Domestic Gas and Electricity (Tariff Cap) Bill

Caroline Flint Excerpts

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

[Caroline Flint (Don Valley) (Lab)]

Do the Government not already have powers, under section 26 of the Energy Act 2010, to introduce a price cap if one group of customers is treated less favourably than others by an energy supplier? Ofgem fears that if it used its powers, there would be a ruling against it and it would end up in the courts. Our purpose today, and my purpose in supporting the Bill, is to lay out once and for all the powers to introduce a price cap for people who are losing out.

[Greg Clark]

It is true that Ofgem has said that it might be challenged in the courts. I do not think we should be afraid of testing arguments in the courts, and I would have preferred to see that happen. The statute that the right hon. Lady mentions would not enable the gap to be closed in a way that would allow competition to continue in the other part of the market—other Members have raised that matter. It would require a closing of the gap, but that could take place by means of the deletion of other tariffs, which is not what we want.

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[John Penrose]

My right hon. Friend is a co-signatory to the letter, for which I thank him, and he makes an important point. It is not just vulnerable customers, of course; it is the many of the rest of us who are time poor. This is a far broader question than just vulnerable customers, although they are a key part of it. Many other families, either because they are loyal or because they just have not got round to it, have not switched. We need to persuade them to change their behaviour, and we need to change the market to help them to do so.

Choosing a new supplier should be no more complicated than changing our brand of coffee or corn flakes. The big six should have to work a lot harder to attract and keep our business. To be fair, as we have heard and as I think my right hon. Friend was alluding to, the regulator, Ofgem, has made a start. We have more than 50 new competing firms that are scrambling to take business off the big six. Smart meters are coming, and switching is slowly getting simpler, quicker, easier and less scary.

The Bill rightly says that the price cap should die after a couple of years, but what about the other details? Price caps, as we have heard, are dangerous things. They are fiendishly difficult to get right: they drive suppliers away if the price is set too low, and they gouge customers if the price is set too high.

So how do we design a cap that does not make things worse rather than better? Well, the Bill says that the price will be set by an all-knowing committee of Ofgem regulators every six months, but the international price of energy moves around every day. Although I am sure Ofgem is full of clever and well-intentioned people, no one is that clever. Any energy trader will tell us it is impossible to know what the price will be in the next six minutes, let alone the next six months.

[Caroline Flint]

Some 5 million people are already benefiting from the price cap for those on pre payment meters or on the warm home discount, and Ofgem is in charge of that. Why cannot it be trusted to extend its skill to a wider group of customers?

[John Penrose]

The right hon. Lady is one of the co-organisers of the letter, and I thank her again for her help. No matter how clever, good and high calibre the committee, people are just not as good as the market at price discovery, provided the market runs properly. When she was shadow Secretary of State for Energy and Climate Change, I heard her talk about having to get a better energy market with better price discovery and having to re-establish an energy pool precisely because of that point. Ofgem, no matter how hard it tries or how well intentioned it may be, just will not get it right a large proportion of the time.

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[Caroline Flint (Don Valley) (Lab)]

Today is a political lesson in never giving up. Despite all the lobbying noise of vested interests, constant denials of market failure and numerous attempts to persuade energy bill payers to shop around, the Government could no longer ignore the fact that the majority of energy bill payers were—and are—being ripped off.

The Bill has a virtuous purpose: to protect customers from unfair energy prices in a market which, sadly, has failed to deliver. Its greatest shortcoming is its timing. In October 2011, I first raised the failings of the UK energy market—the overcharging and the poor value for money offered by the big six. In that year, energy prices had risen by 20%. Data required by the last Labour Government had become available to those with an “anorak” interest in tracking what was happening to prices. It was becoming clear that they did not reflect wholesale costs, and that those on standard variable tariffs were paying over the odds.

The coalition Government of Conservatives and Liberal Democrats attempted reform, but they had little to offer to affect the pricing structure of the failing retail market. They opposed Labour’s energy price freeze—a proposal to cap prices for 20 months while the energy market was reformed—but they knew that they were on the back foot as evidence of overcharging mounted. David Cameron’s agreement to a Competition and Markets Authority review in 2014 was an attempt to take pressure off the Government and kick the issue beyond the 2015 general election. That worked, but it delayed action further.

It must have come as quite a surprise to some in government when the CMA’s findings vindicated Labour’s concern about unfair energy prices. It took two years to reach a conclusion that some of us had already exposed: customers were being systematically overcharged. Between 2012 and 2015, people were overcharged by an average of £1.4 billion a year, and the detriment had increased to £2 billion a year by 2015. By the time the CMA reported the damage, overcharging since 2012 amounted to more than £8 billion. Delay has cost consumers dear.

