ENERGY CRISIS? MARKET FAILURE, INCOMPETENT GOVERNMENT, COVID, OR JUST ANOTHER MANIFESTATION OF BREXIT.

 

Nothing better illustrates the complex interdependencies in modern economies better than the cluster of interrelated threats now hitting the UK with high gas prices, gas company failures, HGV driver shortages and supply chain problems, and shortages of CO₂ – all interacting and impacting on food supplies, supermarket and fuel deliveries, and retail price inflation. So looking for the OBE – One Big Explanation – is a mistake.  But the explanations, excuses and blame shifting currently in evidence are interesting and various. As usual they will include personal prejudices and ideologies as well as informed analysis. Here are a few from the last few days, and an attempt to give a considered, but still personal, verdict on each. The perspective is examination of UK response to both global trends and UK circumstances.

In energy at least it’s just the global gas market and supply shortage. There are multiple causes, and all we can do is try to mitigate the impacts. This contains an essential truth, with a well-established willingness to pay much higher prices (for LNG) in Far East markets, together with more immediate and temporary factors such as weather or low renewables output triggering dramatic spikes in gas prices. But in spite of meeting up to 50% of demand from domestic production, UK prices remain highly exposed to international markets and possibly have surged more than elsewhere in Europe. Decisions to leave the EU's single market for energy, and to make Britain more “independent”, plus reduced reliance on storage, are additional factors that may be exacerbating the UK crisis. Verdict. Global and more regional, European, factors and trends are real and substantial; but the obvious criterion for judging UK government and institutions is UK performance in comparison with other EU countries, most of which are significantly more import dependent.

Covid? It is hard to see why the fading impacts of the covid pandemic should be very different in the UK from the impacts in other countries which have suffered very similar levels of infection. Verdict. Covid will have affected everything in the last 18 months, but as an all-purpose excuse, this is starting to sound rather tired.

It’s all down to our obsession with climate change, and trying to go green, at the expense of energy security. So, if we had doubled down on our dependence on gas, we would be better placed to manage a global tightening of gas supplies? Prima facie, earlier moves to low carbon sources, renewables or nuclear, would have reduced gas import dependency and mitigated the current crisis. One might also more justifiably argue, in relation to the related CO₂ shortage, that Osborne’s highly controversial 2015 cancellation of carbon capture projects (essential components of global low carbon climate strategies) deprived us of an obvious alternative source of CO₂. This would at least have reduced the risk to food production that was an indirect consequence of the gas price spike, and avoided the need for a government subsidy to CO₂ production. These potential supplies might well have been in the wrong place or lacked delivery infrastructure, but this is at least a logical response to a silly argument. Verdict: blaming Green policies to reduce fossil dependency is both counter-intuitive and, in this instance, simply wrong.

Turning to the transport sector, other long term trends, including demographics and an ageing HGV workforce, are to blame. Other countries face the same HGV problems. These are exactly the trends markets are supposed to anticipate, manage and remedy, eg via higher wages and industry training initiatives? The UK has been particularly badly hit, largely due to the post-Brexit exodus of EU drivers. Verdict. These are trends that should have been anticipated, so this is a partial explanation or excuse at best. Comparison with other European countries, which do not have empty shelves or petrol queues, is instructive.

Failures in the design and regulation of UK energy markets. UK electricity trading arrangements do not deal adequately with reliability. Consequently, in the power sector, government has already assumed de facto responsibility for capacity planning. But the current crisis is primarily in gas and responsibilities for security are less clear than in other parts of the energy sector. Traditionally, public utilities supplying essential services like gas were regulated monopolies for a reason. Competition, the Tory and Thatcher mantra for decades, should have been fine provided there was a means of enforcing an obligation to supply on all market participants. Absent that, together with a weak regulatory framework and no clear responsibility for delivering reliability, and problems begin. There is every incentive for aggressively competitive suppliers to undercut more prudent suppliers who have covered their commitments to consumers by contracting for firm future supplies, sometimes at a higher but guaranteed price. This can lead to gambling on permanent excess capacity and the assumption that spot prices will always be low. Failure to anticipate price spike risk puts some companies in trouble and leads to systemic risk for the sector and government bailouts. Verdict. This is a regulatory and policy failure by the UK government, over decades, but it is also a major factor in the current crisis.

It’s Brexit, stupid! Brexit adversely affects both transport and the energy sector.  Undoubtedly the loss of EU drivers is a major factor, probably the biggest, in reducing HGV capacity. But Brexit has also made haulage less efficient. It limits the cabotage rights which made UK (and EU) haulage more efficient. A truck from Spain dropping fruit in Glasgow could pick up dairy in Glasgow for delivery in Hull, then fish in Hull for delivery in Madrid. Ending cabotage is equivalent to reducing effective HGV capacity.  

Trade with Europe in both gas and power remains important for our security. Brexit inevitably puts more friction into that trade, though this may have so far had at most only a limited impact on exchanges of power or on energy security. But it could become a significant factor in a more serious energy crisis, just as in other supply chains. Verdict. Brexit consequences, positive or negative, inevitably impact on almost every aspect of the economy and this includes energy, transport and trade.  

