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“It appears that a very thorough risk assessment has been conducted, which I believe is an essential component of any good procurement process. It will now be important to ensure that these risks continue to be actively monitored and addressed throughout the duration of the contract.”
I have today asked the QCA’s new leadership to make sure that that happens. We are very aware of the matter, and it is one of the lessons from the Sutherland inquiry. In all cases, the Government will make sure that the recommendations are implemented properly, because that is the right way to rebuild confidence in testing for the future.
Points of Order
6.7 pm
Daniel Kawczynski (Shrewsbury and Atcham) (Con): On a point of order, Madam Deputy Speaker. On 3 December, during the Queen’s Speech debate, I intervened on the Prime Minister to ask when the Government would formally produce a response to the parliamentary ombudsman’s report on Equitable Life. He assured me, in this Chamber, that the Government’s response would come before the House of Commons before the Christmas recess. That has not happened, and it will not happen now. I am appalled that the Prime Minister should make a commitment of such magnitude and then renege on it. Is there any chance that we could bring him before the House to explain himself?
Madam Deputy Speaker (Sylvia Heal): That is not a point of order for the Chair. However, the hon. Gentleman’s comments are on the record and of course this House still has two further days to sit before the Christmas recess.
Mr. Kevin Barron (Rother Valley) (Lab): On a point of order, Madam Deputy Speaker. The Chair of this Chamber has a great tradition of protecting the interests of Back Benchers, but today is estimates day and Back Benchers have lost some 2 hours and 38 minutes of debate on those estimates. Is there any way that Back Benchers can be protected, so that our Select Committee reports can be discussed without any loss of time for debating other matters such as we have witnessed this afternoon?
Madam Deputy Speaker: I understand the right hon. Gentleman’s concerns, and that it is important for Back Benchers to have the opportunity to contribute to debate. Again, I shall make sure that his remarks are brought to the attention of Mr. Speaker.
Estimates Day
Vote on Account, 2009-10
OFFICE OF GAS AND ELECTRICITY MARKETS
Energy Prices, Fuel Poverty and Ofgem
[Relevant Documents: The Eleventh Report from the Business and Enterprise Committee, Session 2007-08, HC 293, on Energy prices, fuel poverty and Ofgem, the Government response, HC 1069, Session 2007-08, and the First Report from the Committee, Session 2008-09, HC 32, on E nergy policy: future challenges.]
Motion made, and Question proposed,
That, for the year ending with 31 March 2010, for expenditure by the Office of Gas and Electricity Markets—
(1) resources, not exceeding £315,000, be authorised, on account, for use as set out in HC 1039 of Session 2007-08, and
(2) a sum, not exceeding £700,000, be granted to Her Majesty out of the Consolidated Fund, on account, to meet the costs as so set out.— (Chris Mole.)
6.9 pm
Peter Luff (Mid-Worcestershire) (Con): This is the last occasion on which my Committee, the Business and Enterprise Committee, will initiate a debate on energy policy. We have produced our last report, so this is something of a nostalgic occasion, although it will be much briefer than I had hoped. I would like to associate myself with the remarks of the right hon. Member for Rother Valley (Mr. Barron), the Chairman of the Select Committee on Health. When there are so many Government statements on a day on which there are important matters to debate, injury time should be added to our proceedings, so that all those who want to participate can do so. It is very regrettable that we are down to less than two hours for each of today’s two important debates.
The Government were right to create a new Department of Energy and Climate Change given the importance of the issue of energy, but it is a policy area that members of my Committee and I will miss greatly. It is an endlessly fascinating policy area, with economics, domestic politics, science, geopolitics, social policy and many other considerations forming part of the mix. The policy needs to reconcile three often conflicting aims: security of supply, affordability and sustainability. For example, achieving sustainability often means subsidy and cost, and that is paid for by the consumer, which means higher prices. Security of supply means investment, and that means reasonable profits for the energy companies, which means that prices must move with markets—and with the imperfect wholesale markets, too.
At the start of the year, the six main energy companies announced double-digit price hikes for their retail gas and electricity consumers. Not surprisingly, those steep increases were met with howls of protest from consumers, politicians and the media. The Sunday Times even went as far as to say that the big six were operating a cartel. The firms told us that they were simply responding to rising wholesale prices. Understandably, the Chancellor
and the Government wanted to appear responsive to consumers’ concerns, so the Chancellor hauled the Office of Gas and Electricity Markets before him and demanded to know what was going on—perhaps surprisingly, as he had had responsibility for Ofgem only six months previously. Ofgem responded:
“Britain’s competitive market in energy is working.”
