Two decades ago, Britain privatised its electricity sector and so started the era of free energy markets. But if we are to believe the observations of Britain’s government-appointed Committee on Climate Change (CCC) these free market mechanisms are now a barrier to development of a secure and sustainable energy market. So should the energy market’s brief flirtation with competition and free market enterprise come to a halt?
Energy, as with other markets, is inherently cyclical. Back in the 1980s there was a tacit admission that once competition reached its natural maturity the competition cycle would need to be re-started. Most assumed this maturity would result from the market breaching its critical level of consolidation and thus present regulators and policymakers with the headache of an oligopoly. Yet although competition has slowed the market is not faced with anything approaching an oligopolistic structure and the market is a long way off reaching its natural level of maturity. Therefore we have to assume that competition has failed the market. But has it?
The rationale behind developing a competitive market was straightforward; a liquid and transparent traded market would provide the necessary price signals for market infrastructure investment and thus provide for a secure future. There is nothing fundamentally wrong with this argument, provided the market is allowed to operate competitively. But once policymakers and regulators start meddling with this competitive structure the market’s confidence is undermined and the perceived benefits of a competitive market are harder to realise. And the UK market is a prime example of how not to act.
In May 1997, when the UK’s Labour Party belatedly assumed power after its failure to unseat a weak and divided Conservative government five years earlier, it was consumed by the mistaken belief that it had to exhibit a strong pro-competition commitment. In 1992 the party failed to win the election because it openly promoted higher taxes and more centralisation of power within government. It took five years to re-invent the party as a business loving, pro free enterprise ‘new’ Labour party. This new political veneer seduced both business and public, and the party was duly swept into power. But a political party can never truly change its spots and the Labour government has never been fully comfortable with the market and, conversely, the market has continued to have its reservations toward the government. Neither has fully trusted the other, and for good reason.
Two actions in particular precipitated the market’s concern; first, the windfall tax on the energy sector and second, and more importantly, the ill-judged three-year gas moratorium that ended in November 2000. Indeed many of today’s supply security concerns can be traced back to the gas moratorium. Immediately the moratorium was ended the government approved applications for 4.8 GW of new gas-fired capacity, increasing the oversupply in the market and precipitating the crash in wholesale electricity prices the following year when the government’s New Electricity Trading Arrangements were launched to replace the Electricity Pool. But while the market has seemingly learnt its lesson from this experience – E.On has deferred its Kingsnorth coal-fired project for at least three years owing to insufficient demand – the government has not.
In its report, the CCC argued that current market mechanisms (ie the government’s trading arrangements) would lead to increased gas import dependency and a lack of investment in alternative clean energy technologies. But it’s not necessarily the trading mechanism that is at fault, although it is well overdue for a comprehensive review and possible reform, but more likely the
government’s dictat on the energy mix and its
inability, or refusal, to listen to the market.
Even though the market was becoming oversupplied with gas-fired capacity, with no other large-scale generation plant having been built in Britain since Sizewell B came online in February 1995, the government’s 2003 energy white paper still concluded that Britain’s energy future would be best served by a mix of gas and renewables, with the government comfortable with a gas share of 70%. Given what can only be described as inept forward thinking, is it any surprise that Britain is currently facing a supply shortage within the next decade?
But if this inept energy thinking is bad, the
procrastination is even worse. Since November 2001, when the EU Large Combustion Plants Directive entered into force, the government has known that a large chunk of Britain’s coal-fired capacity would have to close by December 2015 unless it invested in expensive flue gas desulphurisation units before January 2008. And given the UK’s ageing coal infrastructure, with no new coal-fired plant built in Britain since Drax was completed in 1986, it should have been obvious that most coal plant operators would probably opt out of the Directive to keep costs down and maximise returns.
Two of these operators, E.On and RWE npower, submitted plans for new more efficient coal plant that would be built carbon capture-ready. Yet in the knowledge that a large chunk of coal capacity would close by 2016, and with potential supply security questions raised by the increasing dependence on gas imports, the government still procrastinated over E.On’s Kingsnorth proposal for almost three years before the German utility saved it from further ridicule by pulling the project.
Other markets have shown how coal can compete with gas, nuclear and renewables, and over the past decade the European traded coal market has become more competitive with gas as each seeks to set the marginal cost of generation. But while the US and China, for example, look at coal capacity investment as part of the security rationale and then use this rationale to invest in carbon capture and storage (CCS) technology, Britain’s government argues against any new coal-fired capacity unless it is fitted with CCS. But what if CCS technology is not available until 2020, or later? Is a potential medium-term supply shortfall an economic cost worth bearing for the relatively small volume of emissions it would save?
If market competition had been allowed to evolve over the past decade without consistent government meddling it is probable we would not be having this discussion on supply security. Competition didn’t fail; the government failed competition. And now the government believes the only way to provide a secure sustainable energy future is to further constrain free market enterprise by taking a more interventionist approach. Arguably it has finally lost the plot, with most analysts concurring that the government’s energy policy is not fit for purpose. Two decades ago the world followed Britain on the path to a competitive energy future. Few, if any, are still following today.
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