It is the downside that is currently in evidence, summed up in the following quote. “Energy price hikes, empty shelves, chronic labour shortages, tax rises, rampant inflation and that’s before we start talking about farming, fish or the motor industry. Where is the Brexit Wonderland we were promised?”

 

ASTRAZENECA AND THE VACCINE CONTRACT. VON DER LEYEN’S INEXCUSABLE BLUNDER

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Prima facie the contract, now published in redacted form, is pretty clear and appears to support the  Astrazeneca position. Meanwhile the Commission’s threats to intervene across a range of vaccine export arrangements not only represent the worst kind of vaccine nationalism, but also threaten the wider credibility of governments (not just in the EU) across a range of vital public policy concerns, from public health to energy and climate.

The basics are well known. Astrazeneca has hit production problems at its European plants, a common problem with new pharma products, and has had to reduce its estimated deliveries in the next few months. Most such contracts, with a new product and new facilities, necessarily include best endeavours clauses to protect the producer, and this is no exception. Interpretation of such clauses can give rise to legal disputes, but the main issue between the parties in this case appears to be whether those best endeavours can be deemed to include the diversion of supplies promised to other parties under earlier contractual obligations. Since this at the centre of the dispute, it is worth understanding the detail.

If AstraZeneca had made multiple promises which were in conflict with one another, there might be a cause for a major contractual dispute. But in this case, at least on first inspection and according to the EU, the question seems to be the slightly simpler one of whether best endeavours under the contract should oblige AstraZeneca to divert supplies already under production to satisfy its UK client, including those produced in UK plants. If AstraZeneca’s claims are correct then the EU Commission is guilty of the worst kinds of vaccine nationalism and government bullying.

Read the contract! It tells you exactly what AstraZeneca promised!

The specific obligation that is set out in the contract appears under the heading Manufacturing and Supply. It reads as follows:

5.1. Initial Europe Doses. AstraZeneca shall use its Best Reasonable Efforts (BRE) to manufacture the initial Europe doses within the EU for distribution, and to deliver to the Distribution Hubs .... following authorisation ….  [my italics]

Prima facie this is an obligation of BRE in respect of EU manufacturing plants (which do not include those of the UK). This does not appear to confer a right to access supplies ordered much earlier by the UK.

Game over. Or is it?  Two other claims have been made: first that the UK should be deemed to be part of the EU, and second that UK manufacturing plant is mentioned in the contract. Unfortunately for Von der Leyen and Kyriakides, both claims are demolished by a careful reading of a later section.

The relevant section in this case is 5.4 – Manufacturing Sites. In summary it is dealing with the question of where AstraZeneca is permitted to produce under the contract, reflecting the obvious concern that any such facilities should meet European standards. In summary it obliges AstraZeneca to make BRE to use EU or UK sites as far as possible. They may use other non-EU non-UK sites, but only after obtaining EU permission. It also states another remedy for the EU, if production is delayed. This is that the EU may present to AstraZeneca a list of firms (CMOs) with whom they can contract.  AZ is to use BRE to contract with these CMOs to boost production capacity within the EU.

This clause also defines the UK as part of the EU, but only for the purpose of this clause, 5.4. In other words the EU in 5.1 cannot be considered to include the UK. Clause 5.4 does not refer to any obligation on the delivery of the initial dose. It is solely concerned with permissions for where AstraZeneca should be allowed to manufacture, and possible steps if production is delayed.

Personally, therefore, I have found it very hard to find an interpretation of the contract that supports the Commission’s position, although no doubt other legal challenges and arguments may be made.  This contract is of course only one element in the pandemic crisis, and we all know that ultimately solutions depend on international cooperation. As it happens, the UK vaccine bets have paid off and it should soon be in a position to share some of its good fortune, whether with its EU neighbours or through the offices of the WHO, with others.

The Political Fallout is Bad News

I have long been an enthusiastic supporter of the European project, but the Commission’s inept management of the EU vaccine programme, followed by its abysmal tantrum over a not-for-profit contract with a firm that has developed one of the world’s leading vaccines, is utterly inexcusable. To assert an unsustainable interpretation of a contract makes it worse. With its clumsy and hastily reversed Article 16 intervention on the Irish border issue, it has undermined the Northern Ireland Protocol, with potentially disastrous ramifications for the Irish peace process and its own single market. It has damaged the credibility of Western democracies just at a time when they should be recovering from the twin disasters of Trump and Brexit. Fury at the Commission’s performance will not be confined to the UK, is widespread in the member states, and we need to see some high-level resignations, preferably soon.

Falling Credibility in Government and international Bodies is also a Disaster for Climate Policies

The damage cannot be confined to the immediate issue. International agreements depend on good faith, and investment in climate measures depends on the ability of governments to commit to and honour contracts. The Commission has managed to damage both these fundamental building bricks at the same time. This is bad news for the COP 26 climate conference later this year, and its longer term effects may well play out in higher than necessary costs of capital for the climate-related investments we all need to make. A climate coalition with Europe should have been the UK’s best policy. That now looks increasingly problematic.

