[Relevant documents: Energy prices, profits and poverty, Fifth Report from the Energy and Climate Change Committee, HC 108, and the Government and Ofgem responses, HC 717, and the oral evidence taken before the Energy and Climate Change Committee on
Motion made, and Question proposed, That the sitting be now adjourned.—(Mr Evennett.)
It is a pleasure to serve under your chairmanship, Ms Dorries. I remind the House of my entries in the Register of Members’ Financial Interests involving the oil and gas industry, particularly a shareholding in Shell. In addition, I have a non-financial interest as the honorary vice-president of Energy Action Scotland—a fuel poverty charity.
The Select Committee on Energy and Climate Change is pleased to have been granted this debate on our report. It is timely, given the issue’s high profile and in the context of the price rises recently announced by most of the six largest energy companies. The subject has come to the fore again just as the winter weather has started to set in and people face the challenge of keeping their houses warm. The Prime Minister has made a number of interventions to try to reduce energy bills, by suggesting that environmental levies will be rolled back and, more recently, that transmission costs can be reduced. However, the Energy and Climate Change Committee considered the subject in detail, including profits and poverty, well before the recent spate of interest. Our inquiry was launched on the Floor of the House in December last year, and we reported at the start of this summer.
Our report’s opening conclusion was that energy bills are rising and are likely to continue to rise. The wholesale price of fuel, driven by rising global gas prices, has been the largest contributory factor. Several other factors also contribute, including the need to invest in and finance the UK’s electricity and gas network and energy and climate change policies. The extent to which energy supply companies are actively working to reduce their operating costs remains unclear. The Committee had hoped to uncover the real story behind energy company profits, but alas, that is significantly more difficult than it should be. At the time of the report, the Committee stated its disappointment that
“energy supply companies have not gone to greater lengths to explain to their customers the reasons behind energy price rises” and highlighted that poor communication by energy companies
“has resulted in deep mistrust from their customers.”
At a time of rising prices, it is crucial that consumer trust is restored if we are to get the investment that we need. Just last week, the Committee held a session with energy companies to find out what was driving the recent price increases. Following that session, we asked the energy companies to set out information about their profits in a standard format. We published that information on our website today, although it still does not provide a complete picture. Bringing forward the information is an ongoing process, and the Committee will continue to consider how to improve the transparency and comparability of energy company prices and profits.
Does my hon. Friend agree that one of the difficulties in working out what prices ought to be, based on the wholesale cost, is that whereas Ofgem looks at past prices in projecting what it thinks costs ought to be, energy companies project forward to see what prices might be? That is one reason why there is a mismatch.
That is certainly one factor. Obviously, the energy companies’ hedging ahead could be to consumers’ benefit in smoothing out future peaks and troughs in energy prices, but an additional problem is trying to get transparency on what wholesale prices the companies are facing. To give confidence to the consumer that the margin is right, we need greater improvements in clarity. In particular, the companies’ trading operations need to be examined more specifically, and more analysis is needed on the impact of their trading arms.
The Committee recommended that the Department of Energy and Climate Change should lead a full and frank conversation about the contribution that consumers are being expected to make towards ensuring that we have safe, secure and affordable energy supplies. It is crucial that the public are made aware of the challenge that we face in meeting our energy needs. In its response, DECC said that it had been up front about the fact that energy prices will continue to rise and told the Committee that the combined impact of decarbonisation and energy efficiency policies led it to estimate that household energy bills will be 11% lower on average by 2020 than they would be in the absence of Government policies.
The Prime Minister has said that how the policies will be funded is subject to review. We urgently need to know what that means in practice. Is the review about the outcomes of the funding wished for or the desirability of the measures being funded? Our report highlighted that general taxation may be a fairer funding mechanism than the use of levies, but it also emphasised how crucial it is to tackling fuel poverty that we have an effective insulation programme. Fuel poverty is exacerbated by rising prices and income, but it is crucial to our long-term work on tackling fuel poverty that we improve our housing stock and ensuring effective insulation.
In our report, we highlighted factors contributing to price rises. DECC set them out in its response to us. The percentage breakdown for a typical dual fuel bill is 50% for wholesale energy costs, 20% for transmission and distribution charges, 19% for
“other supplier costs and margins” and 5% for VAT. The remaining 6% is presumably related to Government policies. DECC itself stated in its reply to the Committee that, in 2013, Government policies to achieve energy savings, provide support to vulnerable consumers through the warm home scheme and incentivise the shift from fossil fuels were estimated to account for 9% of household energy bills. The figures do not quite add up. Perhaps that has to do with where the carbon price is allocated in the breakdown of those percentages; it could have been included in the wholesale cost of energy.
I highlight the Committee’s conclusion:
“The extent to which energy supply companies are actively working to reduce their operating costs remains unclear.”
The Government’s answer to the Committee on that point was:
“Competition between energy suppliers will put downward pressure on their costs and Government and Ofgem are taking steps to increase competition in the market.”
The crucial simplification of tariffs to improve competition and people’s ability to switch is certainly a helpful step in putting pressure on companies to compete effectively to reduce their margins and operating costs, but it seems that the Prime Minister is not completely confident that the steps to increase competition are working, or working quickly enough. Otherwise, he would not have announced a review of the competitiveness of the market.
It is a pity that Ofgem rejected our recommendation that it publish targets for improvements in the market as a result of its retail market review measures, which were designed to reform the market to deliver greater competition. It would have been good if Ofgem had set out criteria for judging the effectiveness of its measures, but Ofgem does not think it appropriate to set specific quantitative targets for success. The Prime Minister’s new competition review appears to be in addition to the new state of the market reports that Ofgem has agreed to produce in direct response to the Committee’s recommendations. We expect Ofgem to publish the first of the reports in spring next year.
Ofgem said in its response to the Committee that it doubted whether using metrics such as “profit margin” and “rate of return on capital” would help it to determine whether the market is competitive. However, measuring profits and the rate of return on capital, and their movement, would show whether the market was bearing down on costs or allowing them to rise. I repeat the Committee’s assertion that excessive profit margins are a symptom of poorly functioning markets, which underlines the need for complete transparency in what the profit margins are.