Some may have thought that the introduction of a price cap for prepayment meter customers would lay the matter to rest, but that was never going to be the case. Ministers and others on the Government Benches were now keen to talk about market failure and systemic overpricing, using language for which my party and I had been condemned only a few years earlier. Progress has been too slow by half, but now the Government are taking action that has cross-party support, and we have an opportunity to serve notice on injustice and legislate for price protection for consumers, which I believe should take the form of a protected tariff. In fact, I argued for such protection after the 2015 general election. Consumers need nothing less than a regulated maximum charge based on wholesale prices, network costs, and an acceptable level of profit set by Ofgem.

To expose market failure is not to be against all markets. Despite privatisation, energy has always rightly been a managed market when it comes to changes in our energy generation, contracts for difference and capacity markets, and that is the case today. I believe that, across the House and across British society, it is recognised that certain products, such as energy and water, require a different level of Government intervention and regulation.

Even today, with record levels of switching—about 5 million people switched in 2017—many of the criticisms that I levelled at the energy market in 2011 still apply. The market is still dominated by the big six. Between them, they control 78% of the market. The biggest new entrant has just 1% of market share. Movements in energy prices bear little relation to the movement in wholesale prices. The majority of customers have little faith in switching and have not changed supplier for a decade or more, and, as we all know, the majority sit on expensive default standard variable tariffs. More than 5 million people have been helped with a safeguard tariff. The Bill addresses the 11 million households who are overcharged year in, year out.

So what should we do? Let us build on the cross-party support and, through the Bill, defend the principle of a short-term cap on a failing market. We should not be cowed by the self-interested propaganda that we have heard from opponents of the price cap. At the extreme end, we have Centrica linking its plan to shed jobs up to 2020 with the cap. That is outrageous. Centrica has lived off its nationalised legacy—a sticky customer base that it has treated badly. Business analysts observe that British Gas’s businesses supplying energy to business have been performing poorly and that Centrica’s US operation, Direct Energy, has underperformed. They note that almost 80% of those employed by Centrica are abroad—just one in five are in the UK. While those UK jobs are important, it is little surprise that trade unions representing Centrica employees—Unite the union, GMB and Unison—are rightly sceptical about why UK employees might bear the brunt of the effect of corporate failures internationally under the leadership of Iain Conn.

A cap does not mean an end to competition. A reasonably set upper limit on unit prices that is reviewed every six months allows lots of opportunity for competition beneath the cap. It is not a difficult concept. The cap is a maximum; it is not a requirement to charge prices at that level, and the industry knows that full well. It also knows that it will put a bar on unfair prices, and not before time.

[Geraint Davies]

I am listening fascinated to my right hon. Friend’s speech. She is aware that there has been a history of oligopoly abuse in terms of delays in changing prices for customers when world commodity prices change, meaning that there are excessive differentials. Does she think it is possible to have a relatively simple system that takes those two factors into account, but also takes the opportunity to encourage renewables?

[Caroline Flint]

Absolutely, and I am going to come on to renewables. Ministers should beware of any proposal to exempt green tariffs or low-carbon tariffs from the price cap, and let me be clear why. In 75% of days in 2017, wind power supplied more energy than coal power in the UK. Nuclear and renewables are central to our power output in the UK energy market and the generators are well rewarded for that. The notion that any energy provider should charge a premium for so-called green tariffs does not stand up to scrutiny. Consumer support for 100% green energy is welcome, but the idea that they should pay the most expensive tariff cannot be justified. I therefore hope that the Secretary of State will rule that out and deliver a comprehensive cap.

[Sir Oliver Letwin]

I am listening with increasing admiration to the right hon. Lady’s speech, which reminds me of why there was once a Labour party with which I had a great deal more sympathy than I do at present. I strongly agree with what she says about green tariffs. We want to promote green energy, but to do so on a basis that is economically rational.

[Caroline Flint]

I welcome the cross-party support that continues to blossom on this issue.

I urge Ministers to ensure that Ofgem is equipped with all the powers it needs to act as a consumer champion, and to deliver both a price cap and penalties for corporate misbehaviour. I have not been uncritical of Ofgem. For too long the regulator did not hold the big six to account for poor customer service. Where fines were issued, companies were allowed to strike a deal to use the so-called fine to subsidise tariffs for new customers—there was nothing for their loyal customers stuck on default tariffs. Thankfully that has changed.

We saw last week the CMA having to rule on a challenge by SSE and EDF against Ofgem when they tried to modify industry rules. Ofgem determined that those modifications would have led to consumers paying a £120 million rebate to generators and said no. Ofgem was immediately challenged. In this instance, the CMA backed Ofgem and the consumer interest was protected, but let us be under no illusion: there is a constant veiled threat that the energy giants will contest its decisions. We need to be certain that Ofgem has the powers and remedies it needs under the Bill so that it can do the job this House expects and does not become a scapegoat for failure.

