EU policies hampering UK electricity market
In a new report for the Institute of Economic Affairs, energy expert Carlo Stagnaro demonstrates how attempts by the EU to promote competition and liberalisation have only been a partial success at best. The problems created by a bias towards renewables – especially intermittency – are being addressed in a way that further reduces the scope of competition in power markets.
EU policy has been made worse by changes in domestic policy. Despite the successes of liberalisation of electricity markets in the UK, a major policy U-turn began around ten years ago, reducing competition and liberalisation. Steps included limiting the number of offers and tariffs available to consumers, the introduction of measures directing electricity generating companies towards particular technologies, and long-term agreements to fix prices in markets. All these crowd out non-subsidised investments and transfer risks to the taxpayer and the consumer.
This U-turn was paralleled by a push from the EU towards interventionist climate policies such as tax breaks and direct subsidies for renewable capacity, feed-in tariffs treating renewable generation very favourably, and an obligation for member states to grant either priority or guaranteed access to the grid for ‘green electricity’, all of which have been detrimental for consumers.
UK energy privatisation and liberalisation was very successful
- From 1990 to 1999, electricity prices for domestic consumers fell by 26 per cent for domestic users, with a bigger fall for industrial users. Before liberalisation, electricity producers had been locked into expensive contracts using dirty fuels.
- Energy-related greenhouse gas emissions fell by 12 per cent between 1990 and 2010, with emissions per unit GDP falling by 45 per cent.
- There has been some success with liberalisation in the EU but the market share of incumbent, dominant firms in the EU still averaged 56 per cent in 2010
The harmful effects of EU climate change policies
- Intermittency leads to price spikes and the potential for either huge increases in consumer prices or blackouts. Intermittency arising from the use of renewables such as solar and wind has caused enormous pressure for regulated capacity support mechanisms – yet another market intervention. These reduce competition by remunerating generators simply for having capacity regardless of whether it is used.
- A reduction in the genuinely competitive part of the market causes significant supply-and-demand imbalances. When demand for electricity falls – as it did post 2008 – renewable energy producers are immune to the consequences. Because renewables have priority access to the grid and receive subsidies, the genuinely competitive part of the electricity market has been dramatically reduced.
- The cost of reducing carbon emissions has been huge. The chosen mechanisms for reducing carbon emissions have been hugely expensive. Even in Finland – the country able to reduce CO2 emissions most cheaply – the cost per tonne of reduced carbon emissions has been around four times the value of permits under the EU emissions trading scheme. In France, the marginal cost of reducing carbon emissions is probably around 200 times higher. Subsidies for different types of renewables have varied by a factor of 180 times with biomass and waste being especially favourably treated in some countries.
- Renewables targets are very inefficient. The compulsory use of national renewables targets means that countries such as Sweden and France are replacing generating capacity that emits very little carbon with renewables. This is hugely wasteful.
- Where there is potential for intermittency, consumers will have different preferences for price variability and intermittent supply as compared with higher average prices and more reliable supply and price patterns. These matters should be left entirely to the market.
- Policymakers should use only minimum-cost methods to reduce carbon emissions such as cap-and-trade schemes or carbon taxes. This will allow the market to find the most efficient way to reduce carbon emissions.
- There should be considerable liberalisation and the promotion of competition and innovation, both at wholesale and retail level in EU electricity markets. The UK should return to its earlier successful policies and the EU should develop a framework to ensure that other countries follow.
Commenting on the report, Professor Philip Booth, Academic and Research Director at the Institute of Economic Affairs, said:
“This report demonstrates the folly of UK and EU policy in relation to electricity markets. Until ten years ago, the UK led the way in reforming the electricity industry. Markets were deregulated, competition was promoted and industry was privatised, leading to both consumer costs and greenhouse gas emissions falling.
“Forms of regulation – promoted both by the UK and the EU – designed to promote renewables have been incompatible with genuine competition, and led to the unsatisfactory result of regulations leading to yet more regulation. Most perversely of all, such regulations have been a terrible way to reduce carbon emissions.”
Notes to editor:
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Carlo Stagnaro is Senior Fellow of Istituto Bruno Leoni, of which he was Research and Studies Director until April 2014. He currently heads the technical secretariat of Italy’s Minister of Economic Development, Ms Federica Guidi. After graduating in Environmental Engineering at the University of Genoa, he achieved a PhD in Economics, Markets and Institutions from IMT Alti Studi Lucca. His research interests are in the fields of energy economics, public service economics, and liberalisation and privatisation processes.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.
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