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5 Feb 2008 : Column 190WH—continued

The most damaging evidence on this issue came out of recent research by the university of East Anglia, which found that a third of people who had switched ended up worse off than they were before. They had made the wrong choice. It is easy to understand why. Many people change as a result of a calculated, thoughtful exercise, but many change under pressure. I have had
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endless correspondence with Scottish and Southern about old ladies in my constituency being browbeaten into changing their contracts and making bad choices. For all those reasons, one has to be sceptical of the Ofgem argument that there is a functioning market. It functions in part, but it does not function brilliantly.

The final part of the argument is the industry’s claims that, because of the competition, British producers supply cheap power and gas. That is certainly true of British gas, which has historically been relatively cheap. The tables coming from the Minister’s Department suggest that British electricity prices are roughly in the middle of the European range, but that is misleading, because those prices are after tax, and the British VAT rate is one of the lowest in Europe; it is 20 per cent. in many countries. Using the pre-tax cost, Britain has the fifth-highest electricity prices in the Union, so something is not working.

Mr. David Drew (Stroud) (Lab/Co-op): I congratulate the hon. Gentleman on securing this important debate. Does he agree that one problem with the current energy market is that Britain has so little influence over it? We depend increasingly on foreign-owned companies that clearly have interests other than serving the British people to whom they supply energy.

Dr. Cable: I am not sure that I agree. There is a problem with energy suppliers—I shall come to my conclusion on that point in a moment, which is similar to that of the hon. Member for Selby. However, I do not think there is an economic, nationalist argument. I am not sure that having Union flags flying in the board rooms of energy companies would necessarily alter their prices. It is not a question of the nationality of owners, but there is a problem. That has been recognised by many in the competition business.

Stephen Davies, a leading adviser to the Office of Fair Trading, has described the Ofgem approach as misguided and misinformed, and argues that there is a serious problem. Surprisingly, the issue has been taken up by the Competition Commission. The problems are complex. We are not talking about price fixing and crude cartels, but there is a competition issue. The head of the commission has argued that the purpose of its market investigations is

That describes the energy sector pretty well. He then makes a slightly odd remark:

I want to know why the commission is not being involved. It clearly has the competence and powers, and is willing to look into the issue. It feels that Ofgem is not making a reference that it should make, and many questions need to be answered, so why not have an investigation?

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One aspect of Ofgem’s conclusions is right: it accepts that there is monopoly profit in the market. That arises from the gains that producers make from being gifted trading certificates under the European emissions trading system. In response to the Chancellor’s intervention a few days ago, Ofgem estimated that the energy industry will benefit from a windfall worth £9 billion of trade permits under the scheme over a five-year period. Effectively, there is a gift to the industry of £9 billion over five years because companies are being given the permits free of charge. That is a pure windfall and has nothing to do with efficiency.

A series of questions emerge from that situation. First, what are the Government doing about it? Does the Minister intend to implement Ofgem’s recommendation that the windfall should be channelled—it did not suggest a mechanism—to those who are hardest hit by the energy price rises? Should companies try to ensure that it is passed on to all consumers? I know that he is trying to introduce an auction system; I think that 7 per cent. will be auctioned in the next few years, but why only 7 per cent.? Why not 17, 70 or 100 per cent.? It is a free gift to producers, after all. Why is it not being auctioned as one would expect in a market? I expect that he will say that if it were auctioned, companies might try to pass the cost on to consumers, thus pushing up costs even more, but that is why the problem has to be dealt with in conjunction with a reference to the Competition Commission. Different aspects need to be considered together.

David Taylor: The Chancellor will be familiar with the concept of windfall gains because the Treasury will have received about £500 million extra in VAT receipts in the past five years because of the increases in electricity and gas prices. Why cannot some of that be recycled into Warm Front, which is losing about 25 per cent. of current expenditure levels and Government support?

Dr. Cable: That is a good point that I intend to discuss later. There are windfall taxes, although we do not call them that any more, such as the petroleum revenue tax. Other countries are doing that. Spain is trying to retrieve some of the windfall from the European trading certificates, although I do not know what mechanism it is using. It may be similar to that which the hon. Gentleman describes.

My next set of questions is about what the Government could or should be doing regarding other aspects of energy costs, starting with gas storage. An odd feature of Britain is that we have low levels of gas storage in comparison with other EU countries. I think that the figure is still five days, as opposed to more than 50, but it might have changed. We have one major storage at the Rough field, going back to the 1980s. In a world in which prices are volatile and a lot of imports are increasingly required, storage becomes important to even out booms and busts in prices, so why is ours so low? Could anything be done about it? As someone who came out of the oil industry, it puzzles me that we have a mandated strategic reserve for oil—under an international agreement, companies have to provide a strategic reserve—but none for gas. Gas affects households and industry as opposed to just transport, so it is just as strategic as oil—why do we take a different approach to it? Is there anything stopping the Government having such a policy?
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Does it have to be done internationally? Could it be done domestically? What are the practicalities of it? Surely, if we are interested in having greater stability of gas prices, that is one way of achieving it.

