increase. When customers notify that they want to switch, the price increase will not apply to them. There is a requirement for suppliers clearly and prominently to explain to consumers the right to switch in order to avoid price increases, and extra time for consumers in debt to switch after being notified of a price increase, to give them an opportunity to clear their debt and switch.
It is quite clear that Ofgem has made a number of responses to the issues raised over a period of time by many hon. Members and by the Government. The question that we have to ask, which is clearly posed in this debate, is Is this enough? I do not think that it is, if energy companies can still take 65 days to notify. I am told that energy companies are generally taking much less than 65 days to notify, and Ofgem has made clear what is expected in terms of best practice. It has also said that it is keeping the matter under review. I intend to draw this debate and the strong feelings expressed here to Ofgems attention and ask it to address the matter urgently.
I understand the Ministers point on the technicalities and I am grateful for her tone on the substantive arguments. It should not be that a supplier should preferably notify a customer in advance. Does she agree that there is no excuse for a supplier of a product not telling somebody about the cost of that product in advance? I know of no other regularly bought and sold product in this country that somebody could buy or sell without knowing that the price has increased for a week, two weeks, a month, two months or three months. Does the Minister agree that that is unacceptable? The position should move to informing in advance and to giving people the opportunity to change product or supplier.
As I said, I have every sympathy with what the hon. Gentleman has said. We have to allow Ofgem to work this through because if energy companies have to give prior notification to every customer, they will need a mechanism that requires a lot of people to be engaged in transferring the information at the same time.
Under the current arrangement, companies can spread the notification over a period of time. That makes a lot more sense administratively; a company could get so many people in to do a particular task and not need them again until there was another price rise or tariff change. One has to acknowledge that it is not absolutely clear how the transfer of the information at the same time would be organised cost effectively. If something costs more money to do, the cost is passed to consumers.
We need Ofgem to look into the situation in great detail. As the hon. Member for North Southwark and Bermondsey said, the current provision means that only those who have the ability to know will know, but those who do know have a new opportunity to say that they wish to cancel, and they will not bear the penalty of the increased tariff. We have made some progress, but I ask, as the hon. Gentleman does, whether it is enough. I do not believe that it is.
I cannot be alone in having received some helpful phone calls from the Government asking whether I am in debt and worried about my financial security. I am sure that an automated telephone call could be generated to allow people to know that in a months time their energy bill will be altered. I cannot see that that would need armies of people.
The hon. Lady may be right. All I am really saying is that we made the position clear; the Secretary of State for Energy and Climate Change, when he gave evidence last October, said:
I do not think it is acceptable that customers should have to wait 65 days to be informed of price rises. Ofgem have a specific mission that the best practice is notifying consumers of a price rise as soon as possible, and preferably in advance...I think 65 days is a pretty long backstop.
We have made it clear where we stand. A mechanism needs to be found.
I was about to intervene before the Division bell went. I apologise for not being at this mornings sitting. While I find the Ministers remarks, in response to my hon. Friend the Member for North Southwark and Bermondsey and the hon. Member for Wealden, to be conciliatory and understanding, the reality is that in October the Secretary of State, no less, said that the situation was unacceptable. The Minister of State says, in this Committee, that it is unacceptable. She said that my hon. Friends amendment is flawed, and we accept her understanding of that. Surely, all she need do is say to the Committee that she will bring back, on Report, a new clause that either instructs Ofgem to instruct the companies, or instructs the companies themselves, to have an appropriate scheme in place by a specific date. Why will she not just simply do that?
No, on the contrary. It is reasonable that Ofgem has had an opportunity to consider the issue. It has said that it is looking at it. We all agree that something more needs to be done, and some things have been done, as I have described. There will obviously be a further opportunity for me to be questioned on the issue.