Finally, may I urge Ministers to use the period of the cap to review the structure of the energy market? Good regulation, fairness and innovation from existing and new players must all be part of a reshaped energy market of the future. Let us get on with it. The Bill has my support; let us give Ofgem the power to act and cap unfair energy bills.

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[Mark Pawsey (Rugby) (Con)]

It is a pleasure to follow the hon. Member for Leeds North West (Alex Sobel). Unlike him, I do remember the time before privatisation took place in the 1980s and 1990s. It is worth remembering some of the objectives of the privatisation led by the then Conservative Government.

The first objective was to spread ownership, which has happened—ownership is much more diverse now. It is a little concerning when we hear Labour Members oppose private investment in our utilities and infrastructure, from wherever it may come. A serious message is coming from the Opposition, one that they need to think long and hard about before it goes out more broadly to overseas investors who want to come and invest here in the UK.

[Caroline Flint]

Would the hon. Gentleman be surprised to learn that it was only in 1998 that people were first able to change their electricity supplier?

[Mark Pawsey]

That is a concern, but let us not forget who owned these businesses at the time. In many instances, shares in the utilities were bought by the customers, some of whom have since disposed of their shares—some utilities have been acquired by larger corporations. I agree that the ability to change supplier is important.

The other reason for privatisation was to make the industry more efficient. There is no question but that that happened in the immediate aftermath of privatisation. There were dramatic falls in price. I accept that there has been some consolidation, and it is now important that there is some intervention.

I am a member of the Business, Energy and Industrial Strategy Committee, which has taken evidence on this subject. I am probably the most sceptical member of the Committee, and I needed some persuading of the merits of the Bill. I accept that the market could work better, and other interventions could be made to improve it. I have concerns about the long-term consequences of the cap, and I know the Minister will address some of those concerns in her summing up.

The Select Committee has drawn attention to two key issues: the lack of activity by the regulator in holding the big six—the legacy companies of those that were privatised—to account; and, more importantly, the “feeble” response of the big six to the threat of a cap. It may be that the industry did not take the Government’s remarks to heart and that it thought it would get away with it. It is a shame that this legislation has had to be introduced.

As for the market, all customers receive the same product and it is therefore entirely wrong that so many of the big six have a large proportion of their customers on standard variable tariffs—the most expensive rates. I understand that 57% of big six customers are on those tariffs. Of course, it is wrong that those companies should use the high standard variable tariff price to subsidise low prices to attract new customers—we hear of a £300 difference—and in that respect the energy companies have not done the right thing in recent years. One thing they could have done easily was change the description of a “standard variable tariff” to an “emergency rate tariff”, so that consumers were clear that they were on a default rate and that a better rate would be available to them if they were to change tariff. It is wrong that the big six have taken advantage of inertia in that way.

The other innovation that could have been introduced, at the instigation of the regulator, would have been to have a fixed-term contract for the supply of energy, in the same way as people have a fixed 12-month period for their insurance, be it for their home or their motor. If people receive a renewal that is significantly different from the price they have been paying, that in itself is a trigger to shop around. It is a great shame the regulator has not identified and done this, and instead has been far too slow and too reluctant to use the powers it has had.

Switching rates are a useful measure of the effectiveness of the market, and it is great that more and more people are switching. We hear that about 20% switched in the past year. The rate is increasing, but I accept the point that the Minister will make that the figures we see are affected by super switchers. Like my right hon. Friend the Member for New Forest West (Sir Desmond Swayne), who sounds as though he is a super switcher, these people are changing very regularly. We do not need huge numbers of super switchers; we need people to look at and understand their bill, and change when they see themselves at a disadvantage.

I also hope the Minister will address the issue of the detriment that the CMA found—the £1.4 billion. We are looking at a transfer of that sum from companies to consumers, in many cases rectifying the wrongs done to those on standard variable tariffs. One concern is that that detriment exceeds the profits of the energy companies, so the question we might want to ask is: where is that money going to come from? I hope that the action of Government will drive efficiencies, but are those going to be able to be generated sufficiently quickly?

Alternative measures could have been implemented, and one of the first things I would have liked to have seen the Government consider is extending the existing protections for vulnerable customers. We have had protection for those on prepayment meters for some time, and that has been extended to those on the warm home discount. It should not have been difficult to look at Department for Work and Pensions data in order to identify other people who we might consider as being vulnerable and extend those existing protections to them. I am disappointed that we have not looked at doing that.

