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Energy Providers

I welcome the establishment of a new Department. It is long overdue. We had an energy Department, as you will be aware, Mr. Deputy Speaker, up to 1992. Since then, energy has been part of the integrated remit of the DTI. That has taken the focus away from some of the real issues, so it is good that we now have a Department of Energy and Climate Change. I want to concentrate on two things. The first is the increase in energy prices, especially gas prices and the knock-on effect on electricity prices. There are now just six energy companies in the market. There is an oligopoly. There are more inputs into the gas market, but the peculiarity of the gas market has meant that we have seen quite high gas prices. They have increased by 30 per cent. in the past year and electricity prices have increased by 50 per cent. That has had an enormous impact on domestic consumers and industry. When the Business, Enterprise and Regulatory Reform Committee took evidence from the Energy Intensive Users Group in spring, we were told that gas prices in France and Germany were 30 per cent. below those in the United Kingdom. I understand that across Europe electricity prices are 5 per cent. below UK prices. That has put British industry in a difficult position. Its competitiveness was challenged by those prices. When we look at why energy prices have increased, we see the indexation of gas prices to oil prices. The Select Committee took evidence from Energywatch. We were told by the chief executive that it was an irrational indexation and that there were other ways in which we might move. I accept that it would require an international endeavour, but I urge the Minister to consider whether we could embark on such an endeavour to separate gas prices from oil prices. The increase in gas prices has caused great hardship across the economy. As a result of the linkage between gas prices and electricity prices, high gas prices have driven up electricity prices. We have 33 per cent. of our electricity generated by gas and because those stations are the last to be called on—the marginal stations—they set the electricity price for the whole market. High gas prices mean high electricity prices, because the marginal set that is called on is gas-fired. That causes enormous problems. The hon. Member for Wealden (Charles Hendry) mentioned price increases and when he was chided by my hon. Friend the Member for Barnsley, Central (Mr. Illsley) he said that we cannot look back and that we should not dwell on the past. However, the two factors that had an impact on the energy market came about as long ago as 1989. The Conservative Government allowed the use of gas in power stations. Until then, the use of gas in power stations had been restricted. Using gas in power stations has burned an enormous amount of gas, to the extent that this year—2008-09—the UK may be importing 40 per cent. of the gas we use. It is estimated that the figure will go up and that by 2018 the UK will be dependent on imports for 80 per cent. of its gas. The other decision that had a big impact on the energy market was that of the Conservative Government to abandon all the research that had been done on clean coal technology; they demolished the research unit at Grimethorpe colliery. That removed our lead and gave it to other countries, such as Scandinavia. China, too, is making a lot of progress on that technology. A number of factors have an impact on the price of gas. If we are to deal with them meaningfully, it will require international endeavour. The big six are in a much more influential position in respect of electricity, with an enormous say on electricity prices in the market. That does not mean that they sit down in smoke-filled rooms and come to an agreement on the price, but because there is an oligopoly of only six major electricity producers the price signals from one to the other are easily picked up and consequently they follow each other. Over the past year, all the energy companies have increased prices. To be fair Scottish and Southern Energy did not increase its prices in April; it waited until the end of the winter. Nevertheless, all the companies have increased their prices, by 50 per cent. and 30 per cent. for gas and electricity—and that has had an enormous impact. What can we do to deal with electricity prices? Is there a way to reduce them? The price of oil has already come down from $146 a barrel in July to $81 a barrel this week. That means that the gas price has also started to fall, which is likely to bring down inflation from the 5.2 per cent. announced this week. At the same time, we have to be aware that there will be a fall in economic activity in the UK that will also have an impact. Although on the one hand, energy prices are beginning to fall, on the other we shall have to deal with a difficult situation with more people out of work as the economy begins to slow. The Government can do more to deal with the situation, especially with regard to the EU emissions trading scheme, where the energy companies are set to make an enormous amount of money. They have been given free permits and Ofgem reckons that the price of carbon will increase by £9 per tonne, so taking that figure right across the industry, the companies are likely to make £9 billion over phase 2 of the European emissions trading scheme—from January 2008 until 2012. There is an opportunity to consider whether there is room for a windfall tax on that windfall profit. An enormous amount of profit will be made, so there is an opportunity and the Minister may already be considering the possibility of a windfall tax. We could use that money to start to tackle the big issue of fuel poverty. The hon. Member for Wealden asked how many people were already in fuel poverty as a result of the price increases. We know that for every 10 per cent. increase in energy prices, 400,000 households are put into fuel poverty. When we consider the gas price increase of 50 per cent. over the past year, we realise that we could be talking about 2 million households being put back into fuel poverty. The energy companies have a social responsibility. If they do not make money available to deal with fuel poverty from the profits they are making, the Minister must seriously think in terms of a windfall tax. There is another aspect that we must look at carefully. The one thing that we could not do in the BERR Committee when we looked at energy prices was determine where the profit was coming from. On the one hand, the wholesale gas price goes up and on the other hand, because 30-odd per cent. of electricity is generated from gas and gas prices increase in relation to oil, the price of electricity also brings a profit. There are large profits in the wholesale area of gas usage and the Minister may want Ofgem to concentrate on that in its regulation of the energy industry. If that can be done, it could provide another opportunity to work with the energy industry to tackle fuel poverty. All in all, a number of things can be done. We need transparency in the forward gas market, which is not there at present. Some gas companies, in previous acquisitions, bought companies that had long-term gas contracts, and the Minister may want to consider whether those contracts are anti-competitive and what we might do to loosen them up so that they are conducive to more competition. That certainly needs to be looked at. We should also look at the enormous amount of profit that will come from phase 2 of the European emissions trading scheme. In the Minister's previous role, he was close to what was being done on clean coal technology and carbon capture and storage, but there has been such delay. I understand that this year we have listed four companies for further negotiation, but we are not likely to choose one for a contract until next autumn. That is too long. We need to expedite carbon capture and storage. That is not just to deal with coal-fired stations, although that is an important aspect; a gas-fired station produces about half the CO2 emissions of a coal-fired station, so we need to ensure that we use carbon capture and storage on gas-fired stations as well.