Domestic Gas and Electricity (Tariff Cap) Bill

John Penrose Excerpts

3rd reading: House of Commons & Report stage: House of Commons
Monday 30th April 2018 Commons Chamber

We hope that the Government will see the wisdom of and accept the new clause and all the amendments, but if the Minister does not set out a satisfactory explanation of why they cannot agree to new clause 1, we may have to test that principle by means of a Division. Overall we wish the Bill well, as we have shown in our positive stance towards it in our debates so far. We trust that the Government will, in taking on board our assurances about the positive nature of these amendments, produce from this House an amended Bill that will be strengthened by the full support we all give it as it moves to the other place for consideration.

[John Penrose (Weston-super-Mare) (Con)]

I rise to speak to amendments 2 to 4, which stand in my name and those of a variety of Conservative colleagues, including two members of the Business, Energy and Industrial Strategy Committee as well as former Ministers and Cabinet Ministers.

I should pause to say that I am not arguing against the Bill overall—I spoke and voted in favour of it in principle on Second Reading—and I hope that everyone involved in the campaign I have headed in this area for the past year and a half appreciates that I believe an energy price cap is much needed. I pay tribute to the 214 cross-party MPs who signed up to the idea, plus the Prime Minister and the Minister, who have all been vital in getting us to this point today.

My concern is about not the principles but the detail—the type of price cap envisaged under the Bill—because, to put it bluntly, a fair number of free market Tories are pretty concerned that we are choosing the most anti-competitive, complicated, bureaucratic and inflexible cap on offer. It is inflexible because the Bill specifies an absolute cap that will be set by an all-knowing committee of Ofgem regulators every few months. However, the international price of energy moves around every day, and it is impossible to know what the price will be in the next six minutes, let alone six months, so the cap price will be out of date in moments and will stay out of date until it is reset again months later. That means it will not protect customers in the way we all want and, because it will be officially blessed by Ofgem, it will embed and legitimise high prices. It is not just me who is worried. Which? says it is

“not certain that customers on a capped default tariff will benefit as market conditions change in future”.

The proposed cap is also complicated—hideously complicated. Why? The assiduous folk at Ofgem have already started publishing details of how they might go ahead and they are warming to their task. It would not be just a single cap, they say; it would be 42 different ones to cover gas and electricity, different meter types and different parts of the country. There would be more than 42 different caps, however, because each one may be split into several different versions depending on whether people pay by direct debit or in some other way, and each will have a fixed standing charge and a variable element—oh, and there is headroom, too. Each of those three items can be calculated in a marvellously technical and complicated variety of ways. For example, the variable element could use a basket of market tariffs, an updated competitive reference price, or a bottom-up cost assessment. Those things might be calculated using a periodical review of realised costs, or third-party data with pre-specified allowances for certain cost items, and so on and—turgidly, complicatedly—on.

[Sir Oliver Letwin]

My hon. Friend and I have had an engaging conversation about this for many months, but given all the things he reports Ofgem as planning, surely that means we will have not a single point tariff that rapidly becomes outdated, but rather a tariff that will respond—for example, to input costs?

[John Penrose]

As my right hon. Friend says, he and I have had many conversations about this over many months. I can only say to him that if his argument is that Ofgem might come up with a version of an absolute cap that is a bit less absolute and a bit closer to what I am proposing—in effect, one that caps the gap: a relative cap—I would agree with him that that is a good thing, but if that is the case, as a source of advantage for the cap, why would it not be even better to go the whole hog and have a relative cap in the first place?

[John Redwood]

Does my hon. Friend think that a relative cap is more likely to deliver a better deal for the customer than an absolute cap?

[John Penrose]

Yes, absolutely. We heard from the hon. Member for Southampton, Test (Dr Whitehead) what I thought was actually rather a good explanation about why such a cap is so wonderful. The Opposition disagree about the purpose, but the fundamental reason why we are all in the Chamber is that we agree about the injustice in the way the energy market works at the moment, which is that people can start off on one tariff and then get secretively pushed on to a much higher one. It is the clandestine mark-up that riles everybody and really upsets people. By definition, a relative cap would affect what is hacking everybody off, and it would be precisely targeted on dealing with the mischief that is the reason behind the Bill in the first place.

