Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Tom Greatrex MP, Shadow Energy Minister

In response to your call for evidence, we would like to provide, in outline terms, the perspective of the Official Opposition on the Draft Energy Bill, to contribute to the pre-legislative scrutiny work which is being carried out by the Energy and Climate Change Select Committee.

The Official Opposition recognises the need to reduce our carbon emissions and secure the UK’s energy future in an affordable way. We will work constructively with all interested parties in scrutinising the Draft Bill, holding the government to account for the measures it contains and will seek to improve the Bill presented to Parliament following pre-legislative scrutiny by amendment where appropriate.

However, we have a number of concerns about the omissions from the Draft Bill, which the government may or may not intend to include in the Bill to be laid before Parliament later this year, and where further detail is required to provide the clarity and predictability that many potential investors in all forms of technology indicate are required before those decisions are able to be taken.

Further, we are concerned about the timetable to which your Committee is being asked to work to complete the pre-legislative scrutiny of the draft Bill. Given that the Department for Energy and Climate Change initiated a consultation on electricity market reform (EMR) 18 months ago, it is unfortunate that it seems the Committee will only have five sitting weeks in which to hear evidence and complete a report on a set of proposals that are both complex and of crucial importance to the pressing need to meet energy policy challenges. Given there are guidelines in place for the amount of time to be given to scrutinising draft legislation, and the likelihood of the need to take detailed oral evidence from a number of sources, we hope that your Committee feels able to complete its task in the time available and seek further time, including possibly in the September sitting, if a number of concerns arise during the process of your scrutiny.

Reform of the Energy Market in the Interest of Consumers

While a significant proportion of the Bill is ostensibly designed to reform the electricity market, we remain concerned that there is scant content in the Draft Bill to reform the way the electricity market operates from the perspective of the interaction of the consumer with electricity retailers.

We do not believe that reform of how electricity is generated can be separated from how this is supplied to consumers.

As you know, at present the main energy companies dominate the market by generating, trading and retailing electricity. Ninety-nine percent of consumers’ electricity and gas is supplied by just six firms. These same companies also generate up to two-thirds of the UK’s electricity. This lack of competition means that the large energy companies continue to make significant profit whilst hard pressed consumers and businesses face rising bills.

We believe that a system should be introduced which imposes an obligation on energy generators to sell their electricity into a pool where it can be bought through an auction. This would allow new entrants to participate in the market and end the dominance of the largest companies at the expense of both the consumer and smaller companies.

In addition to a pooled system, if the consequence of the mechanisms described in the draft Bill is that there will be further pressure on retail prices passed to consumers by energy suppliers, then energy companies should be required to provide more transparent information about the relationships between their generation and supply businesses and the commercial interaction between those elements of their businesses. Consumers should be able to know the cost to the energy company of electricity generation and supply, the cost per average consumer to the company, where the profits made by energy companies come from, and where these profits go—whether to pay shareholders, executives or to be reinvested in our energy infrastructure. There should therefore be a statutory obligation on energy firms to be fully transparent in the relationship between the different areas of their operations. For example, opaque contracts between the retail and generating arms of the same energy company should be clarified to ensure higher margins are not hidden through transfer pricing.

Further, we believe there should be consideration given to a statutory obligation on energy firms to simplify tariffs so that they are easier for consumers to scrutinise. We propose a two pronged approach to tariff simplification: a daily standing charge and a cost per unit of electricity charge. A daily standing charge would cover the cost of delivering the energy to consumers’ homes. This is the cost of being connected to the gas pipes and electricity cables. This cost would be set by Ofgem and would be the same for all energy companies. The cost per unit element covers the amount of gas and electricity consumers use, and includes any discounts they get for direct debit. Energy companies could decide their own unit price, meaning consumers could easily compare by unit price which was the cheapest deal for them. The ‘daily charge plus unit rate’ model has already been proposed by Ofgem for standard/evergreen tariffs—we believe it should be extended to cover all products in the market. This should also force suppliers to be as efficient as possible in providing a service, as they won’t be able to recover a large amount of their costs through charges that consumers cannot avoid. 

