Clause 74 - Power to modify energy supply licences: information about tariffs

Energy Bill [Lords] – in a Public Bill Committee at 4:00 pm on 16th June 2011.

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Photo of Luciana Berger Luciana Berger Shadow Minister (Energy and Climate Change) 4:00 pm, 16th June 2011

I beg to move amendment 166, in clause 74, page 56, line 28, at end insert—

‘(2A) The information to be provided about a tariff by virtue of subsection (2) with regards to the amount of the tariff must be guaranteed not to change for a period of 12 weeks.’.

Photo of David Crausby David Crausby Labour, Bolton North East

With this it will be convenient to take new clause 30—Energy tariffs—

‘(1) After consultation with electricity and gas retail sellers, and consumer groups, the Secretary of State shall introduce regulations that make it mandatory for electricity and gas through pipeline supply companies supplying to domestic properties to configure their tariffs so that the initial units of energy supplied are at a lower cost to the consumer than remaining units.

(2) The principles of the scheme shall be—

(a) that the number of lower priced initial units shall represent the average amount of energy required for a household of that size to keep warm, clean and fed to a modest but acceptable standard;

(b) the tariff price for the initial units shall be equal to the medium term marginal cost of the production of that energy;

(c) overall, the new combined tariff should be revenue neutral to the energy supply companies.

(3) The scheme and its tariffs will be assessed and audited by the Office of the Gas and Electricity Markets, who will also be responsible for the capture, analysis, and reporting of all information to the Secretary of State regarding the implementation and management of the scheme.’.

Photo of Luciana Berger Luciana Berger Shadow Minister (Energy and Climate Change)

The aim of the amendment is to ensure that the proposals for the cheapest tariff information are not open to abuse, and that consumers are protected from unanticipated hikes in their energy bills. Currently, consumers are unable to anticipate increases in fuel costs in time to compare prices with other providers. The amendment would ensure that consumers have a fixed rate for long enough for them to conclude whether it is best to remain with their current provider or seek an alternative tariff.

Last Saturday, the Secretary of State said:

“Consumers don’t have to take price increases lying down…If an energy company hits you with a price increase, you can hit them back where it hurts—by shopping around and voting with your feet.”

The amendment would ensure that consumers have the flexibility, time and information to do just that. Providing the cheapest tariff information on bills is meaningless unless the price is guaranteed for a set period. If the price rises the following day and the price that was stated is no longer the cheapest option, the information will be useless to consumers. As the average time it takes to switch between energy providers is five to six weeks, we are asking for a tariff to remain at a set level for 12 weeks to ensure that consumers are provided with the flexibility needed to make informed decisions about how their energy is supplied.

Data from Which? reveal that two thirds of people feel that the price they pay for energy should be guaranteed not to increase for a set period. A Which? investigation last October found that the average household can choose between 89 different tariffs, and that more than a fifth of customers who switch their tariff end up paying more. As reported by the BBC, separate research by Ofgem in 2008 found that of those who switched their energy supplier, more than half did so in response to contact with a salesperson. It found that many who switched following doorstep sales ended up on a more expensive tariff, because they were misled and found it difficult to compare bills. Ofgem also said that customers were bamboozled by a complex system of tariffs, increasing from 180 to more than 300. Ofgem research also reveals that 70% of customers found the number of tariffs on offer confusing. It found that households that failed to compare different energy rates could be missing out on savings of up to £170 a year.

The amendment was tabled in the other place by Lord Whitty. Baroness Northover responded that the Government would take the amendment away and consider it further. She said:

“Such a requirement would limit suppliers’ ability to react to changes in the market and may lead to a more conservative pricing strategy, risking higher prices for customers across the board—in other words, the law of unintended consequences, which we have been looking at in other areas.”

However, she continued:

“We are sympathetic to what the noble Lord, Lord Whitty, intends. We have to give careful consideration to the amendment to make sure that the unintended consequences that I have just mentioned are not brought to bear. I therefore propose to him that we take away the amendment for further consideration, because we understand the principles behind it.”—[Official Report, House of Lords, 31 January 2011; Vol. 724, c. GC288-89.]

Despite what the Minister’s noble Friend said in the other place, we have not seen any reference to those considerations, so I ask the Minister to share with the Committee what consideration he has given to the amendment.

Photo of Simon Wright Simon Wright Liberal Democrat, Norwich South

As members of the Committee will be aware, the first block of units used by many energy consumers is often significantly more costly per unit than subsequent blocks. Energy therefore becomes cheaper per unit, the more it is used. That seems counter-intuitive, and goes against what we want to achieve in the Bill, which is to reduce energy use and tackle fuel poverty. The way in which blocks of energy are priced for consumers seems to be a back-to-front incentive and undermines those goals.