[Rebecca Pow (Taunton Deane) (Con)]

I want to put to my hon. Friend something that has been said by MoneySavingExpert, which is that a relative cap would simply result in firms withdrawing the cheapest deals—the shadow Minister mentioned that—and create the “worst of both worlds”. We do not want to fall into such a trap, as some consumers on expensive tariffs would still be paying more than they need to while many firms would not offer the cheap deals they currently offer.

[John Penrose]

That argument has been advanced for both a relative cap and for an absolute cap; some people argue that it applies to both. We heard earlier a rather good explanation of why the argument does not really apply, which is that it would be commercial suicide, or a commercial kamikaze effort, for anybody to try to raise their prices in the switching market, which is highly competitive, because they would very rapidly start losing customers hand over fist. I understand that argument, but I do not think it would be relevant in practice.

[Stephen Kerr]

Just to underline the delicate nature of the balance that we are talking about in terms of caps, the majority view of the Competition and Markets Authority in its report was that a standard variable tariff cap would

“run excessive risks of undermining the competitive process”.

This would be likely to result in worse outcomes for consumers in the long run by

“reducing the incentives of suppliers to compete”

and

“reducing the incentives of customers to engage”,

so a delicate balance needs to be struck.

[John Penrose]

That is absolutely bang on the money. For goodness’ sake, the Competition and Markets Authority is suggesting such a thing, and that is after all its business.

[Mark Pawsey (Rugby) (Con)]

Will my hon. Friend give way?

[John Penrose]

I will take one more intervention, but then I must make some progress.

[Mark Pawsey]

My hon. Friend is talking about people moving from a competitive rate to the default, which he describes as the standard variable tariff. Does he think that people would be less inclined to put up with the higher rate if it had an alternative name, such as an “emergency tariff”?

[John Penrose]

There is now a whole range of underlying pro-competitive reforms—I am not normally one to give Ofgem a vast amount of credit, but it really deserves some in this case—that are needed in this market. Renaming the default or standard variable tariff may not have a huge effect, but it might have a positive effect. There is a series of other things, some of which are even more important, that must happen. It is crucial—I agree with the Labour spokesman about this, as I think we all would—that we do not waste our time and that Ofgem continues to reform the market while this temporary price cap is in effect because, when the price cap comes off, we will want the market to have been sufficiently reformed that no further price caps are necessary, because it works like a normal market in which the customer is king. If we have not done that, we will have wasted our time and everybody else’s.

I was talking about the complications and the hideous complexity of Ofgem’s proposals, but if all that inflexibility and complexity has not put Members off already, they should have a look at the bureaucracy. Pretty much every free market economist will agree that the best way to discover a price is not through a committee that meets every couple of months, but with a genuinely competitive market in which supply and demand are matched from moment to moment all day, every day. Fortunately, we just happen to have one of those handy. The switching market is full of deals on which energy firms compete like mad for business. It is innovative; it has razor-sharp prices; and it takes changes in wholesale energy costs in its stride every day of every week. The customer is, in other words, genuinely king or queen.

That is, as we have just discussed, exactly what we want to see in the rest of the market, so why are we ignoring it? Why go for a far less competitive version that is inflexible, hideously complicated, bureaucratic and committee-based when we could simply tie rip-off default tariffs firmly to the switching market and go down the pub for a drink? The mechanism, as we have heard, would be simplicity itself: a maximum mark-up between each energy firm’s best competitive price and its default tariff—we would cap the gap. Unlike with the arrangements in the Bill, there would be just one decision for regulators to take: the size of the gap. Everything else would be taken care of by the link to the competitive switching market.

[James Heappey]

I am grateful to my hon. Friend—my neighbour—for giving way. Has he given any thought to what a relative cap would do for time-of-use tariffs, the arrival of which we should surely be encouraging? They rely on a big differential from free or negative pricing to the most expensive prices, which disincentivises energy use at peak times. Is he concerned as I am that what he proposes might discourage the arrival of such tariffs?

[John Penrose]

Much would depend on the size of the cap on the gap proposed by Ofgem, and much would depend on the rest of the pricing structure of the energy firm in question with regard to where it chooses to put its default tariff. Many of these things are, as my hon. Friend points out, yet to arrive. They are starting to be introduced, but they are a relatively new innovation, with small but growing penetration. He is absolutely right that we need to make sure that we do not disincentivise such tariffs. They certainly will not be to everybody’s taste, but they may be to the taste of an increasingly large number of people.