My second question relates specifically to diversity of supplies. A recent and, indeed, welcome development is that instead of being dependent on the end of the pipe from the interconnector, Britain now has alternative liquefied natural gas supplies coming in by boat. There have been delays—the Milford Haven problems are well known—but there is a question that I find difficult to answer. Perhaps the Minister knows the answer. Why is the existing Isle of Grain port so underutilised? Apparently, it is only about 50 per cent. utilised, yet if there were a big burst in domestic prices, one would expect, in a market, that liquid gas would come into the country.

A possible explanation is that the Isle of Grain is a BP project and is therefore run in the wider interests of BP. There is nothing wrong with that, but the Government chose not to require third-party access, which would have brought in more competition, enabled more suppliers to make use of the port, and helped to stabilise the market. Why has that not happened, and is it possible to rectify the situation?

Another question under this heading relates to the European Union. We know the well-rehearsed arguments about the malfunctioning of the European gas market in particular, and the link to oil prices, which is a linkage that should not occur, but the practical question is whether anything can be done about it. We all know about EU lack of liberalisation, but where are we on rectifying it? I understand that legislation has been promised by the end of next year that will, in effect, change the market for the better. Can the Minister update us on his assessment of the realism of that time horizon, and whether the legislation will make a difference?

Mr. John Baron (Billericay) (Con): In essence, I agree with the vast majority of the hon. Gentleman’s points, but I suggest that we need to look closely at the EU treaty that is before us at present, as it fails to usher in a truly competitive EU market. The term “free competition” was apparently removed from the draft treaty at the behest of the French, and we are seeing now, for example, the amalgamation of two giant energy companies, Gaz de France and Suez, to create one enormous one. Economic nationalism seems to be on the march on the continent. What does the hon. Gentleman have to say about a treaty that does not seem to be tackling this issue?

Dr. Cable: The hon. Gentleman is anticipating not what I am about to say but what I shall say tomorrow in the debate in the main Chamber on competition policy and the protocol attached to the treaty. In passing, the simple answer is that the protocol will, in effect, make the Sarkozy amendments symbolic and not real. However, the hon. Gentleman has touched on a real problem, and I do not want to minimise it.

My third question is about fuel poverty and the Government’s response to it. The broad problem has often been debated here. We have the problem that a large number of people—currently 4 million, as opposed to 2 million in 2003—are classified as fuel poor on the standard definition of greater than 10 per cent. of income spent on domestic fuel. The problem has been
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caused by a combination of income, energy prices and housing conditions, and the estimate is that some 420,000 fell into fuel poverty in the past month. Last year, 24,000 excess deaths were attributed to fuel poverty, so it is a major social problem.

It is fair to say that when this Government came to power, they initially made considerable strides to deal with the problem—the figure for fuel poor was 4.5 million in 1999—but we have had a recent reversal of fortune. I simply quote what the chairman of the Minister’s own quango, the Fuel Poverty Advisory Group, said about the policy on fuel poverty. He gives a rather harsh judgment that it is “incomprehensible, unjustifiable and shocking”. That is what he told the press over the weekend in discussing the report that his organisation has just published.

I want to focus on the practical ways in which the problem might be alleviated, in particular the debate around the social tariff.

Adam Price (Carmarthen, East and Dinefwr) (PC): Before the hon. Gentleman comes on to solutions, does he accept that part of the problem that we face in respect of fuel price rises is that they are unevenly distributed? Indeed, they are often concentrated in the most disadvantaged communities. Only today, figures came out that show that in Wales electricity prices are, on average, 20 per cent. higher than in England, and of course Wales has some of the most disadvantaged communities in the United Kingdom.

Dr. Cable: Indeed, the pattern of energy prices is regressive, both regionally and between social classes. What happens under the pricing system is that we have a negative social tariff, or, as somebody put it, reverse cross-subsidisation. In effect, the poor subsidise the rich through the pricing system. According to Energywatch, low-income households on prepaid meters pay 20 per cent. more, which amounts to some £140 a year on average, and something closer to £200 a year in the worst cases.

Clearly, the energy companies have addressed the problem, at least in theory, with their own social tariffs. Of course, some companies do not do anything; I believe that npower is one. Some companies—for example, British Gas—do rather more, but then British Gas has the biggest price differential between prepaid meters and online ordering, so the tariff is only partial compensation.

