Barry Sheerman
Main Page: Barry Sheerman (Labour (Co-op) - Huddersfield)(9 years, 11 months ago)
Commons ChamberRead Full debate Read Hansard Text
Caroline Flint
It is regrettable and worrying that, as I understand it, the number of families in fuel poverty is higher now than 10 years ago. All families deserve a good deal, whether they are in fuel poverty or not, but of course we need to give full attention to those who are most vulnerable.
As is to be expected, the companies have come up with all kinds of excuses, and I shall deal with each of them in turn. The first excuse is that even if wholesale costs have fallen, other costs have increased. Given that wholesale costs are by far the biggest single component of a household’s energy bill, making up about half of it, we would need evidence of quite dramatic increases in other costs for this claim to hold true. What might those other costs be? Energy bills are made up of five components: wholesale costs, network charges, environmental and social policies, and the supplier’s operating costs and profits. If we leave aside the operating costs and profits, which are within the company’s control, that leaves only two possibilities—network charges and policy costs, both of which, helpfully, are regulated by Ofgem or mandated by Government, meaning that we can test the companies’ claims.
According to Ofgem, network costs are up slightly, by about £7 on the average bill compared with last year, and are forecast to remain flat this year. So that cannot explain the gulf between wholesale costs and retail prices. What about environmental and social policies—the levies that pay for investment in clean energy, insulation and support for the most vulnerable? Given the cuts to schemes such as ECO, the energy company obligation, the fact that the warm home discount is now funded by the taxpayer and the cuts to the forecast increase in the carbon floor price, the claim does not ring true.
Undoubtedly, there are cost pressures, particularly from the small-scale feed-in tariff, but I hope the Secretary of State, who, after all, sets and monitors these costs, will agree that in no way can they account for the scale of the gap we are now seeing between the prices that companies pay for energy and what they charge their customers.
The second excuse we have heard is that the companies’ hedging strategies prevent them from passing on the reductions. What are these hedging strategies? One would be forgiven for thinking that they are a convenient device that enables the companies to complicate matters and confuse people whenever they are challenged about their prices. In fact, they are simply companies’ trading strategies, which determine how far out and in what quantity they begin to buy the energy they need for any given day. So what the energy companies are saying, in effect, is, “Sorry, we bought our energy on another day when it happened to be more expensive”—which, by the way, just happens to make their generation businesses more money, but let us not get into that for now.
It is impossible for anyone to verify the companies’ claims because they never disclose their hedging strategies, but I invite the House to be sceptical. In a properly functioning competitive market, we would expect that, given that wholesale costs are the largest single component of bills, there would be some motivation for companies to try to out-compete their competitors on that price. Adopting a different hedge might allow them to do that. Just to say that companies have different hedging strategies does not address the substantive question of whether they are adopting trading strategies that impose higher than necessary costs on consumers.
An even less persuasive version of that argument has been suggested. Some so-called analysts have suggested that the reason the companies have failed to pass on the cost reductions is the prospect of an energy price freeze. Although I welcome their confidence in a Labour victory at the next general election, I must say that of all the excuses I have heard in my time in this job, that has to be the most ludicrous. The idea that the day after my right hon. Friend the Leader of the Opposition made his speech on 24 September last year all the energy companies went out and bought up all their energy for the next four years does not stand up to the slightest scrutiny.
Let me be clear: if there is any evidence of suppliers colluding to inflate their margins, which I am sure the Competition and Markets Authority will monitor with great interest, and if this Government refuse to take action, we will. Of course, if we had greater transparency in the way energy is bought and sold in the first place, as Labour has proposed through our electricity pool and ring fence, the issue would be a lot clearer for everyone.
