Review of competition for domestic supply contracts

Domestic Gas and Electricity (Tariff Cap) Bill – in a Public Bill Committee am 4:45 pm ar 13 Mawrth 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Alan Brown Alan Brown Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Infrastructure and Energy) 4:45, 13 Mawrth 2018

I beg to move amendment 1, in clause 7, page 4, line 38, at end insert—

“(1A) The Secretary of State shall within six months of the passing of this Act publish a statement outlining the criteria that is to be used by the Authority in the review to assess whether conditions are in place for effective competition for domestic supply contracts.”

This amendment would require the Secretary of State to outline the criteria that shall be used by Ofgem when assessing whether conditions are in place for effective competition for domestic supply contracts.

I do not know if it is my upbringing in the west of Scotland, but compared to the hon. Member for Southampton, Test, I am a man of few words, so I will be really brief.

Amendment 1 and its explanatory notes lay out the case. I have prepared a timeframe for the Secretary of State to set out the criteria by which Ofgem will assess the operation of the energy market for effective competition in the marketplace, and such effective competition clearly will allow the cap to be lifted.

The amendment is important for a couple of reasons. Clearly, if we want the suppliers to change their behaviour, it is important that they know what they will be measured on. Hopefully, that will give them further incentives to change their behaviour and to make the market much more competitive and effective for consumers.

The Government’s aim is that the cap will be only temporary—perhaps lasting only two years. Therefore, it is a limited timeframe. That makes it even more important that, as soon as we can, we understand what the companies will be measured against. If a report is laid that sets out the criteria within six months, that takes away the risk of moving targets, in terms of the suppliers changing how they are operating, but perhaps not in the way we want. Obviously, we want to manage how they operate and make that most effective for consumers. The amendment is quite simple and speaks for itself.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

The hon. Gentleman is a man of few words, but what a very pleasant accent, if I might say so, and what a joy it is to welcome so many colleagues from north of the border with similar burrs on our side of the House. I will now try to speak exclusively about the amendment and take his example of brevity in doing so.

The hon. Gentleman is absolutely right to raise the question of the conditions for effective competition so that we can all understand when the recommendation to remove the cap is the right one, as he said, considering how the market evolves over the next few years. We all have a hope and expectation that the market will evolve rapidly; indeed, the whole principle behind the Bill is about an intelligent intervention that will help the market to reset to a more competitive environment.

We have set out these general conditions, but I feel very strongly that with an independent regulator that we all believe has the powers and knowledge to both set the cap and confirm whether competition has been restored, it is right that we do not hold it to a specific set of weightings for what competition looks like. Again, I refer to the BEIS Committee, which said:

“We believe that Ofgem have the required expertise to set and measure indicators of effective competition and make the appropriate recommendation to the Secretary of State.”

The hon. Member for Nottingham North made the point about unintended consequences; we had conversations in pre-Bill meetings about whether we would want there to be a formula that said, “It is 20% switching times and 50% price cap reduction”. All that constrains Ofgem’s ability to review and set an opinion on competition, particularly as the market evolves. We are all expecting the energy market to evolve quickly. The amendment would constrain Ofgem’s job unnecessarily. There is nothing to be gained from seeking to pre-empt Ofgem in its work. In raising this issue, the hon. Member for Kilmarnock and Loudoun is absolutely right to say that that scrutiny of what effective competition looks like will form an extremely active test of whether we can all sit around in a couple of years’ time and say that this Bill on which we have all worked so hard has been effective.

On the basis that the amendment would constrain what Ofgem want to do, I hope that the hon. Gentleman feels content with my explanation and will consider withdrawing it.

Photo of Alan Brown Alan Brown Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Infrastructure and Energy)

Listening to the Minister, on one level I think that constraining Ofgem might not be such a bad thing if it constrains it in a way that we are happy with, because then we can have criteria that we as politicians, and consumers and suppliers, understand. On the other hand, I understand what the Minister says, in that the regulator has its own job to do. I am conscious that some of the submissions we received as part of this process express concern about the fact that nobody knows what these effective competition criteria will look like. I still have some slight concerns, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

I beg to move amendment 7, in clause 7, page 4, line 39, leave out from “must” to end of line 40 and insert

“have regard to the extent to which—

(a) progress has been made in installing smart meters for use by domestic customers,

(b) incentives for holders of energy supply licences to improve their efficiency have been created,

(c) holders of energy supply licences are able to compete effectively for domestic supply contracts,

(d) incentives for domestic customers to switch to different supply contracts are in place,

(e) the barriers which prevent the customers from switching from different supply contracts quickly and easily are addressed,

