Draft Electricity and Gas (Internal Markets) Regulations 2011
The Committee consisted of the following Members:
Ainsworth, Mr Bob (Coventry North East) (Lab)
† Blenkinsop, Tom (Middlesbrough South and East Cleveland) (Lab)
† Cairns, Alun (Vale of Glamorgan) (Con)
† Carswell, Mr Douglas (Clacton) (Con)
Donaldson, Mr Jeffrey M. (Lagan Valley) (DUP)
Farrelly, Paul (Newcastle-under-Lyme) (Lab)
† Greatrex, Tom (Rutherglen and Hamilton West) (Lab/Co-op)
† Hendry, Charles (Minister of State, Department of Energy and Climate Change)
† Hunt, Tristram (Stoke-on-Trent Central) (Lab)
† Kirby, Simon (Brighton, Kemptown) (Con)
† McGovern, Jim (Dundee West) (Lab)
† Newton, Sarah (Truro and Falmouth) (Con)
† Roy, Mr Frank (Motherwell and Wishaw) (Lab)
† Skidmore, Chris (Kingswood) (Con)
† Wiggin, Bill (North Herefordshire) (Con)
† Wright, Simon (Norwich South) (LD)
Mark Oxborough, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Thursday 27 October 2011
[Philip Davies in the Chair]
Draft Electricity and Gas (Internal Markets) Regulations 2011
8.55 am
The Minister of State, Department of Energy and Climate Change (Charles Hendry): I beg to move,
That the Committee has considered the Draft Electricity and Gas (Internal Markets) Regulations 2011.
It is a pleasure to serve under your chairmanship this morning, Mr Davies. The regulations implement the EU third energy package, which is a significant tranche of legislation consisting of two directives on gas and electricity and three regulations, in Britain. The legislation will ensure that great progress is made in enhancing consumer protection, promoting competitive energy markets and increasing security of supply. It is a welcome step for the EU and the UK, where we will see many benefits for consumers and business alike.
The regulations introduce new consumer protection measures to ensure that British consumers get the most out of a competitive market, and they focus on breaking down barriers to entry and enhancing competition in our energy markets. Northern Ireland has introduced its own regulations and will be consulting on further implementation measures to complete UK transposition.
In July last year, the Government issued a consultation on the proposals to implement the requirements of the third package. That was followed in the autumn by two more detailed consultations on areas that are of particular interest to industry, namely the amended licence modification process and the need for owners of licence-exempt networks to provide third-party access. In our approach to implementation we have tried to take on industry concerns and minimise uncertainty as far as possible. It has been important, however, to try to strike the right balance between the interests of consumers and industry, while ensuring that we fully implement the requirements of the third package.
The implementing regulations cover four main areas—consumer protection measures; measures that encourage competition by imposing minimum separation and independence requirements when companies or their associates have control of key infrastructure and carry out certain energy activities, such as supply; the extension of third-party access requirements to licence-exempt undertakings; and changes to the duties and powers of the regulatory authority, including a new licence modification procedure.
I will briefly summarise some of the key measures that are included under each of those headings. First, consumer protection is covered in part 2 of the regulations and in the changes to supply licences that are made by schedules 7 and 8, which are introduced by part 10. Primary changes include a requirement for customers to be switched within three weeks of their expressing a
wish to do so, from the end of any cooling-off period. Suppliers will also have a new obligation to improve the switching process. In addition, there are new requirements for energy suppliers to provide customers with more information, to ensure that customers are aware of their rights and enable them to make informed decisions. To that end, a consumer checklist of information that must be provided will be produced by Consumer Focus.Secondly, changes are being made to ensure that certain activities are carried out independently from other energy activities. Such separation is referred to as “unbundling.” Those changes will increase security of supply by promoting fair access to infrastructure, which will result in benefits to competition. Such measures promote unbiased investment decisions by large players in the market and create a fairer playing field for smaller companies and new entrants.
Part 3 of the regulations requires the ownership of transmission systems and interconnectors to be completely separated from interests in supply and production, unless an exemption is held or the operator satisfies the requirements of one of the alternative models that are being made available. It will be for Ofgem to decide whether companies qualify for those alternatives when individual applications are made. The alternative models to ownership unbundling have been made available to provide British businesses with as much flexibility as possible.
Part 4 of the regulations prevents owners of gas storage facilities from producing or supplying gas, and it requires facilities to be operated independently from such interests unless the storage facility is not considered to be technically or economically necessary for the operation of an efficient gas market. Part 5 prevents distribution system operators from producing gas or generating electricity, although an exception is made for businesses that have fewer than 100,000 customers. That provision will ensure that there are no conflicts of interest in investment decisions, and it will promote transparency.