That brings us to the fact that we need greater transparency regarding energy companies’ finances. The Committee discovered that, although segmental statements had gone some way to improving the transparency of profit making in the big six’s retail and generation businesses, there was still a lot of information missing. That was acknowledged by the accounting firm BDO, which led a review of the statements commissioned by Ofgem. BDO made a number of suggestions for improvements. Surprisingly, Ofgem took none of them forward in their original form, arguing that their costs outweighed their benefits.
We made a number of specific recommendations about how energy companies could improve the way that they report their profits, based on BDO’s recommendations, including reporting trading activities, which, as I mentioned earlier, is a crucial part of trying to establish the boundaries between wholesale and retail and whether the consumer is getting a fair deal; having consolidated segmental statements independently audited, to provide confidence that they are a true and fair reflection of the allocation of costs; and requiring companies to align their financial reporting periods.
The Committee was not convinced by Ofgem’s assertion that the implementation of those recommendations and others that were suggested by BDO would place an unnecessary burden on the energy companies. The Committee requested that the cost-benefit analysis underpinning that assertion be published, but we still have not seen it. Ofgem needs to recognise that, given the breakdown of confidence, the benefit of restoring confidence and providing clarity makes the costs a worthwhile incentive to produce a better understanding of the companies’ profits. However, Ofgem remains unpersuaded that there is a case for full implementation of BDO’s recommendations.
Ofgem has launched a new consultation on transparency, but is it really necessary to have another consultation to find out whether a full independent audit of energy companies’ statements would help to provide reassurance that those statements are robust? I think that the evidence to the Committee spoke for itself.
Regarding the transparency of bills, it is disappointing that the Government and Ofgem have not taken up the Committee’s recommendation that energy companies should be compelled to identify the various components that make up their energy bills, including profits, on the bills themselves. The Government and Ofgem have rejected this proposal for fear of confusing customers, and because the information is available elsewhere. It is a shame that the Government and the regulator do not credit the British public with the ability to digest this information if it is clearly set out on bills, and to say that it is available elsewhere suggests that they have some confidence that the public can understand it. It would seem to make sense that in one item of correspondence—when the bill comes through—people receive the breakdown of how that bill was established.
Do the Government not recognise that consumers can understand complex information if it is presented effectively? Is there not something to be gained through the discipline of making energy companies state the breakdown of bills, including profits, on the bills themselves? That would certainly contribute to the honest conversation about energy prices that the Committee has been calling for, not only in this report but in our previous report, “Consumer Engagement with Energy Markets”.
When the Minister responds to the debate, it would be helpful if he said what the Government are doing to promote this necessary conversation with the public about rising energy prices and the need for investment. Why will the Government not support the full implementation of BDO’s recommendations on consolidated segmental statements to help to deliver the transparency that is so badly needed? Also, it would be extremely helpful if the Minister said what form the Prime Minister’s competition review will take and what the consequences will be if it discovers that competition in the energy industry is not effective? Finally, can he outline the time scale and process for conducting the levy review and say whether it is on the outcomes or on the funding mechanism? When can we expect to see that review, and how can people make an input into it?
Our energy supply needs investment that is paid for by profits—that is an inevitable reality of life—but effective competition and transparency are crucial if consumers are to have confidence that they are paying a fair price for that vital investment.
I commend the Committee’s report to the House.
I begin with an apology to the House: I am on a Bill Committee that, to some extent, requires my presence, so I may not be present for the entire debate, but I was anxious to make a contribution to it. I particularly apologise to the Minister, because I may not be present to hear his response; I had been very much looking forward to hearing it.
As our present Select Committee Chairman, Sir Robert Smith, said in his opening remarks, the report represents the best attempt yet at seriously shining a light on one of the central issues in the widening discussion about what is happening with energy bills, what might be done about them and what might be done on levies relating to bills. It attempts, as far as it can, to get to the bottom of what exactly goes on as far as energy companies’ profits are concerned. Clearly, if it is concluded without possible contradiction that energy companies are making what one might term excess profits, the conclusion may be drawn that the bills that stem from those companies’ activities do not bear the appropriate relationship to those companies’ activities, and action may then follow, either through regulation, through the companies themselves, or through further light being shone on the relationship between those two things.
We have seen—most recently in debate in the House yesterday—a considerable difference of opinion about what might best be done about bills, and indeed what might be done on a wider basis, and how the market could be reset if it is considered that the market is dysfunctional, given the way that companies that are vertically integrated—that is certainly the case for the big six—undertake their generation, trading and retail activities.
I imagine that the starting point for a number of those questions is in the table in the report that sets out the aggregate profit margin for the big six companies’ generation and supply. The bald figures are that in 2011, the aggregate margin for profit in generation was 24.4%, and the aggregate margin in supply was 3.1%—a very substantial difference in aggregate profit margin. Bearing in mind that the aggregate profit margin from generation is related to the aggregate profit margin in distribution—one eventually, by one means or another, sells to the other, and there is a retail outcome—we should certainly ask why the two are so different.
Part of what I think the Committee was trying to do in its deliberations and in the report was answer at least some of those questions—questions that I think everyone who took part in the inquiry will agree were extraordinarily difficult, regarding what happens between the generation of electricity and wholesale trading arrangements, and the purchasing of clips to balance supply and demand at a time of gate closure. How that all works along the line is opaque.
The Committee tried to look at how the accounts put forward by companies are presented. The difficulty is that the accounts are presented in different ways and have different internal arrangements. In some instances, they are presented by companies that are not based wholly or partly in the UK and therefore refer, at least in part, to subsidiaries in the UK, which may or may not have a relationship with parent companies outside the UK. It is difficult to say to what extent it is possible to produce the sort of transparency that one might expect and hope for in ensuring genuine accountability with regard to electricity companies.
Ofgem is not the least of those preoccupied with such issues. As the Chair has mentioned, Ofgem had commissioned a consulting company, BDO, to investigate what sort of changes might be made to accounting practices and trading arrangements to ensure greater transparency. As he recorded, the Committee felt disappointed that BDO’s recommendations—to align statements in the same year-end, to require the reporting of trading function results, to produce further work to assess current transfer pricing policy, and so on—were simply not taken up by Ofgem and have not informed Ofgem’s subsequent consultations on wholesale power market liquidity. We feel that it would be a good idea to revisit, even at this stage, what BDO said to Ofgem about those arrangements and to take the recommendations forward more concretely.
