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23 Jan 2007 : Column 392WH—continued
Many people have been surviving because bills have been capped under various schemes from the energy companies, although such capping is offset in the financial markets, so it is not a gift horse from the companies. Powergen and Scottish Power’s deals rolled off at the end of 2006, and British Gas’s deal rolls off in April. Some households will experience a 70 per cent. increase in their bills as the capping programmes come to a close. We all recognise that new investment in infrastructure is vital, but Ofgem has allowed an increase in the return on capital to the energy suppliers, which will rise from 4.2 per cent. to 4.4 per cent. It is estimated that that will mean a further £10 on gas bills
and £2 to £3 on electricity bills. In a time of rising prices, all that is compounding an already unacceptable situation.
The consumer is worse hit than that, because prices roll through into the inflation figures. Energy prices are a key component of inflation pressure through the consumer prices index and the retail prices index, with the resulting fear that increases will lead to higher wage demands and wage pressure. Indeed, that was a major part of the Bank of England’s decision to raise interest rates to 5.25 per cent. earlier this month. Many people think that they will rise to 5.5 per cent. next month, which will also hit both the poor and the well-off consumer.
The right hon. Member for Newcastle upon Tyne, East and Wallsend (Mr. Brown) and the hon. Member for Paisley and Renfrewshire, North (Jim Sheridan) talked about fuel poverty. The number of vulnerable households in fuel poverty has doubled in the past two years, as the Minister will be well aware, to about 2 million. I should be interested to hear whether the Minister thinks that the Government target of eliminating fuel poverty by 2010 is now even feasible, given the recent rise in prices and the behaviour of the energy companies.
We have also had an extensive and helpful discussion about meters and the problems in recalibration. There are about 1 million token meters in the UK. I asked Energywatch what it thought the differential was between the typical householder paying by token and those paying by direct debit, and the answer was £180 a year, which is a rather different figure. That means that the winter fuel allowance for some is gone in one fell swoop. That is a huge differential. I struggle to think of any other retail industry that charges its highest prices to the least well-off and its lowest prices to the better-off. That is a complete reversal.
The programme for smart metering, which could resolve the problem and put the energy companies in a position to charge the most vulnerable the same prices as the better-off, has been moving at a snail’s pace. That issue must be tackled. I have written to British Gas, Scottish Power, npower and Powergen, which are the four companies that are charging back charges for deferred recalibration, to ask why on earth they are following that practice. The hon. Member for Paisley and Renfrewshire, North was eloquent in discussing those issues. Scottish and Southern Energy Group and EDF Energy do not feel the need to impose those back charges on people.
Jim Sheridan: Just to clarify, my understanding is that as a result of political pressure British Gas has come round and is refusing to implement back charges.
Susan Kramer: I very much thank the hon. Gentleman for that. He is more up-to-date on the issue than I am, and I bow to his more pertinent knowledge.
Three companies are still engaging in back charging, however. As the hon. Gentleman said earlier, for many people, choosing the meter is a way of managing their budget—it is a responsible act to take, not an act of carelessness or something that they do because they cannot be bothered. Choosing a meter is an attempt to budget and manage properly on a small income. It is completely unacceptable then to find that a debt is
accrued because of that, through no fault of one’s own. The companies ought to end the practice immediately. I can see absolutely no justification for it. Smart metering should be rolled out as a priority. That topic is essential, so I hope that we shall hear a great deal more about it when the energy White Paper comes forward. I shall be interested, too, to see what the companies will say when one day they get round to responding to my letters.