The Committees proceedings have been conducted with a real sense of co-operation and a real desire to achieve outcomes for some of the poorest customers, particularly the fuel-poor. Ofgems record, however, has been deplorable. The Minister and the whole Committee know that Ofgem has been one of the most useless and toothless organisations it has been possible to invent. No Minister of State should simply say, Im going to pass this on to Ofgem to consider in the fullness of time, and at some point in the future people might get an account sent to them by which the price increase is indicated on time.
I have made my position clear on all counts, and, as I have indicated, I will be in touch with Ofgem. I know that work is being done, and I will see that I am in a position to report further to the Committee. [Interruption.] I should make some more progress.
I will give way on this occasion, but we need to have some regard to our lack of progress. We still have a lot of new clauses and amendments to cover, and I would like to make some progress.
I am most grateful. The Minister has been kind during the whole process. I am, however, confused. The Minister welcomed the fact that action could be taken on this important issue, but Ofgem is not flavour of the month with many people in the industry because of its inability to get real involvement in those areas. Thirdly, we have the Minister later taking additional powers. The whole thing is confusing. Why does she not only simply tell us that something needs to be done, but take the opportunity to come back on Report with an inclusion, or even an acceptance of the new clause tabled by my hon. Friend the Member for Wealden? The Minister should do something in the Bill, so that we all know that when she says that there are things to be done, she really means it.
The hon. Gentleman asks that I bring something back on Report and do something in the Bill. That is not necessary; we want to get action, and action by Ofgem does not require further provision in the Bill. I have undertaken to ask Ofgem urgently to address the matter.
I shall move on to new clause 4, which aims to enable the Secretary of State to modify licence conditions for electricity and gas transmission and to supply licences. The purpose of doing so would be to require that customers bills provide information on the suppliers lowest tariffs. The provision of clear and transparent bills is critical for the effective functioning of the electricity and gas markets, so I have some sympathy with the sentiment behind the new clause. Ofgem has consulted widely on proposals to improve customer information, and has received views from a range of organisations, including consumer groups. I support the changes that Ofgem has made. It is fair to say that whatever we think of Ofgems past record, the evidence we have received and the evidence before our eyes shows that Ofgem has recently made changes that we all ought to agree have been more in the interests of consumers.
As a result of those changesthe hon. Member for North Southwark and Bermondsey referred to thiseach domestic customers bill will need to display the exact tariff name; a comparison of the customers consumption in the period covered by the bill with the corresponding period in the previous year, if available; and, except where a customer has been with a supplier for less than 12 months, the customers consumption for the past 12 months in kilowatt-hours, and the projected costs in pounds per year if the customer remains on the same tariff and uses the same amount of energy.
Customers will be entitled to an annual statement that contains this information plus the principal terms and conditions of the tariff. It will also point out any premiums or discounts that apply to the tariff as compared with the suppliers standard monthly direct debit tariff. The statement will contain a reminder that the customer can switch, along with advice on how to do so. Ofgem has chosen comparisons with the suppliers standard monthly direct debit tariff in order to help inform customers of the offers available to them. This is because it is considered more practicable and helpful than comparing a customers tariff with the cheapest available offer. That might not seem obvious, so I would like to explain why we think that is the case.
Suppliers standard monthly direct debit tariffs are widely available, so they can act as a benchmark when making a comparison with all other tariffs. This is not the case with suppliers cheapest tariffs, which tend to be temporary, introductory offers or only available online. These would not be available to all customers, due to their circumstances or status with the supplier, and may not provide the best deal in the longer term.
I hear what the Minister says and I understand her second point, but she has to accept that not everybody has access to direct debit. Millions of people do not and there are othersmillions, I am surewho do not want to use it because they do not trust other people to take the right amount from their bank accounts. Could she just accept that direct debit is not a proper or reasonable standard because for many people it is not available?
The hon. Gentleman is arguing a case about the cheapest tariff. My argument is that if there needs to be a tariff for comparison, which is what the amendment seeks, then the direct debit standard monthly tariff is the most appropriate benchmark. So it is not a case of saying that that is what people should go on to, but it is freely available and commonly used, and it is Ofgems and our view that it is the most appropriate benchmark. That is the only context in which I raise that tariff.
the cheapest tariff available to the customer from their supplier.