(f) holders of supply licences who operate efficiently are able to finance activities authorised by the licence,

(g) holders of supply licences have eliminated practices that are to the detriment of customers in their tariff structures,

(h) District Network Operator costs and dividends are proportionate to expectations and the impact of that on domestic supply contracts, and

(i) vulnerable and disabled customers are adequately protected

I am afraid this may be the end of the Mr Nice Guy bit. Hon. Members must find that incredible, but it is true. This amendment is potentially very important for the integrity of the whole process of how the price cap is set up, how it works and the circumstances under which it can be brought to a close. There is no real difference between the amendment of the hon. Member for Kilmarnock and Loudoun and mine, except that his requires the Secretary of State to produce a statement to outline the criteria that shall be used by the authority in a review to assess whether conditions are in place for effective competition.

Our amendment seeks to identify what the conditions might look like. That is particularly important, because for this price cap to work clearly both ends of the cap have to be reasonably synchronised. As hon. Members will have observed when we debated an earlier clause, a number of conditions are put forward for the authority to digest when we move from the point of legislation to the point of actually putting the cap in place. There are a number of conditions in clause 1(6) to which the authority needs to have regard when it is putting the cap in place.

That is not so when the authority is considering whether to lift the cap. It is worthwhile considering for a moment what the mechanism for lifting the cap in the Bill actually is. The authority has to carry out a review—in the first instance, in 2020—to look at whether it considers that conditions are in place for effective competition for domestic supply contracts. Therefore, in principle, it can consider whether to bring the cap to an end. Once that review is carried out, roughly before halfway through 2020, the authority must produce a report on the outcome, which must include a recommendation about whether the authority considers that the tariff cap conditions should be extended and should have effect for the following year. When the report is produced, before 31 August 2020, we would expect to see a view from the authority about whether the cap should be continued. Obviously, subject to the sunset clause in the next clause, what the authority says effectively has a one-way view on what the Secretary of State should subsequently say about the cap. As laid out in clause 7(5), the Secretary of State, having received a report,

“must publish a statement setting out whether the Secretary of State considers that conditions are in place for effective competition for domestic supply contracts.”

There is a double-belt, as it were, on the process. The authority comes along and produces a report, as required by the legislation, saying whether or not the cap conditions should be extended. Presumably, any recommendation that the authority makes that does not include a recommendation to extend the cap will be taken as a report saying that the cap should not be extended. On the contrary, the Secretary of State must then read that report and publish his or her own statement setting out whether he or she positively considers, at that point, that the conditions are in place for effective competition, and therefore that the cap can come off.

The procedure in the clause means that it looks like the Secretary of State will be fairly paralysed in what he or she can do about the statement that conditions are in place for effective competition by what the authority says to the Secretary of State in the first place. The question that then arises is about what circumstances surround the report that the authority has to produce for the Secretary of State. The Bill does not actually give us much enlightenment as to what those circumstances are. Rather oddly, there is only one circumstance in the Bill that the authority is required to review:

“the extent to which progress has been made in installing smart meters for use by domestic customers.”

My fear about the roll-out of smart meters, based on my experiences in a previous brief, is that if that is the only thing that the authority has to consider, so far as its review is concerned, it is quite possible that the authority will systematically say that conditions are not yet ready for competition to resume, and will repeatedly produce reports for the Minister saying that conditions are not yet ready because of its particular regard to the installation of smart meters. Under those circumstances, the Minister would find it difficult to produce his or her statement saying that the cap should come to an end.

We may be in a position, effectively by default, in which whatever the views of the Minister we will be in for a cap going up to the end of 2023. One can of course hope that smart meter installation is absolutely on time and that all smart meters are in place by the end of 2020, as they should be, but if that is the prime consideration in the Bill for the authority’s review—the clause does say “among other things”—I should have thought that that would skew the review substantially in the direction of considering that particular concern against others when producing the report for the Minister.

Ofgem has not simply been left to decide for itself what circumstances are in place when it produces its report—and there is something in the Bill that shows that that is not the case. Perhaps I would have understood matters rather better if there was no clause 7(2) and the authority was simply left to its own devices to carry out a review of whether conditions were in place, with the authority deciding what those conditions were. I do not think that would be terribly satisfactory in terms of how we proceed through to the Minister’s statement, but it would nevertheless be consistent.

