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That creates a serious risk, highlighted in our most recent report, that the UK could face an “energy crunch” in the coming years. As with gas storage, it is clear that the market could fail to make the necessary investments on time without intervention from the Government. Every month that we lose increases the risk of the lights going out, or of increased dependency on gas generation, or both. The Government have already said in their White Paper last year that security of supply is their top priority alongside reducing carbon emissions. They will now have to work very hard to ensure that those two objectives do not become mutually exclusive. For example, new coal-fired generation will be possible only if there is
significant progress on carbon capture and storage, which requires a much greater level of investment from the Government. They must quickly make the relevant national policy statement on nuclear power, and learn from the recent Finnish experience of cost overruns and delays, if new nuclear is to play the role that they want in the future energy mix, and which I believe it is right to want.
The retail markets receive most attention, and we uncovered many problems in the service provided to households and small businesses. I want to make it clear that neither we nor Ofgem found any evidence of the energy companies acting as a cartel, but they do not need to do so. Given that the market is dominated by just six players, it is easy for them to make informed judgments about one another’s actions and position in the market. They do not need to collude, because the market is broken. Ofgem has, rightly, always advocated the benefits of consumers switching to realise the benefits of the liberalised markets. About half of households have changed either their electricity or gas supplier since liberalisation. Most of them have done so to benefit from a dual-fuel tariff or some other offer. However, 20 per cent. of households have never switched, and they are predominantly pensioners, people in social group E and those in rented accommodation—in other words, some of the most vulnerable people.
Our inquiry and Ofgem’s probe found that those consumers least likely or able to switch were most likely to be the victims of price-discriminatory practices by the energy companies. For example, suppliers charge their legacy customers—the ones who stay with them and do not switch—an average of 6 per cent. more for electricity than out-of-area customers. Suppliers earn much higher margins on electricity than on gas, thus disadvantaging 4.3 million households that are not on the gas main. Both standard credit and prepayment meter users are disproportionately overcharged compared with direct debit customers. I therefore welcome what Ofgem said today, but I want to highlight the issue and ram the point home: it is not just about prepayment meters—where standard credit terms operate, that is where the bulk of fuel poverty exists.
John Battle (Leeds, West) (Lab) rose—
Mr. Russell Brown (Dumfries and Galloway) (Lab) rose—
Alan Simpson (Nottingham, South) (Lab) rose—
Peter Luff: I shall give way, first, to the right hon. Member for Leeds, West (John Battle), secondly to the hon. Member for Dumfries and Galloway (Mr. Brown), and thirdly to the hon. Member for Nottingham, South (Alan Simpson).
John Battle: Most of us welcome the Committee’s work and the timely reports that it has produced. Does the hon. Gentleman agree that many of the 6 million people on prepayment meters in particular do not have bank accounts and cannot switch, so it is not an option for them? They pay £100 a year more than standard payers, and they pay £500 a year more than people on direct debit. Even under Ofgem’s proposals, they will pay £51 a year more. Is it not time to end the iniquity of the poorest subsidising the rest of us, and to ensure that people on prepayment meters do not pay a penny more?
Peter Luff: The Committee’s view on that point was very simple. There are additional costs involved in running prepayment meters, and it is essential that there is no excessive recovery of price beyond that actual economic cost. If the Government want to say that those people should pay the same price for electricity as people on other terms, some kind of subsidy is required—either a cross-subsidy from other consumers or a subsidy from the taxpayer. That is a perfectly legitimate thing to want to do, but I point out that a cross-subsidy from standard credit customers to prepayment customers would work against the interests of tackling fuel poverty. However, I accept the point that the right hon. Gentleman makes.