That would by definition exclude tariffs to which they were not entitled. She might also note that one of the things that annoys people most is that they get an attractive introductory offer and as soon as they have been ensnared, the prices start going up. That causes a great deal of anger.
I agree with the hon. Gentleman entirely on that point, but he is proposing something that I cannot foresee being practicalthat for every single individual the energy company could provide the cheapest tariff for that individual, as opposed to its cheapest tariff. There is a real difference, and in order to provide the cheapest tariff to that individual person and household, it would be necessary to know a whole raft of answers to questions about the circumstances of that individual household. The general tenor of debate on these issues has been about the cheapest tariff that the company offers. I took that to be what the hon. Gentleman referred to.
I expect Ofgem to continue to work with energy suppliers, consumers and consumer representatives to ensure that consumers have good information about the best electricity or gas deals and how to switch to them. It is also important that consumers understand their consumption, so that they can reduce it and their emissions as far as possible.
I turn now to new clause 18, which aims to require the Secretary of State to limit by regulation the number of retail tariffs offered by energy suppliers to no more than 10, within six months of the Bill becoming an Act of Parliament. The hon. Member for North Southwark and Bermondsey, who proposed this, said that it was arbitrary to pick on 10. It would be difficult to set a specific number, as distinct from saying that it would be desirable for companies themselves to operate a limitto help with information and to enable people to get the best dealin order to avoid unnecessary and useless tariffs. We would all want to encourage that. To set a specific number does create problems.
It is crucial to the efficient working of the energy market that consumers be able to engage fully with and understand the range of products available to them. Again, I have every sympathy with people who are currently baffled by the array of different tariffs on offer. Like most people in this room, I suspect, I have not delved into this issue in any depth because it is daunting and I do not have the time. We all recognise the difficulties.
However, while undoubtedly well intentioned, the new clause would have an unintended and detrimental impact on innovation and choice. That risks higher prices for consumers, and may also mean that the introduction of tariffs that meet real consumer needs and wants would be slower. We have seen in recent years the growth in popularity of online tariffs and the advent of green tariffs. We can expect further tariff innovations associated with smart metering, such as the new time of use tariffs. If the new clause were adopted, we could anticipate that tariff innovations such as these would be less likely to be introduced and would be introduced more slowly, as suppliers would be more cautious about introducing innovative tariffs that usually have a small and limited market.
In addition, the new clause would make it more difficult for suppliers to offer a range of tariffs tailored to customers needs. For example, there are now tariffs with or without a standing charge, which will appeal to different customers depending on whether they consume large or small amounts of energy. We should also not forget the existing range of social and discounted tariffs aimed at helping the most vulnerable consumers to meet their energy needs. In general, the ability to offer a range of tariffs that can more fully meet consumer needs and enhance the overall competitiveness in the market, leading to lower prices, is of course a positive one.
The critical issue is ensuring that consumers can understand what is on offer and can easily find clear and comprehensive information that will help them make the right choices regarding the most cost-effective energy supplies for their circumstances. Lack of clarity and transparency is the real issue. That is why Ofgem is taking action to address confusion about the range of tariffs available and ensure consumers can select the best tariff for their needs. It has introduced new rules to make suppliers marketing clearer, improve information on all consumers bills and require suppliers to provide customers with a detailed annual statement from this year. The statement will include a comparison of the customers current tariff with their suppliers standard monthly direct debit tariff, as I said, and a reminder that customers can switch. That will help them to establish whether they might be able to move to a cheaper tariff.
Ofgem has also introduced new overarching standards, including requirements that suppliers must not sell a customer a product or service that he or she does not fully understand or that is inappropriate for their needs and circumstances, or offer products that are unnecessarily complex or confusing. Most importantly, Ofgem will be monitoring the effectiveness of the remedies; as part of the process, we expect it to review whether the changes have proved sufficient to help consumers understand the range of tariffs available to them.
