Examination of Witnesses

Domestic Gas and Electricity (Tariff Cap) Bill – in a Public Bill Committee at 10:15 am on 13 March 2018.

Alert me about debates like this

Rich Hall, Pete Moorey and Peter Smith gave evidence.

We will now hear evidence from Rich Hall, Chief Economist for Energy at Citizens Advice, Pete Moorey, Director of Advocacy and Public Affairs at Which? and Peter Smith, Director of Policy and Research at National Energy Action. We have until 11.25 am.

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)

Q Good morning. Thank you very much for coming. I have lots of questions for you. Thank you very much also for your support—sometimes equivocal and sometimes unequivocal—for the Bill.

One question that I think is exercising us all is support for vulnerable customers, who we strongly believe the Bill will help. We are interested in your views as to what else, as well as the Bill, would be necessary to deliver what we all want: maximum protection for the most vulnerable.

Rich Hall:

I will kick off. I think we would strongly support the view that we would like to see protections in place for vulnerable consumers as a priority—for them to be the first to be protected and the last to lose protection if there were to be a circumstance in which it would be lost. We know from the CMA’s investigation and from other studies that consumers with vulnerability characteristics are less likely to switch than the norm: disabled people, the elderly, those on low incomes, renters, people in rural areas and those who left education early. Some of the most vulnerable consumers in society are likely to be on the worst rates.

The Bill should provide significant protection to those consumers for the lifespan of the legislation, but that lifespan is clearly finite in its current form. There would be annual reviews from 2020 to 2022, which we would expect to pay particular regard to the impact of the price cap on vulnerable customers and to the extent to which they are engaged in the market and benefiting from it or need further protection.

However, in its current form the Bill would fall away no later than 2023, which creates an issue around how you would ensure that those consumers continued to be protected beyond that date. Clearly, if it were possible to encourage them to engage more in the market and to switch, that would be our first line of protection in which they could help to protect themselves. However, we have to look back at the historic records here and note that over 20 years or so there has been significant disengagement in the marketplace. It might be difficult to tease vulnerable customers into the market. From our perspective, we would be looking to see price protection for vulnerable consumers extended beyond the lifespan of the legislation.

We note and welcome the comments from the Minister and the Government in their response to the Business, Energy and Industrial Strategy Committee’s pre-legislative scrutiny, that enduring protections might be needed, and also Dermot Nolan’s comments, from Ofgem, to a similar effect. I think the challenge is: if it is not going to be in the form of protection through this cap, what is it? We currently think that there might be a need for an enduring cap, and the Bill in its current form does not necessarily provide for that protection after 2023.

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)

Q Thank you. Mr Moorey, you have not been super-supportive. Would you agree on the need for more protection for vulnerable customers?

Pete Moorey:

I support everything that Rich said on the potential need for ongoing support for vulnerable consumers beyond the end of the cap as set out in the Bill. It is important, though, that we do not assume that vulnerable consumers across the board do not engage in the energy market. We know that the most vulnerable are often the savviest consumers. They have to be: they are on tight budgets and, therefore, they can be the most adept at engaging with markets. I know Peter’s organisation, National Energy Action, has done an awful lot of work with very vulnerable people to get them engaged and on to some of the best deals in the market.

Our—and, I hope, your—vision is ultimately of a market that is competitive and delivering good outcomes for consumers. That should include vulnerable consumers and the ability for those consumers to be as actively engaged in the energy market, as they are in many other markets—notwithstanding the fact that, as Rich said, there will potentially be some people who will need ongoing additional support. We would support that.

Peter Smith:

There are two clear priorities that sit outside the Bill. The first would be to extend the warm home discount scheme to smaller suppliers; currently, smaller suppliers, with fewer than 250,000 customers, are not required to provide the warm home discount scheme. That means a real challenge on the doorstep in terms of encouraging households, particularly vulnerable households, to switch to the smaller suppliers. Those smaller suppliers are often able, at least on a price comparison website, to provide the cheapest deal but households do not know that they might be missing out on the warm home discount scheme.

The second element is to get on and use the data-sharing powers on which there was a recent consultation, which would enable Government to better share information about households eligible for the warm home discount scheme and could, therefore, benefit from the safeguard tariff.

Those two actions can take place regardless of this Bill. As we warned in the Business, Energy and Industrial Strategy Committee’s pre-legislative scrutiny, if we do not do those things, the cost might be that 500,000 low income and vulnerable households—many working-age—will miss out on approximately £260-worth of support this winter and next. It is an urgent priority.