By charging the highest amount for the initial units, those who are trying the hardest to save energy—perhaps because they can least afford it—are paying on average more per unit than excessive energy users. The new clause would undo that position, so that when a reasonable amount of energy for the type of property in question was used, the cost would increase from a low initial unit cost. That provides a more sensible incentive to keep energy use down, and those with low and moderate energy use would see a drop in their bills. A tariff structure of that kind is used commonly in south-east Europe and the Flemish part of Belgium.

Consumers should be able to access a pricing structure for their energy that is revenue-neutral overall for the suppliers, but which seeks to reflect the ambition under the Bill of reducing energy use and tackling fuel poverty. While smart metering is not required for the rising block tariffs that I propose, it would help consumers monitor their energy use, so that they could avoid moving into higher-consumption-priced blocks. I accept that an issue could arise from the new clause for those who are fuel-poor or in circumstances—perhaps medical—in which a high level of thermal comfort becomes a necessity, and clearly we do not want to penalise those groups. However, I hope that the green deal will solve that issue by improving the insulation of homes, thereby enabling a system of rising block tariffs that is equitable for all. A system of dispensation might need to be introduced for low-income households with necessarily high energy needs, but I hope that the Minister will consider the new clause, and I look forward to his response.

Photo of Charles Hendry Charles Hendry The Minister of State, Department of Energy and Climate Change 4:15 pm, 16th June 2011

I shall deal with first with amendment 166. The hon. Member for Liverpool, Wavertree, made the good point that it would not help consumers if information on their tariff went out of date quickly. Her amendment would require the Government to fix the length of time for which the supplier’s lowest tariff was available to a particular  customer at 12 weeks after information about that tariff had been provided to the consumer on their bill. I recognise that the intention of the amendment is to allow customers sufficient time to consider the information on their bills and to act on it before the supplier can move the goalposts and change the price, and to ensure that consumers are confident in the information that they are given by their supplier.

The Bill will allow the Government to require suppliers to inform customers about their lowest tariff and how to switch to it. It is a feature of our competitive market that energy suppliers can react to changes in the market. The amendment would effectively stop suppliers making changes to the price of a tariff in respect of a particular customer for 12 weeks, which is not the intention of the Bill. Such a requirement would limit the ability of suppliers to react to changes in the market, and we remain of the view that that would lead to a more conservative pricing strategy overall, and that it risks higher prices for customers across the board.

The amendment could also lead to discrimination between customers of a particular supplier. Those consumers already on the tariff in question will be given 30 days’ advance notice of a price increase. That is a change that has been made since the Government came to power. It used to be the case that customers could be advised retrospectively of a change, and we believed that that was completely unacceptable. Customers who had been offered a tariff by their supplier would have that rate guaranteed for 12 weeks, which might give them eight weeks extra at the lower rate if prices increased. That would be evident discrimination between new customers and longer-standing ones.

I agree with the objective of the amendment tabled by the hon. Member for Liverpool, Wavertree, which is to ensure that the information that consumers receive is clear and credible, and that they fully understand cost implications when they decide to change tariffs. I remind her, however, that the information on the bill is a prompt; customers must contact their suppliers to switch, at which time they can discuss their energy needs and receive a personalised quote. Any changes to existing offers, or new offers, must be made clear at that point. In addition, suppliers are required to give 30 days’ notice of a price increase, so if customers call to inquire about a tariff that is shortly to change, suppliers will be obliged to make that clear. The customer will therefore be aware of the increase in advance, and can decide whether to go ahead with a switch.

The issue has required careful consideration, and having reflected further on it since it was raised in the other place, we remain of the view that the proposal would result in discrimination between different types of customer. Inevitably, the hon. Member for Liverpool, Wavertree—and all of us—would soon start to receive complaints from constituents, who would say, “I have been with this company for years and I was given only 30 days’ notice of a price change, whereas my next-door neighbours, who joined it two days before the price increase, enjoyed their tariff for another eight weeks.” It would be hard to defend that relationship, because there would be no equity in it. I hope, therefore, that on reflection, the hon. Lady will withdraw the amendment.

When I took on this brief in opposition, I had tremendous sympathy with the issues dealt with in new clause 30. The system seemed illogical on the grounds  of energy conservation and affordability. However, I was persuaded, even before the election, that the sort of change that my hon. Friend the Member for Norwich South outlined would not achieve what we are trying to do. I think we all agree that we want to encourage households to reduce their energy consumption, and we are mindful of the consequences of energy bills on people who are least able to pay them.

The new clause would require the Government to mandate energy companies to use the inverted, or rising block, tariffs system. Under the present arrangements, suppliers are free to respond to consumer demand in their pricing systems. Many tariffs that are currently on offer charge the first unit of electricity and gas at a higher rate, and subsequent units at lower ones. Others take a time-of-use approach and charge less at certain periods—at night, for example—or offer a flat-rate tariff with a standing charge to cover fixed costs. Some suppliers are considering the potential for further alternative pricing structures, including other time-of-use and rising block tariffs.

