Cable on Fuel Poverty

9.13.55pm UTC (GMT +0000) Wed 6th Feb 2008

• [Feb 5] ENERGY Regulations (Consumer Prices): Vincent Cable: I have been lucky in recent weeks with Mr. Speaker's roulette wheel-this is the second major debate that I have secured since the new year.

It is topical, and the matter has been discussed in the House. Debate on the Energy Bill has been concerned primarily with the mix of suppliers and particularly the role of nuclear energy, but it has touched on fuel poverty. There was a debate here in Westminster Hall on fuel poverty on 8 January, secured by the hon. Member for Edinburgh, North and Leith (Mark Lazarowicz). Many of the right points were made, and since then the fuel poverty advisory group has delivered its report and there have been important discussions about the matter. I hope to add value by advancing some of the arguments made.

I wish to raise three matters. The first, and biggest, is whether energy prices are overwhelmingly driven by increased costs or whether there is an element of a breakdown in competition, unfair competition or monopoly profit. That is an important point that we have not properly pursued, although the Chancellor intervened with Ofgem. The debate presents an opportunity to pursue it in detail. I notice that the hon. Member for Selby (Mr. Grogan) is here. He will probably speak for himself, but he has tabled a motion in the past few days recommending a move towards the Competition Commission. I shall argue that he is right that that needs to happen, and I shall make the argument for that step by step.

The second matter that I wish to touch on is whether the Government could do something about costs and prices directly or indirectly through the European Union. I shall mention briefly gas storage, liquefied natural gas terminals and access to the European Union market. Thirdly, and finally, I shall return to something that has been discussed here often-fuel poverty and the role of the social tariff.

The context of the debate is substantial increases in domestic energy prices-I shall be talking about domestic energy, not transport. Four of the big six producers have increased their prices in January, and E.ON is thought to be following fairly soon. There has been a 17 per cent. increase in the price of gas and a 12 per cent. increase in the price of electricity. In a five-year period, there has been an 85 per cent. increase in the price of gas and a 63 per cent. increase in the price of electricity. Combined bills have gone up by 76 per cent. over that five-year period, and in the past few days we have crossed the psychological threshold of an average household energy bill being more than £1,000.

Associated with that are various symptoms of hardship. There were an estimated 420,000 additional cases of fuel poverty in January alone, based on the conventional definition of spending more than 10 per cent. of income on fuel. Worryingly, there has also been a rise in disconnections. Many of us thought that that problem had been solved by Government intervention some years ago, but disconnections have almost doubled in the past two years as a result of stress on prices.

The conventional explanation for the rise in prices is that it is linked to cost. That is clearly a major factor-it would be unreasonable to suggest otherwise. There have been big increases in international prices of oil, gas and coal. Gas is particularly important in the UK electricity sector, and prices are determined in a peculiar way at the end of the interconnector, linked with oil prices in Europe after a time lag of three to six months. External factors such as rising world prices are clearly a major influence. As the Minister has recently reminded us, there are additional factors such as the fact that we are opting for strong environmental policies, which impose on producers costs that are inevitably passed on. We must understand that. As he has pointed out, the annual cost of the renewable energy obligation is about £1 billion a year, and in addition there are the costs of energy efficiency undertakings. That all adds to costs.

The big question I want to pose is whether that is a satisfactory explanation. Is that all there is, or is there more to it? Some 80 per cent. of the public believe that they are being ripped off by the energy companies, according to a YouGov survey in the past few weeks. Is that right, and a fair assessment? Clearly the Chancellor of the Exchequer is worried that there is something else involved, otherwise he would not have approached Ofgem. I want to go through the argument about whether there has been a failure of competition policy that needs action.

The first point in the argument is that there is good research. A body called Cornwall Energy Associates carried out a meticulous, detailed study commissioned by Unison, the trade union, on the period 2003 to 2006. It tried to explain the increase in electricity and gas prices in that period and concluded that gas prices were pretty well determined by cost increases and were not a particular problem. On household budgets as a whole, it found that only 72 per cent. of the increase could be explained by cost increases and that there was a big unexplained differential.

The study meticulously went through all the contributory factors and concluded that the only plausible explanation was an increase in margins by the integrated energy companies that supply electricity. The study did not take a dogmatic, ideological view about that and stated that it was partly understandable, because profit margins had been very low in 2003 and it was understandable to try to rebuild them. However, the key conclusion was that as a result of their dominance in the market, the energy producers were able to push up their prices faster than their costs. There did not seem to be any other obvious explanation.