Thirdly, another significant change that the regulations introduce is the requirement for licence-exempt owners of distribution networks to grant unrelated—that is, third-party—suppliers access to their systems, as established in part 6 of the regulations. That will benefit consumers connected to such networks, who, as a result of the change, will be able to choose their energy supplier and receive the advantages of competition. Some industry parties have expressed concerns about the burdens that the change will place on small businesses. We have therefore tried to impose the lowest burden possible on networks within the EU requirements and we will produce guidance to provide as much clarity as possible for affected businesses.
Of the changes relating to Ofgem, which part 7 designates as the regulatory authority for Great Britain, the most noteworthy is the alteration to the licence modification procedure as set out in part 9. Under the third package, the regulatory authority must be able to take autonomous decisions and implement binding decisions by the European Commission and the Agency for the Cooperation of Energy Regulators. In parallel, parties affected by those decisions must have access to suitable mechanisms of appeal.
Under the current system, Ofgem’s proposals for licence modifications can be blocked by 20% of relevant
licence holders based on market share or number of licence holders. That disadvantages smaller players in the market and can hardly be described as autonomous decision making. We are therefore introducing a new licence modification process that allows Ofgem to make decisions and act on them autonomously, but gives those affected by such decisions a right of appeal.I am aware that some market participants do not welcome the changes and believe that by applying the system to all licence modifications, rather than simply to those resulting directly from European obligations, we have gone further than is strictly necessary in our implementation. However, in many instances, modifications relate to both an EU obligation and a domestic matter, which renders a dual system impractical, if not impossible, to operate. Instead, we propose a robust, transparent and coherent decision-making framework with an appropriate appeals mechanism.
I hope that I have been able to provide suitable clarity about the mechanisms in the measure, and that the Committee will agree that the regulations represent a sensible transposition of the third package requirements. They will improve the functioning of our energy market and bring real benefits to consumers while improving our long-term security of supply. I therefore commend them to the Committee.
9.2 am
Tom Greatrex (Rutherglen and Hamilton West) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Davies, and to be able to respond to the Minister. First, I place it on record that for the first—and perhaps last—time in the 18 months or so since I was elected, I am in agreement with the right hon. Member for Wokingham (Mr Redwood). I am an occasional reader of his blog, and earlier this week, he said in it that people have had enough of high energy bills, which is a political hot issue. The right hon. Gentleman is correct and the regulations are important in that context, although I am not sure that he would agree with them, given that they transpose regulations from Europe’s third package measures.
I am grateful to the Minister for summarising the effects of the measures. That has been incredibly helpful, but not as helpful as it might have been had the Government met the deadline to transpose the regulations, which was some seven months ago. Had they done so, I would not have had the pleasure, over the past few days, of reading the regulations and the explanatory memorandum, which run to almost 400 pages. We broadly welcome the measures, which build on work begun by the previous Government, including the negotiations that led to them. The regulations are a significant driver towards providing some of the information and transparency that is much needed, especially in the electricity market.
In recent weeks, many people, including the chief executive of Scottish and Southern Energy, Ian Marchant, have noted that many customers have a deficit of trust in large energy companies. That concern has come to the fore in recent months as living standards have been squeezed by rising costs and falling disposable income levels. Requiring suppliers to keep five years’ worth of information relating to electricity and gas sales and purchases, including volumes and counter parties, will help the regulator to understand the actual wholesale
cost of energy. In recent weeks, some electricity companies have said that information published by Ofgem is partial or a misleading snapshot. I hope that the information that will be available through the measures will help address any legitimate shortcomings in such information.I hope that the Minister can answer a couple of questions. Under the regulations, customers must be able to switch companies within three weeks of expressing a wish to do so, from the end of the cooling-off process. The Secretary of State made great play of that after the energy summit last week. I should note that being able to switch supplier, in and of itself, is not the answer to rising prices. We know that approximately eight in 10 people will never switch and that those who do switch do not always end up paying less. I am sure that the Minister, with his personal experience, would acknowledge that the process is not necessarily straightforward.
How does the Minister see the obligation to improve the switching process working in practice? How will the three-week deadline be enforced? What sanctions could be applied were that condition to be breached? Who would apply that sanction? How will we know who is at fault, whether it is the company a consumer is switching from or the company they are switching to?
To be able to make an effective decision on switching, the consumer requires useful and meaningful information. One of the conditions of the draft regulations requires Consumer Focus to provide an energy consumer checklist, which is dealt with on page 19 of the explanatory memorandum. The detail of the content of that checklist does not appear. Will the Minister say a little more about that? The only reference to it that I have found is in a letter on his Department’s website from the director general for energy and transport to UKRep. That letter lists 78 questions to which consumers may want answers, which does not strike me as being the most user-friendly way to provide such information. Will the Minister explain where that information is to be published? Does he recognise the point raised during last week’s debate by my hon. Friend the Member for Glasgow North West (John Robertson), with whom I wholly concur, that many of those who may be paying more than they should, and who may potentially benefit from switching, do not necessarily have access to the internet? So merely publishing the information on a website will not necessarily help people in most need of relief from the energy bill levels they are paying.
