My Lords, this amendment speaks to the setting of the strategy and policy statement required by the Bill. Part 5 is an interesting aspect of the Bill because it moves away from purely electricity and considers all energy matters. It requires that a strategy and policy statement be maintained and formulated for Great Britain’s strategic priorities in relation to energy policy. I stress that because, as we all know, energy policy is far more than simply electricity or gas but encompasses all the primary energy used to supply energy to businesses and consumers for heat, electricity and transportation needs. This may seem academic but it is important to stress this because time and again Governments have been tempted to equate energy with electricity. They often extend that to include gas but it is rare for there to be a holistic view of all energy. The establishment of the Department of Energy and Climate Change created a structure in which I had hoped that a more holistic view of energy could be developed.
However, there are still departments of government with responsibility for energy that sit outside the DECC framework, most notably the Department for Transport, and it is not quite clear how the Department of Energy and Climate Change relates to other departments that have an impact on energy policy. That is true at a departmental level.
At the regulatory level—this part of the Bill also deals with the independent regulator Ofgem and its duties—there is clearly a gap. I am encouraged that the setting of a strategic policy statement will, I hope, create a much clearer framework of who is doing what and who has responsibility for what. We have a regulator for electricity and gas, but it is not an energy regulator. The powers do not extend to the many consumers who are off the gas grid network and rely on unregulated sources of energy. Periodically there are concerns, which often reach the media, about people who have been forced to purchase from other suppliers and be completely dependent on that fuel in the winter months. There is no price regulation there.
Colleagues in another place have raised concerns over how non-domestic consumers are represented by our regulator. We tend to equate the regulation as being on behalf of consumers but that is a broad definition and there is a subset of consumers, the small and medium-sized enterprises, which are facing considerable issues. I hope that Ofgem’s remit will cover them and that we hear more about how they can be protected.
I have tabled my amendment to force the Government to consider the gaps in current regulation. That will become increasingly important, not least because, as
we move forward with a low-carbon agenda, the three major energy markets—electricity, heat and transport—are starting to merge and cross over. The noble Lord, Lord Flight, last week tabled an amendment on the interplay between biofuels being used in the heat market and transport markets. These issues are becoming increasingly apparent. It is not just that fuels can be diverted into different markets but a process of electrification of transport and heat is underway. I do not know what all the issues will be as we go down this path but we should certainly have a regulator capable of looking across all the energy markets.
Another aspect to this that we hope the SPS will address is the creeping lack of clarity about the relative roles of the department and the regulator. I give just two examples. At the moment, there is a tendency for Ofgem to be involved in policy. Perhaps the most notable example of that is Project Discovery, Ofgem’s foray into the murky world of security of supply, which takes it well beyond the role of a price and market regulator into a policy arena in which the department should operate. On the other hand, the department is starting to act like a price regulator, with the Prime Minister starting to make policy on tariffs. We are shortly to hear a lot more about those proposals but it is clear that there is an increasing crossover and complete lack of clarity here. I hope that this SPS will help to address that.
My next point relates to how the commodity markets are regulated. This is an important issue because, as we have seen in the press in a number of cases, where there is potential for market abuse there needs to be a clear regulatory framework. In the commodity fuel markets, there is a lack of clarity on the distinction between where the FCA is involved in regulating markets and where Ofgem’s role starts. This will become a very important issue, not least because we are now considering a Bill in which we are placing quite a high degree of emphasis on reference prices against which we will be comparing strike prices. I have raised this in the very helpful briefings we have had in the run-up to the Bill. I was referred to the implementation of REMIT, a Europe-wide move to prevent abuses in the wholesale energy market, but I am not fully reassured by that. I have a number of questions in relation to it. Has it been implemented in the UK? When will it be implemented? The deadline for the introduction of penalties for abuse was 29 June. Have we implemented the penalties? Are we compliant with that European requirement?
REMIT goes only so far. When we are looking at a system that is highly dependent on market-based prices, I am concerned about who is going to ensure that the data that go into that process are comprehensive, holistic and not subject to abuse. In the oil market, we have heard of abuses by oil companies and about rating agencies colluding to provide only a small part of the information, not the full picture. If that is possible, do we not need to look at statutory underpinning for this information? How can we develop robust reference prices if the information provided to rating agencies is done on a voluntary basis and has no statutory underpinning? What are we doing to ensure that we have full and complete transparency in the data that are provided to develop these reference prices?
It will come as no surprise that our party is very critical of Ofgem. I have said that I do not think that the role of Ofgem is broad enough and have talked about the lack of clarity and the confusion about where the FCA’s role starts and where Ofgem’s role starts. The most worrying criticism of the regulator is that it is failing in its current remit. It is not acting to enforce fairness. Its process of reform started in 2008 and was evaluated in 2011. Of the 16 benchmarks set to compare progress against, 12 showed no improvement. That is simply not good enough. From 2008 to 2011 is a long period, and there was no improvement in 12 of those benchmarks. Ofgem is clearly failing in its stated purpose of enforcing fairness in the market.
Ofgem has failed to live up to expectations about transparency in the market. I know that this will come up in later parts of the Bill as we talk about access to markets and liquidity. In 2011, the accountants BDO issued a report, I think at the behest of the Government, looking at what could be done to improve transparency in the market. Eight recommendations were made. Of them, six were quietly dropped; only two were pursued, and they were varied from the original advice. This is a serious issue, and this is the part of the Bill where we talk about the authority and the role of regulation. We have very serious concerns about Ofgem’s remit and its ability to deliver on its current functions. Our policy would be to replace this regulator with a regulator fit for purpose to deliver proper regulation and to protect consumers now and in the future across the whole energy market.