Review of level at which cap is set

Domestic Gas and Electricity (Tariff Cap) Bill – in a Public Bill Committee at 4:15 pm on 13 March 2018.

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Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy) 4:15, 13 March 2018

I beg to move amendment 6, in clause 6, page 4, line 31, leave out “6” and insert “3”.

I must confess that I have been following the past several clauses assiduously by reference to the draft Bill instead of to the actual Bill, although the Government had not made any changes, so I do not feel too out of sorts. However, with this clause, the draft Bill and the final Bill part ways considerably. Fortunately, I managed to realise where I was in time, so we can talk about this relatively short clause, which is on a review of the level at which the cap is set.

The clause is important because it is the clause that decides this is a cap and not a freeze. The requirement on the authority is that it regularly review the level at which the cap is set, on the basis of all the circumstances to which the market has been subject, and whether the cap should be modified or changed as a result of its review. Indeed, the clause requires the authority to publish a statement when it has done that review, as to whether it proposes to change the level at which the cap is set.

For example, let us say that we set a price cap such that it comes in at the end of November 2018. Even if the cap was terminated towards the end of 2020 upon a statement by the Minister that competition had returned to the market and everything was okay, the mechanism, internally to the price cap over its period of existence, would mean that there would be—as matters stand at the moment in this clause—something like four reviews, which would lead to the authority issuing a statement saying whether the cap should stay at its previously agreed level or be raised. As I said, that would be determined by an inevitable consideration of what was happening to wholesale prices, which we know are sometimes fairly volatile.

It might be worth seeking a little clarification on this and assurances on whether we have sufficient clarity in our legislation here, but I assume that if those reviews, or one of those reviews, looked at the wholesale market, and that market had, for whatever reason, dropped precipitously, and it was considered by the authority that that drop was not just a brief drop, but a fairly sustained drop, the authority would reasonably recommend that the cap be tightened—that is, that the top of the cap should come down, rather than go up.

We are making the assumption that that is a necessary part of the proceedings, because, as has been amply laid out, we know that wholesale prices are a factor in any price cap or price freeze. Indeed, as I recall from my conversations with my right hon. Friend the Member for Don Valley about the previous cap, which was discussed amply in this place, the question of what to do about wholesale markets, and how they tucked in to any particular cap or freeze and over what period, is central in constructing any cap in a reasonable way, and allows us to take account properly of the fact that companies subject to those wholesale price changes would necessarily have to absorb them or could have some sort of leeway given through consideration by the authority of how those changes might be passed on in a different cap.

Clearly, that cap, in principle, can work both ways. I am not sure—I would welcome an assurance from the Minister—that the authority would reasonably be required to consider tightening the cap on its review, if it turned out that the wholesale prices determined that it should do so. That is an additional reason why the amendment, which is even shorter than the previous amendment—it has one number in it, rather than a number of letters—suggests that the authority’s review on the level of the cap should be at least every three months, rather than every six months. That would mean that the movement in wholesale prices could be better calibrated against what the cap consists of. Certainly, there have been suggestions that sticking to the requirement for a six-month review by the authority could lead to some clunkiness in the proceedings, because the cap would be in a certain position up to that six-month point, and then it would be clunked up and be in place for another six-month period.

We can imagine what may happen with the wholesale market if we look back over the last year and a half to two years of wholesale prices. If the movements in wholesale prices over the last two years were to be set against the likely period of the first stage of the temporary cap, we would see movements in those wholesale prices that could not easily be accommodated in a set of four interventions in that period. That is why we have suggested the amendment in this way, particularly in the context of the fact that wholesale prices could conceivably go both ways in that period—sometimes quite decidedly so—as they have done over the last few years.

I am sure hon. Members will have different views on the amendment, but it can be seen as strengthening the reasonableness of the Bill in terms of its approach to how we offer tariffs to customers under a price cap, and to how we offer reasonable circumstances to businesses operating under a price cap in which to do their business. We have a joint duty to ensure that the market works reasonably well for companies as well as for customers.

Someone may answer that it is not technically possible to reduce the time to three months, because so much time has to be spent reviewing whether the trend is long term or short term, so reducing the time would not allow anyone to be sure that the trend was a trend. I would accept that point, but failing that, reducing the period to three months would be a wholly beneficial part of the cap, and it would be welcomed in principle on all sides of the debate.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth) 4:30, 13 March 2018

The hon. Gentleman again puts forward a sensible probing amendment that it is a pleasure to think about and speak to, but I will chance my luck and try to persuade him to withdraw it.

The hon. Gentleman is right that the review is a crucial part of the Bill’s effectiveness. Is the cap set at the right level? Is the ability to change the cap clear? Have we set out the conditions under which the cap must apply? We will get on to the conditions as to what success looks like. Is the cap dynamic enough to make a difference in the market?

If I read clause 6 carefully, two words precede the hon. Gentleman’s one-number intervention. In terms of reviewing the cap, the clause uses the phrase:

The Authority must, at least once every 6 months”.

When we had this conversation on Second Reading, I said, correctly, that the opportunity is there for Ofgem to review this cap more frequently than that, should it choose to do so. It can review it on a weekly basis or a three-monthly basis, but it must review the cap every six months. That is consistent with the reviews of the prepayment meter cap, which is already delivering savings of up to £120 a year, as we talked about, and which is what the excellent Business, Energy and Industrial Strategy Committee report recommended. I think that the flexibility the hon. Gentleman is seeking is covered by the words “at least”.

