Britain’s energy policy is a giant mess. Unless policy makers come to their senses, we will condemn ourselves to falling living standards, gross inefficiencies and a monumental misallocation of resources.
The story of how the Labour Party destroyed Britain’s system of financial regulation, launching the ill-fated Financial Services Authority, is now well known. The tale of how it wrecked the pioneering energy market painstakingly introduced by its predecessor, a process tragically continued by the present coalition, is far less well understood. We should thus be grateful for the latest paper from Reform, the think tank, which explains exactly how it all went wrong.
The main point is that Britain no longer has a real energy market and that the Coalition’s reforms are “the biggest expansion of state power since the nationalisations of the 1940s and 1950s”. Nominally private companies still generate and deliver electricity that consumers pay for but just about everything, from prices to outcomes, are now heavily determined by politicians.
The author, Rupert Darwall, finds that the result is a “vast ramshackle Public Private Partnership combining the worst of all worlds – state direction of investment funded by high cost private sector finance”. Devastatingly, as he notes cogently, almost all sorts of generation that currently take place in Britain – be it zero, low or high carbon – now benefits from handouts or various kinds of price supports.
The unfashionable truth is that the privatisation of the electricity industry in the 1980s and the introduction of genuine competition in the 1990s was a triumph. The real hero was Lord Lawson of Blaby, energy secretary in the 1980s. The system evolved and improved over time, with a key duopoly eventually broken up, with the pro-competition drive led by Stephen Littlechild, the brilliant economist who was in charge of energy regulation in the 1990s. Prices fell significantly, delivering large benefits to consumers and companies and helping to deliver a significant boost to competitiveness.
The rot really set in when Tony Blair decided in 2007 to impose a target that a predetermined proportion of energy would be generated from renewable energy, mainly wind and solar. Ed Miliband’s influence on the UK’s energy policy during his time in government was also catastrophic. The return of regulation was helped by the fact that energy prices had started to rise again for the first time in years, and the increase was blamed (entirely wrongly) on privatisation and markets. Paradoxically, the interventions of the Labour and coalition years seem almost designed to dramatically hike prices.
The Labour reforms ended the free market that had been introduced by the Tories and which had worked far better than many people realised at the time.