I refer to Ofgem’s more recent wholesale power market liquidity document, which came out at about the same time as the Select Committee’s report. That document received considerable mention in yesterday’s debate on energy on the Floor of the House as a document that could substantially deal with the question of transparency in markets and trading.
Trading appears to be one of the most opaque areas that we considered. One of BDO’s recommendations is to require
“the reporting of trading function results, including disclosure of the risk each trading function assumes”.
Ofgem had a go at looking at that, but from what I have observed about the process, it has fallen rather short of producing proposals that can get to grips with the issue of trading, which seems fairly central in trying to find out exactly what is happening. A vertically integrated company will inevitably have a trading arm, which may purchase for its retail operation, and may conduct trade with regard to its wholesale operation. By and large, it will trade on a bilateral basis with itself.
One of the practices we heard about, which appears to be wholly without transparency, is netting off. A number of activities, particularly those further down the curve—further out than what might look like trading —do not appear as trading at all and are netted off in the company’s accounts. We heard recently that varying percentages of the big six energy companies’ activities appear to be based on netting off. That appears to be outside the purview of what Ofgem had to say about wholesale power market liquidity.
There are other arrangements that struck me that remain outside the mechanisms that may enhance transparency in trading. There is the practice whereby one side of an organisation realises, near to gate closure, that it is unbalanced in terms of its previous purchases. It will effectively phone itself up to balance itself on the other side by creating trade—that is, creating generation that would not otherwise have taken place. That may appear as a trade, but it is not; it is a pre-order to prevent the company from going out of balance and incurring costs that it might not like to at the point of gate closure.
There are also mid-stream trading arrangements, which a number of the big six operate; they bring under their wing small independents, which act as if they were trading on behalf of the larger company. The trades made by the larger company are offered to the smaller, independent company. It is a little like some south American countries using the dollar as their currency while technically being independent. That may bring considerable benefits to those smaller companies, but it means that a number of the trades that take place do not look quite what they are.
We seem to need to go a lot further to establish how the various flows within vertically integrated companies take place, and how the outcomes of those flows either benefit or disbenefit customers. Certainly, there is the argument that some of the issues, such as netting off and gate closure balancing policies, may benefit customers, inasmuch as they save money, even though they appear to be anti-competitive in terms of the way in which trades are arranged. Getting full disclosure right may have the consequence that some costs go up rather than down. Indeed, one needs to be clear and careful about what those effects look like, and how they pan out, in terms of the relationships between companies.
I endorse the report’s recommendations on the necessary clarification of trading and company reporting arrangements. I would go a little further: I believe that the Committee has the appetite to continue investigating how to overthrow the trading arrangements that appear to take place within those vertically integrated companies, albeit in the context of ensuring that above-the-table arrangements are increasingly transparent.
The Committee also considered the relationship between prices and poverty. Interestingly, the Committee considered the role that levies might play; that was rather prescient, in the context of the levy review that has been announced. I am now clear on what is and is not in that levy review. What are essentially regarded as green levies are not in the green levy review, and what are essentially not regarded as green levies are in the green levy review. The levies that one can determine to be true green levies on bills, such as the renewables obligation, feed-in tariffs and the upcoming contract for difference, are not going to be reviewed. Levies such as the warm home discount, the energy companies obligation and the earlier levy on smart meters, however, remain to be reviewed. They are not green levies, and neither is the carbon floor price, which looks like a green levy but does not actually save any carbon and goes entirely to the Treasury. When those levies are reviewed, exactly what will the review consist of, and what will be its objectives? If the review simply asks to what extent we can remove those levies, a number of the issues raised by the Committee—how the levies continue to be important in combating fuel poverty, undertaking energy efficiency and insulating homes of the fuel-poor—will be overthrown.
The Committee concluded, somewhat presciently in light of the recent debate, that
“the increasing use of levies on bills to fund energy and climate change policies is problematic since it is likely to hit hardest those least able to pay. We note that public funding is less regressive than levies in this respect.”
Would a review of those particular levies—we concentrated, among other things, on the energy companies obligation—consider moving some of the obligations into general taxation? Or is the purpose to reduce the overall impact of the energy companies obligation on bills? I understand that, in recent days, No. 10 has issued a target to the Department of Energy and Climate Change on the expected outcome of the energy levy review. I am interested to hear whether that target exists, what it looks like and in what form it will be met.
The Committee also concluded that as it stands, the ECO is not sufficient to fulfil the targets of energy efficiency, demand reduction and combating poverty that the various programmes within it were set up to do. Indeed, the Committee concluded that the ECO falls far short of that ambition. Removing a substantial part of the ECO because of a levy review when it is already established that the obligation falls far short of its ambitions would be a retrograde step. I am anxious to hear more about the relationship between those levies and fuel poverty. Are the Committee’s points on fuel poverty and the levies well made? How will the Government address that in the context of the levy review?
I conclude by commending the report, as far as it goes, which was produced under difficult circumstances. I freely accept, as I am sure everyone does, that it is extremely difficult to shine a light on the subject accurately and unwaveringly without all sorts of considerations being raised that may or may not be germane to the direction of that light. If we can shed better light on all the arrangements, our debates will proceed much more objectively. If the Select Committee continues its work, I hope we will do a service to the debate.
According to DECC, average gas and electricity prices have risen by 41% and 20% respectively in real terms since 2007. There has been a lot discussion in the past couple of weeks on the most recent price rises—on average, 10% per company price rises, which we all saw in a very short space of time—and a lot of the debate focused on how much the energy companies could or could not blame the preceding year’s rise in wholesale prices.
The Committee had a discussion with the companies, and there was some disagreement on exactly what had happened to wholesale prices over the previous year. The figures from 2007 show that we should not consider the problems of one year in isolation. We should not consider in isolation an individual set of price rises put in place by the companies because the problem has been ongoing for many years. There are continuing upward pressures on prices.
In some ways, perhaps the Committee has once again demonstrated its prescience by pre-empting this debate by conducting our inquiry before the most recent—perhaps “hysteria” is not the right word—strong interest in energy prices, which is a result of the most recent price rises. The price rises are important because they have crystallised the debate. Energy prices are now a rapidly increasing concern, and energy policy is dominating the news for reasons that those of us who want a coherent, long-term energy policy probably wish it was not.