GLOBAL BRITAIN. IS COP 26 THE GREAT OPPORTUNITY?

 

It ought to be, but our government is hamstrung by its own ideologies, its recent history, and our decision to cut adrift from Europe.

The next climate summit COP 26 is so important for our collective future that we should all hope for  a resounding success. The question will be whether the UK is up to the task of delivering on the promise, and achieving worthwhile agreements and commitments. A lot depends on the ability of the summit host to persuade and cajole. Alok Sharma, the Business Secretary has been charged to work full time on preparations for COP 26, and, encouragingly, is quoted as recognising that “the biggest challenge of our time is climate change and we need to work together to deliver a cleaner, greener world”.

On the positive side, the UK does bring some strengths. Tony Blair gave the UK a genuine world first in the 2008 Climate Change Act, targeting an 80% reduction (from 1990 levels) in emissions, the first time such a national target had been introduced into law. The UK is able to claim significant reductions in its own emissions, even if these largely reflect the special circumstances of its gas for coal transformation of the power sector and the off-shoring of emissions that resulted from the Thatcherite de-industrialisation of the 1980s and 1990s. And it has important strengths both in policy formation and in science, both vital for the future.

And growing environmental awareness provides an auspicious international backdrop for climate action. 2020 saw some of the highest global temperatures on record, alarming heat and record wildfires in the Arctic, and record tropical storms in the Atlantic. Even if these and the Australian bush fires are not all directly attributable to global warming, and other factors are indeed often at work, the impact on the public consciousness has been huge.

Even the covid pandemic plays into the wider Green agenda that our failure to protect our global environment has been a huge mistake, with the indications of connections between declining wildlife habitat and the probability of viruses jumping the species barrier.

Finally 2020 has seen the stunning electoral defeat of arch science denier and fossil fuel promoter Donald Trump. Covid-19 has proved not to be a hoax, and so has climate science. The biggest single obstacle to international progress, the intransigence of the USA on climate issues, has softened even if not wholly removed, at least for now.

But this is also where the credibility problems of the current UK government begin. It is not helped by its poor and embarrassing record in appeasing the disgraced Trump, partly in its desperation to find international, and particularly US, support for Brexit.  “… this opportunity is dependent upon Mr Trump’s presidency. Without him the US would be offering no support for Brexit and would be seeking to frustrate it.” (Rees-Mogg, 2018)

The bigger problem is that the Tory party has over a long period been the home of the most vocal climate sceptics – Lawson, Redwood and many others. Moreover “climate hoax” claims,  and more muted efforts to reject or ignore the implications of climate science, are strongly associated with the tendency to theological belief in Brexit (with Lawson fronting the Brexit campaign), an observation I made in this blog in 2016, and which many others, including The Economist, have made subsequently.

Nor is the Tory ideological commitment to low public spending and a small state easy to sustain in the face of the kind of crisis provoked by climate change (or by covid-19 for that matter). Action to reduce emissions, to promote electric vehicles and alternative heat provision, and to mitigate the effects of climate change, are all going to require huge infrastructure spending, policy interventions, and financial commitment by governments everywhere.

But the more interesting challenges for British commitment to climate goals will come in relation to its ambitions for international trade, and its fragile trading relationship with Europe. In July 2020, the EU launched a consultation on proposals for a border carbon adjustment mechanism, effectively a carbon tax imposed on imports from countries deemed to have less rigorous emissions policies than the EU. This provoked predictable outrage from Trump and much of corporate America, but the concept will also have longer lasting and more subtle effects on trade. There are powerful arguments for this kind of tax, to allow a “level playing field” in trade, and to prevent carbon and jobs “leakage” to countries that refuse to cooperate with low carbon goals.

It is very likely that a such a carbon tax, applied at borders, would impact initially only on highly energy intensive sectors such as steel, aluminium and cement. My own view is that pushing it down to other sectors may prove much more difficult in terms of measuring carbon content, with complexities that may make current issues with “rules of origin” look comparatively simple. But the effect on trade negotiations is likely to be more subtle, with pressures to imitate and endorse EU climate targets.

The consequence is that for the UK to operate successfully as the host of COP 26, this initiative is likely to push it closer to the EU position on convergence of trade policy and climate objectives. This is almost certainly in the UK’s short, medium and long term interest anyway, but may be a hard pill to swallow in the aftermath of the bitter divisions, internal and external, of the last four years. Even if the USA, under Biden, adopts a much more progressive position, major players, such as India, Brazil and others, will be much more resistant. The Brexiter reliance, at least in terms of political rhetoric, on new friends and trading partners, will make effective international  influence more difficult. But that of course is just one more negative consequence of leaving the world’s largest free trading block in the first place. A climate coalition with Europe remains the UK’s best policy.