We did not believe the regulator. We called in the then Minister for Energy, the right hon. Member for Croydon, North (Malcolm Wicks), who is in the Chamber—it is a pleasure to see him here—in order to understand what was happening. His evidence was eloquent and elegant, as always, but I have to say that we were not totally reassured, so we launched our own inquiry. It soon transpired that Ofgem did not believe its analysis of the markets either, as the regulator launched its own probe into the energy supply market little more than two weeks after we had done so. We do not believe that Ofgem would have launched its probe had we not forced its hand. At the very least, our inquiry ensured that the regulator did its job properly. Its initial findings are a very thorough job of work. Our work turned into one of the largest and most complex inquiries that the Committee has ever conducted, and this debate marks its culmination, as we hand over responsibility to the new Committee in the new year.
This debate is primarily about our July report, “Energy prices, fuel poverty and Ofgem” but also tagged is our most recent—and last—report, published last Friday, called “Energy policy: future challenges”. Together, the two reports represent our main views on those complex issues, and I hope that the new Committee will study them carefully. I believe them to be politically and economically well-founded and, for such a complex subject, to be pretty readable, too. I want to thank all the Committee staff who worked so hard to ensure that the documents were published rapidly and efficiently. I am blessed with a great team in my Committee office, and I am proud of them all.
Let me turn to the subject of wholesale oil and gas markets. Any discussion of energy prices must begin with the price of oil. At the start of 2008, the markets heralded a price of $100 per barrel—an amount that would have been unthinkable five years ago. Not content with one high watermark, the markets continued to push prices up for the first half of the year. By the time my Committee published its July report, prices had reached almost $150, and some pundits were predicting that the price would be $200 or even $250 by about now. Such expectations now seem laughable. The energy price bubble has met the same end as most other asset price bubbles; it was pricked by the harsh reality of a sharp economic downturn. That is not to say that the oil price will not reach such heights again—it probably will, but not in the short to medium term.
The important point is that the price of gas and electricity are inextricably linked to that of oil. That is because the UK is no longer self-sufficient in its supply of gas, and must instead depend increasingly on imports, particularly from Europe. On the continent, for largely historical reasons, gas prices are linked to oil prices. There is no economic rationale for that at all, and no one could really explain to us why it persists, other than that it seems rather to suit the interests of the oil and gas companies.
Gas supply from the UK continental shelf is falling rapidly, and almost all the new electricity generating capacity due to come online in the short to medium term will use gas. That means, it seems, that the UK’s dependency on gas imports is set to increase. That poses major challenges for the Government. We have a liberalised gas market in the UK, but it is structurally tied to an unliberalised European market. UK gas prices rarely fall below European levels because our companies simply choose to export surplus production. That is particularly the case in the summer, when gas consumption is lower. In the winter, UK prices have to rise significantly above European levels to attract that gas back. That is part of the reason why we have seen such large spikes in the price of gas during recent winters.
A further big reason is that the European markets have not liberalised in the same way as we have. There is not much that we can do about that, try as we might. Heaven knows successive Energy Ministers have tried, and I am sure that they will continue to do so.
Mr. Mike Weir (Angus) (SNP): I agree with the hon. Gentleman’s analysis, but does he not agree that the situation is even worse than that? In its evidence to the Committee, the Energy Intensive Users Group said that even when its members were in a position to take gas from continental suppliers, those suppliers would not supply it to them, so they could not take advantage of cheaper supplies on the continent, even where an interconnector existed.
Peter Luff: I am most grateful to the hon. Gentleman—a distinguished member of my Committee—for that remark. As far as I am aware, that issue has not yet satisfactorily been addressed. It seems to be a breach of the simple single market rules of the European Union, and I cannot understand that. It is a matter of great concern to the Committee, and I hope that it will be to our successors, too.
On gas supply, the Government must take some of the blame for the current predicament. If we were able to store gas at times when it is cheaper, the UK would not suffer from the current volatility in prices. Our growing dependency on gas and the need for more storage was a car crash that the Committee, and its predecessor, saw coming years ago, and I am afraid that the Government have been very slow to react to it. We have just 13 days of storage capacity. Germany has 99 and France has 122. Even if all the projects under construction or with the required consents were built, we would add only another five days of storage by 2014. In other words, we need growth of a greater magnitude than that achieved to date if we are to match the Europeans and protect our vital national interests. Planning has been a problem in that regard, as it has been for many aspects of energy infrastructure. We can only hope that the new Infrastructure Planning Commission will help in that regard, although even if it does—there are some doubts about that—it will be some time before it begins to have an impact. The Government must move quickly to put in place a national policy statement on gas storage.