All sorts of odd things have been thrown into the debate in the past few weeks, from a potential Government-imposed price freeze to a potential windfall tax and, most recently, potential changes to the management of green and social levies. To a large degree, I am concerned that many of those solutions are reactive and potentially temporary. The nub of the problem with energy policy is that, for multiple reasons, we face ongoing upward pressure on prices. For too long, politicians of all shades have not been willing to have an honest debate on why that is and what the implications are.
In particular, through our collective rhetoric, politicians have persistently fuelled the myth that Governments can control the cost of energy to a much larger degree than they can. We are all guilty of that. It is tempting to have a pop at the Opposition for what I believe is an incoherent price freeze policy, but politicians of all parties have tended to point to the other lot and say, “When you were in power, prices did x.” That fuels the expectation that Governments can pull a lever, push a button and control such things.
In some ways, it is hardly surprising that the natural conclusion of all that rhetoric is—I will say it—the incoherent policy of the Labour party, suggesting that it can pull a lever and freeze prices. Neither a price freeze nor a windfall tax would do anything to address the root causes of energy price rises. Both would be short-term sticking plasters to address the symptoms.
Prices have risen for many reasons. In spite of the argument over the past few weeks about what has happened to wholesale prices during the past year, it is true that increasing international wholesale prices are a key medium-to-long-term driver of why consumer prices are rising. It is hard to see therefore how the wholesale price over the past year can justify the large price increases that we have seen in the past few weeks. The UK is now a net importer of gas, so we are a price taker; we have to pay the going rate for the marginal cost of gas—whether for liquefied natural gas or shipped or pipeline gas, whichever is setting the marginal price at the time.
Prices are also increasing owing to significantly rising network and transmission costs. Those costs are getting off scot free, to a certain extent, because we do not talk about the transmission costs as much as we should—up 10% this year. We do not see them discussed in the media or in the House to the same degree as we discuss gas prices and wholesale prices.
Furthermore, some of the price rises are clearly the result of Government levies, which are there for different reasons; DECC, however, has estimated that energy and climate change policies will add 33% to average electricity prices by 2020. It is true therefore that an artificial price rise has been put on bills by politicians. The Government are absolutely right to review the impact of such levies and whether the different policies can be managed in different ways.
I do not want to sound as though I am excusing the big six and saying that they are not to blame, because they have a lot to answer for. In our inquiry, we struggled to pin on them so many of the legitimate questions that we had to ask—Members who spoke earlier have gone through some in great detail, and I will not repeat what they said—but, clearly, a lack of transparency and competition have allowed us to get into the situation in which the big six have such highly complicated structures that they appear to be overcharging themselves. To a degree, the high profits at the generation end and the low profits at the distribution end smack of the big six overcharging themselves and each other somewhere along the line. I urge the Government to reconsider asking Ofgem to implement the BDO recommendations, as the Committee suggested.
For politicians in the House to point at the big six and say, “It’s all their fault,” is dishonest and simplistic, however, because the situation is much more complicated than that. As a matter of policy, we are in fact switching off the cheapest ways of generating power and replacing them with more expensive ways of doing so. We are doing that deliberately, with a large degree of consensus, and for sound reasons if we believe that climate change is a real problem that needs to be addressed. I do believe that, and most people in this place—though not all—probably agree.
In a sense, however, we have not even started on that process. Right now, we are still sweating old coal assets as if there were no tomorrow—burning cheap coal in old coal-fired power stations, for which the capital costs have long since been paid. When those power stations start to come off line over the next few years and are replaced with newer generating assets, we really will see the structural cost of energy starting to rise as a result of many of our policies. The levy control framework, for example, will have risen to almost £6.5 billion by 2018-19, whereas all big six energy companies made a total of £3.7 billion in earnings before interest and tax last year.
There is a growing problem with the cost of what we are doing. I am not necessarily making a plea not to do those things—I will come on to that—but I am making a plea for a honest debate about the impact and the implications. I have said it before and I say it again: I regularly find myself sitting around a table with Government officials, scientists, academics, politicians and the industry to discuss energy policy, but the person who is usually missing from the table and the discussion is Mrs Jones of Acacia avenue, who ultimately has to pay for everything that we are doing.
The Government and politicians cannot simply wave a legislative magic wand and wish into existence the ideal energy mix that we might want to see in 2030 or 2050. We need a credible and investable road map for how to get from where we are now to where we are going. That would include a sensible energy mix, including new nuclear—I strongly welcome the recent decision on Hinkley Point—and we must not be frightened of moving from coal to gas. The Government’s gas strategy has, in fact, demonstrated that they recognise that.
We need to explore shale gas; we have a potentially enormous resource on our doorstep. It must be done safely and with the consent of local communities, but we must not allow fears that are in many cases built on myths to prevent us from exploring and exploiting that domestic resource. We must also have a much stronger focus on carbon capture and storage, because gas will be part of the mix for a long time and we need to mitigate that by moving much further forward on CCS.
The argument for moving some of the levies, which are social as well as green, from energy bills into general taxation is a sound and interesting one. I welcome the review, because I want to see more analysis of the figures and numbers for what that might mean for the average energy bill, for the average income tax bill and at the different bands. We can do a lot of what we are doing much more progressively; the regressive nature of how we do things—through energy bills—has been a problem.
We also need much greater focus on energy efficiency, which is always called the elephant in the room. Interestingly, when I go into a room to talk about energy policy, someone will say, “The elephant in the room is energy efficiency.” I am sorry, but it is no longer an elephant, because we all know it is there and we all talk about it.
Order. I am sorry, Mr Byles, but I have been working out the timings. For everyone to have a reasonable amount of time to speak—seven minutes—is it possible for you to wind up in the next few minutes? That will allow for the Front-Bench speakers as well.
No problem at all—I will wind up in less than a few minutes, Ms Dorries. Thank you.
We have an enormous challenge in keeping our energy costs down, in decarbonising and in attracting the huge amount of investment that we need. The fourth part of the trilemma—the right word should be “quadlemma”—is the investment needed. We must come up with a way of keeping energy costs down and decarbonising without frightening away the investors we need to put hundreds of billions of pounds into our energy infrastructure in future to keep the lights on.
My plea to politicians on all sides of the debate is that, although we can discuss and hold each other to account, we should not allow energy to become a political football or a party political issue—I see a smile on the face of the Opposition Front-Bench spokesman, so he will not be making energy a political football, I hope—because it is far too important for that.
