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Energy prices: a political power play Energy prices: a political power play
(7 months later)
In warning of "very tight power station capacity", Alistair Buchanan of Ofgem provoked the headlines about the lights going out that he must have expected. In truth, with the possible exception of a very occasional December evening, blackout Britain remains a remote prospect, and Mr Buchanan was careful to eschew direct use of such language. But if he is keen to engender a sense of crisis, that is understandable – and not only because a slothful regulator wishes to cover its back against the worst case.In warning of "very tight power station capacity", Alistair Buchanan of Ofgem provoked the headlines about the lights going out that he must have expected. In truth, with the possible exception of a very occasional December evening, blackout Britain remains a remote prospect, and Mr Buchanan was careful to eschew direct use of such language. But if he is keen to engender a sense of crisis, that is understandable – and not only because a slothful regulator wishes to cover its back against the worst case.
There is indeed, as Mr Buchanan insisted, an energy gap opening up. Coal power stations are being decommissioned. Even in the increasingly doubtful event than nuclear can fill the gap, it will not do so before 2020. In the interim, Britain will have to get by with less energy. Even while power continues to flow to the plug, that will mean higher and more volatile prices. If and when the economic recovery materialises, demand for energy will rise, so this is one problem that will only get worse.There is indeed, as Mr Buchanan insisted, an energy gap opening up. Coal power stations are being decommissioned. Even in the increasingly doubtful event than nuclear can fill the gap, it will not do so before 2020. In the interim, Britain will have to get by with less energy. Even while power continues to flow to the plug, that will mean higher and more volatile prices. If and when the economic recovery materialises, demand for energy will rise, so this is one problem that will only get worse.
The government's response is a creakingly complex energy bill, which guarantees little but uncertainty. In the bizarre theology of a privatised electricity sector in which France's nationalised EDF is the biggest player, it is regarded as unacceptably retrograde for ministers to decide anything directly, and policy must operate through incentive schemes. Consequently, instead of having anything as coherent as a new dash for gas or a green light for new nuclear, we have various "capacity payments", "contracts for difference" and "feed-in tariffs". If all these disparate levers were pulled in one direction at once, then just maybe the quasi-market could deliver a strategy by indirect means. Sadly, political divisions preclude this.The government's response is a creakingly complex energy bill, which guarantees little but uncertainty. In the bizarre theology of a privatised electricity sector in which France's nationalised EDF is the biggest player, it is regarded as unacceptably retrograde for ministers to decide anything directly, and policy must operate through incentive schemes. Consequently, instead of having anything as coherent as a new dash for gas or a green light for new nuclear, we have various "capacity payments", "contracts for difference" and "feed-in tariffs". If all these disparate levers were pulled in one direction at once, then just maybe the quasi-market could deliver a strategy by indirect means. Sadly, political divisions preclude this.
The coalition has failed to send stable signals – renewables, nuclear and latterly gas have been talked up as the future in turn. George Osborne dreams of Britain somehow defying its geology to cash in on America's shale revolution, while manoeuvring to kill off nuclear because of legitimate fears over cost. The Lib Dem energy secretary, Ed Davey, hankers for green alternatives, but the wind is taken out of his sails by his Tory deputy, John Hayes, who regards turbines as an ugly irrelevance.The coalition has failed to send stable signals – renewables, nuclear and latterly gas have been talked up as the future in turn. George Osborne dreams of Britain somehow defying its geology to cash in on America's shale revolution, while manoeuvring to kill off nuclear because of legitimate fears over cost. The Lib Dem energy secretary, Ed Davey, hankers for green alternatives, but the wind is taken out of his sails by his Tory deputy, John Hayes, who regards turbines as an ugly irrelevance.
In sum, the means of getting anything done are intricate, and only a strong political grip – of which there is no sign – will make policy effective. Would-be investors in gas, green power and nuclear look on with no confidence at what return they can expect, and respond by walking away, leaving Britain with its energy gap. It is a frustrating position because – for all the complexity – the economics are at root quite simple.In sum, the means of getting anything done are intricate, and only a strong political grip – of which there is no sign – will make policy effective. Would-be investors in gas, green power and nuclear look on with no confidence at what return they can expect, and respond by walking away, leaving Britain with its energy gap. It is a frustrating position because – for all the complexity – the economics are at root quite simple.
The price of electricity has two components: the cost of the energy itself and an insurance premium. The premium finances enough extra power to ensure that the grid can answer any plausible surge in demand. If the government wants to stick within the market paradigm, it should simply auction contracts to provide that surplus, leaving the companies to select the most efficient means. There would, however, have to be a requirement for the winning bids to comply with the UK's obligations on carbon. That could be done, but the need to manage a market again raises the question of whether it is time for a broader rethink, and a more directed energy policy.The price of electricity has two components: the cost of the energy itself and an insurance premium. The premium finances enough extra power to ensure that the grid can answer any plausible surge in demand. If the government wants to stick within the market paradigm, it should simply auction contracts to provide that surplus, leaving the companies to select the most efficient means. There would, however, have to be a requirement for the winning bids to comply with the UK's obligations on carbon. That could be done, but the need to manage a market again raises the question of whether it is time for a broader rethink, and a more directed energy policy.
Ed Miliband hinted last week that he had ideas which could cut bills for hard-pressed customers, but said nothing about how. If, like the coalition and New Labour before it, he wants to stick within the architecture created at privatisation, he is likely to find that it is tricky to get anything done. If, on the other hand, he wants more radical change, he will soon have to give an indication of exactly what – not just because of the usual argument about oppositions building up credibility through detailed policies, but also because uncertainty about the policy of the potential next government could compound the metaphorical power cut which the coalition has already imposed on Britain's electricity sector.Ed Miliband hinted last week that he had ideas which could cut bills for hard-pressed customers, but said nothing about how. If, like the coalition and New Labour before it, he wants to stick within the architecture created at privatisation, he is likely to find that it is tricky to get anything done. If, on the other hand, he wants more radical change, he will soon have to give an indication of exactly what – not just because of the usual argument about oppositions building up credibility through detailed policies, but also because uncertainty about the policy of the potential next government could compound the metaphorical power cut which the coalition has already imposed on Britain's electricity sector.
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