New clause 19 requires Ofgem to publish a full list of available energy tariffs in the national, regional and local press at least three times a year. The published tariffs would be fixed and be the only ones available for the six months following publication of the list. It is, of course, important that consumers should have easy access to the information that they require to understand the full range of tariffs.
Following its probe into retail energy markets, Ofgem is taking action to ensure that consumers are aware of the range of tariffs available and can select the best tariff for their needs. As I set out earlier, customers will get with their current tariff a comparison with their suppliers standard monthly direct debit tariff and a reminder that they can switch. That will help them work out whether they might be able to move to a cheaper tariff. In addition, Ofgem has introduced new rules that require written estimates to be provided prior to the completion of door-to-door sales, to help prevent mis-selling.
Consumer Focus also plays an important role in overseeing the switching and price comparison websites. Consumer Focus accredits reputable price comparison websites through the confidence code, its voluntary code of practice. Accredited websites help consumers decide the best deal for their circumstances, by comparing their current suppliers tariffs and usage with those of all the major suppliers.
I am not sure whether it was the hon. Gentlemans intention to limit the introduction of new tariffs, and changes to the rates of tariffs, but that would be a consequence of the drafting of the new clause. Such a requirement would limit customer choice and significantly undermine competition by limiting the opportunity for the introduction of new tariffs, or the amendment of existing onesa point made by the hon. Member for Angus. It could also lead to higher overall prices for consumers. If tariffs are fixed for six months, suppliers would probably load an extra risk premium on to customers because they would not be able to respond to price changes and price shocks in the wholesale market. Furthermore, fixed rate energy deals suit the needs of some consumers, but not all of them.
The debate has covered a number of important issues related to energy tariffs. All of us consider this to be a field where many unsatisfactory practices still continue. Ensuring that consumers can understand their own bills and the other options available to them, and can be confident that they will not get hit with price rises without appropriate forewarning, is central to the delivery of the fair deal for consumers to which the Government are committed. However, a number of measures have been implemented recently to address those issues and we look forward to seeing more action from Ofgem in due course. I therefore believe that the hon. Members amendments and new clauses are unnecessary at this stage.
The Minister has given a careful and gentle reply, but consumers need a robust ministerial response to an organisation that has existed for many years, and which the British public view as one of the most feeble regulators. As my hon. Friend the Member for Harrogate and Knaresborough said, Ofgem has been pathetic in upholding the interests of consumers over the years; it has always been slow off the mark and behind the curve. It is always unwilling to be tough enough for the utility companies and it has always responded belatedly and slowly to public pressure.
To be fair, however, Ofgem has moved in recent months and I have outlined its current position. However, it is not acceptable that we should have to wait for it again to consider when it will move next. My hon. Friend and I have indicated what needs to happen. If the Government are not willing to table a new clause or amendment on Report to ensure that people know in advance what their bills will be, we will do it for them. I believe that all Opposition parties and a significant number of Government Back Benchers would support that. The Government ought to realise the way the wind is blowing and join those who see the need to stand up for the consumer. I hope that the Minister will not resist that too much.
I am also minded to try to persuade my Opposition colleagues that, when they choose subjects for Supply days, they should table a motion along the lines of, This House has no confidence in Ofgem, with a proposal for reducing the salaries of those in charge until they understand the implications of what they do. We have to get the message across. I hope that those who listen to and read our deliberations understand that some of us think that theyparticularly the poor and disadvantagedhave been ripped off and have not been supported by the regulator, in all the time that it has had power. I do not think that I can be clearer. If, after the general election, there is not an overall majority, Ofgem had better watch out. [Hon. Members: Oh!] I hope it gets the message loud and clear.
I have dealt with the issue of needing to tell people the price in advance. I will not talk at length about the benchmark tariff, but I wish to respond to the Ministers reply to my point. I understand the difference between the benchmark and the lowest tariff available to the consumer. I also understand that every household has a different pattern of use and that what may be cheaper for one family may not be cheaper for their neighbour.