The BBC news on Radio 4 at 1 o’clock today said—I did not hear the whole story, because I had to be in the Chamber—that there was one wind turbine in Wales that had cost £48,000 to put up, but was producing £5 of electricity a month. That is beautifully symbolic of some of the things that are wrong with the existing energy policy.
I was not a member of the Committee when the report was written, but I have read it and it is a good one. It calls for greater transparency and more competition and its conclusions rely on the presumption that fossil fuel prices will carry on rising, therefore making renewables worth using and more financially efficient. The next report by the Committee, as Dan Byles said, should look at some of the fundamentals. The reason why electricity prices are going up is simple: the cost of production and the levels of demand. Looking at that, as the hon. Gentleman indicated in parts of his speech, is worth doing.
The example I gave at the beginning of my speech is an extreme one, but it is a strange policy that decides to invest in energy sources that provide guaranteed income for the generators at three times the current market rate for energy, as is the case with offshore wind farms. As has been said, the reason is fear of climate change and induced global warming because of the increased production of carbon dioxide. We could have a long debate about that, but I do not intend to go into it now.
What is rarely said is that the current policies are having a perverse impact. How many times do we hear Government spokespeople say that the carbon footprint of the United Kingdom and Europe is increasing as emissions go down? The reason is simple. We have exported our production to China, India and elsewhere, where production processes are less efficient and we have to pay the carbon price of bringing goods here.
The cost of electricity production from offshore wind farms is three times the market price for an intermittent supply, and at the same time we are increasing our carbon footprint. That is not sensible, and the policy is not working. It will work only if everyone signs up to an international agreement on carbon, and it is highly unlikely that the United States, India and China—the major carbon producers—will do that.
The fact that our carbon footprint is increasing is not often mentioned, and some Ministers do not seem to understand anything about the issue. When the Minister, Gregory Barker, was asked to define climate change, he gave the useless definition that climate change was climate change. He repeated that twice. When a Minister of State has that level of understanding, it is not surprising that we do not have useful policies.
The other basis of the policy is that the people in the Department of Energy and Climate Change know that the price of fossil fuels will rise over the next 10 or 15 years. If they could predict the market, I suspect they would not be working in the Department because they would all be rich. The fact is that there is a super-abundance of fossil fuels in the world; there are trillions of cubic metres of shale gas in this country and sufficient coal to supply the world for hundreds of years. That is not the problem, although there are constraints on supply at particular times.
The price of oil and gas now is about the same as in 1974, when exactly the same predictions—that the price of gas and oil would continue to rise—were being made. It may, or it may not. It cannot be predicted, and we must focus on reducing the price of energy production instead of increasing it, as we are doing at present. We need huge investment in research to find more efficient forms of energy, probably renewables.
After our previous debate, I sent the Minister, the right hon. Member for Bexhill and Battle, an analysis of the market showing that the extra cost—not the cost—of replacing our power production facilities was about £226 billion, and that was for renewables: wind farms and other forms of alternative energy. If 20% of that went into research into fusion processes, incremental improvements in the current technologies and improvements in batteries and storage instead of wind farms, that would probably affect prices more, whatever the international price of fossil fuels. That would be better than putting all our eggs in one basket, as we seem to be doing.
The other side of the equation is demand. There are some complicated schemes. The green deal is not working and has a very low take-up among people who are not well off and want a better energy deal to insulate their homes. I referred to the extra £226 billion needed to replace energy kit in this country. If my arithmetic is correct, if we gave £1,000 to households—it could be done on a needs basis and would not necessarily involve every household—that would cost £30 billion, which is about 15% of the extra cost. That would dramatically improve the position of people living in fuel poverty and it would reduce demand, although probably not on a one-to-one basis because when demand is reduced people tend to use the money to buy extra electrical goods and so on. However, it would have a significant impact on what is going on.
I am glad that the Labour party decided to introduce a freeze on prices after the next general election. That will not be a solution to the problem of energy prices in the long term, but it will give us a chance to take a much closer look, as the hon. Member for North Warwickshire said, at what we are doing about energy.
Many people with good motives have said that the world is going to fry and that we had better build windmills. Most of that policy is not working. It is expensive and it is putting people into fuel poverty. I am not on the side of people who want to destroy the planet—quite the reverse: I am on the side of people who cannot afford to pay their fuel bills. We must take a serious, long-term look at how we can produce energy at lower cost and provide a secure supply, which we do not have at present.
As I am on the list, I will take the opportunity to speak briefly about the report, which I commend. I also commend my hon. Friend Sir Robert Smith, Chairman pro tem of the Select Committee, for bringing its report to the Chamber.
The issue is not so much a quadrilemma, whatever band that may be—my hon. Friend Dan Byles referred to it—but a dilemma. It is how to keep bills low for our constituents while ensuring that investment flows into our energy infrastructure, which is in dire need of replacement. That is not an argument between political parties; it is a fact.
Our discussions over the past few weeks have been fuelled by this report and the decision of the big six energy companies to raise prices. They have been about fixing prices, and the Labour party’s proposed price freeze. That would take us down a path that is dangerous for energy infrastructure investment. I made that point yesterday during the Opposition debate on energy prices.
During that debate, my fellow member of the Select Committee, Dr Whitehead, who is not in his place, said that the big six energy companies invest significantly in energy infrastructure. The fact of the matter is that at our Select Committee sitting of a week or so ago, Tony
Cocker from E.ON made the point that E.ON has invested more than £7 billion in that infrastructure over the past five years. If we are to invest something like £110 billion over 10 years in infrastructure, we can work out that E.ON is spending about 10% of that cost. Extrapolate that over the other energy companies in the big six, and we are talking about £60 billion’s or £70 billion’s worth of investment from the total of £110 billion that is required to build our new power stations, put in our pipelines and build pylons to keep our lights switched on.
We have to be careful in our energy proposals that we do not spook the markets or frighten off the private sector investment that we need in our generating capacity and downstream piping—otherwise, the poor old taxpayer will have to foot the bill. I simply make this plea, which echoes what my hon. Friend the Member for North Warwickshire said: we want to keep prices low, but let us not do anything that ends up costing the taxpayer and consumer more in taxpayer-funded infrastructure investment as a result of the private sector’s being frightened off by Government policy or pronouncements by would-be Governments.