I would prefer to start from a simple cap—capping the gap—and then have to make a couple of adjustments, rather than making even more complicated something that is, as I have described, already hideously complicated. If we manage to take care of all the complexity and bureaucracy by establishing a link to the competitive switching market—hey presto!—we will have driven a stake through the heart of the rip-off tariffs. Switching supplier would still be worth while, and there would be far fewer jobs for bureaucrats, lawyers and lobbyists. The customer would be king.

My amendments would make a relative cap either possible or required, depending on which version was chosen. I do not expect or intend to press the amendments to a Division, but I want everybody to realise that there is a more competitive, more flexible, less bureaucratic, more customer-friendly and generally better alternative, and that at the moment we are not taking it.

It is not just free market Tories such as myself who think that capping the gap is the right way to go. The Labour Front-Bench team, as we have heard, have tabled an amendment that proposes something similar. They might disagree with my description of it, and they have a fancy-schmancy name for it, but, broadly speaking—as my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) pointed out earlier—the wording is very similar and the amendments would effectively do the same thing.

Labour Front Benchers and I disagree over timing, however. The effect of their proposal would be permanent, whereas ours would be temporary while we fixed the underlying anti-competitive problems in the market. There is, none the less, clear cross-party consensus on the principle, at the very least, so why does the Bill ignore this cross-party opportunity? Why are a notionally pro-competition Conservative Government choosing the less competitive, more bureaucratically inflexible and more complicated version instead? Why are we snatching defeat from the jaws of what ought to be a famous free market victory? I look forward to hearing the Minister’s answer.

[Frank Field]

I will not press my amendment to a Division either, but I am very happy to speak to it for 30 seconds. It is designed to request an undertaking from the Minister that she will ask Ofgem to look at the poorest consumers on which it has data and offer them an automatic switch to the lowest rate that suits their expenditure pattern. On that happy note, because I am sure the Minister will give way later, I shall sit down.

--- Later in debate ---

[The Minister for Energy and Clean Growth (Claire Perry)]

I thank all colleagues here this afternoon for their intelligent and sensible contributions to a debate that has run for several years. We are now within striking distance of bringing this Bill to a conclusion and sending it off in good order to the other place. I particularly thank my relatively close—geographically speaking—party colleague, my hon. Friend the Member for Weston-super-Mare (John Penrose), whose dogged and intelligent scrutiny, along with that of his colleagues, has made this a much better Bill, and I pay the same compliment to the hon. Member for Leeds West (Rachel Reeves) and her Select Committee. This shows that when we work together we can deliver good legislation. I will respond to the amendments discussed today and my hope is that in doing so no Member feels obliged to press their amendments to a vote.

New clause 1, which we discussed at length in Committee and again today, seeks to introduce an ongoing, almost perpetual, relative price cap once the absolute price cap is removed. Like the Member speaking for the Scottish National party, the hon. Member for Kilmarnock and Loudoun (Alan Brown), I am a little perplexed by this amendment, as I said in Committee. The hon. Member for Southampton, Test (Dr Whitehead) has spoken so powerfully on many occasions against a relative cap and in favour of an absolute cap, and yet this new clause suggests bringing in the opposite: a relative cap on a perpetual basis. I will talk more about the issues we have with relative caps, but this is a little counterintuitive. It would also mean—this will be anathema to many colleagues who have spoken passionately today in support of a relative cap—effectively perpetual Government intervention in the energy market. There is strong agreement across the House in favour of competitive markets delivering the best for consumers. When those markets are broken, or regulation slips out of date, it is right to improve the powers of regulators, but perpetual Government intervention, particularly in setting prices, is not the way to deliver the best outcomes. Therefore, the new clause is not necessary.

Moving on to the comments on relative caps, Ofgem said in its evidence, which others strongly supported, that a relative cap will be gamed by the largest suppliers. If we introduce this hypothesis, it will be gamed. As my hon. Friend the Member for Eddisbury (Antoinette Sandbach) also pointed out, we also heard in Select Committee evidence sessions that there was overwhelming support for an absolute cap—now and then.

[John Penrose]

rose—

[Claire Perry]

My hon. Friend wishes to intervene, and I will of course give way.