Two things that can be done inside the Bill, reflecting on the previous evidence and remarks from the rest of the panel, would be to clarify in clause 2 that Ofgem should have due regard to households on the safeguard tariff. We are particularly worried that there is an assumption being baked in at this stage that the SVT-wide cap will protect exactly the same households as are protected by the safeguard tariff. That is not the case. We are also making an assumption that the relative values of those two different caps are going to be broadly the same. Again, that is not the case. We would like Ofgem to consider those two issues specifically. It is right that that is reflected in clause 2, and we support the hon. Member for Southampton, Test’s amendments that seek to achieve that outcome.

The final thing from my perspective is in relation to clause 8, where the conditions by which we remove this SVT-wide price protection need to be met. The opportunities that Dermot Nolan talked about to reflect on vulnerability within that context, particularly engagement for vulnerable consumers, are the clear priority and should be listed in the Bill to make sure that that assessment on competition is also reflecting on engagement of consumers, particularly the most vulnerable households. There would be a set of things that could be done to make that clear.

Photo of Michelle Donelan Michelle Donelan Conservative, Chippenham

I just want to follow up and build on the topic of consumers. How do you each feel this Bill will impact on the interest groups you represent? This is particularly pertinent to Which?

Pete Moorey:

We represent all consumers, and the Bill may have a number of different impacts for all consumers. Clearly, for the large number of people on standard variable tariffs, it is going to mean a cut in their energy bills, which will be very welcome for them.

However, as you are probably aware, we have some concerns about the risks presented by a price cap and the impact that could have for consumers as a whole, which may well be mitigated by the measures in the Bill regarding Ofgem, ensuring that it maintains attempts to promote competition.

Nevertheless, the things that we are concerned about with the introduction of a price cap are that we do not see any softening of competition and that we do not see prices for consumers overall going up. It is likely that for some consumers we will see some price rises, as some tariffs get removed. We do not want to see a reduction in the standard of customer service, which is often deemed as being poor among the larger suppliers; the annual satisfaction survey that we do at Which? every year shows that the larger suppliers do very poorly on a whole range of metrics.

Also, we do not want to see less innovation in the market. So we do not want to see the introduction of a cap having an impact on the smart meter roll-out, or indeed on the transformation that Dermot Nolan spoke about, which we really support, around the introduction of new suppliers in the market, who may well be able to bring a transformation to energy, which is what we want to see.

I absolutely understand why the price cap is being introduced. I think the energy industry had opportunities, time and again, to stop this from happening, and they failed to react to that and to the problems that their customers were facing in the market. However, as we now introduce the cap, we have to be very mindful of those risks: the last thing we want is a price cap to come in, be removed at the end, and for us then to be left with exactly the same kind of broken market that we have now.

Photo of Vicky Ford Vicky Ford Conservative, Chelmsford

Q I want to push a bit harder on understanding the concerns of Which?, because I see smart meters being only a part of the whole move towards smart consumption and connected appliances that talk to each other—in order, for example, to use less energy at peak times of day. Such innovations are important. Do you want to ensure that the cap does not stop that sort of innovation and instead continues to encourage consumers to have a competitive offer?

Pete Moorey:

Absolutely. Smart meters themselves are only the facilitator of a new kind of market. Gas and electricity is a homogenous product. Of course it is dull for consumers to engage with, and our expectations around them switching have been—by and large—fairly ridiculous really, given that there is generally little value in switching beyond the price that you can be saving, which can be significant. But beyond that, why people should really engage with this market has been bewildering to consumers, really.

However, we are now just starting to see potentially a very different energy market, because of smart metering and then smart appliances, as well as the introduction of electric vehicles, storage and a whole range of other changes. They should make energy an attractive industry for new kinds of players to enter, which may well mean that consumers start to be offered very different kinds of things. It may well be, as Dermot said, that there will be much more bundled products, whereby suppliers effectively offer to look after your whole house—your whole life—and that may well be attractive.

Of course, with that comes the risk that that will potentially only benefit people like me, who perhaps have the ability and the money to engage with that market. We obviously want to see all consumers benefiting and we will need to be very mindful, as that change comes, about vulnerable consumers and their ability to benefit from the price cap, too. They should do, because the positive benefit could well be that you can target much more specific products at the most vulnerable, and ensure that they really are getting value out of their relationship with their energy supplier, or indeed with a whole range of other suppliers that could start to form a hub around smart meters and other smart appliances.

Photo of Vicky Ford Vicky Ford Conservative, Chelmsford

Q So, is 2023 the right date?