DEATH OF THE WASHINGTON CONSENSUS

From the pure doctrines of neoliberal thinking the intellectual pendulum has been moving back from market fundamentalism towards more ambivalent and centrist positions on the role of policy interventions by the state. Nowhere is this more true than in the vitally important power sector and its pivotal position in addressing climate issues. A major review from within the World Bank confirms this trend.

The phrase Washington Consensus was first used in 1989 by the economist John Williamson to describe prescriptions on policies for macroeconomic stabilization, opening of markets to trade and investment, and the expansion of market forces within domestic economies. Subsequently, and to his dismay, it was given a wider meaning, to refer to a more general orientation towards a strongly market-based approach (sometimes described as market fundamentalism or neoliberalism). The distinction is huge, and Williamson has argued  that his original, narrowly defined prescription is now  broadly taken for granted, enjoying the status of "motherhood and apple pie", but that the broader meaning, as a kind of neoliberal manifesto, "never enjoyed a consensus in Washington or anywhere much else" and can reasonably be said to be dead.^[1]

We are now seeing the gradual but measurable decline in influence of the more fundamentalist market philosophies that have dominated the last 30 to 40 years. For much of that time, the power sector, long a natural monopoly, has been in the nature of a laboratory for market-centric philosophies. A  main obsession of policy makers in the power sector has therefore been pursuit of a so-called market liberalisation agenda. Nowhere was this more prevalent than in major international institutions. These included the Energy Directorate of the Commission of the European Union, in its vision for a single integrated European energy market, and the World Bank, in its prescriptions for developing countries. The prescriptions were often strongly influenced by what came to be known, perhaps inaccurately, as the Washington Consensus. For electric power this meant several key characteristics:

·         vertical and horizontal unbundling of what were often fully integrated utilities; corporate separation of generation from the wires businesses of the transmission (high voltage) and distribution (low voltage) networks, and also from retail supply, and also division into multiple entities in generation and distribution.

·         the establishment of an independent regulator for the sector, and formal regulation of the residual elements of natural monopoly.

·         privatisation of all the unbundled entities.

·         ensuring the maximum of competition in all aspects of the sector, but particularly in generation and supply.

Paradoxically for an industry that had always, due to its combination of economies of scale and real time command and control, been regarded as a natural monopoly, reforms to open up the sector also became something of an icon for free market enthusiasts. If this industry could be converted to a collection of markets then anything was possible.

Progress in Europe

The UK had led the way when it came to reform. In 1990 the UK wholesale market was deregulated, competition was promoted and the industry was privatised. The European Commission enthusiastically encouraged other EU countries to follow this lead and liberalise their electricity markets. This was the dominant direction of travel, even if progress was both slow and partial. In France, in particular, the market is dominated by state-owned nuclear power, has a single transmission and a single distribution company, and remains one of the most successful power sectors in Europe, as is indicated by the comparative price figures shown below.

Meanwhile the UK, after attaining something close to theoretical perfection by the late 1990s, has, over the last 10 to 15 years, abandoned a number of the basic tenets of the fundamentalist philosophy. Government has intervened both through the introduction of price caps[2] and by making major decisions on, as well as underwriting of, new investment in generating capacity. Unsurprisingly leading free market enthusiasts such as Carlo Stagnaro[3] now write that “…in the EU, and the UK in particular, the liberalisation of the electricity market is rapidly being reversed and replaced by old-fashioned command-and-control policies.”

There are a number of good (as well as less good) reasons for this dramatic shift in policy direction.[4] An important one is the increasing emphasis on policy for reducing CO₂ emissions, where the EU’s emissions trading scheme (ETS) has proved inadequate to the task of generating realistic carbon prices consistent with ambitious emission reduction policies. Another is the intrinsic failure of liberalised market structures to provide the incentives necessary to induce new investment in long life generation assets. A third is a failure to adapt spot markets designed by and for fossil generation plant operators as they become increasingly unworkable in a world dominated by the technical characteristics of renewables, nuclear and energy storage. A fourth is that even in its most liberalised form the power market has always retained significant elements of command and control, as well as a significant and complex role for the network operators who remain as natural monopolies.  And, finally, competitive retail markets, where they exist, have not delivered significant benefits to consumers and do not command widespread public approval.

But the bottom line is that the paradigm of energy markets free of significant intervention has been quietly dropped. Certainly, privatisation of the monopoly network components of the sector, with effective regulation, has brought some efficiency gains. But governments have also recognised their continuing responsibility for maintaining reliable and sustainable supply. In the UK there has been a dawning realisation of the need to reverse direction and head downhill from the sunlit uplands of the reform purists, and will shortly see it meeting an EU still struggling half-heartedly towards the summit.

And in developing economies? A recent ESMAP[5]  (World Bank) review suggests a major loss of faith in the Washington Consensus.

In the home of the Washington Consensus, the World Bank has long been attempting to improve power sector governance in developing countries, often using the liberalised market paradigm as an ideal. The typical underlying problems in much of the developing world are well known. They include arbitrary and inconsistent political interference in the sector, inadequate cost recovery (which in turn limits funds available for investment), and managerial inefficiency in state monopolies. World Bank prescriptions invariably contain many sensible proposals to remedy these problems, but they also pushed the comprehensive free market agenda far too hard in a sector that had always been recognised as one of the most difficult in which to create a genuine and effective competitive market. The  results were predictable. An extremely valuable recent review[6]  by ESMAP reviewed experience across a wide range of countries. The lessons are revealing. 

