New Labour paid lip-service to a competitive electricity market, while chipping away at its ability to operate effectively – through a constant accretion of new policies, typically promoting renewables. The effect has been to salami-slice the market into technology-specific segments, to increase political and regulatory uncertainty, to encourage lobbying and rent-seeking, and to increase financing costs. Instead of competing by taking investment decisions and innovating, market players wait for government to say what they want. There is a gradual reversion from market decisions to ‘monopoly’ decisions by government.
The Committee on Climate Change (CCC) said last week that the government should, in future, specify and tender long-term fixed price contracts for its desired generation mix. This would go even further towards replacing the market with central planning.
Britain’s competitive energy markets are one of the most remarkable public policy success stories of the last twenty years, emulated around the world. They have delivered greater security of supply, lower prices and innovation. They should not be casually tossed away. Instead, markets need to be exploited to deliver lower carbon emissions and secure supplies at lowest costs.
The challenge of climate change makes a well-functioning market even more important. There are huge uncertainties about how decarbonisation will occur over the coming decades – about which generation and demand-side technologies will prove themselves, what their relative costs will be, and other scientific, economic and political developments.
Well-functioning markets (guided by an effective carbon pricing framework) can deliver lower carbon at lowest cost, thereby addressing the most important barrier to successful electricity decarbonisation: the public’s and businesses’ willingness to pay the costs.
What is not important for electricity decarbonisation is fine-tuning a target for carbon emissions in 20 or 30 years time, as the CCC undertakes in its latest report, nor a new 2030 renewables target as mooted by the European Commission. Such an approach, requiring certainty of outcome, is driving the resurgence of central planning. Even the Chinese Communist Party attempts to plan for only five years.
Planning in the energy sector has poor record. For example, in 1970 the Central Electricity Generating Board predicted that future electricity demand would require 100 GW of installed capacity by 1995, when in the event only just over half of that capacity was required. And, the technological innovations which have enabled extraction of shale gas show how new information can shred plans. Compared to five years ago, there has been a transformation in expectations about future supplies of secure, low-cost gas as a result.
The process of decarbonisation is likely to involve a range of technologies, including renewables, gas, nuclear, Carbon Capture and Storage, and energy efficiency. Successful decarbonisation will be a process of innovating, revealing the right technologies, their right proportions, and rolling them out in the right order, adapting as new information is revealed. Markets, subject to a neutral carbon pricing framework, are able to achieve this.
Markets do not deliver central planners’ preferred outcomes. But left to work, with the right rules, they can exceed them. For example, the competitive UK gas market, in response to expected declines in North Sea gas, delivered a 500% increase in import infrastructure over the last decade, which now enables 120% of average annual UK gas demand to be imported. What central planner would have imagined this possible?
If we allow it, the market – aided by a credible, long-term carbon pricing framework and government support focused on innovation, not subsidised deployment of ‘winners’ – will find innovative and cost-effective ways to decarbonise, to unexpected trajectories, and exceed the imaginations of central planners.
Policy Exchange has this week published its report Re-Monopolising Power: Ten principles for electricity market reform.
Dr Simon Less is Research Director, Environment and Energy at Policy Exchange.