Mr. Russell Brown: May I, too, congratulate the hon. Gentleman and his Committee on their work? In recent weeks something has come to the fore that I discussed with interested groups in the summer recess, and it concerns people who pay by direct debit who have received demands from their supplier to increase their monthly payment. On a personal basis—and I let my good lady wife deal with this—I received a demand in recent weeks for an increase of 57 per cent. on what we previously paid. When my wife challenged that—that is the point: I have encouraged people to challenge those demands—the energy company reduced it to 17 per cent. The companies are taking people’s money, putting it into their bank accounts, and they may well be dragging people needlessly into fuel poverty.
Peter Luff: I am grateful to the hon. Gentleman for making that important point, which I was going to mention later.
I said some things about that to the BBC two or three weeks ago, and all hell broke loose. My e-mail inbox and my postbag have swollen to huge proportions, because there are many experiences like that. The essential weakness of the energy companies’ position is that nine times out of 10, they reduce the price. When the Minister appeared before the Committee, he admitted that he had a similar experience with his direct debit. I have had a similar experience with mine. I know police officers, journalists and colleagues in the House who have all had the same experience. The problem is too widespread to be ignored. I gave a file of evidence to Ofgem, which is looking at what it can do to investigate the problem. It says that it lacks quantitative evidence but, my God, it has a lot of qualitative evidence. It needs to get on with it and look at this, because it is an important issue. If we want to move people on to direct debit terms to get the benefit of better prices, we must tackle other aspects of the deal that hurt those people, as could well be the case at present.
Alan Simpson:
I, too, am grateful for the work of the hon. Gentleman and his Committee. Were they able to look rigorously at the weakness of Ofgem’s claims about switching and the fuel-poor? The reality is that 1,000 households a week have been forced, as a result of fuel debt, to come off standard tariffs and on to prepayment meters, which is the only choice that they are offered. Even the argument that someone who has not been forced on to a prepayment meter could choose to switch to another tariff is not valid, because they do not have access. Conditions applied by energy companies say that to gain access to the best tariff people must have
been a customer for at least a year before they can have such an entitlement. Those measures progressively exclude the fuel-poor, rather than include them.
Peter Luff: That is a powerful point. I strongly suspect that my hon. Friend the Member for Wealden (Charles Hendry) will make some observations about the Post Office card account when he speaks on behalf of the Opposition, and offer some proposals to deal with that issue. The hon. Member for Nottingham, South is absolutely right, but that is not the only concern, because we are concerned, too, about the number of people who switch on to higher tariffs. The evidence is that 20 to 32 per cent. of households move on to a higher tariff after switching, so it is a mess.
On the specific issue of the fuel-poor and direct selling, recent evidence from Ofgem showed that 48 per cent. of gas customers and 42 per cent. of electricity customers who switched as a result of a direct sales approach—doorstep selling—failed to achieve a price reduction. Ofgem has proposed action, but we think that although direct selling plays a role in helping people switch, if it helps people switch wrongly, it is doing more harm than good and needs to be banned. We will look at that carefully.
Incidentally, it is not just private individuals who are affected, but small and medium-sized enterprises. We heard compelling evidence of predatory pricing, delaying tactics to win back customers, and confusing contract cancellation requirements. We are glad that Ofgem is looking at the SME market as well, but it is sad that that has come too late for my constituency company, BizzEnergy, which has gone into receivership, and for Electricity4Business, which has been driven out of the market. The market is thus becoming less, not more, competitive.
I would say a great deal more about fuel poverty, but time is against me and a number of colleagues wish to speak. Briefly, we believe that fuel poverty levels will reach 5.5 million. That figure is quite widely accepted. The Government will therefore fail to meet their target to eradicate fuel poverty for vulnerable households by 2010, unless there are sharp reductions in price in the future. In our reports, we asked for the Government to go back to the drawing board in their approach to fuel poverty.
We asked for a mandatory definition of what constitutes a social tariff and who qualifies for it. We said that income-raising measures should be targeted more accurately at the fuel-poor, not only pensioners. Pensioners are not the only group in fuel poverty, just as prepayment meter customers are not. Disabled people and many other vulnerable groups are also in fuel poverty, and we need to take action to help those groups as well, particularly through levels of investment in the energy efficiency of our housing stock.