Only one in five countries implemented both vertical and horizontal unbundling of utilities, separating generation transmission and transmission from distribution and creating multiple generation and distribution utilities. Restructuring is intended primarily as a stepping stone to deeper reforms, and countries that went no further tended not to see significant impacts. Indeed, restructuring of power systems that are very small and/or poorly governed … can actually be counter-productive by reducing the scale of operation and increasing its complexity.

Only one in five developing countries has been able to introduce a wholesale power market during the past 25 years. … A demanding list of structural, financial, and regulatory preconditions for power markets prevents most other developing countries from following suit.

Many countries announced reforms that did not subsequently go through, and some countries enacted reforms that later had to be reversed.

Although many countries enacted solid legal frameworks, the practice of regulation continues to lag far behind. For example, while almost all countries give the regulators legal authority on the critical issue of determining tariffs, this authority is routinely overruled by the governments in one out of three countries. … cost recovery remains an elusive goal.

Among the best-performing power sec­tors in the developing world are some that fully implemented market-oriented reforms, as well as others that retained a domi­nant and competent state-owned utility guided by strong policy mandates, combined with a more gradualist and targeted role for the private sector.

Where distribution utilities were privatized, countries were much more likely to adhere to cost-recovery tariffs. This however is a confusion of cause and effect. It will normally only be possible to persuade private investors to participate if financial viability has already been guaranteed by tariff reforms. Requiring a newly privatised business to implement tariff reforms will tend to discredit the private sector by blaming it for higher prices. 

Market reforms can be helpful in improving the overall efficiency and financial viability of the power sector, and in creating a better climate for investment. However, they cannot—in and of themselves—deliver on these social and environmental aspirations. Complementary policy measures are needed to direct and incentivize the specific investments that are needed.

This is a complex and revealing story of modest successes and disappointing failures. The theoretical ideals of unfettered competitive markets and minimal state involvement have proved to be less important than much more basic goals of good governance, limiting arbitrary political interference and patronage, introducing cost covering tariffs and improving revenue collection (eg by reducing illegal abstraction). Much of this depended simply on making power sector entities into commercial organisations rather than organs of government.  All these basic reforms were in any case preconditions for the success of more ambitious targets, such as privatisation or functioning spot markets for energy trading. And developing countries will be under international pressures to face the same policy challenges as the developed world in terms of sustainability; this will continue to limit the scope for “hands off” policies for the energy sector.

The Way Ahead

To a very large extent the power sector is the future of low carbon energy provision, and its organisation is therefore a vitally important matter to everyone. The “Washington Consensus” will have had some notable achievements in promoting independent regulation, transparency, formal separation from government and a more commercial approach. But the more ambitious aspirations, for pure market structures free of policy interventions, have remained out of reach. The central importance of the sector, especially in the context of sustainable policies to address the issues of climate change, mean that governments are increasingly likely to play a major role in monitoring and supporting low carbon policies for the power sector.

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[1] This summary paraphrases a Wikipedia article on this subject which also references Williamson’s observations on the subject.

[2] Earlier posting of April 2016. PRICE CAPS.  HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?

[3] Stagnaro  is a Senior Fellow of the Italian free market think tank Istituto Bruno Leoni. His comments can be found in a 2016 article Whatever happened to electricity market liberalisation?

[4] A much fuller discussion of these issues can be found using the tab LOW CARBON POWER on the top bar

[5] The Energy Sector Management Assistance Programme of the World Bank. “ESMAP is a partnership between the World Bank Group and 18 partners to help low and middle-income countries reduce poverty and boost growth, through environmentally sustainable energy solutions. ESMAP’s analytical and advisory services are fully integrated within the WBG’s country financing and policy dialogue in the energy sector.”

[6] Rethinking Power Sector Reform in the Developing World, ESMAP Background Paper, September 2019. https://www.esmap.org/rethinking_power_sector_reform

A BREXIT ELECTION OR A CLIMATE CHANGE ELECTION? THE BATTLE LINES ARE THE SAME.

There can be no doubt about which issue is of greater importance for our future, but the “usual suspects” (our politicians and the commentariat) largely divide along the same lines on both. And in each case trade should be a crucial element in the policy mix and the political arguments. 






Brexit may be a forgotten issue in twenty years’ time (although it might not be wise to put money on that), but we can guarantee that climate  change will still be with us, most likely with ever more serious manifestations in terms of extreme weather and disruptive droughts and floods, but also with less time left to avoid climate catastrophe. We can also guarantee that under these conditions it, or rather the politics of mitigation and adaptation, will be climbing steadily higher on the political agenda.