Using the standard monthly direct debit figures as a benchmarkthey may indeed be the standard lowest priceimplies, by definition, that people are being incentivised to go for direct debit. That is not an option for a lot of people and many others do not want it as an option. Some people will never trust the system to take money from their bank account. Neither will they ever trust the person who receives the money to control when that happens.
Something has struck me. If a companys cheapest tariff is an online tariff, what is the value in telling consumers who cannot possibly go online about that cheapest tariff?
That is why we have to try to get an understanding that works and is available for everybody. We have been logical, because we have said that there should be no difference in the unit cost whether one pays online, through direct debit, by cheque or by prepayment meter. The Ministers point is perfectly valid if we agree that there should be different rates depending on how one pays. If there is no difference of rate, however, that issue does not arise. We can then argue that a standard tariff of a monthly payment might be the cheapest way to do it.
On the number of tariffs, there could be more felicitous or accurate drafting to make sure that we are not seeking to get everybody to move to a new tariff. The intention behind our proposal is that only a limited number of tariffs should be available, but that does not mean that they cannot change over time.
I am open to the argument that there should be eight tariffs rather than 10. The great god choice is not as wonderful as people often proclaim it to be, and socialists in the Labour party do not normally argue that it is what everybody needs most. Our experience with the utility companies tells us that people can have far too many choicesif they cannot understand what the choices are, they have no choice at all.
New clause 19 is not intended to be inflexible, but there would be merit in having some rigour or discipline in the frequency with which people can change the prices. I suggested that the tariff should be advertised three times a year, or quarterly. Most people pay quarterly or more frequently, and very few people pay less frequently than that. That comes back to the initial debate about when people should be told about price rises.
I do not see any reason why there would be the great administrative burden mentioned by the hon. Member for St. Albans in her intervention. If people were to know three months in advance that there was going to be a price rise, they could receive that notification in the batch of three-monthly bills. That would cover most people in the country who get a bill, and I do not see that there would be a great cramping of the style of the utility companies.
We will go away and reflect on the best drafting of the new clauses and amendments. Initially, we were minded to press the amendment to a vote, but I buy the Ministers point about the amendment being more appropriate for a different stage of the Bill, so I will not seek to get colleagues to divide on what is an inappropriately placed amendment. However, I give notice that an amendment, or a new clause, will be tabled on Report, to ensure that Ofgem does its job better and that the utility companies tell people in advance how much their energy will cost and address some of the other issues. I hope that, by then, the Minister will have realised that it will be in her interest, as well as that of the consumer, to support the measure. I beg to ask leave to withdraw the amendment.
I do not intend to keep the Committee long, but I should be grateful if the Minister clarified a few points. Under the market power licence condition, Ofgems powers have been increased due to suspicions that the constraints have resulted in gaming by some of the energy companies, particularly in Scotland. The interconnector to England is limited to 2.2 GW, which is insufficient to cope with the constraints in Scotland, although there are plans to upgrade it to 3.3 GW by 2011. As renewables uptake increases and fossil fuels and nuclear power come off line, Scotland will become more reliant on base load from England and larger connections will need to be made.
There is some ambiguity about whether that new power is to overcome balancing issues in the grid or whether it is to identify gaming, and it would be helpful if the Minister set out what the powers are intended for and how she expects them to be used. There is concern that there is no definition of what constitutes a constraint, and the authority has the ability to determine what that might be. Again, it would be helpful if the Minister set out her interpretation of the concept of a constraint.
We also need greater clarification on what would be considered as gaming. As the volume of renewables increases in the mix, there will be a need for more gas plant as a back-up capacity, which will run only for limited periods. That would inevitably be more expensive per kilowatt-hour, as there will be a need to recoup the capital costs over a shorter operating period. That could be considered gaming, although it would be a natural commercial activity. I would be grateful if the Minister clarified whether she would consider that to be gaming.