I am also disappointed that we did not look at more effectively turbo-charging the marketing programme to encourage people to change their supplier or tariff. Some 5.5 million people switched in 2017. If more people exercised the power to which the right hon. Member for Don Valley (Caroline Flint) just referred—the ability to switch—this legislation would not be necessary.

The third issue I wish to raise is that of smart meters, which will empower consumers. It is a great shame that we have not managed that process more successfully and we have not got SMETS2 meters out into the market more quickly, so that people are also provided with the tools to be able to change their supplier swiftly and easily. It is important that the Bill is a short-term measure. It is vital that the sunset clause is in place, and I know that the Minister will be keen to state why that is there. Like other Members, I hope she will address how we are going to identify whether the market is working sufficiently well to make the second term unnecessary. I hope that it will not be necessary and that the action the Government are taking now will cause the energy companies to address the issues and deal with standard variable tariffs.

I wish quickly to address one concern about the possible consequences of the price cap. I am worried that we will see the same as what happened with tuition fees, with suppliers congregating around the cap and there being less incentive for people to change. I am worried that in the short term some of the work we have done to encourage people to switch will be lost as things stabilise. As I have mentioned, I am also worried about the difficulty of removing the cap, and, as I said in my intervention on the Secretary of State, I am concerned about how we can set it at the right level.

As other Members have said, there is currently lots of change in energy generation. I hope that the dynamic nature of the market in generation can be replicated in the market in supply, and that the temporary measure in the Bill will be exactly that so that we can return to an effective, competitive market as quickly as possible.

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[Antoinette Sandbach (Eddisbury) (Con)]

It is a pleasure to follow the hon. Member for North Ayrshire and Arran (Patricia Gibson). I agree with many of her comments.

It is quite clear that gas prices fell in the period between the early 1990s and 2001, and bills were down by about £102, but they rose in the period from 2001 to 2015 by about £408. Electricity prices rose 44% between 2003 and 2007. Although I agree that we need to take action, I argue that it this Government who are acting when the previous Government failed to do so. Why do we have to act? As my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) pointed out, it is because of predatory pricing by the big six companies.

[Caroline Flint]

I accept that we are talking about decades—I do not think that the market we ended up with was one that Margaret Thatcher thought that she was creating. The truth is that it was only after 2010 that we had any transparency and could access the data to tell us what was going on with these prices and why the mark-ups were so high. That is an important lesson from all this: transparency in this market is absolutely key.

[Antoinette Sandbach]

I agree that transparency is key, but I do not think that the price rises would have been hidden in the period between 2003 and 2007. Ordinary consumers would have seen—as we all did—what was happening in their bills at that time. I also agree that evidence-based policy making is the best way forward. In instituting the CMA review, David Cameron was not kicking the matter into the long grass; he was getting the evidence that proved that consumers have had a detriment of £1.4 billion. This is the action that is coming out of that inquiry, which reported in 2016. It is right that we are taking action. Which? shows that energy prices topped the list of consumer worries— 64% of consumers were worried about their energy prices. I find it puzzling that switching rates are so low—only 18%—given the way that consumers worry about their bills.

On the Select Committee, it was very shocking to hear the high numbers of people on the standard variable tariffs. Some companies had more than 80% of their customers on standard variable tariffs, which is simply unacceptable. It is that predatory pricing by companies where they are using those so-called sticky customers on the higher rates to offer switching rates that new entrants to the market cannot compete with and are therefore squeezed out. The Bill will address that practice, and I welcome that.

There is another area where we need to act. I follow on from the hon. Member for North Ayrshire and Arran in saying that switching is biased towards the A, B and C1 social groupings. Some 29% of those earning over £16,000 have never switched, but this figure rises to 39% among those who earn less than £16,000. As others have said, if people are not switching, they are not able to access the best deals. This cap is needed to protect those on the lowest incomes, but we must also encourage people in those groups to take advantage of the market. They can do so through Citizens Advice. Many libraries have computers that people can use to look up deals on the internet. It is important that, as well as the cap, the Government look at how they can reach out to the more disadvantaged social groups—groups D and E—that have never switched and at how they can take advantage of the market.

[Caroline Flint]

The hon. Lady is making an important point. Does she agree that it worth looking at how we could regulate independent brokers who could switch customers—on the customers’ behalf and under their authorisation—to the best deals? That might help these customers, and it could apply not only to energy, but to broadband, mobiles and insurance.

[Antoinette Sandbach]

We are already seeing those kinds of mechanisms with MoneySuperMarket.com and other organisations. However, some are incentivised, getting payments for switching. The Government have given Citizens Advice £100,000 to provide transparency regarding the rates offered and to help those who come to it with debt problems or other problems to switch.