We have not done that. We have put an effective condition down, but we have been silent about all the other conditions that might exist and guide Ofgem in its review. The amendment would essentially take a number of conditions about the circumstances in which the cap should be set up that are mentioned earlier in the Bill and puts them in place as conditions for terminating the cap. It therefore bookends the temporary cap process. It would also add protections for a couple of our other concerns, such as vulnerable and disabled customers, and we can all agree that that should be the case. That is particularly important in terms of Parliament, through the Minister, retaining the ability properly to determine whether the cap should be removed or not. Although I have considerable faith in Ofgem to do the right thing, that is what we will be doing if we leave the Bill as it is. Legislation should not be based on leaving someone to do something on the basis of their good intentions and good offices.

As I have mentioned, it is necessary to legislate for the worst circumstances, not the best. We can hope that the best circumstances will happen, but at least then we would have the legislation there to proof us should the worst happen. The worst could be that Ofgem, in its wisdom, decides only to consider the progress of smart meters or to make up its own concerns as to what the market does or does not look like and then reports to the Minister that it does not think the cap should be lifted, even though at that point the Minister is jumping up and down, thinking it should be. If we get into that position, Parliament and the Minister will have lost control of the cap. Since we think that the cap should be temporary, I imagine that, if the circumstances are right, we will want to see it as a more temporary cap rather than a less temporary one. I suggest that adopting these guidance notes, as it were, for Ofgem would put us precisely in that position.

I hope to receive an explanation as to why everything is all right in the world of the Bill as far as Ofgem is concerned and to hear that my fears are entirely imaginary and that the out arrangements for the cap are in perfectly good hands, so I need not worry myself at all. However, I fear I may not. I hope the Minister will have a very good attempt at persuading me. This matter is really important, and we ought to take it seriously.

Photo of James Heappey James Heappey Ceidwadwyr, Wells 5:00, 13 Mawrth 2018

I rise to speak briefly. I know exactly what the shadow Minister is trying to achieve with the amendment, and I agree with him that the cap must be a temporary measure. On Second Reading, I answered an intervention by saying that this should be a raid into the market, not an occupation. It is very necessary indeed to set out clearly the terms on which the cap will come to an end.

Having said that, my concern with the amendment is that whereas the Bill as drafted refers explicitly simply to progress with smart meter deployment—it quite reasonably leaves the regulator and the Minister to work out what progress is being made on the remainder—the hon. Gentleman’s list is so lengthy as to be overly prescriptive. Some measures in his list, such as improving efficiency in suppliers’ business models, are not the business of the regulator at all. I rather think that suppliers will be driven to find efficiency by the creation of competition, rather than needing to have it required of them. That is what the market does.

The hon. Gentleman is an enthusiastic fellow traveller on the route to a decentralised, digitised, dynamic energy system, so I wonder why his list does not include half-hourly settlement or the universal application of demand-side response, why he does not require the market to be electric vehicle-ready, why he is not concerned about transmission costs as well as distribution costs, why he does not seek signals from the regulator about the readiness of the market to manage a decentralised energy system given all the price advantages that might bring, and why he is not enthusiastic about a code review or embedded benefits, or about looking at what energy-efficiency measures have been made or at whether we are ready for a data-heavy digitised market.

As well as all those things, there is the unknown scale of the renewable deployment that might come our way, alongside the flexibility that storage and demand-side response will bring with them, and what impact that might have on price variability over the course of a year. There are so many unknowns, and the pace of change in the energy system is such that being as prescriptive as the hon. Gentleman desires at this stage would risk hindering progress in the system. It would shape the way the market worked towards achieving the end of the price cap, rather than allowing it to be disrupted in the way that I know he and I genuinely hope it will be.

Photo of James Heappey James Heappey Ceidwadwyr, Wells

I was done, but I am happy to give way.

Photo of Alan Brown Alan Brown Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Infrastructure and Energy)

I understand the hon. Gentleman’s point about other factors that may ultimately influence the retail energy market, but why should progress with smart meter installation be the one thing we tell Ofgem it must measure in its review? It seems to me a bit strange to specify that criterion but say that we do not want all the other important criteria that the hon. Member for Southampton, Test laid out.

Photo of James Heappey James Heappey Ceidwadwyr, Wells

I suspect that the Minister is much better placed to answer that than I am, but I guess—I would support this wholly if it were the case—that we have done a lot of work with carrots when it comes to smart meters and we are starting to get into stick territory. If we want the new digitised market to really work—I know that almost everyone here is passionate about achieving that—smart meters are no longer optional: they are a necessity. To use that as a metric of success seems very reasonable to me.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

I want to try to address two of the main points that came up: what “good” looks like, the conditions for success and how far we should specify them in the Bill, and why progress with installing smart meters is the only explicit condition. Ultimately, this is the nub of the whole Bill. We are all here because we believe that the conditions for effective competition are not in place and that the Bill will assist the market towards that evolution. I suspect that we all believe in well regulated, competitive markets delivering the best value and service for consumers, and if we see a regulatory gap—a place where the regulator needs new powers to deliver that—it is only right that we fill it. That is what we are doing.