David Taylor (North West Leicestershire, Labour): The hon. Gentleman will know that so far, Ofgem has rebutted and brushed away the concerns that people have raised. He is a distinguished economist of some standing. Does he agree that a market that is served by just six main suppliers is rather more likely to be oligopolistic than one served by the 20 suppliers that we had immediately just after so-called energy liberalisation?

Vincent Cable: The hon. Gentleman is right, and anticipates what I am going on to say. There has been a fundamental change in the market in the 20 years since privatisation. Initially there were two electricity generators, one integrated gas producer and a lot of regional monopolies. We then had a proliferation of competitors, but the industry has since consolidated and in the past 10 years has moved from 20 competitors to six vertically integrated companies.

The question is whether that matters and why. It matters because it has a major impact on new companies trying to enter the industry. I have had correspondence from a company called BizzEnergy, which is a specialist producer trying to sell wholesale energy supplies to small-scale business. In its letter to me and the attached note-the Minister probably has it, because the company has campaigned actively-it states:

"One of the biggest concerns facing companies like BizzEnergy is that with the 'Big 6' having their own power stations, with direct access to energy sources...this leads to market inconsistencies and aids the anti-competitive structure of the market...The liquidity of the wholesale market is currently very poor and sporadic due, in part, to this level of vertical integration."

It concludes:

"This has a direct impact on independent energy suppliers such as BizzEnergy and its potential new customers."

BizzEnergy is not the only company that is making that point. British Energy, which is the big nuclear energy company, has made a similar point about the dominating influence of the six integrated companies and their distorting effect. I do not wish to open the argument about nuclear power, but that is clearly testimony to the working of the market.

aJim Devine (Livingston, Labour): I congratulate the hon. Gentleman on securing the debate. Does he agree that it is a remarkable coincidence that the six major companies have managed to increase their costs relatively similarly? The increases have all been about eight, nine or 10 times the rate of inflation. At a time when we are capping public sector worker pay, should we not consider capping those increases?

Vincent Cable: I agree with the spirit of the hon. Gentleman's intervention, although it is not strictly true: it is interesting that one of the six, Scottish and Southern, has not yet increased its prices. It argues that profits have accrued in the industry through the issue of emissions trading licences, and it is using them to hold down its prices. However, the spirit of the hon. Gentleman's question is right.

The next element in the argument is that the industry, supported by Ofgem, argues that we do not need to worry about any of that or those six producers, because consumers switch suppliers, which eats away at any profit margins that arise. They argue that 50 per cent. of households have switched suppliers and that households can make mark-ups of up to £100. They say, "It is a good market, so why should we worry about it?" However, when we probe a little further, it is clear that the supposedly competitive retail market does not work as it is supposed to work. Half of households have never switched-mine is one of them-perhaps because of conservatism or age. For the 6 million households with pre-payment meters, it is often, indeed invariably, impossible to switch because they are locked into a debt repayment arrangement with their supplier, so they cannot exercise that choice.

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 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.

David Drew (Stroud, Labour): 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.

Vincent Cable: I am not sure that I do 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

"to enable the competition authorities to take an in-depth look at markets where competition is thought to be not working well, but where the problem does not at first sight appear to emanate from the dominant position of a single firm or the existence of hard core cartels."

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

"Despite the CC's powerful armoury of regulatory and competition enforcement powers, its involvement in regulated sectors...has been minimal. Whatever the justification...the fact is that regulators are not making references to the CC for market investigations."

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?

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 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 (North West Leicestershire, Labour): 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?

Vincent Cable: That is a good point, which 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, so why do we take a different approach to it? Is there anything stopping the Government from having such a policy? Does it have to be done internationally? Could it be done domestically? What are the practicalities of doing that? Surely, if we are interested in having greater stability of gas prices, that is one way of doing 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 actually make a difference?

John Baron (Billericay, Conservative): 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?

Vincent 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 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 & Dinefwr, Plaid Cymru): Before the hon. Gentleman comes on to solutions, does he accept that part of the problem that we face in respect of the current 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.

Vincent Cable: Indeed, the pattern of energy prices is regressive, both regionally and between social classes. What happens under the current pricing system is that we have a kind of 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 actually 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 in the course of this debate 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 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. [http://tinyurl.com/ys3qwh]