The right hon. Member for Newcastle upon Tyne, East and Wallsend raised the issue of the environment, which is important in the context of energy pricing. We all recognise that energy from high-carbon sources is a key element of climate change. Prices for such energy will rise in the future, but that ought to be in the context of declining energy bills. Sometimes we confuse those two. British homes are exceedingly inefficient in the way that they use fossil fuels. If we had the same levels of home energy efficiency as for example Sweden—which is a far colder country, so we cannot say that the difference is caused by climate—the typical household would save £770 a year on its fuel bills and we would not be having this discussion at all. Domestic energy use accounts for about 20 per cent. of the UK’s total carbon emissions. If price rises were accompanied by bills that were reducing because of funding for a major conservation programme, major new efficiencies and safety nets for the most vulnerable and because of a surge of investment into renewables and new technologies, we would be responding differently today.
As consumers see energy price rises as a way for companies to take advantage and become wealthy at their expense, my great fear is that they will have a cynical reaction to all proposals that would lead to energy price rises and regard all such proposals as a cover for increased profitability, rather than part of a coherent climate change strategy and a mechanism that could lead to lower bills, even if energy prices rose on a cubic metre basis.
As we are well aware, energy suppliers have a regulatory requirement to promote energy efficiency. However, the conundrum is that they still make far more money from increasing energy prices than from trying to persuade people to be more efficient.
A great deal has been said about the European Union. Last winter, imports from Belgium were extremely scarce, despite the lure of high prices in the UK. The European Commission expressed serious concern about Governments who hoard or divert supplies of liquefied natural gas and we have all welcomed its dramatic action, which included raiding the offices of European gas suppliers. That made clear how serious the Commission is about the issue. It also launched anti-trust investigations. I welcome its strongly worded statements that consumers and businesses are losing out because of inefficient and expensive gas and electricity markets.
However, it is important to say that in the UK we should not be complacent. Continental Europe is managing many of its markets inefficiently, but that does not mean that the UK market is satisfactory. I asked Energywatch whether I could see in graph form, which I sometimes find easier to understand, the pattern of wholesale and retail energy price rises for the past few years, the one charted against the other. I know, Mr. Amess, that we cannot show exhibits in
these debates, but a visual scan shows something remarkable. As we know, energy companies buy ahead in the market, and that is an argument for the lag in reducing prices. However, when wholesale prices are rising, the lag on those graphs looks exceedingly small. In fact, the companies sometimes seem to be leading, rather than lagging. It is a curious pattern. Yet as wholesale prices decline, the lag looks very long; there seems to be very little balance between the two.
More worrying, however, is that the energy companies are moving in lock step. The companies have different capital structures. There are different degrees of vertical or horizontal integration in the industry, and different customer mixes. Prima facie, I would expect a variety in the pattern of energy purchases and pricing strategies, but I do not. There are six companies in the UK market today, down from 22 only a few years ago; not a single one of those consolidations was examined by the Competition Commission. Now the pricing patterns seem rather unexpected.
Comparing our situation with that of continental Europe is comparing worse with bad. Ofgem has the power to fine companies 10 per cent. of global revenues if they are pricing inappropriately or lack competitiveness, or it can refer companies to the Competition Commission. It strikes me that it is extremely shy of taking such action. Ofgem’s typical answer is to tell consumers to switch to another supplier. However, as others have said, the gains made from doing so tend to be extremely short-term: one switches to another company because it projects that it will provide a lower price next year, but price changes follow. To expect consumers to be checking and switching virtually on a monthly basis is completely unrealistic.
When looking at the graphs that I described a moment ago, it is easy to see that the whole industry pretty much realigns itself according to the patterns of British Gas. That was certainly true last March. British Gas has promised that it will cut prices some time this year, but that strikes me as a soft statement—not one on which I, as a consumer, would wish to hang my hat.
I have asked the Minister to consider a number of things, particularly the vulnerability of those in fuel poverty, issues of metering, the potential for smart meters and better ways to increase household efficiency across the field of energy. He should also look again at his powers to refer companies to the Competition Commission. If Ofgem will not act, the Minister can. I recommend that he looks at the detail that Energywatch allowed me to look at. He should look at those pricing patterns and consider whether we need to act far more strongly. I ask him to take that into consideration.
