"Time for a realistic appraisal
of our liberalised market experiment. Is
this the end of the road for the wilder free market fantasies of the 1990s?"
……...
We are in the UK currently witnessing a number of testaments
to the failings of structures set up in the 1990s, and after, as an important and
widely acclaimed part of the Thatcherite revolution to reduce the role of the state
and re-invigorate the disciplines of the marketplace. This has been most evident
in the spheres where permanent contact, and conflict, between public policy and
private incentives is almost unavoidable. For the UK the most salient current
examples are probably:
·
Transport, where public dissatisfaction with prices
and service quality on the railways is reaching new heights, and, some allege,
the level of subsidy exceeds that given to the pre-privatisation network.
·
Health, where the notorious Lansley reforms have
proved to be either useless or counter-productive in making the NHS “internal
market” more effective.
·
Electricity, where Hitachi’s effective
withdrawal from UK nuclear power construction threatens a fundamental plank of
the UK’s energy policy.
·
Oil, where the failure of the private sector to
make adequate provision for North Sea decommissioning places a potential bill
on taxpayers estimated at £24 billion, a number not much smaller than the £39
billion the UK will be paying as it leaves the EU (and the latter number is
much less likely to escalate).
This is a big subject, so today’s comment is confined to the
power industry and a little bit of its history. We do of course need to recognise that electricity
privatisation did indeed achieve some important gains. Most notably the move
away from self to independent regulation and into private ownership created the
financial incentives for efficiency in electricity distribution, where costs
fell substantially. It’s also true that the previous governance structure of
the industry was far from perfect. As a 1980s Chief Economist at the somewhat
dysfunctional Electricity Council, then tasked with the sector’s regulation, I
observed that the old CEGB had a degree of professional arrogance, a tendency
to goldplating investment and poor investment decisions, and also disregard for
the interests of consumers and the downstream distribution sector. It was in
some ways far too independent of
political control. On the positive side, it was always highly professional and inter
alia contributed substantially to UK science research efforts in ways that have
since been badly missed.
The structure set up at privatisation, to which I also contributed,
was also a success, at least in the short term. Its most remarkable achievement,
however, was to replicate the reliable, efficient and internationally admired operation
of the National Grid. This was to change from a centralised command and control
of plant dispatch in ascending order of cost, the so-called merit order, with a
market system that could, as a matter of both principle and practice, deliver
the same performance from the existing collection of power stations. The
seamless transfer from public to private, and from command and control to a
free market and private ownership, was achieved without the misfortunes that were
to dog the privatised rail network a few years later, where the network management
in essence “lost control of the assets”, inter alia leading to some tragic accidents.
But if operational efficiency was maintained, and distribution
costs reduced, successful transition to dependence on private sector investment
was much less clear. The market arrangements were designed to allow the threat
of power shortages to induce price rises that would incentivise enough capacity
through very large “price spikes”. Together
with initial animal spirits and the coincidence of radical technology change
(combined cycle gas) with cheap gas, along with guaranteed markets for some of
the investors, this all worked for a while, but it was not long before the cracks
started to appear. Government and the then regulator refused to accept the
logic that deficient supply could in principle drive higher prices and that
these would be essential, in the absence of any other commitments to investors,
to get new capacity built. The original market mechanism designed to act as a signal
for new capacity was abandoned with the new trading arrangements in 2000. Since
then there has been no substantial new investment in generation that has not
relied either on long term contractual guarantees, as with the nuclear
programme, or on similar levels of guarantee through feed-in tariffs.
The government has in practice been wholly unable to escape
responsibility for sector investment. As the Hitachi episode, among others,
shows, this has brought its energy policy, and the pretence of relying on
private sector finance, close to collapse. However that pretence has brought
its own costs. Complex financial structures, as with private finance initiative
(PFI) projects, have been successful mainly in raising the cost of capital, as
compared to keeping projects on the government books.
These are far from being the only problems with the new market
structures that have been allowed to evolve since 1990 and 2000. Others include
the continuing EU wide absence of carbon prices necessary to promote low carbon
policies, failure of the sector structure to promote rational tariffs either
now or for the future, inappropriate loading of social and other costs into
consumer prices, and widespread dissatisfaction with energy supplier profit
margins.[1]
All of these subjects are extremely important and deserving of more analysis.[2]
Nor is there any evidence, on the basis of international
price comparison[3],
that the UK, or at least its consumers, have benefited from the path breaking
reforms of the Thatcher era. The table below compares UK and French domestic electricity
prices over the last three years. The relative position of the UK benefits significantly
from the exchange rate decline after the 2016 referendum. France, a near neighbour
and similarly sized economy, is chosen as an interesting comparator because it
has had a much more centrally controlled system, and, unlike the UK, has benefited
from a successful nuclear programme.
This shows the small but significant improvement in the UK’s
position attributable to the post referendum fall in the exchange rate. But the
larger gap, as compared to households, also suggests that UK “competitive
failure” has been manifested mainly in power generation.
All of the above leads to the suggestion that all is not
well with energy sector governance in the UK. Widely acclaimed as leading the
world in the 1990s, the reality has been that the UK’s liberalised market frameworks
have simply not delivered within a 21st century environment. Surely
this is the time for a comprehensive re-appraisal.
[1] A
number of these tariff issues are discussed much more fully in the author’s paper
prepared for Energy Systems Catapult, and published by them as
Cost
Reflective Pricing in Energy Networks. The
nature of future tariffs, and implications for households and their technology
choices. April 2018.
[2] A
much fuller discussion of these points is also given on another page on this site,
Low Carbon Power, and
also the author’s “think piece”,
published in 2016 by the Energy Technologies Institute on how to deliver
efficient networks for a low carbon future energy system. It aims inert alia to
set an agenda for a future power systems architecture.
Enabling
Efficient Networks for Low Carbon
Futures: Options for governance and
regulation. 2016
[3] Price
comparison data is taken from sources published by BEIS and is readily available
online.