Yet the hon. Gentleman raises an important point: what happens if there are suddenly wild fluctuations in the energy market, which we want consumers to benefit from, and particularly if there is a sustained price fall? I have looked at this a bit. It is a bit like the mortgage market: unless someone is on a tracker rate, changes in the wholesale prices do not always feed into the retail prices. Indeed, these companies make an art, or a science, of hedging their supplies so that they bake in what their margins look like on a future basis. Any sustained price fall would take its time to feed through to those companies’ overall cost of energy provision.

Indeed, companies change their SVTs only once or twice a year, even though those are standard variable tariffs. We had a very interesting conversation this morning in Committee about whether that was a rather benign description—maybe we should be looking to tighten up the language a bit. These variable tariffs vary only once or twice a year. There is an argument that giving Ofgem a statutory duty to review this at least every six months provides an opportunity for the market movement to be greater than it is under the SVTs. I feel that with the words “at least” we have provided in the Bill for Ofgem to react to market movements or any other structural changes that would affect consumers. That flexibility is there.

As always, the hon. Gentleman has thought about these things carefully. As he alluded to, there is a risk that by specifying every three months, given that this is a short-term cap—it will apply for a minimum of just over two years and a maximum of just over five years—we would perhaps create an unnecessary process burden. We want Ofgem to continue to regulate this market well; we want it to continue to bring forward initiatives such as the cancellation of billing backwards for more than 12 months and the work it has announced it wants to do in the wholesale energy markets to ensure that returns are proportionate. I am persuaded that by changing the period to three months, we would create a potentially unnecessary burden that does not deliver anything more than we have already allowed for with the wording of clause 6(1).

Photo of James Heappey James Heappey Conservative, Wells

I got there in the nick of time. While the Minister has been speaking, I have been looking at Ofgem’s tracker for wholesale energy prices. It is clear to me that in the first quarter of each calendar year, prices are particularly volatile and disproportionately higher than in the remainder of the year. In his evidence, Dermot Nolan said that, over six months, those midwinter peaks are ridden out. That means we should defer to his judgment that six months is the right unit, not quarterly.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

My hon. Friend again brings assiduous online research, which is marvellous, and his knowledge of this market, to support the point that Ofgem believes that six months is a proportionate time. The Bill does allow Ofgem—should it be required to do so by market movements, and that volatility persists over a period of time—to make the necessary adjustments. I know that I am on a winning trend, which may not last, but on that basis, I hope the hon. Gentleman is persuaded once again to withdraw the amendment.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

The intervention of the hon. Member for Wells demonstrates why I should not only have been looking at the right Bill in the last 10 minutes, but have brought my iPad with me.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

There you are—I am on my own now.

At the heart of this proposal is the rocket and feathers issue that my right hon. Friend the Member for Don Valley is famed for in her past interventions in this area, which is about the extent to which, when wholesale prices go up, energy companies put prices up pretty assiduously to compensate for the additional costs, but when wholesale prices come down, the same picture is not quite so much in evidence. For various reasons—buying along the curve, hedging in the medium term and various other things—the energy companies all say, “Oh no, we can’t possibly put our prices down, because of the positions we have taken.” It seems to work one way rather than the other.

Being able to reflect reasonably accurately what is happening and to direct a cap accordingly is potentially a very good thing. I did not entirely catch the Minister saying that Ofgem would clearly have the ability and the authority to tighten the cap if necessary under those circumstances.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth) 4:45, 13 March 2018

That is an excellent point, and I was thinking of exactly the same things when the hon. Gentleman was speaking. The rocket and feathers, by the way, sounds like a marvellous pub in the Don Valley that I would love to come and visit one day. That is an excellent description for what happens and, thinking it through, the existence of the cap protects against the feathers, because there will be a hard stop in the market that might accelerate the fall of the feathers or create something a little more weighty, on the same duration, or a more accelerated duration, than the current SVTs. It would be a prod to the market, to make sure that those downward prices are reflected in the price cap. On that basis, it could be very helpful to overcoming the problem.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

Indeed. As the hon. Member for Wells points out, over the recent period, there has been a pattern of volatility in the wholesale market, but not necessarily a pattern of predictability. The market tends to be rather more volatile at the beginning of the year; the level of volatility differs, but we know it is more volatile. There is the question of looking at that effect over the entire period of intervention of the cap, and how that volatility is factored into Ofgem’s duties.

I take the point that the phrase in the Bill is

“at least once every 6 months”.

After what has been said this afternoon, I hope that Ofgem will consider fairly carefully how its interventions take place. It may well be that—after close consultation with the hon. Member for Wells—Ofgem comes along and says it will review the cap more frequently at certain parts of the year and rather less frequently at other parts of the year.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

I hope that the hon. Gentleman will agree that the wording of the Bill allows Ofgem to effect exactly those decisions, should it think it necessary.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

I take that point. Although I prefer to legislate with absolute certainty rather than hope, in this instance we can reasonably expect that Ofgem would look at that properly, as far as the market is concerned. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

We have had an excellent debate, where we have been genuinely probing and testing the Bill, and we have come to a good outcome. I commend the clause to the Committee.

Question put and agreed to.

Question 6 accordingly ordered to stand part of the Bill.

Clause 7