10.36 am
Charles Hendry (Wealden) (Con):
It is a great pleasure to take part in a debate in which all who have spoken have made extremely constructive and thoughtful contributions. Like others, I congratulate the right hon. Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) on his speech and particularly on
how he has worked with his colleagues in Lanarkshire to ensure that they have the maximum joint impact on behalf of their constituencies. That is a lesson to us all on how to achieve more by working together.
The problems that we are addressing would have been much worse had it not been for the mild period in the run-up to Christmas. Given the climate today, it may seem a long time ago, but December was extraordinarily mild. Had it not been, people’s bills would have been higher and the problems worse.
I listened with care and interest to the right hon. Member for Newcastle upon Tyne, East and Wallsend (Mr. Brown), who made some extremely valid points. At times, we all see him as the Chancellor of the Exchequer’s representative on planet earth. Perhaps underlying his comments was a hint that when the Chancellor eventually takes over, he will introduce a windfall tax, a commitment explicitly called for by the hon. Member for Paisley and Renfrewshire, North (Jim Sheridan); I am not sure why Scottish constituencies have such long names.
However, I would exercise caution. The hon. Gentleman talked about taxing BP on its global profits for what is essentially a British issue. We have to be very careful with global companies, which can move elsewhere. I think that one of the first things that BP would do would be to stop its investment into seeing whether carbon capture and storage can be made to work. Policies such as the hon. Gentleman’s can often have unintended consequences, so we need to exercise significant caution.
We have heard that the DTI has set targets for eliminating fuel poverty in vulnerable households and also that we have moved further away from that in recent years. It has been estimated that the total number of vulnerable households in fuel poverty will have risen by about 1 million between 2003 and 2006. The biggest contribution has not been Government measures but the era of lower, sometimes falling, fuel costs. That took many people out of fuel poverty. In exactly the same way, prices have been rising sharply and that has brought many more people back into fuel poverty.
The DTI estimates that for every 1 per cent. of fuel price increase, 40,000 homes are pushed into fuel poverty. Energywatch estimates that the number of fuel-poor households in Britain will soon top 4 million and the Government look set to miss their target of eliminating fuel poverty in all vulnerable households by 2010. Those increases mean that people on an average income are feeling the pinch, as average household energy bills now top £1,000 a year. However, without any doubt the biggest effect of the price rises is still on consumers on lower and fixed incomes and those who do not have the financial flexibility to accommodate large hikes in the bills. It always strikes me as rather peculiar that the more energy one uses the lower one’s bills become. The first few units are charged at a higher price than the subsequent units, which means that those who are in single households or trying to be cautious about the amount of fuel that they use end up paying a higher price per unit than those who are more profligate with electricity or gas.
The debate has focused clearly on the significant increases that have taken place: a 94 per cent. increase in household gas bills and a 60 per cent. increase in
electricity bills between 2003 and 2007. Those are huge increases, and understandably an issue of great concern to us all. I also understand the concerns that have been expressed about pre-payment meters and I am certainly concerned that several companies, particularly those that have been mentioned in the debate—npower, Powergen and Scottish Power—are continuing the practice.
I am disappointed to hear that the hon. Member for Richmond Park (Susan Kramer) has not had a reply to her letters. I wrote before Christmas and had a reply almost by return, so maybe she wrote only yesterday and the companies have not had a chance to reply. I received a comprehensive response to the concerns that I raised and was left in no doubt that the companies want to end the practice. However, they say that it will take time. The meters need to be replaced, and we need to have more effective smart metering and meters that can be read or changed automatically without access to the properties. In some cases, people have been left for years without a visit to correct the calibration of their meters. That is simply unacceptable. Something the Minister might consider discussing with Ofgem is whether there should be a cut-off period for back-charging. If the companies have not addressed the issues within a period of some weeks, they should not be able to back-charge for anything beyond that period. The companies clearly have the ability to bring the practice to an end and they must do so as quickly as they can.
