Friday 13 March 2015
Labour is today announcing plans to give the regulator the power to cut prices by winter and freeze energy bills until 2017
- Labour is announcing today plans to give the regulator the power to cut prices by winter and freeze energy bills until 2017
The energy market isn’t working for working people…
- Energy bills have increased by over £300 since the last election.
- The number of families with children who can't afford to heat their homes is at an all-time high.
- Limited competition, in a market dominated by 6 companies, and weak regulation has resulted in 3 out of 4 families being overcharged.
Energy companies hike prices when the cost of energy rises but don’t cut them fully when it falls…
- When wholesale prices rose, energy companies hiked up bills.
- Over the last year, wholesale energy prices have fallen by an average of 20%, yet the Big 6 have only passed on cuts of 1- 5% on gas bills and nothing on electricity bills.
- The consumer group Which? estimates that further cuts of up to 10% in electricity and gas bills are possible this year – saving families up to £2.5bn a year
The Tories know that this is a problem…
- In January this year, George Osborne admitted “We need to ensure falls in wholesale prices are properly passed on to all consumers and we will continue to monitor this very closely.”
…but they won’t act because they won’t stand up to the energy companies…
- In Opposition, David Cameron said “You have to give the regulator the teeth to order that those reductions are made and that is what we will do.”
- Six years later, his government voted against Labour’s plans for a regulator with the power to order energy companies to cut bills when wholesale prices fall and they opposed Labour’s price freeze.
Labour’s Better Plan:
Labour has a better plan – we will give the regulator the power to cut prices by winter and freeze energy bills until 2017 whilst we reset the market…
- Labour will put an immediate stop to this overcharging by giving the regulator the power to cut prices and a duty to act in time for this winter.
- We will freeze energy bills until 2017, so that bills can fall but not rise, whilst we fix the market:
- By getting the Big 6 to separate out the parts of their business that generate energy from the parts that sell to consumers;
- Getting them to sell all their energy in an open pool;
- Introducing a simple new tariff structure; and
- Abolishing Ofgem and replacing it with a tough new energy watchdog from January 2017.
- The energy market is broken. It is dominated by six companies that supply to over 90% of homes and generate 70% of the power we use.
- Limited competition and weak regulation has weakened the incentives to keep prices low. So when the price of energy rises (wholesale price), energy companies pass this on to consumers but when it drops consumers don’t see the benefit of this through reductions in bills.
- On David Cameron’s watch, energy companies hiked up bills by an average of 10.4% a year between 2011 and 2013, blaming rising energy costs.
- Since December 2013, wholesale gas prices have been falling by an estimated 22% whilst electricity prices have fallen by 17%. But the Big 6 have only passed on a fraction of this – between 1 and 5% for gas and nothing for electricity – to consumers as cut in bills. The result has been a growing mark-up between the price energy companies pay for the energy they buy and the price they charge their customers.
- The consumer group Which? estimates that further cuts of up to 10% in electricity and gas bills are possible this year. This could save families up to £2.5bn a year – about £100 off their annual fuel bill.
- Despite claiming that ‘we need to ensure falls in wholesale prices are properly passed on to all consumers’, the Government has failed to act.
- We will introduce legislation immediately on entering office to freeze prices, so they can fall and not rise, and give the regulator the power to cut prices and a duty to review prices and act in time for winter.
- We will then fix the market so that it delivers a better deal for working families in the long run by forcing energy companies to separate out the parts of the business that generate energy from the parts that sell to homes and businesses; requiring them to trade their energy on a pool; introducing a simple new tariff structure; and creating a tough new energy watchdog with new powers to police the market.
Wholesale costs have fallen –isn’t the reason companies haven't passed them Labour's price freeze?
Energy companies always have 101 excuses why they won’t cut prices – and they have form in putting up prices when wholesale costs rise but not cutting them when they fall. When energy prices went up in 2008, bills went up. But when energy prices fell in 2009, household bills only fell by a fraction in the following two years. Ofgem did a report that identified this problem in 2011 too, and again in 2014, when it said the problem had got worse. Unlike this Government that has refused to take action, the next Labour Government will.
But some of the energy companies have said in private that the freeze is the reason why they haven't cut prices?
Energy companies have always got 101 excuses why they won’t cut prices – but in fact a number of them are on the record saying that our plans have no bearing on their current pricing decision. The Chief Executive of Centrica Iain Conn said, for example that "The price freeze….had absolutely no impact on our decisions on pricing’.
Iain Conn (Centrica Chief Executive), BBC News, 19 February 2015 http://www.bbc.co.uk/news/business-31532272
How would you actually give the regulator this power?
We will pass legislation to give the regulator the power to cut prices and put a specific legal duty on it to review prices by the autumn, ensure that consumers are paying a fair price, and if not, cut prices so that wholesale costs are passed on to consumers.
How will you actually be able to force the energy companies to pass on the reductions in wholesale costs?
To supply gas and electricity in this country, companies have to have a licence, given by the regulator. That licence comes with conditions which companies have to operate by – they’re designed to protect consumers. Under our plans, one of the conditions would be that prices are fair and reductions on wholesale costs are passed on to consumers, and the regulator would have the power to enforce this if not.
How much will the regulator cut prices by?
This will be up to the regulator. But the consumer group Which? has done some independent analysis which says that a cut of up to 10% cuts is possible this year. That would mean savings of about £100 a family a year. If you look at the prices that suppliers are offering new customers, compared to what they’re charging existing customers, the average difference is around £180, which surely suggests that suppliers have scope to cut price significantly. So all the evidence suggests that energy supplier should be cutting their prices.