[John Penrose]

I hesitate to pray the Labour Front Benchers in aid of my argument, but the Minister has just quoted Ofgem in favour of hers, so perhaps it will make sense. Does she not agree that it would be commercial suicide for a supplier to raise its tariffs in the competitive market, to protect its position, were a relative cap to be introduced? I think the shadow Minister said earlier that it would be commercially suicidal or a kamikaze move.

[Claire Perry]

I am afraid that I have to disagree with my hon. Friend and reject that point. That is what has been happening for many years to the most vulnerable customers, who have seen price rises recently and who are not switching for a variety of reasons. We are trying to deal with that customer group today. I hope that the hon. Member for Southampton, Test will withdraw the new clause on the basis that it is not rational and not needed.

Amendment 5 proposes that a set period of five months be placed in the Bill. We debated that at length in Committee, and I believe that we are all seized of the need to bring the Bill into force in good order as quickly as possible—we do not want to wait any longer. We want the Bill to be in place by the time we rise for the summer recess, and obviously it has to go through the other place first. We want the caps to be transparent and to be applied in time for this winter, 2018, so that people can start to benefit and make savings on their energy bills immediately.

We heard from Back Benchers why they felt the five months provision would be difficult, and I will add my concern that if Ofgem were to go over such a legal limit, even by a couple of days, it could inhibit its ability legally to bring forward the cap. We must do nothing to reduce Ofgem’s ability to consult on the cap and put it in place. It is worth emphasising again—I am sure the regulators and others are listening—that we want and expect the cap to be in place by the end of the year. I do not think the proposal in amendment 5 is either legally permissible or necessary.

Amendments 2, 3 and 4 were tabled by my hon. Friend the Member for Weston-super-Mare and supported by many Members who have thought carefully about this issue. We have refined the Bill through the course of our discussions and made it into a better piece of legislation, and I am grateful for that. We have heard again today many of the arguments that we have heard during the Bill’s passage. We are talking about a theoretical position in talking about a relative cap, because the only cap we currently have is the safeguard tariff, which is an absolute cap and which appears to be working to save customers money.

Our concern is that with a relative cap, we could see suppliers lifting their skirts on their cheaper tariffs, and that there could be an inhibiting effect on some of the innovations that my hon. Friend the Member for Wells (James Heappey) mentioned, with companies charging extremely low prices for time of use tariffs. We heard overwhelming evidence during the evidence sessions chaired by the hon. Member for Leeds West, and also in the Public Bill Committee, that absolute caps were considered a much better way of bringing forward the protections that we all want. That is the view of Ofgem, the Select Committee, Citizens Advice, moneysupermarket.com and some of the new energy companies, and I am persuaded that those organisations have the interests of the customers we are trying to help at heart.

I am also concerned that if we had relative caps, there could be a lot of gaming going on and a lot less transparency. We have talked about what would happen if suppliers lifted their prices. We know that the trouble we have is with a group of customers we refer to as disengaged. They are not digitally enabled; they tend to be older, on lower incomes and more vulnerable; and they are not as susceptible or sensitive to the price elasticity that would perhaps persuade others to switch. The aim of this price cap Bill is to protect those customers, so I do not believe that it is necessary to accept those amendments.

[John Penrose]

I just want to point out that the criticism that the relative cap can result in an increase in switching rates and tariffs has equally been applied to the absolute cap. There has been criticism of both kinds of cap, not just of the relative cap.

[Claire Perry]

There has been a lot of criticism of both kinds of cap, but if we look at the one sort of cap that we have—the prepayment meter cap that is extended to vulnerable customers—we see that those customers have saved between £60 and £120 on the basis of that cap. It has actually worked to reduce their prices. I am pleased that my hon. Friend is not intending to press his amendment to a vote.

Amendment 6 seeks to ensure that we have a stated amount of the savings that might accrue. I think that is perhaps slightly mischievous, and it does not really reflect the consensual spirit that we have had throughout the passage of the Bill. I can imagine that the people coming up with these numbers were looking at the savings that we have discussed in relation to the prepayment cap, or indeed the £300 average difference between the most expensive and the cheapest tariffs in the market. However, as my right hon. Friend the Member for Wokingham (John Redwood) said, we need to calculate volume as well as price to estimate the service, and we do not yet know what cap Ofgem will set. We also do not want to constrain Ofgem’s ability to set the cap or to create targets for the big six to work towards as the maximum saving. I hope that, on the basis of that explanation, the hon. Member for Southampton, Test will be content not to press his amendment.