Liberalised energy markets have provided the UK with some of the cheapest energy in Europe for much of the past decade. However, that has changed in recent years as the UK system is much more open to changes in pricing on the international market than, say, France or Germany. We have seen markets where prices have gone up, and previously they have gone down, too. That is the way in which the market works. Ofgem has strong powers in this area, and it must use its powers to intervene if it feels that there is an unacceptable time lag between the price on the wholesale market going down and the reflection of that in the prices charged to consumers.
We have seen a remarkable amount of flexibility and we need to understand why that has happened. The issue in this country is often that the gas is bought on the spot market or the wholesale market many months before it is used, so there will inevitably be a time lag. Our concern is about how long that time lag should be rather than if it takes place at all. That links into the issue of storage. Historically, we have needed less storage than other countries because when we had all the gas that we needed domestically we could simply pull it out of the North sea and use it as required on demand. As we have now become a net importer of gas, we need more storage facilities.
The Government have been slow to deal with some of the issues, although they are now getting the situation more on track. Until recently, the UK had only about 11 days’ storage for gas compared to an average of 55 days’ storage in Europe. Connections such as the Langeled pipeline and some of the new facilities that have been brought on stream will address those issues before long. This winter will certainly be less tight on gas than last winter, and when Langeled is operating in full capacity in the course of this year the
problems should significantly be addressed. I dare say that it will be some time before any Minister says again that we are awash with gas, as the Minister said last year.
The debate is set against a background of rising energy prices, and that is a global issue, but mention has also been made of the importance of tackling climate change. We must understand that some green means of generation will be more expensive than some of the cheap sources of energy that we have had in the past. If coal is to have a future, it has to be dealt with in a different way through carbon capture and storage. That will significantly push up the cost of generating electricity using coal. If, as we do, we all want to see new, green forms of electricity generation coming on stream, we have to accept that some of them will be more expensive than the forms that we have traditionally been used to.
Oil prices doubled between 2004 and 2005 as global demand increased and peaked at more than $75 a barrel in August last year. The price of gas is a critical factor in determining the price paid by the grid for electricity generation, as gas contracts are often linked to oil prices. Rapid increases in the oil price thus have an immediate effect on gas and electricity bills.
A number of factors are involved, but at the heart of addressing the problem to achieve a long-term solution is liberalisation. Disproportionate pressure has been put on the liberalised markets, particularly in the UK, because of the lack of action by some of our European colleagues. Indeed, the lack of effective liberalisation in continental gas markets could cost end users of gas as much as £10 billion a year, as estimated by Global Insight in August 2005.
We wait with interest to learn what the European Commission has to say about the large European so-called national champions and what it intends to do about those over the coming year. Energywatch has said that it believes that the root of the problem lies in uncompetitive wholesale gas markets, and has called for action to deliver liberalised European energy markets and greater import and storage capacity. We welcome the work of the European Commission to investigate the need for liberalisation in the European energy market. There are significant problems with the arrangements in Europe, including a high degree of market concentration and vertical foreclosure and a lack of transparency and market integration. Those are terms that will not be widely understood, but the issues need to be addressed as a matter of urgency.
A major factor behind the increasing cost of fuel and energy for the domestic user is a dwindling supply of North sea gas and oil. The Government have estimated that the UK will be a net importer of oil on a sustained annual basis by 2010. Now, more than ever, we rely on gas and oil from abroad and must act wisely when satisfying the balance between price and reliability of source. Without policy changes, investment in future energy policy will be in new gas-fired power stations, but just because a new gas-fired power station is built that does not mean that there will be the gas to fuel it. Indeed, some estimates suggest that there will be a demand for four times as much gas as will be available.
We have heard about the impact of the prices on individual households and people. The points have been well made and they are issues that we all
understand. I wanted to make more points, but it is important that the Minister is given a significant amount of time to respond to those points and to explain what additional steps the Government can take to address them.
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