We believe that in the draft Bill the government has missed an important element in their desire to fundamentally reform the way the energy market works in pursuit of stated policy objectives, so that reforms work in the interests of the consumer as well as providing impetus for investment in energy infrastructure.

Contracts for Difference (CfD)

Given the prominence given by the government to the Contract for Difference mechanism described in the draft Bill, there is a concerning lack of detail as to how it is envisaged that intervention will work in practice, and the associated fundamental issues of the strike price(s) and explanation for how the contractual relationship between generating companies and the counterparty will work, or even who the counterparty is and how that will be underpinned in legislation. While we note this is an issue which has been the subject of earlier discussion between your Committee and the Energy Minister, we are concerned that the lack of clarity in what some have described as the most important element of the Draft Bill will impact negatively on imminent and future investment decisions across the full range of energy technologies.

For example, on the length of CfD for different technologies, Annex B published alongside the Draft Bill merely sets out DECC’s “emerging thinking” and notes that “analysis is currently being done”. Given that the Department for Energy and Climate Change launched a consultation on EMR in December 2010, your Committee published a report on EMR in May 2011, the government published a White Paper on EMR in July 2011, and then published a technical update on EMR in December 2011, we would have thought the government has had ample opportunity to clarify its thinking and conclude its analysis.

Further information is also required on how the reference and strike prices will be determined, how often these will be reviewed, the length of contracts and how contracts will be implemented.

This lack of information could be off putting for potential investors in low carbon technology in the UK. While we note that EDF Energy has publicly indicated that a final investment decision on Hinkley Point C will need to be made before the end of this year, there is similar concern amongst companies considering investment in other low carbon technologies and those institutions from which they will seek to secure funding for those investments. While it is unsurprising that much of the public comment has been on prospects for new nuclear, there is real concern that without sufficient detail on how CfD will work, it will not only be EDF that consider they are not in a position to make informed decisions which could have a significant impact on the UK’s energy future.

There is also understandable concern that whilst energy suppliers will recoup the costs of paying energy generators from the consumer when the reference price is lower than the strike price, it would appear that there is no mechanism for ensuring that consumers see the benefit when the situation is reversed.

Some will argue that competitive pressure will ensure that consumers do not lose out, however we believe it is a lack of effective competition at present that has resulted in an energy market that is not working in the best interests of consumers. The failure of the Draft Bill to open up the market to new entrants and improve competition does not inspire confidence that competition will work in the interests of consumers in relation to the CfD mechanism.

Demand Reduction

By the Secretary of State for Energy and Climate Change’s own admission, the Draft Bill contains no measures on demand reduction. In an interview with the Daily Telegraph on 26 May 2012, the Secretary of State stated that the government has “not excluded it from the final Draft Bill, but we haven’t found a way yet to do it.”

This position is of some concern, given the chaos surrounding the government’s current energy efficiency and demand reduction measures.

The Government’s flagship energy efficiency scheme the Green Deal is currently well behind schedule. Secondary legislation is yet to be passed, no Green Deal assessors have been trained and little information is available on crucial factors such as incentives and interest rates.

Worryingly DECC’s own impact assessment shows that the scheme will only reach two to three million homes, falling far short of the required number to meet the UK’s carbon reduction targets and precipitating an 80% drop in the cavity walls being filled. In addition the new Energy Company Obligation (ECO) to be introduced alongside the Green Deal is a regressive measure, which will only lift a fraction of households needed out of fuel poverty given the scale of this problem.

Given this, there is a clear need for further measures to encourage reduced household consumption and support hard pressed families struggling to meet the cost of rising energy bills.

Summary

The Official Opposition will work constructively to ensure there is meaningful examination of the provisions of the draft Bill, both to inform Parliamentary consideration of the Bill that will emerge later this year and its legislative process and to ensure that where we consider there may be shortcomings that can be addressed by tabling amendments to improve the Bill.

We will obviously take careful note of the pre-legislative scrutiny process and your report on the draft Bill, but note at this stage that the omission of measures to radically reform the energy market to redress the current imbalance in favour of the consumer is of concern, as is the lack of detail on important aspects of the mechanisms included in the draft Bill. We hope that these are areas your Committee will seek to interrogate during the intensive period of pre-legislative scrutiny ahead.

June 2012