We were very pleased to see the Government’s £1 billion fuel poverty package, which we thought struck the right note. That will prove the most effective way of addressing fuel poverty in the long run. However, I repeat that we are very sorry that so little has been done to address the needs of the fuel-poor other than pensioners.
Finally, our work over the past year has shone light on many problems in the UK’s energy markets—energy markets of which we all thought we could be rather
proud. That light caught the market’s regulator, Ofgem, unawares. We feel as a Committee that we have set the agenda for Ofgem on too many occasions—for example, the direct debit issue was not being considered, but as a result of our Committee’s activities, it is being looked at now.
Although we welcomed the regulator’s recent probe of the energy supply market, and many of its proposals, we hope Ofgem will make a new year’s resolution for 2009 and take time to reflect on how it fell so far behind the curve in 2008. Part of the solution may lie in its powers. We hope the Government will look to ensure that the regulator has all the tools it needs to police the sector effectively. There is an important recommendation in our most recent report in relation to market abuse powers, which we are sympathetic to Ofgem’s claim to gain for itself.
Mr. Elliot Morley (Scunthorpe) (Lab) rose—
Peter Luff: I give way with pleasure to the right hon. Gentleman.
Mr. Morley: I am grateful and add my support for the report. It is a very good job and extremely readable. I was interested in what the hon. Gentleman said about whether Ofgem’s powers had kept up with the changes in the energy market. Interestingly, the report mentions that where Ofgem had tried to intervene, the Competition Commission had blocked it. Does he think it is just an issue of Ofgem’s powers, or is there a bigger structural problem?
Peter Luff: What the chief executive said to us is that
“‘the Enterprise Act or the Competition Act is quite often a very clumsy tool—using a sledgehammer to crack what may be a big or a small nut’”.
If we could give Ofgem more carefully defined and targeted market abuse powers, it could crack those small nuts, which are often the problems that cause most grievance to our constituents, and understandably so.
Such considerations as we have been debating need also to be placed within a wider debate on the effectiveness of the overall regulatory regime for energy. A plethora of bodies now exists. They include Consumer Direct, Consumer Focus, the energy ombudsman, the energy companies and Ofgem itself. I find such a framework confusing and I am trying to work my way through it. Members of the Committee find it confusing, and the witnesses who came before us said that they thought it probably would be confusing.
I know that there have been changes recently that will take time to settle down, but one wonders how our average constituent is supposed to understand the system. After saying that I was referring the direct debit issue to Ofgem, I have been getting quite a lot of letters saying, “But Ofgem has been abolished.” No, it is Energywatch that has been abolished. These constant changes are unhelpful, and the structure runs the risk of not properly informing the regulator about issues and problems in the market.
The events of 2008 within the energy sector and the wider economic context have profound implications for the UK’s future energy policy. Ofgem and the Government must now rethink whether the assumptions that they have made are the right ones. Is the market working as effectively as both claim? I do not think it is. Will that market deliver security of supply? It is far from certain
that it will. Can that be achieved without sacrificing our carbon reduction ambitions? It must be, and I hope it will be.
Are the renewable energy targets really achievable? I have yet to hear anyone who thinks they genuinely are achievable. They are good targets to work towards, but can we achieve them? I doubt it very much. A question that worries me a great deal is whether it is right to devolve important social policy questions about poverty to Ofgem and the energy companies. Are those not matters for Government to decide?
On a specific point, I think smart meters are an important part of the answer to the direct debit question, to carbon dioxide reductions, and to informing consumers about what they are consuming. I note that the Government are in a two-year consultation period for a 10-year roll-out programme for smart meters. Italy did smart meters in three years, so I hope we can move a little more quickly on that subject. We could find mechanisms to enable us to do that. There might be some extra cost, but the benefits would be huge.