So there is a strong case for arguing that climate issues should be the primary focus of our big political choices. The contrary case of course is that climate change is a global problem and requires global solutions. UK commitment to zero carbon targets is of little value unless it is widely matched across the world. (Hence the importance of the Paris Agreement). In consequence the decisions that will have the biggest near and medium term consequences, in terms of employment, income and general well-being, will be those that relate to our trading relationships with our nearest neighbours in Europe, in other words the Brexit debate.

But these two issues have, in the context of British and US politics, become inextricably linked together by the motives and ideologies of the main protagonists in the debate.

I wrote extensively on this subject inJuly 2016.

“Predictably, in the light of the Brexit vote, Nigel Lawson’s Global Warming Policy Foundation has called for a de facto reversal of UK policy in relation to climate issues.  This is wholly unsurprising given that so many of the moving spirits in the Leave campaign – Lawson himself, Redwood, Rees Mogg, together with several of the small band of Brexit economists, and the Institute for Economic Affairs, have for many years engaged in passionate denial of both the climate evidence and the climate science.

The reasons for the correlation are clear. Commitment to and support for neo-liberal views of unfettered free markets and a minimal state are threatened, both by a Europe that does not always share those views and by a global danger whose resolution depends on global cooperation. Should this further attempt to advance the neo-liberal agenda be a cause for any concern?” 

I argued, correctly in the event, that the Lawson pitch would not be heeded. “The answer is almost certainly not. The costs of Brexit for the power sector may be high, but the climate policy imperatives are likely to be unchanged.”

The historic link between support for Brexit and climate science denial is however indisputable.  It has extended not only to many other Conservative MPs, but to Farage and UKIP (forerunner of the Brexit party), to Donald Trump and even to Brexit voting Labour MPs such as Graham Stringer, given his close association with Lawson’s Global Warming Policy Foundation. Also indisputable is the connection, in ideological terms, between promotion of Brexit and small state, minimal regulation, low tax, free trade ideologies.

What is interesting now is the speed with which the Conservative party is abandoning, or pretending to abandon, most of the electorally inconvenient elements of this ideology. It is now committing itself, belatedly, to the kind of strong commitments on climate – zero carbon by 2050 for the UK – pioneered by Tony Blair in the 2008 Climate Act. But it is also, at least in its promises, committing to much higher levels of public spending, and an enlarged public sector, which are equally incompatible with the neo-liberal vision of the world.

For those of us who recognise the overwhelming imperatives for action on climate issues, it will be important to recognise the impact of Brexit on UK energy and climate policies, including some of the conflicts with other cherished beliefs and policies. Brexit would not necessarily have an immediate impact on UK freedom of action on climate related measures, other than through its almost inevitable consequence of reducing national income and hence affordability.

This is partly because EU-wide policies such as the emissions trading scheme have been of limited success, and partly because the physical infrastructure of interconnections with Europe will remain and be used for mutually beneficial trades. The UK might even in principle enjoy greater freedoms in state aids for the energy sector without the restrictions of a Europe wide competition policy.

As the EU scheme develops however it may provide members with potentially more efficient means to meet their carbon targets through trading, but it will be a scheme from which the UK is likely to remain excluded. Much more important however will be the longer term loss of UK influence on global climate initiatives, and most important will be the likely collision of climate policies with UK aspirations for international trade.

Increasingly countries making serious attempts to reduce carbon emissions will find it difficult to tolerate the export of jobs in energy intensive sectors to countries that pursue more lax policies. Climate policies will necessarily intrude into trade negotiations.

Since the Conservative Brexit narrative, despite the blizzard of other danger signals on pharmaceuticals, agriculture and regulatory standards, is based largely around a new trade deal with the US, this creates a serious inconsistency between their promises on carbon reduction and their post Brexit philosophy on trade. The US has already removed itself from the Paris Agreement, and is likely to retain a strong interest in protecting its own coal industry and promotion of coal exports, while countries adopting more responsible climate policies will not be willing to see their own industries penalised. This leads on to issues that the Conservative party has so far been unwilling to confront.

Brexiters will have many more questions to answer.

DECLARING A CLIMATE EMERGENCY IS FINE. BUT WHAT SHOULD THE ACTION AND POLICY PRIORITIES BE?

The UK Parliament has responded to a recent raising of awareness on climate change by declaring a climate emergency.  This is unequivocally a positive sign for anyone concerned with our future wellbeing and species survival, but it leaves a lot of questions unanswered, not least on how to select priorities for effective policies. Here are a few thoughts.

This is a global not a national crisis.

Anything the UK can achieve, given it is responsible for less than 2% of global emissions, will only be meaningful if it has a wider impact and is set within a context of international cooperation and agreement. Any policies seeking a global reach will also, inevitably and inextricably be bound up with trade. There is for example no gain from simply exporting UK emissions to other places. The UK can achieve little on its own, and it is hard to see how we on our own would have any significant influence on China, India, or the USA, particularly a USA under a President who regards climate science as a hoax.  