I have made my plea, and with that, Madam—I was going to say “Madam Deputy Speaker”. With that, I commend you, Ms Dorries, for so admirably calling me to speak when I did not think I was going to be called. I hope that Mr Speaker and the Deputy Speakers start to do the same.
It is a pleasure to follow colleagues who work together very diligently on the Energy and Climate Change Committee. I begin by paying tribute to the Clerks and staff of the Committee for their work in putting such good reports together, so concisely. This debate is very important, and as other Members have said, a number of issues that are now in the mainstream of politics were initially raised by the Committee and put into the report.
I want to take one issue up with Dan Byles, with regards to what he said about incoherent policies; I shall get my own back and then move on in a more consensual way. I think there is incoherence in the policy at the moment—not in the Labour party’s policy, but in the Government’s policy—of bringing in additional tariffs in January this year, then bringing in additional carbon prices in April this year, and then saying in November, “We are going to have a review”. The Government need to stop and think whether to hold back on bringing in such levies or whether to think the issue through in the long term. They cannot have it both ways.
I want to concentrate on two areas that were in the report briefly, but have been missing from the debate. We have discussed extensively wholesale prices and levies—and quite rightly, because they make up large components of the bill when put together. However, another section of the bill is transmission, which, again, the hon. Gentleman touched on.
If we look at the table in the report, when we break down the bill, the cost of transmission and distribution of energies to our homes contributes between 19% and 25% for the companies. There is a variant of some 6% and some regions are paying that extra cost. Given that we have a national grid, I do not see why that should be the case. One such area is mine, which generates a lot of energy through nuclear and renewables. We need to look at that point.
I am not sure which Government Front-Bench Member will wind up, but I hope that we will get some answers on whether the energy review will look at transmission costs, because they make up a huge amount. We did not get them yesterday, because the Secretary of State was not around for long, but we need those answers rather than having the question knocked about.
I have a suggestion, and if Mr Lilley catches your eye, Ms Dorries, I know that he will endorse what I am saying from a different perspective: we need to look at the grid infrastructure and see whether we need another model of delivery for transmission and distribution in our country.
In Wales, the water industry has a not-for-profit organisation running pipes to homes and it invests all its profit back in infrastructure. That reduces costs to the customer at times, but the company is honest and open when it needs to do big maintenance and additional work on the infrastructure. Exactly what that company is doing is clear and transparent, because it produces its reports, and it has members on the relevant committee who are not from the industry.
Before anybody suggests that such an approach would in some way inhibit competition, within that model, companies go out to tender to get the work, so there is competition within that non-profit organisation. We could consider such a way forward for our national grid; at the moment, I do not believe that National Grid is acting in the national interest—I think it is acting in the interests of shareholders, first and foremost, because of the nature of the company. That is wrong for such an important issue as utilities and transmitting electricity, heat and fuel to our homes. We need a different model.
I understand the time constraints, so I shall conclude on the very important topic, which was in our report, of fuel poverty—rural fuel poverty, in particular. I make no apology for having this debate now. My right hon. Friend Edward Miliband said that this is not only about a price freeze; it is deeper than that. It is about regulation and looking at the whole market.
The issue has been clouded by the energy price freeze, but that would allow a pause, and the Government are very good at pauses. They paused on the Health and Social Care Bill, and they are now pausing on the gagging Bill—the Transparency of Lobbying, Non-party Campaigning and Trade Union Administration Bill. We need a pause with regards to price rises in the energy sector, so that we can have a proper review of the regulator.
I have argued for some time in the House that we need to be fair to the off-grid—those many residents in the UK who are not on the gas mains and who are paying more for their fuel than those who have dual fuel and are able to get discounts from the energy companies. Many of my constituents are in that position and pay a lot more—some 30%, 40%, and 50% more—for their heating than those who are on the gas mains.
Malcolm Wicks when the previous Labour Government were in power. I totally disagree with the energy companies when they ask for the Competition Commission and the Office of Fair Trading to look at the issue. That will take a long time, and when they have looked at the self-regulated off-grid market—they have reviewed it many times—they say, “Competition is there.”
In theory, competition is indeed there, and in practice it is there on some occasions, but it is still pushing prices up, and many families and households in this country cannot afford to heat their homes. It is very important that we look at those issues rationally and that we stand up for our constituents.
Finally, the hon. Member for North Warwickshire asked why we are having the debate now and said that fuel prices have been going up since 2007. In the past three to four years, people have had pay freezes and their household incomes have flatlined. Inflation is only 2.7%, but food inflation and energy inflation is far more than the basic rate of inflation, so people are suffering. Their incomes are going down in real terms and they are struggling to pay their bills.
That is why I am proud of this report. We have highlighted some very good issues that are now in the mainstream of political debate. We should move forward to a conclusion, where we are helping to ease the burden on our constituents and get the right investment for the future, without the excessive profits. We all need utilities. We all need heating and electricity in our homes. We want to get a coherent policy for the future, and this report will help shape that.
Rising energy bills are hurting our constituents; we all know that. The public suspect that those increases in energy bills are driven by rising profits. Politicians and environmental campaigners have a vested interest in fanning that suspicion to divert attention from the increases in the cost of energy that the political elite are planning in the move to increasingly costly renewables, with the added costs that they impose on the transmission network.
The Select Committee’s duty is to investigate the public’s concerns and, if we establish that there are excess profits as a result of monopoly power, suggest ways of bringing the big six energy companies to heel by strengthening competition and through stronger regulation. In the report before the House, the best figure that we could establish for the aggregate level of profit for the energy companies—generating profits, wholesale profits and those downstream—was something like 7.6% of the household energy bill. That is not itself an obviously excessive figure, and it certainly cannot explain the very large price rises. The main factor clearly has been rising fuel costs in the past.
However, before the Committee held our hearings last week, we shared the public’s suspicion, at least as far as the current round of tariff increases was concerned, because we could not see how they could be explained by rising fuel costs; they certainly had not risen by 8% or 10%. We therefore planned to ask the companies forensic questions: if they had raised their tariffs by 8%, how much had their costs gone up by over the same period? When they fudged and prevaricated, we would come back with searing criticisms and indictments. To our surprise, they did not fudge. They gave concrete figures on how much their costs had gone up, company by company, and element by element of their costs. The main factor was not rising fuel and wholesale prices. It was two other factors: rising transmission costs, because the regulator had allowed a 10% increase in transmission tariffs; and, in many cases, policy costs—the costs of social and environmental subsidies as a result of our switch to renewables.