Pete Moorey:

Yes. I think it is the right date, but the critical thing is that Ofgem has the ability on a very regular basis to review how the price cap is working, to set out transparently the changes being made in the market, and to be able to recommend to the Government whether the cap should be removed earlier. I think that having that balance is right.

Photo of Bill Grant Bill Grant Conservative, Ayr, Carrick and Cumnock

Q We mentioned smart meters. Do you believe that the roll-out of the smart meters will engender or promote effective competition in the energy market, and, if so, will that contribute to the ending of the cap by 2023? Indeed, I think there is an opportunity in the previous three years to end the cap. What part do you think that process will play?

Finally, picking up on Pete’s reference the less well-off groups, or those who are less price-savvy—I think that was the term—do you think the meters will assist those people in understanding their expenditure? Do you really think it will have an impact?

Pete Moorey:

I hope so, but I think there are significant challenges for the roll-out. The fact is that the roll-out does not appear to be going as well as it should. Our own research in the last few months revealed that energy suppliers would be having to install 24 meters per minute for us to hit the target by 2020. So we have to keep a close eye on the smart meter roll-out. I do hope that it leads to changes, and changes that benefit all consumers, but that will require not only groups like us but also yourselves to keep an incredibly close eye on the roll-out.

Peter Smith:

National Energy Action runs something called the communities programme, alongside Smart Energy GB, which is the organisation that exists to engage smart meter roll-out. We are doing some valuable work on that, but we are concerned that the roll-out is significantly back-loaded now. That challenges the cost-benefit analysis that the Government originally estimated, which assumes cumulative benefits running all the way through successive years, up to 2020. Now we are in 2018—and 2020 is there; so there is a concern.

Photo of Bill Grant Bill Grant Conservative, Ayr, Carrick and Cumnock

Q Is it 53 million installations? I think that is the target by—

Peter Smith:

It would be slightly less than that, but it depends whether you think you need to put in SMETS2 meters, once they are ready, and replace the SMETS1 meters. We recognise the value of smart meters, particularly for low-income and vulnerable households, given the fear of an unknown bill. Estimated bills are the biggest concern that these guys get, so we recognise that they can have sufficient benefits. The trouble is we are so back-loaded now, the care and attention and extra help that we thought was going to be possible with smart meter roll-out is now going to be compromised, as everybody, as you say, is just going for volume.

Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

This question is for NEA; I think you have already covered quite a bit of this. Obviously your remit is to look at issues of fuel poverty. You have already spoken about the warm home discount scheme and the safeguarding tariff, and the need for more engagement to make more people aware of those. You have just mentioned that smart meters have a role to play in fuel poverty as well. Do you think this Bill will help to address fuel poverty? Do you think there is enough in it? Do you think it really gets to the heart of it, or is it just about consumers being overpriced at the top end of the market and people being perhaps neglected at the bottomQ ?

Peter Smith:

First things first: it was reflected in my comments to the Business, Energy and Industrial Strategy Committee as well that NEA believes we must also tackle the vicious overlap between the households with the lowest incomes living in the least efficient homes. That needs to continue to be a priority, and, sadly, we have seen a dramatic drop-off recently in home energy efficiency delivery rates. You could build that into one condition by which Ofgem could make an assessment about whether we are now pulling on that lever as hard as can, maybe as part of an ambitious energy efficiency infrastructure programme.

The second thing relates particularly to the Bill. As I have described, there is a risk that we are assuming that the same people are covered through the SVT-wide cap as benefit currently—or would do in a few months’ time, with the extension of data-sharing powers—in the safeguard tariff. There is a difference between the people that it covers, so not everybody that will be protected by the SVT-wide cap will be protected by the safeguard tariff currently; and the values are very different—or could potentially be very different—in terms of the value of the safeguard tariff currently in place. That is about £100.

Given the drivers on Ofgem to create headroom to encourage competition and so on, that headroom might be significantly reduced. Therefore the general value that the two relative caps present might be very different. So in simple terms we cannot assure ourselves that the provisions in the Bill are consistent with the value that the safeguard tariff is currently providing. Ofgem need to consider that issue in relation to clause 2. It should be written into the Bill.

Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

Q That was going to be my question. How should those things be done in clause 2?

Peter Smith:

Clause 2 needs to say that there should be specific regard to customers that currently benefit from the safeguard tariff, and that the value of those relative price protections should be considered, to make sure that vulnerable customers benefit from the most attractive option.

Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

Q Do you think the pool of people that currently are eligible for the safeguarding tariff is wide enough, or, in an ideal world, that it ought to be extended?

Peter Smith:

Currently, the safeguarding tariff only targets those households that receive the warm home discount scheme. Those are typically poorer pensioners who automatically receive the warm home discount scheme, and some households in what is called the “border group”, which have to apply for support. Some households apply and are eligible, but miss out on the assistance because the programme is a first come, first served programme. Therefore we have been urging—and there were encouraging signs recently that this was going to be acted upon—that that should be extended to all households that were eligible for the warm home discount scheme, so it would cover those people who apply but maybe miss out on support.

Photo of Kerry McCarthy Kerry McCarthy Labour, Bristol East

Q At the moment, you have to be first in the queue to get the tariff. There is no reason why—

Peter Smith:

You are either doubly benefited or doubly negatively impacted, because you do not receive the warm home discount scheme and therefore miss out on the safeguard cap, or you get the warm home discount scheme and the safeguard cap. We can reconcile all of that without these provisions. It was encouraging to hear Dermot Nolan say that he is minded to have due consideration of those issues when he sets the cap—because we could get into a situation where we look to preserve the extended safeguard cap at the same time as continuing with this endeavour. That would make sure that some of the issues I have spoken to are addressed. We would welcome that approach.

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)

Q Pete Moorey, your submission to the pre-legislative scrutiny of the BEIS Select Committee raised issues about the extent to which the remedies put forward by the CMA as far as market restitution was concerned were not, in your view, sufficient. Bearing in mind that it is going to be down to Ofgem to declare that the market is now functioning reasonably well and that the cap can now be taken off, what sort of remedies, in addition to those suggested by the CMA, might you have in mind to get the market working again? Do you think those should be introduced during the price cap or after it? Should they run after the price cap is over or concurrent with it?

Pete Moorey:

We supported many of the remedies of the CMA, so while we did not believe that they would take us far enough to deliver effective competition, it was absolutely right that the CMA recommended that we would be testing and trialling new ways of engaging people in the energy market. We were disappointed that the energy industry did not respond effectively enough to that. We said to the industry immediately after the CMA inquiry, “Start getting on with it. Test and trial new ways of engaging particularly the most disengaged people with the energy market.” I think that a lot of that work should continue. The good news from Dermot Nolan this morning, and from other statements Ofgem have made over time, is that they are going to continue to do work on that, which is welcome.

We are not necessarily suggesting that there are other remedies such as that that could be trialled. It is more that we should be spending time considering what transformational changes can be made to the market along the lines that Dermot Nolan was talking about, particularly in his responses to James Heappey, to ensure that we have much more innovation in the market through new suppliers who can be tapping into the benefits that smart and other changes in the energy market will make. That is likely to be the transformation that will lead to a new kind of energy market where consumers are more engaged. That is the critical element, alongside all the key factors around switching levels—particularly engagement of more vulnerable consumers, energy satisfaction, trust in the market and so on—that we should be looking at.

As I say, simply removing the cap in 2023, and the market looking effectively as it is now, will not, I think, be the kind of change that we all want to see in the energy industry, and certainly will not deliver the kind of change that consumers need.

Photo of Alan Brown Alan Brown Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Infrastructure and Energy)

Q Are there any improvements needed to the Bill? I have a couple of suggestions and considerations. We have already heard the merits of trying to introduce what is called a relative cap to work underneath the absolute cap, and we have spoken about vulnerable customers. Are there any improvements that could be made to the Bill to protect vulnerable and disabled customers?

Peter Smith:

I will try to be a bit more concise than I was earlier. Clause 2 needs to be amended specifically to ensure that the safeguard tariff is considered when setting the SVT-wide cap, and Ofgem needs to have a duty to consider that. In clauses 7 and 8, we need to include customer engagement, particularly vulnerable customer engagement, as part of that overall assessment of competition and of whether it is working effectively.

I could give you a couple of examples, but perhaps they are best fleshed out in some further written evidence. They would include online access. For instance, we know that households that are offline do not benefit from the considerable discounts for online deals and from paperless billing discounts, and they do not get to apply to the warm home discount scheme. Cumulatively that could be up to £300. Things like that need to be considered when we make that overall assessment.

Rich Hall:

From our perspective, we are broadly comfortable with the Bill in its current form. In the area of providing enhanced assurance that vulnerable customers’ circumstances are being improved, we think that is something that should be captured within the annual assessment by Ofgem and by the Secretary of State. We are reasonably comfortable that that is implicitly delivered through the Bill, but I can understand that there are arguments that there might be benefits in it being explicitly delivered on the face of the Bill.