The legislation should not be drawn in such a way as to discourage the development of peaking plant available when there is a need for a small amount of extra capacity in times of great demand, as that could discourage investment. We need a distinction between what was referred to during the evidence-taking session as a good spike, a signal that demand is outstripping supply, and a bad spike, where there is considered to be an abuse of market power. I would be grateful if the Minister provided further clarification on those issues before we continue with further consideration of the Bill.
I want to raise some concerns about the market licence condition. After hearing the evidence from Ofgem and the energy companies, I remain slightly confused as to what the position is, so I would like to press the matter further.
As I understand it, Ofgem takes the view that it would like more power to control excessive returns in the wholesale market and has particular concerns about balancing market constraints in the grid system. As has been pointed out, the main constraints appear to be in the Cheviot gap and the interconnect between Scotland and England. ScottishPower has raised the prospect that the situation has a very adverse effect on the two main Scottish generators and the ability to invest in future plant.
When we explored the issue in evidence, it appeared that the main problem was that there should have been a major upgrade of interconnection before the adoption of the British electricity trading transmission arrangements, or BETTA, system that brought the Scottish grid into the UK-wide transmission system. That was not done, and the result has been that due to weaknesses in the grid, the present system of constraints has arisen. As I understand itperhaps the Minister can clarify thisgenerators can be paid not to generate electricity at certain times when the grid cannot take the electricity because of a lack of capacity. That is a concern.
As the hon. Member for Wealden said, when the amount of renewables changes on the grid, and as we see other types of generation, coal and gas could increasingly become a back-up system for renewables when not enough is produced from wind or whatever. It could become very difficult for them to come on the system if capacity was constrained. My main concern is that while Ofgem appears to take the view that companies might deliberately exploit the system to make excessive profit, it does not seem to me that it produced any concrete examples in its evidence of when that has happened. It mentioned that it had set up the Competition Act inquiry, but apparently the matter was not pursued.
It is fair to say that there is a lot of disagreement between Ofgem and the companies about the real reason for ending the inquiry. Can the Minister tell us anything more about that? In particular, will she tell us why she feels the Competition Act cannot deal with the matter? I would have thought that if there was any evidence of an electricity company abusing its market position in such a way, the Competition Act should have been able to deal with it.
When I pursued the issue with Sarah Harrison of Ofgem in the evidence session, she stated that it was important to think ahead. She said:
In a world that envisages a connect-and-manage approach to transmission access, those opportunities for constraints on the network are going to get even greater. Therefore, there is the risk that undue exploitation can be exercised.[Official Report, Energy Public Bill Committee, 5 January 2010; c. 72, Q172.]
In other words, Ofgem seems to be of the view that someone in the future could do something to benefit from the constraints, although there is no evidence that that has been done at present. Sarah Harrison also quoted a figure of £125 million as the cost of such constraints as evidence that the clause should go through. However, on being pressed by me, she conceded that this was the cost of constraint within the whole grid system, rather than that due to abuse of the constraint system. Does the Minister have figures if she feels there has already been abuse within the system, as opposed to constraints over the whole system? Again, if I understand it correctly, that arises because of deficiencies in the grid system, and not necessarilyalthough it could be the casedue to abuse. It is important to make that distinction.
If we are to have a truly open market in energy, we cannot also try to restrain generation in this manner. ScottishPower made a point about the adverse effect of risking investment in new generation in Scotland and therefore security of supply. The point, which was explained by Rupert Steele during his evidence, is that in a commodity-only market, there needs to be a way to signal the value of capacity to stimulate investment. If restrictions are placed on the balancing market and only short-run marginal costs went into the equation, there would be less incentive to invest in new plant. I reiterate that that could become important when we are looking at more renewables, with regard to where the base load comes from. Not all plant can be turned on and off as necessary. In essence, it seems that rather than necessarily being a symptom of use of the market, the constraints might well signal the need for greater investment.
The clause might have the perverse effect of discouraging new investment. If there is evidence of the consumer suffering as a result of what is happening, clearly the market power licence condition is fair and should be pursued. I would like some reassurance, however, that we are not going down a road that will endanger necessary investment in the grid system and future generating capacity.