Once again, I have great sympathy with what the hon. Member for Southampton, Test set out. I feel sometimes that we are a bit like Eeyore and Tigger: he is always looking for the very worst outcome and I am always very optimistic about the future. Perhaps it is good that we often meet in the middle. The challenge, as my hon. Friend the Member for Wells set out, is that the list that the hon. Gentleman has put forward is very sensible. I am sure that we could all come up with further factors that we thought would indicate that the market was acting more competitively.

One thing gives me comfort. If we believe that the independent regulator has the skills and powers to do this job, it is right that the regulator should do it. When it makes its report it will be completely transparent as to what conditions it has considered.

The Select Committee said, in its excellent summary, that

“We believe that setting a definition of ‘the conditions for effective competition’ before setting the cap could create incentives for suppliers to game the system”— back to that problem—

“or treat the cap as a box-checking exercise rather than going above and beyond their obligations.”

That also gets us back to the unwelcome but possible prospect of legal challenges. Suppose that in the Bill we say, “We think that Ofgem should have regard to one of the hon. Gentleman’s conditions”, but the market evolves so quickly that the condition becomes irrelevant. What if, after the legislation was lifted properly with the sunset clause, Ofgem determined that that condition was not taken into account? There will be an opportunity for a legal challenge to say, “Aha! You didn’t take into account that particular condition”.

One of the reasons why I love this job so much is that this is such a rapidly evolving market. If we look at what has happened to the price of offshore wind and of renewables, we have seen precipitous changes in pricing and the structure of the market. I believe we had two new entrants to the market in 2010; almost 70 companies are now competing, in a matter of seven years. There is this really rapid change. I fear that, by setting out what appear to all of us to be very sensible conditions, we risk creating “a box-checking exercise” and risk creating again future legal obligations that would come back and basically render what we want to achieve null and void.

For me, this is very much a job for the expert regulator. I take comfort from the fact that the process will be very transparent; the regulator will have to set out why it considers this market to be more competitive.

Photo of Alan Brown Alan Brown Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Infrastructure and Energy) 5:15, 13 Mawrth 2018

Why would it be a box-ticking exercise if we as parliamentarians set out criteria that we think can be used, but not if Ofgem sets out the criteria?

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

That is a valid point. I guess that by setting the criteria in the Bill we would effectively constrain the opportunities that Ofgem has. Ofgem, as a regulator, should be able to sit closer to the market and observe its evolution, and amend its processes accordingly. All of us know how even the most tortuous, tiny change to a Bill, even if it is done through a statutory instrument, can chew up an awful lot of time and reopen a debate that did not actually need to be reopened.

The hon. Member for Southampton, Test is right that we absolutely have legal powers to protect our constituents, and that is what we are doing, but what we are also doing is empowering the regulator to be perhaps more nimble and agile than politicians and even my fine civil servants might be.

I turn to the Smart Meters Bill, because it is right to say, “Why is that the only thing in the Bill?” Frankly, the reason is that we are rolling out this massive Government programme. We are talking about £11 billion of investment and £17 billion of benefit to consumers. It is now a licence condition for Ofgem. We have had the first roll-out and we are working hard on the data integration, so that the upgrades to a SMETS2 meter happen seamlessly and remotely. I fully intend to work with industry very closely this summer to start to turbocharge that process. There is huge benefit there; the conditions are in place and we want to accelerate.

We want to make sure that the obligations to be part of the evolution of a competitive market and to roll out smart meters are inextricably linked in the minds of industry. On that basis, although we have an important role to play in talking about the terms of effective competition, we expect the market to continue to evolve. It would not be helpful to constrain Ofgem’s definition now by setting out what could be perfectly sensible ideas.

Of course, there will be an opportunity to review Ofgem’s report and say what the conditions are. We have not yet talked about what the transparency of publication is for that report, but that is certainly something we can address when we discuss that part of the Bill. There is a question as to how transparent that report is made and how widely it should be circulated. As the Committee knows, I am open to ideas of transparency, because it is the way to drive the best forms of competitive behaviour. I fear I may be chancing my luck this late in the day, but I invite the hon. Member for Southampton, Test to withdraw his amendment.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

May I say something first about Tigger and Eeyore? I can see the analogy, but we have to remember that Tigger got Pooh and Piglet completely lost in their quest for the North Pole, and also consumed all Roo’s medicine in a very unhealthy way.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

But surely the hon. Gentleman would accept that that was a fine and wonderful adventure, and Tigger did it with great gusto?