Unsurprisingly, those most hostile to effective action on emissions, like Trump and our own home-grown Brexit gang, are also those most hostile to the EU. EU policies on emissions are admittedly far from ideal, and need substantial strengthening and reform; but it would be far easier for the UK to influence these from within by remaining a member of the EU. For the most part, other EU states and their populations at least share the same broad objectives.

The EU emissions trading scheme is not perfect and needs substantial tightening, but if it can be made consistent with the right climate objectives and targets, then continued participation is in the UK’s economic interest and will assist our own decarbonisation.

We need the closest possible cooperation with our nearest neighbours in the EU. Resolving the chaos and confusion of our current position, and preferably remaining within the EU, must also rank as a first priority for effective action on climate. Participation in a reformed EU trading scheme will make our own measures less costly.

There is a big premium on early rather than delayed action.

Sometimes the case is made for postponing action while time is spent researching better solutions. But the reality is that early reductions in greenhouse gas emissions (GHG), and especially CO₂, confer a large benefit and have a big option value in postponing climate milestones. This trumps the risk that we might occasionally choose less than perfect solutions when new technologies may be available further down the road. The benefits of early action are generally under recognised.

Front end loading of any emissions reduction strategy helps postpone critical climate milestones. This factor alone justifies the emergency tag. We should  start with the low hanging fruit, the easy wins that can be achieved, not at zero cost or without any pain, but without major infrastructure spending or excessive disruption to current lifestyles

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There are a few relatively low cost “wins” that do not depend on massive infrastructure investment, but relate more to behaviour, lifestyle choices and a few habits and customs. These may be partly attained through personal choices, but they are also susceptible to economic pressures and broader policies.  Two behavioural factors with major impact on GHG emissions are the very rapid growth in aviation and the consumption of meat in our diets. A third is the extent of speed and traffic congestion, two of the major factors that raise road transport emissions

Work towards international agreement on taxation of aviation fuel.

Environmental costs are largely priced into road transport fuels, at least in Europe, but not into aviation. There is a degree[1] of economic distortion here – absurdly, the fuel cost of a two people using their car to travel a thousand miles in Europe may be twice as much as two airfares, even though it gives rise to less than half the emissions. More importantly ultra-low airfares encourage very high carbon-intensive lifestyles, such as weekly commutes to distant weekend cottages, transatlantic stag weekends or Christmas shopping expeditions. This is a significant source of GHG driven by a tax anomaly. Some of these considerations also apply to the treatment of fuel for shipping.

With aviation as one of the fastest growing sources of GHG emissions, and the absence of an immediately available technology solution (electric aircraft), this must be an obvious priority if we are serious about the issue. As a measure it has an international impact, but of course depends on international agreement, although coverage of flights within Europe could be an important start.

Less meat eating.

Complete abandonment of meat in diets may not be a realistic goal, but even modest reductions could achieve significant reductions in GHG emissions associated with livestock rearing. Eating less meat in many Western economies has significant health benefits, and is a lifestyle trend that is already gaining ground. It is also consistent with a more sustainable approach to agriculture and land use, a reminder that CO₂ is not the only problem of environmental degradation that we face.

Managing road traffic; reducing both speeds and congestion.

Speed and congestion, as every motorist with a trip meter will know, are both major sources of extra fuel consumption that are to a significant degree within our individual and collective control. Lower speeds lead to significant reductions in fuel consumption, and so do measures, like road pricing, designed to curb urban congestion. Once again these are measures that can bring health, safety and general environmental benefits.

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Behavioural changes only take us so far.  Eating less meat, taking fewer flights and turning down the heating to 19^oC will not get emissions anywhere near the ultimate target of zero. We are ultimately dependent on making changes that depend on large scale infrastructure investment, especially in relation to power and heat. So as well as making the relatively easy emissions savings we need to turn our attention to a wide range of actions required to prepare for substantial infrastructure development.

My priorities[2] on this include

• Much more coherent direction of the power sector towards earlier achievement of very low emissions targets.
• Re-establishing support for carbon capture and storage, and other low carbon options in generation.
• Infrastructure that enables rapid transformation towards electric vehicles (EVs)
• Much clearer policies for heat, and promotion of early trials of local heat networks, as well as other routes to low carbon such as electric heat pumps.

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[1] Obviously travel time may be a bigger factor than cost for many people, but relative costs will also influence travel choices as between road, rail and air.

[2] Some of these broader policy questions are discusses elsewhere on this site, including the pages: Decarbonising Heat, Low Carbon Power, and A Climate Manifesto. (bar at top of this page)

THE GREAT IDEOLOGICAL DIVIDE OVER ORGANISATION OF THE POWER SECTOR WILL CONTINUE.

What if anything does the European experience tell us ?

 There is a continuing and long running source of tension in political approaches to the power sector and indeed to network energy utilities as a whole. It is between central direction and state involvement on the one hand and privatisation and liberalised markets on the other. The distinction is of course often full of ambiguities. Today, two very different models for electricity commercialization operate in the different states of the USA. Most popular now is a competitive model, in which power producers can openly access transmission infrastructure and participate in wholesale electricity markets. The other is the traditional regulated monopoly model, in which state commissions regulate privately owned and vertically integrated electricity providers, who are de facto central planners. In Europe state owned companies, such as EdF (still 85% state owned), have participated successfully in liberalising markets across Europe.

