Energy and Environment

A vicious circle of state intervention is taking Britain’s energy markets back to the 1970s

Whether you are a green activist or a poverty campaigner, energy policy under the Thatcher-Major-Blair governments was a striking success. Between 1990 and 1999, prices for domestic consumers fell by 26 per cent and the fall for industrial consumers was even greater. Energy-related greenhouse gas emissions per unit of GDP fell by 45 per cent between 1990 and 2010. This is quite some achievement and it happened because of privatisation and deregulation.

Some people argue that these benefits were only achieved because of a fall in world energy prices in that period. However, it was only because of privatisation and liberalisation that energy producers were able to take advantage of the low cost of particular fuels (mainly gas at that time).

Unfortunately, the current government’s policies tend to hark back to the days when the energy industry was centrally planned and competition was limited. Things started to go wrong under the 2005 Labour government, but accelerated under the coalition.

As energy expert Carlo Stagnaro shows in a new Institute of Economic Affairs study, every intervention led to further intervention and we ended up with a “market” in which competition was severely undermined and costs were loaded on to businesses and households.

In particular, the government explicitly promoted renewables by trying to “pick winners”. It also gave renewables priority access to the grid. Because renewables generate at almost zero marginal cost when the sun is shining and the wind is blowing and also because the government guaranteed generous “feed-in tariffs” for some renewable producers, the genuinely competitive part of the market was reduced. Furthermore, renewables are subject to intermittency. This is a particular problem in the UK, where there is a tendency for the wind not to blow when it is very cold. We have been very lucky this winter: it has been warm and windy and the lights have stayed on; it could have been different. Because of intermittency, the government decided it needed to pay generators simply for having the capacity to produce electricity even if no energy was generated.

The government has also centrally planned generation – just as it did in the 1970s. For example, it has an absurd contract with the Chinese government for the delivery of nuclear power, and the government decides how much should be produced by renewables and to what degree each source will be subsidised.

All this is in addition to the regulator’s policy of restricting competition by reducing the number of tariffs available and preventing energy companies from offering lower tariffs out of their main distribution areas.

Some of this policy is dictated by EU legislation. Instead of countries reducing their carbon emissions at the lowest cost possible, renewables targets imposed by the EU have meant that some countries, such as France, have been replacing generation that already emits little carbon with still cleaner technologies at enormous cost – sometimes 200 times the cost of carbon trading permits in the EU emissions trading system.

So, where should we go now? If the EU wishes to reduce carbon emissions, it should only adopt technology-neutral policies – in other words, emissions trading systems and carbon taxes. After such mechanisms are set up, renewables should stand or fall on their own merits. Renewables generators and their consumers should bear the costs and risks of their own intermittency problems.

More generally, we must return to an agenda of competition and liberalisation and encourage the roll out of such an agenda in the European Union. The UK has shown how successful liberalised energy markets can be, both for consumers and for the environment. We once gave the lead, we must do so again.

Prof Philip Booth is the IEA’s Academic and Research Director. This article was first published in City AM.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

3 thoughts on “A vicious circle of state intervention is taking Britain’s energy markets back to the 1970s”

  1. Posted 05/01/2016 at 09:32 | Permalink

    But none of that ensures that the “lights stay on” during winter. How does a free market approach ensure that there is sufficient energy going into the grid? The free market outcome would be more than one grid, a kind of premium grid where those that can afford it can secure energy throughout the year?

  2. Posted 05/01/2016 at 12:32 | Permalink

    RE MQ Blogger:
    A free market in supply does not necessarily mean a free market in transmission (just as a free market in cars doesn’t require a free market in roads). The point that only those who are rich enough can afford energy is a valid one – whether you believe it or not the article does suggest that in a free market of suppliers the cost to consumers would be lower. Personally I think the cost for domestic energy is remarkably cheap, but even if people couldn’t afford, say £60 per month for gas and electricity, the solution is not for the state to control the market, but simply give poor people money to spend on energy (either in cash or vouchers).

  3. Posted 05/01/2016 at 13:09 | Permalink

    MQ, the point is not the grid but the supplier. There are trade-offs. You can pay for extra capacity so that there is always supply; you can have less renewable energy so that security of supply is greater; you can have more variable pricing so that you always have supply but you might have to pay more when there are shortages; or you can risk outages. Of course, these options are not going to be available in an infinite number of combinations, but the basic issue is that suppliers should be able to offer these choices to customers and they should bear the costs of the different options. Security of supply has a market price. Currently, we have to have excess capacity and security of supply with no price variability and minimal probability of blackouts whether we like it or not. Those who would like green energy might be happy if the consequences were occasional blackouts (it might fit with their consciences better than having some gas fired power station continually kept in operation but not used, just in case). It would certainly be cheaper.

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