Worryingly, planning is not the only important issue. The industry told us that the economic incentives for the market to build new storage simply did not exist
until fairly recently. Those incentives have now been virtually wiped out by the collapse in energy prices, and by the reduced availability of financing resulting from the credit crunch. In simple terms, the market will not deliver. If new storage capacity is to be built on time, the Government must think again about the incentives that they can provide.
Lack of gas storage is not the only problem with the wholesale gas markets. Companies have been investing in new infrastructure for liquefied natural gas imports to the UK. One of our main facilities is at the Isle of Grain. Its owners—BP and Sonatrach—have barely used it this year, choosing instead to send LNG to the far east, where economies are willing to pay more. Third parties have the right to use the facility, but none has done so this year. Ofgem has been dismissive of the possibility that the regulatory framework for gaining access might be a factor, despite several witnesses telling us that it is. We believe that Ofgem should look again at the issue. Otherwise, we will have concerns about the outlook for new LNG capacity at Milford Haven.
Liquidity in the gas market is a major concern for the Committee. For those who want to buy gas to use right now, the UK has one of the most liquid gas markets in the world, but that is not the experience for manufacturers who want to hedge prices by buying ahead; they just cannot do that. The financial crisis has served only to reduce liquidity further. Ofgem and the Government—I hope that this will not be true of the new Department—do not seem to believe that that is a problem. The UK’s manufacturing base has told us otherwise. When even an arm of government—the NHS Purchasing and Supply Agency—is concerned that there is
“no effective long term market”
for gas, the Government and the regulator should take notice.
What about wholesale electricity? Failings in the wholesale gas market feed through to the wholesale electricity market, because 40 per cent. of our electricity comes from gas, and it provides the marginal source of generation in the UK—it sets the price. Our Committee found serious failings in that market, too. In 2008, electricity prices have been driven up, not just by higher gas prices, but because of environmental costs. For example, Ofgem reckons that since the start of phase 2 of the European Union emissions trading scheme, £9 per megawatt-hour has been added to the price of electricity, despite the fact that generators receive 93 per cent. of their permits free of charge. The Government estimate that the resulting windfall is about £2 billion a year over the five years of phase 2.
No one knows exactly what the energy companies are doing with their windfall gains, which are distributed very unevenly between energy companies and generators. At first, the energy companies denied that the windfall gains even existed, and to the extent that they did admit to them, companies claimed that the value of the windfall had been passed on through lower prices or greater investment—investment that we need. The Government have rightly taken a different view in clawing back some of that money to tackle fuel poverty—that was one of the recommendations in our July report—but we are disappointed that neither they nor Ofgem has conducted a fuller analysis of what those windfalls were or how they were distributed.
When the Committee published its report, the big six controlled 55 per cent. of electricity output, with the rest shared among the independent generators. In recent months, further consolidation has been promised, with the purchase of British Energy by the French company, EDF, which will own nearly a quarter of the UK’s electricity output, with the big six controlling nearly three quarters of that output. Our report pushed the regulatory bodies to ensure that that consolidation did not affect the competitiveness of the market adversely, and I hope that the European Commission will have something to say about that when it reports on the acquisition of British Energy.
Consolidation, however, was not our only concern. Many witnesses hid the fact that their companies owned both wholesale and retail arms—there was no transparency on where their profits were made. If other firms—potential new entrants—cannot see where profit-making opportunities lie in the value chain, it is easy to see why they are reluctant to enter the market to compete with the existing players, which is why we welcome Ofgem’s decision, following the Government’s prompting in response to one of our recommendations, to require the vertically integrated companies fully to disaggregate their accounts. That is an important, and big, step forward.
Mr. Weir: Again, I agree with the hon. Gentleman, but does he not accept that there is a problem, as many of our energy companies are owned by multinationals, and it is even more difficult to find which part of their profits comes from the UK?
Peter Luff: The hon. Gentleman makes an important point with which I agree. It is something about which British Gas is particularly aggrieved, because it sometimes gets more of the blame than other companies because its profits are more visible than those of its competitors.
Sadly, that is not the only issue facing new entrants. We found that the electricity market suffers from a profound lack of liquidity—a problem exacerbated by the financial crisis—which contributes to price volatility and poor price transparency. It contributed, too, to the exit of two of the largest independent electricity suppliers outside the big six in recent months. We welcome Ofgem’s tough line on this issue, announced in its probe findings, and we hope that our successor Committee will look at the issue in detail. As it stands, the market discourages new investment in generation by new entrants, which leaves us heavily dependent on the big six to deliver the conventional capacity that the UK needs to replace the nuclear and coal-fired power stations that are set to close in the coming years. We are fearful that the economic and financial crisis will lead to delays in that much needed investment.
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