The final excuse we have heard is that nothing untoward could possibly be happening because the energy market is so competitive. Switching is up, we are told, and competition has never been more vigorous, but the facts speak for themselves: wholesale costs have fallen substantially, and over a sustained period; and not only has none of the major suppliers cut its prices, but none has even indicated that it has any intention of doing so. Indeed, some suppliers have actually ruled out price cuts this year. In its interim management statement, published last month, Centrica reported:
“No change expected in residential energy prices this year”.
However, as today’s motion notes, if competition was working effectively, we would expect wholesale cost reductions to be passed on as quickly and fully as wholesale cost increases, but we never see that. A report published by Ofgem in 2011 stated:
“We have found some evidence that customer energy bills respond more rapidly to rising supplier costs compared with falling costs.”
In its “State of the Market Assessment” this year, which led it to make a referral to the CMA, Ofgem again found that:
“There appears to be an asymmetry in how suppliers respond to changes in costs. We found that suppliers pass on cost increases more fully and more quickly than cost decreases.”
Furthermore, it observed that:
“The asymmetry we found was greater than when Ofgem performed a similar exercise in 2011.”
It is not just wholesale costs. It must be a bitter disappointment to the Secretary of State that four of the big six have still not passed on the full £50 saving to 3.7 million customers following the deal he struck with them on green levies in December.
This is not some passing trend that will correct itself in the fullness of time; it is a systemic problem in our energy market that is a result of deep-seated and fundamental flaws in its structure and regulation. Waiting for the CMA to report is not an option. Wholesale prices have been falling for the past six months, with no signs that consumers will benefit, and the CMA investigation, which has not even begun, will take a further 18 months to complete.
That being the case, the question raised is this: what should we do about it? In theory, there are two things that can protect consumers: competition, where companies compete on pricing and customer service to win and retain customers; and regulation, where consumers enjoy certain defined protections. But in the energy market competition is at best immature and regulation, at least on pricing, is non-existent.
Mr Sheerman
My right hon. Friend is very kind. Is there not another dimension to this? In the country, including my constituency, the consumer base is getting angrier and better organised, through social media and other ways. They will not put up with this for much longer.
Caroline Flint
Absolutely. People were told that technology—doing things online, for example—would always make things better, but that is not the case. The point applies to those who do not have the confidence to challenge and those with busy lives who just do not have the time. I seem to recall a previous Energy Minister admitting that he spent at least half a day trying to sort out his own energy bill. If he cannot do it, what hope is there for others?
Mr Davey
My hon. Friend has spotted a point to which I will return. There is a bit of inconsistency there.
The historians among us might note that the two proposals for price control regulations are particularly interesting because they reverse the policy that Labour backed in government. In 2002, under Labour, Ofgem abolished all price controls on gas and electricity. Is it not interesting that, even though there is now more competition than in 2002, Labour has done a U-turn and wants price control regulations back?
Mr Sheerman
I have a lot of respect for the right hon. Gentleman, as he knows, but he has spoken about history and about inconsistencies in Labour policy. We were all prepared to oppose the greenest Government ever. If he wants to get the history right, he will recognise that there has been a wholesale retreat from that commitment.
Mr Davey
I am very grateful for the hon. Gentleman’s intervention. This is the greenest Government ever. We have the green investment bank. We have more than doubled renewable electricity. Low-carbon electricity is booming. This is the top place in Europe for renewable electricity, the best place in the world for offshore wind, the best place in the world for tidal investment and the second best place in the world for biomass. I could go on. I hope that he intervenes on that point again.
As I was saying, the interventionist approach of the Opposition is not our approach. We want to aim our intervention at ensuring that our energy markets are more competitive and work harder for consumers. We want to get more energy firms into the market, make it easier for customers to change energy supplier when they do not get a good deal and prevent firms from abusing their market dominance. Price controls will not do any of that.
My argument today is that our reforms to Britain’s energy market are beginning to work. Increased competition is beginning to help people not only to freeze but to cut energy bills. Our approach, fixing the messed-up energy markets we inherited from the Leader of the Opposition, is now bearing fruit.