Naturally, the factual conclusions that we established went largely unreported, because they did not play into the prevailing narrative. Of course, the fact that we established what we did does not mean that the profits at the beginning were not excessive and did not contain an element of monopoly profit. Conservative Members are all in favour of profits, as long as they are earned through increased efficiency and increased investment. We are strongly against monopoly profits and if, in our inquiries with Ofgem and the inquiry that my right hon. Friend the Prime Minister has established, we find that there is a monopoly element, we will be the first to support returning that excess profit to the consumer, and we will certainly welcome any steps that can increase competition and reduce unnecessary costs. As Albert Owen said, that should not exclude our looking at other models for the downstream element—he says that that applies in Wales; it certainly applies in places such as New York—if that could reduce the costs to the consumer.
However, the big factor driving energy costs in the past has been rising fuel costs and, essentially, rising gas costs, which drive up both the cost of electricity and, directly, the cost of gas bills; and the big factor in the future will be the switch to renewables. Graham Stringer is a distinguished addition to our Committee, and his contributions to our debates will be of great importance. As he mentioned, onshore wind will double the cost of electricity; offshore wind trebles it. The figures for other renewables are of a similar order of magnitude. There is no way switching from fossil fuels to renewables will do anything other than increase the cost of energy to both households and industry. We should remember that only one third of the cost of renewables goes on to household energy bills. Two thirds go on to industry, but ultimately those costs, too, are borne by households. The pain that people are feeling from their energy bills is only one third of the total cost that will be imposed on them.
What shall we do about this? Knowing that the main cost driver in the past has been the rising cost of gas, we should be going hell for leather in drilling for and exploiting shale. Over little more than six or seven years in the United States, the shale gas and shale oil revolutions have brought down prices by two thirds. If we do the same in this country and overcome the obstacles that the environmental non-governmental organisations such as Friends of the Earth and so on are trying to put in the way, and the obstacles inadvertently imposed by European law, we can enjoy similar success. Either we will bring down gas costs in this country or, if they remain high because we are linked to the European gas grid, the profit on that gas will generate huge tax revenues, which will enable us to relieve other burdens on households. Either way, we should be doing that, and I urge the Government to tackle that with renewed vigour. I know that my right hon. Friend the Minister is personally keen to achieve that, and to make good the unnecessary 18-month moratorium that Chris Huhne imposed on this country; I think that was a greater crime than his speeding issues.
We should recognise that the transmission costs are going up in large measure because of the need to link up the transmission network to distant places. Huge subsea transmission cables are being built. Some £24 billion is to be spent on renewing and extending the transmission network. That is equivalent to £120 per household every year between now and the end of the decade.
We should go for shale and have a pause—a moratorium —on the switch to renewables; there are still enough costs coming through from that to make life very painful for our constituents. The German Government are thinking of doing that. The Spanish Government have done something like it. We should not be ahead of the field in penalising our constituents and our industry by imposing unnecessary and excessive costs on them. I urge Ministers and the Opposition to think again about a commitment that, whatever they pretend, will be the ultimate cause of problems for our constituents and businesses in the future.
As ever, it is a pleasure to serve under your chairmanship, Ms Dorries, and it is a particular pleasure to be here today to discuss the Select Committee on Energy and Climate Change’s report entitled “Energy Prices, Profits and Poverty”, and the responses to it.
I commend the Select Committee on producing such a thorough and authoritative report. On behalf of the Opposition, I welcome the tone and tenor of the conclusions and recommendations. They mirror our criticisms of the energy market and reflect our desire to see that market improved for the benefit of British consumers and British businesses. The conclusions were ably set out by the Chair of the Committee, Sir Robert Smith, in his opening speech. The Committee is fortunate to have on it a number of hon. Members who possess real expertise on, and insight into, energy policy in the UK, and who command widespread respect in the House. We have heard from many of them today, but unfortunately I do not think that I will be able to go through each of their speeches, because of the short time that we have to wind up the debate.
As is well known, the Labour party is not satisfied with how the energy market is functioning. We have therefore laid out plans for ambitious reform of that market, involving separating the generation and supply sides of the big six energy companies, establishing a new regulator and, crucially, freezing prices for 20 months while we get that job done. The evidence for the need for that reform package is visible to all of us in our constituencies, day in, day out, but this report has added to that list of evidence. I would like, in the remainder of the debate, to draw the House’s attention to some of the conclusions that I feel are particularly relevant.
One thing that comes across very starkly from the report’s conclusions is the dissatisfaction with the regulator, Ofgem. Several recommendations demand more activity from Ofgem, but conclusion 16 on page 73 seems particularly frank. In it, the Committee states that it is
“astonished” at how long it has taken Ofgem to act on improving wholesale market competitiveness to ensure that customers are paying a fair price for their energy. In the rarefied language of parliamentary reports, that stands out as particularly hard-hitting, and it is our belief that Ofgem needs to be replaced with a much more effective regulator that has powers to force energy companies to reduce their prices when the wholesale cost of energy falls.
Yesterday, in the Opposition day debate, the Secretary of State attacked the Labour party over its plans to reform Ofgem before claiming, in a somewhat contradictory fashion, that he himself was seeking to reform Ofgem. Some people would say, “That’s the Liberal Democrats for you,” but I would never think of being so cruel.
Much of the Government’s response to the problems of the energy market has been to encourage people to switch their supplier. Of course people should ensure that they are getting the best deal that they can, and of course we should ensure that switching supplier is as simple as possible. However, from the consumers’ perspective, there is little point in making the effort to switch supplier when they are just switching from one company that is overcharging to another that is overcharging.
As is noted in conclusions 8, the low-level of switching between suppliers is a symptom, not a cause, of a lack of competition. It is difficult to see how any policy to make switching easy could have a significant effect if underlying problems in the market are not addressed. The Government seem to be deliberately ignoring the fact that switching has actually halved in two years, with only 340,000 people switching in June this year; that is down from almost 800,000 in summer 2011. The Government have to accept that fundamental flaws in the market have caused that lack of competition. Structural reform to break the stranglehold of the big six and introduce transparency into the market is the only way to fix those problems.