Before I answer the specific questions that have been asked, it might help the Committee if I try to set out what is embodied in the clause, because it is easier to get the framework.
The clause sets out the framework within which the Secretary of State will have the power to introduce a condition on generation licences to protect the consumer from undue exploitation of market power in the electricity balancing market. Ofgem has identified an aspect of that market that is vulnerable to the exploitation of market power, to the detriment of consumers. In March, it consulted on potential solutions to the problem, including the introduction of a specific licence condition. That consultation revealed that one example of the exploitation might have led to costs of up to £120 million to the consumer during the 2008-09 financial year alone.
The problem area being targeted is unique to the electricity balancing market. As electricity cannot be stored, National Grid has an obligation to ensure that supply and demand are constantly in balance. In some areas, the transmission lines that transport the electricity do not have the capacity to move excess generation to the areas that need it. Such situations are known as transmission constraints. I was asked to define constraintthat is the definition. In such scenarios when a constraint arises and there is generation one side of it that cannot be received at the other side, National Grid will often rely on the help of a number of plants either side of the constraint to increase or decrease generation and so maintain balance.
Occasionally, due to the location of a constraint and the spread of available generation, National Grid will find itself dependent on a specific company to alter its output to help to balance the system. That can create an opportunity for the generator to exploit that market power and charge over-high prices for its services. Those excessive fees are ultimately passed on to the consumer via electricity bills, and that is what we wish to prevent by taking the new power.
It is vital that the problem is addressed nowthe hon. Member for Angus referred to this. In the coming years, the transmission network is set to be upgraded considerably, and that work will ultimately remove the conditions that provide the opportunities for the exploitation of market power. In the short term, however, the practical implications of that development and maintenance of the network will be an increase in transmission constraints and hence the potential for exploitation. I believe that the clause provides a proportionate and effective way to ensure that the consumer is protected during the coming years. Importantly, it is a targeted solution that will avoid regulatory uncertainty, and therefore any impact on much-needed generation investment.
Four specific conditions have been outlined under which a generator may be deemed to have received an excessive benefit as a result of a transmission constraint period. I emphasise that this is all about excessive benefits, not normal commercial opportunities that arise in the balancing of the electricity market. The first condition is when an electricity company has acted in such a way as to make it more likely that National Grid will be forced to accept its offers and bids in the balancing mechanism at a high price. For example, it may withhold the electricity produced by a particular plant from the market because it predicts that National Grid may later rely on that plant to produce electricity to balance the system. The company is then able to use a resulting position of market power to charge an excessive price for that increase in generation. That is probably what the hon. Member for Wealden was referring to when he asked if it was gamingI imagine that it is the appropriate term.
The second condition applies when a generator takes advantage of market power during an existing transmission export constraint and charges National Grid an excessive amount to reduce its generation, knowing that the system operator will have no choice but to accept. The third condition refers to a bilateral balancing contract with National Grid known as an inter-trip. Inter-trips are an automatic switch that can be fitted to a generation plant. It will trip if the transmission system becomes overloaded and it allows National Grid to run the system at a higher capacity than would otherwise be possible. Licence holders are able to charge an arming fee to allow the set up of the controls on their generation plants. There is evidence to suggest that arming fees for commercial inter-trip services have not always been priced reasonably and the clause aims to prevent such exploitative behaviour.
Those three conditions correspond with those scenarios that need to be tackled to protect the consumer. Although it is not our intention to go further, we need to be sure that the Government have the power to address any related scenarios that come to light as we consult on the licence condition, and that is the purpose of condition four. Although it is not expressly set out in the clause, our clear intention is that the licence condition will relate only to situations where there are transmission constraints, and it will be applied to all generators on a non-discriminatory basis. Our aim is not to prevent generators from flexing prices or following normal market behaviour. The conditions have been specifically designed to target behaviours that enable generators to earn excessive profits where restricted transmission capacity allows them to do so.