This might be slightly outside the scope of the Bill.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

I was just going to say briefly that Eeyore stopped people standing on each other and falling over while trying to get Piglet out of a tree. He was very wise in certain circumstances. What I am trying to say, I hope without any further reference at all to Pooh and Piglet, is that under these circumstances we need to be a little more—I will refer to it again—Eeyoreish than Tiggerish. It is essential that we are careful about the going out of the cap, just as we are careful about its going in.

I heard what the hon. Member for Wells had to say—indeed, it would have been possible to put out a list as long as your arm of possible concerns. He is quite right. I heartily endorse a number of the concerns he raised. I am grateful to him for describing me as a fellow traveller; as he will know, in our party, being described as a fellow traveller is not always meant in the most complimentary of ways. He has set the record straight as far as that is concerned.

What I have tried to do with this particular amendment—by the way, I am not particularly precious about every last line of it—is to craft a number of considerations that should reasonably pass by the eyes of Ofgem when it is thinking about whether conditions have returned to the market or not, so that it is shaped. Indeed, if the Minister were to say, “Yes, jolly good idea, but we’re not quite sure that all the conditions are absolutely right. We’ll take it away and come back with something on Report that will set that out in a rather better way,” I would be overjoyed. It is an attempt to try to make things work, rather than to get everything right first time.

What I do know, however, is that among the flakier conditions is ensuring that Ofgem has due consideration for the roll-out of smart meters. I could see circumstances where the smart meter roll-out has gone completely down the Swanee, yet market conditions are effectively there for the removal of the cap. Indeed, from what I know about the circumstances around the smart meter roll-out, partly as a result of my involvement in the Smart Meters Bill recently, it is quite possible that the smart meter roll-out will go seriously down the Swanee.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

I now feel a T-shirt coming on saying, “What would Eeyore do?” I wanted to try to give the hon. Gentleman some comfort on this matter. Clause 7(1) refers back to something set out in clause 1(6)(b):

“whether conditions are in place for effective competition for domestic supply contracts.”

That means that in consulting on the cap structure, what Ofgem believes to be important will have to be explicit upfront. Also on smart meters, it says that the review “must, among other things”, so it is not the exclusive thing. In fact, I have just reassured myself, because clause 7(5) states that the Secretary of State will have to publish the statement about whether they consider the conditions to be in place. It will be very explicit about which conditions have been taken into account in establishing whether the market competitive conditions have been restored.

Photo of Alan Whitehead Alan Whitehead Shadow Minister (Department for Business, Energy and Industrial Strategy) (Energy and Climate Change), Shadow Minister (Business, Energy and Industrial Strategy)

I thank the Minister for her concordance-like examination of the Bill to look at those conditions, but I stand by the point that there is, with the anomalous imposition of smart meter roll-out, nothing there effectively. I would have hoped that the Minister would be able to say, “Yes, you are quite right. There is nothing there effectively and we can put something there—perhaps not exactly this—on Report”. That would have caused my worries about the out as well as the in of the price cap to recede, but apparently that is not going to happen.

I, of course, wish the Minister the best of luck with her Tiggerish wish to get smart meters absolutely right. I am sure she will give that her full attention and ensure that it works as well as it possibly can, but I am afraid that under the circumstances I will have to press the amendment to a vote on the principle of what it is about.

Question put, That the amendment be made.

The Committee divided:

Ayes 8, Noes 9.

Rhif adran 1 Caledonian Pinewood Forest — Review of competition for domestic supply contracts

Ie: 8 MPs

Na: 9 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Photo of Claire Perry Claire Perry The Minister of State, Department for Business, Energy and Industrial Strategy, Minister of State (Business, Energy and Industrial Strategy) (Energy and Clean Growth)

I rise simply to say that I think that was a useful conversation about what competition looks like. We have made excellent progress today, and I propose that clause 7 stand part of the Bill.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Rebecca Harris.)

Adjourned till Thursday 15 March at half-past Eleven o’clock.

Written evidence to be reported to the House

DGEB01 Scope

DGEB02 Energy UK

DGEB03 OVO Energy

DGEB04 Centrica plc

DGEB05 E.ON UK

DGEB06 Octopus Energy

DGEB07 npower

DGEB08 Energy Networks Association

DGEB09 SSE

DGEB10 Bulb

DGEB11 uSwitch

DGEB12 Citizens Advice

DGEB13 Utilita Energy Ltd

DGEB14 Green Gas Certification Scheme (GGCS)

DGEB15 Ecotricity