Three factors help explain both the liberalisation trend and the fact that it will continue to struggle for wider acceptance. They are “the three D’s” -decarbonisation, digitalisation and decentralisation, all of which are having and will continue to have a major impact on the governance of the power sector.

But first it is worth recalling the features of the power sector that explain its historical development as some form of monopoly, with central control (not always at national level) over the operation of the system.

1.    The natural monopoly character of networks, the high and medium voltage transmission or distribution lines, transformers and control operations which imply a heavy cost of physical fixed infrastructure.  

2.    The command and control nature of the real time operation of systems to balance supply and demand.

3.    Finally there is the need to secure investment in very expensive immobile plant, eg generating plant, with a very long life. Investors need inducement to put money in a utility in return for a low but secure rate of return – this is critical to the affordability of power for consumers.

The answer historically was always that some form of centrally controlled monopoly, publicly or privately owned, and with a high degree of vertical integration, was both inevitable and demonstrably the most economically efficient model. The liberalisation message, by contrast, was that you could and indeed should unbundle the elements that were natural monopoly – the wires business - from the elements that were in principle at least open to competition – generation and retail sale to consumers. The natural monopoly networks could then be put into private ownership and regulated by statute to maintain quality standards and limit the owners to a fair rate of return. The competitive elements, especially generation, would be subject to market disciplines and economic regulation confined to monitoring by the national competition authorities.

A major factor permitting liberalisation was the extent of advance in sophisticated communication and IT systems (digitalisation), which had the effect of reducing the otherwise huge transactions costs in unbundling an integrated activity like electricity supply. This allowed, inter alia, the penetration of competitive market ideas right down to the level of retail supply to small consumers. Even so the industry retains a substantial, and necessary, element of command and control, over system operations, which is achieved through a complex structure of operating codes and protocols.

So what are the lessons from European experience. The messages are mixed. The UK was a pioneer and pushed the liberalisation process furthest – widely cited as a great achievement. The rest of Europe, pushed by the European Commission, has been moving more slowly and hesitantly along the same track. There are a plethora of different models, with variations on the degree of unbundling, monopoly and competition, and different forms of state involvement and intervention.

But has liberalisation been a great success? One can certainly point to particular plus points, especially in the regulation of the network businesses, but I would suggest that the answer is much more complex and nuanced. The UK has major problems with the power sector, with several indicators that all is not well. Little or no investment in generation now takes place without some form of government subsidy or guarantee; in other words the government has been sucked back into close involvement with, and responsibility for, investment decisions in the sector; at the same time it has lost many of the key levers and policy instruments previously provided by ownership, and which would assist good decision making.

Another area of disquiet has been the operation of retail competition, with substantial allegations of various forms of abuse or unfair trading practices. At the last election both parties went into the election on a platform of price controls, an anathema to any conception of a properly functioning liberalised market.

And has the more liberalised UK industry been more successful than its rivals within the EU? If we look at the levels of retail prices as an international comparison[1] (which has its own complexities) the evidence is not compelling. The UK is in the middle of the pack and does not do as well as France in particular. France, with its history of state ownership and a dirigiste approach to the economy, has been perhaps the most successful over the period, at least for the power sector.

For the future we need to turn to the other two D’s. Decarbonisation will have the most profound impact on how the sector is managed and governed. There are huge difficulties in relying on a carbon price alone to achieve the emissions reductions we need. That implies more interventionist policies not fewer. And the low carbon technologies lack the flexibility of fossil generation. This creates both technical and theoretical difficulties[2] for efficient systems operation within a conventional market framework. This will inevitable lead to some return towards more command and control within system operations.

Digitalisation has enabled the unbundling and successful market experiments that we have. It now needs to be deployed to enable much more interesting forms of competition and innovation at the retail level, but it won’t resolve the fundamental investment conundrum – of getting large scale investment.

Decentralisation and local control depend partly on what become the dominant low carbon technologies, but much more on the growing involvement of consumers – the demand side. The centre of gravity of decision may move away from the centre to much more local entities. But many of the same dilemmas for policy, securing investment and meeting low carbon targets, will still be there. Paradoxically the loss of scale may predispose to less market oriented approaches, as the complexities and transaction costs involved in small scale power networks outweigh any theoretical benefit from competition incentives.

In my view we are seeing a slow move back towards greater government involvement in the power sector, for all the reasons above. The challenge will be to develop our existing structures to accommodate the interventions necessary to decarbonise the economy, while at the same time continuing to exploit the innovations, not least in tariffs and metering[3], that can spring at least in part from domestic supply competition.

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[1] I drew attention to the UK – France comparison in a recent comment on 27 January.

[2] This is an issue discussed in more detail elsewhere on this site, but is part of a family of rather technical issues around the conditions that can create market failure.

[3] This is another subject discussed earlier in the context of utility tariffs in a low carbon future.