On the subject of green levies, I agree with recommendation 4 that there needs to be
“a full and frank conversation about the contribution that consumers are being expected to make”,
and many speakers today echoed that point.
There was a moment in the Opposition day debate yesterday when an MP on the Government Benches—I do not wish to embarrass them by name—gave a speech praising the Government’s subsidies for nuclear power and low-carbon generation, which they said had an effect on power stations in their constituency. They also praised the ECO scheme and the Government’s efficiency measures. However, they then said, very directly, that green levies must be rolled back. If MPs do not have a sound understanding of what these green levies are, it does not make things easier for the public.
I am about to discuss a part of those green levies in which I am very interested: the ECO, particularly as it relates to fuel poverty. I was pleased to see that the Committee’s report focused on that in some detail. I know there will be widespread agreement among Members that fuel poverty, whatever measure the Government use, is far too high in this country. The news that, in the whole of Europe, only Estonia has a higher proportion of households in fuel poverty than the UK should set all our alarm bells ringing.
From our exchange at the Dispatch Box yesterday, it seems that the Minister of State, Department of Energy and Climate Change, Gregory Barker, and I have substantially different views on the performance of the Government’s flagship ECO scheme. I simply do not believe that the ECO is ambitious or effective enough to meet the fuel poverty challenge in this country. In answer to Mr Lilley, the chances are that the ECO’s cost will rise out of proportion to the success of the measures being delivered.
The Government’s objective is to try to lift one in 10 —or, in the worst-case scenario, one in 20—of the households in fuel poverty out of it. That is not a sufficient response to the scale of the crisis. To that end, I especially welcome the Committee’s recommendation 24 —the recommendation that ECO expenditure be focused more heavily on fuel-poor households.
I will not have time to go into the detail I had hoped to. In relation to the green deal, it is clear that only Government Ministers believe that the scheme is still working. If we were to focus the ECO more heavily on the fuel-poor, as the report requests, the green deal would need to work far more effectively to tackle carbon reductions, which could be paid for by people who would be willing to pay if there was an attractive enough package.
In conclusion, the Select Committee should be commended for producing a report of this quality. All of us who want to see the energy market reformed and a better deal secured for consumers and businesses need to engage with its recommendations. We believe that the report endorses our case for serious structural reform, a tougher regulator, the reform of the green deal and the replacement of the ECO. I thank the Committee members for their diligence and insight, which is a credit to their constituents, to the House and to the public debate on these issues.
I repeat to the House the apology that I gave privately to the Chairman of the Committee and the shadow Minister for having had to leave in the middle of this debate. I, too, congratulate the Committee on its inquiry. This has been a useful debate, and I welcome the opportunity to add to the conclusions that we have already published, and to comment on the recommendations.
We agree with one of the central points of the report: that transparency around the price that consumers pay is crucial—a point made by the Chairman of the Committee, Sir Robert Smith. We have already been taking action to help people and businesses who are struggling with their energy bills, and we are taking steps to make the retail market simpler for consumers.
I think that was the first time that business was mentioned; I omitted to do so, too. Would the Minister consider in the energy review looking at switching for businesses, so that they can break their contracts more easily, or have a comparison website where they can look for bargains in the marketplace?
That is an important point, and I would like to reassure the hon. Gentleman that work is going on to make it easier for small businesses to escape some of the higher tariffs under the contracts they are placed on, and to encourage more collective purchasing among small businesses. There is an organisation called Lumina that covers small businesses in my county of Kent, and I think there are others. That is a very important point.
Consumers will get the best deals only when suppliers face tough competition, and that is what the Government and Ofgem are working to achieve. We are committed to tackling the problem of fuel poverty; I note what the Committee has said about that. I was pleased to see what it had to say about the new definition of fuel poverty that we are bringing in through the Energy Bill. We are committed to helping people, especially low-income vulnerable households, to heat their homes more affordably.
We have already introduced some immediate help: 2 million vulnerable households will get £135 off their energy bills this winter, thanks to the warm home discount. Around 12.5 million pensioners will get the winter fuel payment: £200 for the under-80s and £300 for those over 80. There are cold-weather payments that are available if needed, and last year, they delivered £146 million to help cut bills for the most vulnerable. This year, we have added to those policies with more direct action. The Big Energy Saving Network is training 500 volunteers to go out into communities to help people get better deals from their energy suppliers and reduce their energy bills.
Energy efficiency remains a central part of our strategy, to help the fuel-poor and to deliver permanent energy savings. I am well aware of the serious concern among colleagues in the House for those consumers who are off-grid. I have chaired two meetings of our round table on that, in conjunction with the all-party group on this issue, and we have now established a code of conduct for the suppliers to ensure that—again, as the Committee would wish—prices are properly transparent at the point at which they are delivered, in a way that matches the transparency at the point at which they were ordered. More than 230,000 low-income households will be warmer this winter, thanks to energy efficiency measures that have been installed through the energy companies obligation.
Let me turn briefly to retail market reform. Competition is the key tool in exerting downward pressure on prices. Companies that do not compete effectively will lose customers. We are using the Energy Bill to ensure that Labour’s big six companies now place consumers on the cheapest tariff that meets their preferences, and give those consumers clear information to help them shop around.
I was also asked about the review of levies that is going on. We are looking hard at how we can get people’s energy bills as low as possible, to help hard-pressed families, just as we have done with the fuel duty and the council tax. I was asked specifically when we would see the result of that work. I hope that will be around the time of the autumn statement in a few weeks. That work includes some of the network costs. Ofgem has yet to establish the distribution costs for the next period. There is plenty of work to be done there to ensure that we bear down on those costs that form a considerable amount of the bill.
I would like to give the Chairman of the Select Committee a few seconds to reply. In closing, I thank the Committee for its work and the inquiry it has led. We are acting to help those most in need to keep warm this winter. We are also acting to ensure that everybody will get a better deal from the energy companies.
Perhaps the Minister could write to us with more detailed answers to substantive questions. I would like to echo the thanks to the staff of the Committee for the excellent support they have given us in producing this report. It is a matter that we will have to keep at, in order to get transparency and effective scrutiny to ensure that people do not pay more than they have to for their bills at such a difficult time.