These are many of the questions—not all of them—that the regulator, the Government and the new Energy and Climate Change Committee face, among others, in the coming years. I am sorry to kiss goodbye to these issues. They are vital ones, and the Committee and the Government have some very important questions to face.
Madam Deputy Speaker (Sylvia Heal): Order. May I advise Members that the Chair of the Business and Enterprise Committee, Mr. Peter Luff, and the Chair of the Health Committee have decided that the time for debate will be divided equally between the two subjects, so the present debate will conclude at about five minutes past eight. I hope, therefore, that hon. Members will be as brief as they can so that more Members can make a contribution.
6.35 pm
Dr. Alan Whitehead (Southampton, Test) (Lab): I join right hon. and hon. Members in paying tribute to the work of the Business and Enterprise Committee and its two recent reports, both for their content and for their quick and timely production. They address the current volatile issues in the market and the longer-term trends on which we should base our energy policy, rather than what is happening daily.
Although oil peaked at $147 a barrel in July, it has apparently been in free fall ever since, with its current price at $40 to $45 a barrel. That underpins everything else connected with our energy supplies. We must track those curves to make sure that the energy companies charge consumers prices that relate to those and other changes, such as the fact that two nuclear power stations have been out of commission for a considerable time, which raises issues of confidence in our electricity supplies, and the changes in the value of the pound, which have implications for the importation of gas.
It is important to keep those curves in sight when we discuss energy charges. Notwithstanding the cheaper energy prices that may be with us for a while, it remains fundamentally true that the era of cheap energy is firmly over. It is more than possible that when leading industrial companies come out of recession, the price of oil could rapidly rise very high indeed. We need to
make structural changes to our medium and longer-term energy policies and supplies, rather than simply deal with shorter-term changes.
Those considerations are relevant to the problem of fuel poverty. We are told that, because of the definition of fuel poverty as a percentage of income, 40,000 people go into fuel poverty for every 1 per cent. rise in electricity prices. Logically, 40,000 people come out of fuel poverty, according to that definition, if prices come down. If prices are in a slump, the Government might look as though they are reaching their target for the eradication of fuel poverty over, say, a six-month period, yet six months later they might look as though they are way off beam. The people involved, of course, do not have more money in their pockets to pay for fuel, and neither do they consume different quantities of it; they have simply moved around as a result of forces way beyond their and other people’s control. We need to concentrate on structural changes to the relationship of fuel-poor people to the energy that they consume. That is the right way to combat fuel poverty in a high-cost energy economy.
That will require measures to enable fuel-poor people to control their energy consumption more effectively, and the recent measures to equalise prepayment meters are a pointer in that direction. The issue is not just that people with such meters are more likely to be in fuel poverty, although that is not exclusively the case, or that it is unfair that prepayment meter users are charged excessive premiums, although my right hon. Friend the Member for Leeds, West (John Battle) is absolutely right to be concerned about how those meters have effectively been used as an additional charging device. The issue is also that if consumption is controlled, an additional expense for the fuel-poor is avoided.
In defence of the direct debit payers, who are the yardstick by which pre-payment meters are measured, I might add that, as the hon. Member for Mid-Worcestershire (Peter Luff) emphasised, just as small imbalances in a roulette wheel system will always benefit the casino, small changes in direct debit payments appear systematically to end up putting money in the energy companies’ banks. Even given the churn over time, direct debit consumers are probably systematically lending energy companies money. That does not appear to be right as far as long-term energy supplies are concerned, and I hope that Ofgem will take seriously an investigation into the matter. One of the roles of the successor Committee should be to make sure that the issue is pursued.
Mr. David Winnick (Walsall, North) (Lab): Does my hon. Friend agree that there should be maximum pressure, certainly from Parliament and the Government, on the energy companies to reduce their prices substantially, given what is happening with wholesale prices? Does he not agree that the feeling among so many of our constituents about the energy bosses is one of contempt—even more than they feel for bankers? In fact, the general mood is that when people deal with the energy bosses, they are dealing with greedy swine.
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