In terms of there potentially being a relative cap underneath the absolute cap, I have some similar views to Dermot on that, in that it is an idea that has been floated only really in the last few days and weeks, possibly by people who would prefer a relative cap and who are now trying to use absolute plus relative as an alternative vehicle to reintroduce that approach.

We have some concerns about the relative cap approach. Because the large incumbents have so many sticky customers, in comparison with the relatively small number of customers they could pick up through any promotional campaign, if they were to seek to hold their line on their acquisition prices, that would make the cost of acquiring new customers punitively expensive. Because of that, we think it is more likely that the large incumbents would simply exit the acquisition market, which would neither help their SVT customers, who would continue to pay the same prices, nor improve pressure in that market. There is a risk that a relative price cap could backfire and be worse than the status quo, so we see the decision on absolute versus relative as not simply a choice between a good model and an excellent model, but as a choice between a good model and an unworkable model.

Pete Moorey:

I would not add anything to what Rich said, but in terms of other changes to the Bill, there could be some changes to ensure there is more transparency and accountability of Ofgem, in terms of setting the cap. We would like to see changes so that Ofgem are required to set out clear criteria for monitoring and evaluating the success of the cap. We wanted to see a requirement to review the price cap every six months. It may well be that the evidence you have just heard from Dermot Nolan suggests that they will be reviewing it anyway every six months and that the bar could be set lower. It may well be that that is unnecessary in the Bill itself, given that it seems likely from what he said this morning that we will have a consultation on that as well. I think Ofgem should be required to publish reports on the impact of the cap on a regular basis and on how they would take any action if the cap was having any negative impacts.

Photo of James Heappey James Heappey Conservative, Wells

Q Some of the big six, in particular, have tried to head off this legislation by, apparently, removing people from their SVTs already. I wonder whether you have made any analysis of the sort of tariffs they have been transferring people on to and of whether that represents genuinely better behaviour, or are they just getting ripped off in a different way?

Rich Hall:

We do not have any analysis on that to hand, but it is a crucial issue, in that the problem with SVTs is not their name, but their characteristics; it is the fact that they are extremely poor value products that exploit consumer inertia. If the replacement products simply have the same characteristics, and they are benchmarked to a similar level of pricing, that is simply an attempt to get around the intent of the Bill rather than to reduce the detriment that those customers see. That is an area where we, Ofgem and others will need to improve our monitoring in the coming months, as we see more of those tariffs in the market. At the moment, it is still fairly soon after the launch of these approaches by three suppliers, so it is a bit too early to say, but it is a genuine issue.

Photo of Vicky Ford Vicky Ford Conservative, Chelmsford

Q Just to come in on this issue of reviewing every six months, that is of course in the Bill.

Pete Moorey:

That is good news.

Photo of Stephen Kerr Stephen Kerr Conservative, Stirling

Q Would it help to remove the stickiness of customers if the SVTs were renamed emergency tariffs, because that is quite alarming?

Pete Moorey:

I don’t know. It might do. That probably returns to the point I made to Alan Whitehead around testing and trialling different ways of engaging people in the market. It is really important that Ofgem tests how it communicates the safeguard and whether it should be called the safeguard. There is a real danger that most consumers, once they hear they are on a safeguard tariff, think that there is absolutely no reason for them to switch. Once the cap is in place, one of our key messages at Which? would be to go out there and say to people, “The safeguard tariff is not the cheapest tariff on the market. You could well still be saving hundreds of pounds by switching, particularly to some of the smaller suppliers in the market.”

Photo of Stephen Kerr Stephen Kerr Conservative, Stirling

Q I think the standard variable tariff sounds rather benign.

Pete Moorey:

Absolutely.

Photo of Stephen Kerr Stephen Kerr Conservative, Stirling

Q If it was something more aggressively named, people might go, “I don’t want to go on this tariff.”

Pete Moorey:

I think it should be tested.

Peter Smith:

There is also a risk that if people are on the safeguard tariff, they think that they are safeguarded, but they are not taking up the wider support schemes that the Government have made suppliers deliver—things such as the energy company obligation, the warm home discount scheme, free gas safety checks and the priority services register. There are a number of other things that need to be considered to assess whether or not consumer engagement is happening, particularly for vulnerable households.

If there are no further questions from Members, I thank the witnesses for their evidence.

Ordered, That further consideration be now adjourned. —(Rebecca Harris.)

Adjourned till this day at Two o’clock.