I now turn to the duty on Consumer Focus to provide information. As we all know, Consumer Focus is being replaced through the Public Bodies Bill and its functions transferred to Citizens Advice and Citizens Advice Scotland. Given that those are voluntary organisations, will the Minister explain how they will be required to provide such information? How will that be enforced?
The draft regulations also implement some degree of unbundling, which I broadly welcome. I am interested by the Minister’s comments on the licence notification process moving from a system in which proposals may be blocked by 20% of relevant licence holders. Will he tell us more on Ofgem’s new role in that process? Is he confident that Ofgem has the appropriate resources to fulfil that role, or will it need additional support? How will Ofgem’s progress in opening up the market be monitored? Will it be required to report to him, to his Department or to Parliament?
I have a quick question on local networks. I know there was some discussion in the other place on how the draft regulations will affect small combined heat and power providers and industrial estates with local networks, in the context of individual companies or individuals being able to switch and the effect that might have on a local network.
The impact assessment refers to the access and storage facility provisions ensuring greater competition and reduced bills. We have heard a lot in recent days on measures that will, or it is claimed will, help to reduce bills. Will the Minister explain what measures will be in place to provide information on the impact of such measures? Will the measures actually reduce bills, or will they merely add to the profit margins of the larger companies?
As I said, the lack of trust in energy companies demands transparency, both in this respect and in other respects. The draft regulations go some way to providing that transparency, and in that sense I welcome them, but I ask the Minister to respond to my points, if he is able to, so that he may give us some additional confidence.
9.9 am
Charles Hendry: I welcome the hon. Gentleman. This is his first statutory instrument and, for his first outing, we have chosen one that is straightforward and simple.
The hon. Gentleman said that he was sorry that the draft regulations were not tabled when they were scheduled a few months ago, but not a single country in the European Union was able to meet that deadline due to the great complexity of the measures. We are still well ahead of the overall majority—eight of the 27 member states have now transposed the directive into their own legislation—so we are among the early adopters. That shows good progress given the complexity and size of the British market.
The hon. Gentleman mentioned my right hon. Friend the Member for Wokingham, who I think would broadly welcome the regulations, because they work strongly towards the British model, in terms of open markets, competition, and trying to ensure that other countries get the same benefits that competition has brought to British consumers over the years. Many measures that are covered are much more focused on the vertically integrated companies one finds elsewhere in Europe, rather than on the much more open market found here in the United Kingdom. I am confident that this is another area in which the hon. Member for Rutherglen and Hamilton West can find common ground with my right hon. Friend the Member for Wokingham, and I look forward to that being a trend he can build on in his shadow ministerial role.
The hon. Gentleman is absolutely right that the provisions build on a lot of work done by the previous Government. It is important for consumers to know that the commitment to opening up markets is shared across the political spectrum, and I am grateful for my predecessors’ work.
The hon. Gentleman asked about consumer interests in relation to the role of Consumer Focus and the cooling-off process, as well as how the switching process might work. The checklist is being produced by Consumer Focus at the moment. The suppliers will have an obligation
to send their customers the checklist annually and, if requested by them, separately. It will not be tucked away on our departmental website; it will be actively promoted to consumers to try and ensure that there is a greater understanding and awareness of their rights, and of how they can be assisted through the process.The hon. Gentleman asked how matters would be taken forward with the abolition of Consumer Focus. There has been a consultation process on the future role of consumer groups, and it is felt that there is common ground between Citizens Advice and Consumer Focus, and that they can make a joint contribution. On the policy areas, we often think that organisations with a national understanding can help to develop such details, so the responses to the consultation process are being assessed. There is clearly a commitment to a strong consumer body, which will be able to ensure that consumer interests are taken into account in the process.
The hon. Gentleman asked how the switching process would work. Essentially, at the moment someone announces that they want to switch suppliers, the clock starts ticking. There will, therefore, be an obligation to deliver the switch on time. An exception is made when there is a cooling-off period; for example, if somebody has only very recently switched suppliers and there may be a cooling-off period, that would provide an extension. There are exceptions to that rule; for example, a customer may say that they want to switch but that they do not want to do so within three weeks, because they want to postpone it. Such people will have that right, and we believe that that is an important contribution for consumers.
The hon. Gentleman asked about meeting the deadline and what sanctions were involved. People clearly need to be satisfied in that respect. The measures enable Ofgem to impose fines and penalties on companies that do not meet their legal obligations, and as part of that process, those should be set at the appropriate level by Ofgem.