Do Which?’s figure factor in the cut there have already been to energy prices?
Well there haven’t been any reductions at all to electricity prices and according to Which?’s analysis prices could be cut by up to 10%. There were some small reductions to gas prices earlier this year – ranging between 1% and 5%. Which? say that these should have been up to 10%, so again there is scope for significant further price cuts of up to 9% or so. Let’s not forget either that this research was done weeks ago, and wholesale prices have continued to fall since then, so the scope for price cuts may be even greater.
So will this mean a blanket cut across the industry? Won’t this harm small suppliers?
This will be for the regulator to decide based on the market information it has. We are seeing big differences in the prices being offered by small suppliers and the standard tariffs that the Big 6 offer – which suggests that a company by company approach would make the most sense.
What if energy companies cut their prices beforehand?
Of course that would be good news for consumers. Unfortunately, the energy companies have a very poor track record when it comes to passing on falls in wholesale costs, and this Government has consistently refused to take action to deal with the problem. But, obviously, we want these savings passed on to consumers as soon as possible. If the introduction of this new power is enough of a deterrent to make them cut their prices that would be a good thing for consumers. But we’d want to make sure that the full saving was passed on, which is why it’s important the regulator has this power.
What if the regulator said that prices shouldn’t be cut, or that they should be increased?
The regulator is independent, but I would be extremely surprised if that was the view they come to, given when the most recent prices cut were announced Ofgem, the regulator, made a point of saying that the recent price cuts were only a “small step” in the right direction. All the evidence from consumer groups like Which?, from analysis of market data, even from Ofgem’s own analysis shows that the falls in wholesale costs have not been passed on to consumers.
Hasn’t Labour said it will be abolish Ofgem? How will you be able to do this if regulator isn’t there?
Yes, we don’t believe that Ofgem has done a good enough job to protect consumers. That’s why we’ve said we will create a new regulator, with new duties and new powers. This new regulator will be in place by January 2017. In the meantime, an interim regulator will continue to function and they will be given the power to cut prices.
How will the regulator be able to work out whether wholesale prices have or haven’t been passed on? Doesn’t this all depend on some pretty complicated pricing models and hedging strategies?
Ofgem already has access to information on what prices energy is being bought at and what consumers are being charged. Ofgem also has the power to request additional information from companies. What we are giving them is a clear duty to act on this information by autumn and the power to cut prices in response.
Is this the start of permanent price regulation?
We have been clear that our goal is to reset the market and create a competitive, transparent market that people can trust. Part of this, is giving the regulator a backstop power to cut bills when these are being kept artificially high so that prices consumers are charged reflect those in a genuinely competitive market.
If you are cutting prices during the freeze, does that mean you aren’t freezing prices?
We have been clear from day 1 that the freeze is to stop prices going up not falling. This is spelt out clearly in the Green Paper we published in 2013.
So will you freeze at this cut price?
We will freeze prices immediately on entering office until 2017 so prices can’t rise above this level. But we have been clear that within the freeze prices can be cut. Any cuts imposed by the regulator that winter would run at least until the end of the freeze the following year.
Wouldn’t this undermine the regulator independence from Government?
No – the regulator will remain operationally independent and free from any interference from ministers. But like all economic regulators in the UK, the regulator’s functions and powers are defined in statute. These functions and powers set the context for all regulatory decisions.
Won’t your reforms reduce investment?
No, by rebuilding trust in the market and providing greater investor certainty they will support investment. What any investor needs isn’t short term returns based on overcharging but long term certainty on returns. That is why we will commit to the 2030 power sector decarbonisation target which the industry has been calling for and we will stick with the system of contracts for difference which guarantees investors a return on their investment.
Energy companies are saying that your policy will cause the lights to go out?
This is just scare-mongering. Our plan to reset the market will make it harder for these companies to overcharge consumers, so of course they’ll tell scare stories about the lights going out. The reality is that what investors care about is long term certainty. That is why we will commit to the 2030 power sector decarbonisation target which the industry has been calling for and we will stick with the system of contracts for difference which guarantees investors a return on their investment.
How will you actually freeze prices?
We will introduce legislation immediately on entering office to freeze energy prices.
Why does the price freeze end in 2017?
This is the amount of time that we think we need for our reforms to start kicking in. 20 months gives us enough time to bring forward legislation, create a new regulator and begin implementing are reforms to reset the market.
Isn’t this illegal under EU law?
No, this is a temporary freeze while the market is put on a genuinely competitive footing. European law allows price intervention to prevent consumers losing out. Many European countries have much more heavily regulated energy prices.
How will you stop companies just increasing their prices once the freeze ends?
The freeze will run until 2017. At that point our market reforms will start kicking in and the new energy watchdog will be up and running. With its new remit and powers, it will be the job of the regulator to police the market and make sure that companies are charging consumers a fair price.
Will prices rise after the freeze?
Our price freeze guarantee lasts till 2017. By then, our reforms will have started kicking in and we will have put in place a regulator who can guarantee fair prices, including forcing companies to pass on cuts when the price of energy falls. This will mean that consumers will be better off under us than under the Tories.
How much will people save through a price freeze?
This will depend on how much they are paying on their bill. But an average household user would save £120 and an average business user would save £1,800.
So are you saying companies shouldn’t make profits?
Of course they should. This isn’t about what profits companies have or haven’t made, it is about whether consumers are getting a fair deal from the market. It is absolutely clear to us that the market isn’t working. The price freeze is intended to put a stop to this whilst we reset the market.