I shall now try to answer some of the specific questions asked. The hon. Member for Angus asked about the Competition Act inquiry into the pricing and dispatching of ScottishPower and Scottish and Southern Energy. It was launched in 2008 by Ofgem to look into a problem with transmission constraints on the Cheviot boundary, as the hon. Gentleman indicated. As Ofgem failed to find an infringement using competition law, the case was dropped. Ofgem was confident that exploitative practices had been taking place and believed that the lack of infringement was due to intrinsic limitations applying to competition law in these specific circumstances, as there are often difficulties with defining market power in the electricity market.
We have found that when Ofgem is confident that there is abuse taking place, and companies are charging higher prices or benefiting more than they should, it has been unable to fit the complaint into competition law. That is why it has sought a means of tackling the problem and why we have sought to facilitate that in the clauses on market power licence conditions.
I was also asked how Ofgem had arrived at the figure of £125 million and if that sum related to excess profits or the overall cost of the balance arrangement. Following the evidence session, I asked for clarity on that point, with which I have now been provided and which I shall share with the Committee. Ofgem, in its initial consultation document on the market power licence condition, estimated that in a worst-case scenario, the potential direct costs attributable to undue exploitation of market power in the balancing mechanism could have been as much as £125 million in 2008-09. That is very much a maximum that assumes that every balancing action in Scotland will involve the exercise of market power. That figure is derived by taking the average megawatt per hour price for various balancing actions in Scotland, comparing that with the average price in England and Wales, and then multiplying by the forecast level of Scottish constraints. The higher average price in Scotland is considered to be due to lack of competition and evidence of the exploitation of market power.
Hearing that may not please the hon. Member for Angus, but that is the basis on which Ofgem calculated the figure. It is clearly the worst-case scenario, using constraints that exist between Scotland and England; if they were all the subject of market power abuse, that would be the outcome.
I understand what the Minister is saying, and I look forward to considering in more detail the written explanation, which seems reasonably complex. However, it is clear that there are natural constraints in the system, and it seems unfair to cite the full cost of those constraints as the result of misuse of market power. It appears that Ofgem is saying that its calculation of £125 million is likely to be due to the abuse of market power. However, as we all know, there are constraints in the Cheviot boundary. There are also constraints in other parts of the system, and if Ofgem takes that attitude, it may well make companies think, Do we want to invest if we are not going to get a return, because it is going to push our prices down?
The issue is complex, as the hon. Gentleman has said. Obviously, we do not have the expertise. It is difficult for any of us to distinguish whether natural or normal commercial practices would be involvedwhether a company was gaining some financial reward from an opportunity in the balancing market, or whether it was exploiting the position and gaining an excessive reward because of its market power. That is the judgment that Ofgem has made and the calculation that it had to quantify. It has indicated what the case would be in that fairly extreme scenario.
We must be willing to accept that Ofgem is confident that there have been abuses of market power and that it needs to have an opportunity to make accusations properly within a legal context, when it thinks that that has happened. Of course, there also have to be systems of fairness and accountability, and companies so charged have to be able to make their case. We will come to that later in the Bill. Here we are providing the framework within which such presumed misuse of market power can be tested by Ofgem. At the moment, that appears not to be the case.
Let me try to conclude. The Government believe that the electricity balancing market is currently vulnerable to exploitation, and estimates suggest that there may be a high cost to the consumer. For that reason, we think it absolutely right that we should target such exploitation and ensure that consumers are properly protected until the underlying cause is resolved through the completed upgrade of the transmission network.
I will acknowledge one further point that I was asked about and which I have so far failed to address. It regards the question of whether this is a problem of the need to further upgrade and invest in the transmission network. That is absolutely the case. Over time, with greater investment, we envisage the problem not existing in the way that it does today. We will come on to discussions about investment in the transmission network. The Government are absolutely committed to making such investments, as a result of which the problem will undoubtedly not exist in the same way in future.