Electricity Prices

HC Deb 15 February 1988 vol 127 cc690-3

7. Mr. Pike

To ask the Secretary of State for Energy what further representations he has received regarding the proposed increase in electricity prices.

Mr. Michael Spicer

I have received a number of representations.

Mr. Pike

Has not the Secretary of State said that the rate of increases is faster than that which the chairman of the CEGB would have wished? Does the Minister recognise that this is of serious concern to many industries, which believe that this will put them at a disadvantage in the face of European competition? If the Government do not change their policy, they are likely to put more jobs in jeopardy.

Mr. Spicer

Perhaps the hon. Gentleman will be interested in the facts about this. The United Kingdom's domestic electricity prices are among the lowest in Europe and will continue to be so after April. For typical industrial consumers electricity prices will remain at about the average for Europe after the increase in April. After the April increase, United Kingdom industrial electricity prices will continue to be lower than the average prices in the United States and Japan.

Mr. Hannam

Is my hon. Friend aware that the South Western electricity board is proposing a 12 per cent. increase in prices next year? In an area of below average incomes, will this not be damaging? Will my hon. Friend have discussions with the electricity board to try to prevent such a large increase?

Mr. Spicer

We have been enjoying such low electricity prices largely because the industry has been earning an exceptionally low rate of return on investments. As the industry now requires considerable new investment—

Mr. Skinner

It is being fattened up.

Mr. Spicer

Whatever the hon. Member for Bolsover (Mr. Skinner) may say about fattening up, whether the industry was in the public or the private sector, it would have to increase its rate of return.

Mr. Hardy

When the Government announced the price increase, it was suggested that it was done to provide the CEGB with an adequate capacity to invest. When the figures were examined, it appeared that the CEGB had already budgeted for £1 billion of investment before the price increase. Is the Minister sure that this increase is necessary, or are he and his colleagues determined that the price increase will go ahead to provide a sweetener for privatisation and reduce the competitive edge of British industry?

Mr. Spicer

Between now and the year 2000 there will have to be investment of £45 billion—in outturn prices— so that the industry can meet demand. To achieve that rate of investment, the industry—whether it is in the private or public sector—has to start to gear itself up to the approximate 5 per cent. rate of return that the Labour party agreed was an appropriate rate of return in the public sector.

Dr. Michael Clark

Should not electricity prices be competitive to the user industry but commercial from the supply industry in order that the massive investment can be properly serviced? Do not some companies, such as chemical companies, use large amounts of electricity, particularly if they have to heat their products first before electrolysing them? Therefore, will my hon. Friend consider a special form of tariff for those high users of electricity in the chemical industry?

Mr. Spicer

I agree with what my hon. Friend has said. There are arrangements whereby heavy users have a 6 per cent. discount.

Mr. McAllion

Does the Minister accept that the rise in electricity prices is the third heavy blow that the Government have dealt to pensioners this winter? Already £3.5 million has been cut from the Government's allocation for home insulation grants, pensioners on supplementary benefit have been expected to meet 10 per cent. of the costs of insulation materials and now the cost of electricity is to increase at more than twice the rate of inflation. Does the Minister not have on his conscience the report from Winter Action on Cold Homes, which is in The Independent today? That shows that more than 5 million pensioners cannot afford to heat their homes properly and that up to 30,000 pensioners die every year from cold-related causes. Why is he making them pay the price of privatisation?

Mr. Spicer

First, there will be no rises until April. Secondly, when those rises take place domestic consumers will be 6 per cent. better off in real terms than they were five years ago. Thirdly, pensions have kept pace with inflation over the past five years and domestic electricity prices have fallen by 15 per cent. in real terms.

Mr. Beaumont-Dark

Does my hon. Friend accept that most of us are anxious to believe the story that he tells us, but that we find ourselves with a certain complexity? Lord Marshall said that what the Minister now says is not exactitude and the Confederation of British Industry, which is involved in trying to make industry prosperous, also thinks that what the Minister said is an inexactitude. Who should we believe—them or the Minister?

Mr. Spicer

Me, Sir.

Mr. Matthew Taylor

The Minister speaks of the need to increase the rate of return for the industry. Does he not accept the CBI figures, which suggest that a 4.75 per cent. rate of return on Treasury figures is equivalent to a 16 to 18 per cent. rate of return on the normal, non-inflation adjusted figures that business uses and that that rate of return exceeds that of many high-risk, let alone low-risk, industries? Does he accept that many pensioners, industrialists and others are bitter and angry about the increases that are being imposed by the Government, not for a rate of return, but to make the industry privatisable and to increase the money going to those people who can afford to buy it?

Mr. Spicer

The hon. Gentleman forgot to mention that if we are taking a historic cost basis of 16 per cent., the average historic cost basis for industry is 18 per cent. We are not even going to reach that level after this rise.

Mr. Rost

Is not the main justification for demanding a slightly higher rate of return now the prospect of cheaper electricity in the future? It will surely stimulate investment in new technology, particularly by the private sector generators, which would allow more competition and lower prices in the future.

Mr. Spicer

My hon. Friend is absolutely right on two grounds. First, it will encourage new and modern investment in the industry. Secondly, as we privatise the industry, there will be increased pressures on the cost efficiency of the industry, which in the long term will bring down the relative prices.

Mr. Prescott

Does the Minister accept that his answers will not be acceptable to the House? Can he confirm that he is to meet the CBI to hear its representations on a study that has just been concluded by the London Business School, looking into whether the claims of the Government that the rate of return on capital and profits are necessary for investment in the industry? The conclusion of that report, which is quoted in the press, is that the rise in electricity prices is unnecessary and inappropriate and does not stand critical examination. In reality, the increase is totally unjustified. The Government are simply fattening up the industry for privatisation, and the cost is being paid by the misery and deaths of pensioners who are paying price increases of twice the rate of inflation.

Mr. Spicer

I can confirm that my right hon. Friend the Secretary of State and I will be meeting the CBI in the near future. At that meeting we shall be putting forward precisely the same points as I have been putting to the House this afternoon.

Mr. Forth

Is my hon. Friend surprised at the reaction to the increase from, for example, the CBI, which is conceding up to 8 per cent. average wage increases when labour costs represent over two thirds of its total costs whereas electricity represents only a small percentage of those costs? Does my hon. Friend share my surprise at that?

Mr. Spicer

I share my hon. Friend's surprise because electricity prices represent 2 per cent. of manufacturing costs whereas 46 per cent. of the average firm's costs are represented by labour costs, which have been rising in cash terms by 50 per cent. over the past five years.