Can the Minister bring us up to date on the arguments on the social tariff? As he knows, a formidable coalition of charities—Help the Aged, Energywatch, the National Consumer Council, Unison, Save the Children, Barnardo’s, the National Housing Federation and Age Concern—is arguing that a Government power to require the companies to introduce a minimum standard of social tariff needs to be written into the Energy Bill. It is not a very ambitious demand, but it appears that the Government are balking even at that, and that they do not want reserve powers to be written into the legislation. I hope that the Minister will explain his position on the issue and say whether he is willing to listen to the powerful representations that have been made. A minimum standard is not too much to ask for in this context.

To conclude, this issue is relevant not just to the past few weeks. I fear that the sudden surge in energy prices
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may well intensify. In fact, the Minister himself has said that we have moved away from the world of cheap energy. I do not know whether that is true, but certainly in the short term oil prices will be very high, and they normally feed through into gas prices after three to six months. There may be further pressures for utility price increases. Many industrial users are seriously worried about the forward markets, and what will happen this summer.

Many of the issues that I raised will continue to be relevant. I hope that through debate and discussion we can make some progress, particularly on a Competition Commission reference and on a more progressive policy on fuel poverty and the social tariff.

11.28 am

Mr. Tom Clarke (Coatbridge, Chryston and Bellshill) (Lab): I congratulate the hon. Member for Twickenham (Dr. Cable) on introducing the debate and on his careful analysis of the problems that we are facing. I welcome what he had to say, not least because he anticipated some of the things that I wanted to say myself, and because he repeated some of the points that I made not just in the debate in this Chamber in January this year, but on 23 January last year, when I warned about some of the things that happened in the course of the year and the winter.

The policies of the energy companies and the role of Ofgem, which we will want to consider and which were touched on by the hon. Gentleman, have not avoided what seems to be a crass undermining of the Government’s policy on inflation. The fact is that millions of people in Britain, many thousands of them in my constituency, are finding that their quality of life has diminished. My hon. Friends who are present this morning have raised those matters again and again.

We welcome the fact that today’s Daily Record dealt in some detail with the issues that we are debating; we welcome that transparency. I am also pleased that the paper’s leader, although its coverage was largely encouraged by Alistair Buchanan, who does a very good public relations job for Ofgem, made clear the position that we are in:

The leader went on to mention that Alistair Buchanan

To be fair to Mr. Buchanan, he was promoting the idea, which I want to deal with shortly, and which the hon. Member for Twickenham addressed, that switching is the answer for many people. If there is a bonanza out there, it seems to me that it is not for the most vulnerable people, who have to pay the additional prices, or for those who have been the subject of so many studies, including the one by Save the Children, to which I shall return if I have time. More and more of the poorest people must deal with problems caused by price increases. If there is a bonanza, I can see evidence only of the one that the energy companies are enjoying to the hilt.

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Mr. Devine: My right hon. Friend has raised an important point. Does he agree that the Government are adopting a contrary position when they cap the pay of public sector workers in the fight against inflation—saving merely £30 million in the case of the police—while at the same time they allow companies to rip off the people of Britain?

Mr. Clarke: My hon. Friend makes a good point, which has been raised again and again by my constituents—and, no doubt, his.

The Daily Record leader concluded by referring to people power. In fairness, it was encouraging people to switch where that would be appropriate. However, it said:

I welcome what the Record is doing, but, as to people power, Members of this House have tried again and again to exercise exactly that. One of my reasons for calling for a debate last January was that my Lanarkshire colleagues got together and, trying to speak for 500,000 potential consumers, we wrote to all the energy companies and said, “If you can reach agreement with companies on a discount, we offer you the prospect, as Members of Parliament, with nothing to gain, of a forum to enable the big companies to speak to the people. There would be competition in action and our constituents would have the opportunity to choose the company best suiting their needs.” What we got from many of the companies was absolute abuse. There was no suggestion that our constituents could enjoy the same access as companies. I spoke to a gentleman from a big company yesterday who told me that it had an agreement under which it paid for bulk purchase five years in advance. I do not know of any of my constituents who are being urged to switch who would get that benefit.

I want now to discuss switching, and what it means in reality. I use the word “reality” because I am a realist. The hon. Member for Twickenham accepted, and I agree, that of course wholesale prices have risen and that oil and energy reforms cost more. Inevitably that has an impact on the prices that must be considered. My question is why the consumer should bear most of the burden. I think that that is the question asked by most of us. In a truly competitive market, if only two, not one—we heard from the hon. Member for Twickenham that one of the energy companies has acted pretty well in this context—offered their consumers reasonable prices, they would undercut the rest, and bring about an exercise in real competition and choice.

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