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FT: Britain’s Energy Market Needs Perestroika

Editorial, Financial Times

Malthusian anxiety and shambolic policies are putting the prosperity of a generation at risk.

Since UK opposition leader Ed Miliband promised to freeze energy bills for 20 months, the Conservatives have vacillated between calling him a conman and peddling snake oil of their own. If Britain is to keep the lights on without incurring crippling costs, the country’s energy policy debate needs more substantial fuel.

Two revolutions are unfolding in the electricity market. The first involves building expensive renewables and nuclear plants, paid for through higher bills. Environmental levies have so far been modest, accounting for less than 10 per cent of the cost of electricity. By 2030 this will rise to 41 per cent. Britain has pledged to supply 15 per cent of its energy needs from renewable sources by 2020, and to halve emissions from 1990 levels by 2025. Some experts say that, given more time, the same targets could be achieved at lower cost.

Bold undertakings to reduce emissions were popular when they were announced at the height of the boom. Yet that moment of Malthusian anxiety was also one of economic cheer, and little attention was paid to the sacrifices that expensive energy entails. This burden now falls on shoulders that are slenderer than once thought.

If Britain never adequately reckoned with the cost of its carbon commitments, it may also have been too optimistic about the benefits. The country accounts for less than 2 per cent of world emissions. The heroic reductions that are planned will have a negligible effect on global temperatures.

This would be true even if the UK’s moderation were not offset by intemperance elsewhere. In fact, investment in energy-intensive industries is already being drawn to countries such as the US where costs are lower. Britain may end up exporting emissions – and jobs – to countries that have shunned such onerous environmental commitments. The halting progress towards a global carbon pact provides scant vindication for those who thought that where Britain led, others would follow.

Politicians portray these policies as the inevitable consequence of legally binding commitments. Such wilful naivety gives an unintended meaning to Prime Minister David Cameron’s pledge to lead the greenest government ever. If the UK’s environmental policy is defensible, it should be defended. If not, the government should repeal or renegotiate the laws and treaties in which these commitments are enshrined. Mr Cameron has pledged action to prevent Brussels from throttling UK companies with red tape. He should not pretend that crucial parameters of energy policy are out of his hands.

Alongside this revolution in the means of production is one of economic planning. Since privatisation the electricity industry has been run on market principles. Price controls were abolished and politicians placed their faith in competition to keep prices low and the grid adequately supplied. Now, the government is becoming the industry’s Gosplan. It decides what plants are built, sets their prices and guarantees financing for their construction.

Mr Miliband’s price freeze is an extension of this approach, which presents him as the solution to a problem that he helped to create as energy secretary. Despite fingering power companies for rising energy prices, Mr Miliband produced no evidence of profiteering.

A fairer criticism is that energy companies have invested too little in replacing the country’s ageing power stations. One explanation is that generators are restricting supply in the hope of driving up prices. Another is that they lack incentives to build capacity needed to meet peak demand, because current rules pay little to plants that usually sit idle.

Either way, urgent reforms are needed if the UK is to avoid a capacity crunch. The best solution would be to rewrite the market rules to spur the needed investment in the most efficient way. Alternatively, the power industry could be nationalised and financed with cheap government debt – although efficiency would suffer.

But politicians have chosen neither course, preferring to make private generators bow to government plans. This is capitalism with British characteristics. It combines the inefficiency of state planning with the expense of private capital, exacerbated by the fear that politicians will retrospectively change their minds.

The losers from this shambolic policy are more numerous than the struggling households that are rightly at the centre of political concern. The prosperity of a generation is at risk. Britain cannot afford to hobble itself with overly high energy costs as it embarks on the road to recovery.

Financial Times, 28 October 2013