As for Ofgem’s ability to do its job and whether additional resources are needed, Ofgem’s costs are reimbursed by industry. If Ofgem needs additional resources to carry out its proper job as a regulator, those resources will be available. It is an independent regulator, which is accountable to Parliament, rather than to me. In terms of monitoring the work that it is doing, it can be held to account for its decisions, through the Select Committee process and the parliamentary process.
As for the level of fines that can be imposed, Ofgem will have the ability to fine up to 10% of the turnover of the companies involved. High penalties can be put in place in such circumstances.
The hon. Gentleman raised the issue brought up in a debate last week by the hon. Member for Glasgow North West, about access to information for those who do not use websites. That is important, because there will often be a close correlation between those who are fuel poor and limited access to a computer, or ability to use it to their best advantage. It is well known—everyone trots my example out on a regular basis—that I was not capable of switching, because the system was too complicated. I am told that I should have gone to a comparison website, rather than trying to compare them myself. It shows that such complexity puts an awful lot of people off switching. We know that last year only 15% of energy customers—17% of gas customers—switched, so the majority remains very static.
It does not simply need to be done through the web network, but must be done more directly, which is why an outcome of last week’s consumer summit was that the energy companies will write to their customers or say on bills if they believe that the customer could get a better tariff—“You ought to look at this because we believe you can get a better tariff”. They will inform consumers how their usage compares with similar properties in the area, so that people can see if their energy consumption is average or above or below average.In addition, the Government will write to millions of less-well-off consumers to tell them that they might be eligible for free or heavily discounted insulation. This is not just a reactive process whereby people have to find out the information. Industry will be required to write to many of their consumers, and we will also write to many consumers to draw their attention to where they may get a better package.
Mr Frank Roy (Motherwell and Wishaw) (Lab): On that point, when a company writes to consumers, will it forcefully let them know how they can change if they want to?
Charles Hendry: There will be two aspects. First, bills will say that a consumer ought to check because the company believes, looking at their consumption pattern, that they could be on a better tariff, and, secondly, companies will write to millions of vulnerable customers over the coming months specifically to say, “Looking at your consumption pattern, we believe that you could benefit from switching to a different tariff”. They will not say, “Go from my company to someone else”, but will explain that within the company’s own tariff structure, a customer could get a better deal and will therefore explain how to go through that process. It is much more active engagement than we have seen before. We recognise the concerns that the hon. Gentleman outlined.
The hon. Member for Rutherglen and Hamilton West also asked whether the measures, alongside the other areas we have looked at, would reduce people’s bills. He shares our view of the importance of competition in this sector. It is one of the best ways to bring benefits to consumers. We recognise that in this very difficult climate people are already beginning to struggle to pay bills, and that situation will undoubtedly get worse as the demand for gas and heating rises through the winter. It is difficult to see what can happen internationally to bring down wholesale prices dramatically over that time. Wholesale gas prices were 40% higher in September this year than in September last year, and some of that cost inevitably gets passed to consumers.
We are right to say that insulation, checking the accuracy of bills and looking at switching opportunities
are part of the answer, but they cannot be the full answer. All our constituents would benefit from checking that their bills were accurate in relation to their consumption levels, ensuring that they were on the most appropriate package for their use and needs, and seeing how they could benefit through that. The changes will bring significant benefits—in some cases, consumers will benefit by £200 a year from switching to a better tariff, but, inevitably, that will not be available to everybody. We should all be checking, particularly those who are most vulnerable.Jim McGovern (Dundee West) (Lab): Has the Minister never considered that public ownership could be more beneficial to the consumer than competition?
Charles Hendry: I have considered that it would be much more detrimental. If one looks at models of public ownership in other countries, one can see that prices are higher. The competitive model in the UK delivers us the cheapest electricity and gas prices in Europe. Although we have seen them rise, our electricity prices are still the lowest and our gas prices the third lowest in Europe. The UK model has brought benefits.
As for the bills people pay, because our homes are nothing like as well insulated as they ought to be, we consume many more units of electricity than other countries, so the total bill that people pay, rather than the cost per unit, ends up more expensive here than in some other countries. That is why so much focus now is on better insulation and other such issues. I realise, Mr Davies, that this is not entirely within the spirit of the motion—in fact, it is entirely contrary to it—but if we pursued the hon. Gentleman’s argument, many hundreds of billions of pounds would be needed. In the current climate, he could perhaps go to President Sarkozy to say, “I have another idea for a few hundred billion pounds you may wish to spend today.” The scope for taking it forward would not deliver the benefits he aspires to for consumers; in fact, it would add significant extra costs.
Mr Davies, I suspect we are trying your patience in moving away from the issues raised. I hope I have answered the hon. Gentlemen’s questions and have satisfied the Committee that the Government have thought carefully about the range of measures we put forward. With those comments, I hope that the Committee will agree the motion.