What if the UK runs out of power?

When I started working in energy procurement consultancy ten years ago, the UK was always cited as an example of how energy markets should be organized. Anglo-Saxon liberalism had inspired policymakers on the other side of the Channel to create open energy markets much faster than their continental colleagues. It is therefore startling for me to find an article in this week’s Economist with the title ‘Britain’s energy crisis: how long till the lights go out?’ (http://www.economist.com/opinion/displaystory.cfm?story_id=14167834). Apparently, liberalization English-style, shouldn’t be considered as being so exemplary after all.

It is indeed true that the UK is heading for trouble as for its energy supply. Power plants are not built quickly enough to deal with rising demand due to:

–        The nuclear path being blocked for a long time due to a political decision for nuclear phase-out,

–        Investment in coal-fired power plants also difficult due to the ambitious carbon dioxide reduction targets,

–        slow development in renewable energy due to planning restrictions and lack of coherent policy.

This leaves only investment in gas-fired power plants open as a possibility. And we do observe that the proportion of gas-fired in the UK’s power production is growing rapidly. The trouble is that this ‘dash for gas’ coincides with a development where the UK is more and more dependent on imports of gas as its own production is in decline. The outlook for the UK power market is grim: under-diversified, overly dependent on imports of electricity and fuel (natural gas). And strangely enough, even if the rest of Europe is actively building new power lines to other countries, the UK is also slow to build import capacity. This brings the prospect of the lights going out uncomfortably near.

I fear that many anti-liberalization forces inside Europe will use the UK example as an argument in favor of less energy market liberalization. The events in the UK power market will be to many just another sign that the Anglo-Saxon model doesn’t work. And these anti-liberal voices have already started to sound louder due to the financial crisis.

We should indeed reflect upon the way we organize energy market if we observe what happens in the UK. It does prove that the neo-liberal adagio that markets should function wholly independent of the policy-making level is not true. The trouble with the UK power market is due to a lack of interest in it by policy-makers. UK politicians have refused to face the problems and to take the policy decisions that were necessary to deal with it. The renewable energy policy is a clear example of this. Tony Blair and Gordon Brown have always sounded very ambitious when it came to greenery. But we simply observe that development of e.g. wind power is dwarfed when compared to countries such as Germany and Spain.

If one thing is made clear from the experience in the power market across the Channel, it is that an energy market needs good policy decisions to function like it should. The long term development of the power supply portfolio is one of those domains where politicians need to do the necessary things. The market in itself cannot deal with that.

Does this mean that we should exchange our Anglo-Saxon economic textbooks for French ones? Should we go in the direction of ‘le dirigisme’ like we observe in the French energy market where the government is involved at every level of energy market decision making? I don’t think so. Too much policy-making can be harmful as well. Just think about EU agricultural policy if you need to get convinced of that. And liberalization of energy markets is not necessarily a failure, just think about the Nordpool market in the Scandinavian countries. The trouble in the UK’s power market shows us that we should rethink the roles of private initiative and collective decision-making, of economics and politics, in energy markets. Just like we should do it for our financial markets.

6 thoughts on “What if the UK runs out of power?

  1. Nice blog, Benedict.

    I absolutely agree. Successive British governments have left it to the market to effect energy ‘policy’ (Nigel Lawson started this with his ‘the best energy policy is to have no energy policy’)and it comes as no great surprise that such a strategy doesn’t work.

    Bring back the Central Electricity Generating Board!

  2. Thanks Tim. I don’t think that we should have the state planning the actual day-to-day supply. The market mechanism has proven to be very efficient in doing that, more efficient than central planning. But what a country like the UK needs, is a long term planning of its power generation. It should say ‘by 2020 we want so much power to be produced from renewable, so much from nuclear, so much from coal, so much from gas’ and then have some selection mechanism for granting potential suppliers the licences to do so. Moreover, the policy should be consistent, i.e. no further constraints should pop up when it comes down to actually building the plans. British policy has seen too many ambitious plans killed by some local policy decision. If you want to develop wind power, you shouldn’t allow local authorities to block every windmill from being build in their backyard.

  3. By all accounts the CEGB was pretty effective, but that’s by the by.

    If the government does say ‘We need 30% nuclear, 30% renewable and 40% fossil’ then it will have to pay for it. Can the Tories, for if the lights do go out it seems it will be on their watch, go against their neo-liberal tendencies to effect this?

  4. Benedict – Is procurement a mechanism for implementing policy in the U.K.?

    I come out of California where the State and the regulator found procurement to be a key touchstone for policy implementation, but I’m not familiar enough the U.K. structure.

    I now practice in the Philippines and the government so far has totally ignored procurement as an implementation tool to policy, which includes keeping the lights on. Reactions?

    • Dear Nick, can you clarify what you mean by ‘procurement as a mechanism for implementing policy’? Do you mean that the state buys energy which it then distributes to certain customer groups. I do remember reading about the Californian State buying energy to deal with the Californian energy crisis and that it turned out to be a disaster when prices fell much lower afterwards. This is clearly not a policy instrument in the UK. Governments limit themselves to granting authorisations for running power plants.

      • Ah. Reading up on your work, I now see your procurement work is on the retail side, for industrials and I wasn’t clear – I was referring to power procurement by the (regulated) distribution utilities. There the regulator can implement policy through procurement guidelines – i.e. related to what, when, how the utility will procure.

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