If we were to mandate a rising block tariff, as the amendment suggests, we would, effectively, be putting price controls on suppliers. Competition would be affected, to the detriment of consumers, who would be denied the wide range of tariffs and opportunities that might appeal to them. Incentives to compete for low-consumption customers would be reduced, and services to such customers might suffer. The incentives for suppliers to sell more gas and electricity would be greater.

Most importantly, I remain concerned about the social impacts of a rising block tariff model. We want customers to reduce their consumption, but we do not want even more of the poorest consumers to cut their energy use to levels that put their health at risk. Evidence suggests that, on average, fuel-poor households have higher energy requirements than non-fuel-poor households. Therefore, many fuel-poor customers who spend more time at home, such as the elderly, those with disabilities, or those with large families, might receive higher fuel bills as a result of such a policy, which might actually increase fuel poverty.

Photo of Tessa Munt Tessa Munt Liberal Democrat, Wells

The Minister will be aware of my extreme interest in the matter. It strikes me as crackers to have a system that allows people to be charged more for their first units. Our whole aim is surely to reduce the use of energy and thereby minimise the energy gap, with which we are threatened at every turn. Surely, the green deal will help precisely those fuel-poor households. As a Government, we should take a flier on this and try to persuade energy companies to act in the interests of keeping energy use down and ensuring that the fuel-poor households save money.

Photo of Charles Hendry Charles Hendry The Minister of State, Department of Energy and Climate Change

My hon. Friend makes a valid point. The green deal will help all households in time—not just the fuel-poor—and all households should be able to consume less energy. It will remain the case, however, that people who have to stay at home because of a disability or long-term illness or large families who are at home more will consume more electricity and gas than people who are out all day. The household with two working parents, where the children have left home, would benefit significantly from the proposal, but the household that the hon. Member for Rutherglen and Hamilton West referred to earlier, where they already  have to use more energy in the winter months and at other times of the year, would be penalised—relative to other parts of the country—because it is simply colder there. The hon. Member for Hyndburn mentioned earlier that he was worried about some households in his constituency, because they have to be at home due to general poverty issues, age and disability. They would also be penalised under the proposal.

I can understand why a range of tariffs is desirable, so that those who can be encouraged actually opt in, but to mandate it would end up hurting most the people who we all believe can least afford to be hurt. We have seen campaigns about other Bills going through Parliament from organisations such as Macmillan Cancer Relief on behalf of those who are at home with terminal illnesses and who inevitably need to keep warm, because they cannot move so much. Again, unless one finds a way of compensating those households in particular, which is difficult, they will be hit by a policy that mandates it. For all the reasons about energy conservation and logic, I understand why it is desirable that people should move towards that sort of tariff, but mandating it has an unintended consequence that would end up hurting people who should not be negatively affected by the proposals. I hope, therefore, that my hon. Friend the Member for Wells will be prepared to reconsider the new clause.

My final point is that part of the way of dealing with the issue is to get new entrants into the market, to get the Co-op coming in as an energy supplier and to get others in that will shop around for the best deal and offer different tariffs. Getting greater liquidity into the sector must be one of our priorities, so that the consumer has more choice. I urge the hon. Lady to decide that mandating it is not the best way of taking the proposal forward for all households.

Photo of Tessa Munt Tessa Munt Liberal Democrat, Wells

I have a close relationship with Good Energy, which works in my constituency, and my understanding is that it has frozen its prices over the past six months, at least, and possibly the past year. If there are good examples of companies, such as Good Energy, that can freeze their prices and if they were identified and advertised in some way, that sets a good example to other companies.

I also want to point out that a number of people suffer from fuel poverty in my constituency, because they have no option but to use domestic heating oil as there is no gas. I know that the Minister is aware of that, because I have raised it several times before.

Photo of Charles Hendry Charles Hendry The Minister of State, Department of Energy and Climate Change

I certainly accept what the hon. Lady says about Good Energy. There is a range of good companies in that area that are coming into the market, and we would be keen to facilitate that process and to enable them to grow more quickly and to provide more genuine competition. On that basis, I hope that the hon. Lady will reconsider her new clause. The off-gas-grid issues are separate, and that is why we asked the Office of Fair Trading to investigate. We will have its response by the autumn, so we will hopefully see a different pattern in place by next winter, because many of us have constituents who have been affected.

With those comments, I hope that those who tabled the amendment, and the new clause that we are considering with it, will decide to withdraw them.

Photo of Luciana Berger Luciana Berger Shadow Minister (Energy and Climate Change)

Following the Minister’s statement, we anticipate further consideration of the issues in the next Energy Bill, so we are prepared to drop the amendment at this stage.

Photo of Simon Wright Simon Wright Liberal Democrat, Norwich South

I will not be pressing this to a vote.

Amendment, by leave, withdrawn.

Clause 74 ordered to stand part of the Bill

Clauses 75 to 77 ordered to stand part of the Bill.