Can liberalised energy markets cut carbon emissions? Britain is starting to doubt it
FOR many left-wingers, the credit crunch was proof that markets do not always know best. The near-collapse of the world’s banking system shows once and for all, they argue, that an industry as important as finance cannot be left to the whims of the invisible hand. Yet despite much speechifying from banker-bashing politicians, such views do not seem to have taken hold. Bonuses are back in many City dealing-rooms, and the old argument against regulation—that it would drive firms away from Britain and impoverish the country—is being heard again.
Away from the spotlight, though, another industry is facing its own crisis of confidence in laissez-faire liberalism. Climate change, a looming shortage of electricity and worries about the risks of relying on imported energy are causing many to doubt whether Britain’s vaunted liberalised energy markets are up to the job.
The most recent salvo was fired on October 12th, when the Committee on Climate Change, chaired by Lord Turner (who is also a financial regulator), published its first report. The CCC was appointed to advise the government on how to meet its targets for greenhouse-gas emissions, which call for an 80% reduction, relative to 1990, by 2050. It concluded that far too little is being done. Although recession is holding emissions back, they are dropping at an average annual rate of under 1%, rather than the 2-3% needed.
The committee’s diagnosis was stark: the market, left to its own devices, is failing to deliver. Consumers are not buying energy-efficient appliances or insulating their houses, carmakers are failing to get emissions down and power companies still prefer fossil fuels to greener alternatives. A bracing dose of re-regulation was prescribed: the CCC suggests compulsory emissions caps for cars, feed-in tariffs to help green-power producers and a state-enforced minimum carbon price to encourage nuclear and “clean” coal power stations. David Kennedy, the committee’s chief executive, put it plainly: “We’ve stuck with the market a long time,” he said. “We don’t think we can stick by it any more.”
Similar doubts about the wisdom of the markets are to be found throughout the energy sector, from academics and analysts to managers at some of its biggest companies. Lord Browne, a former boss of BP, an oil firm, opined publicly this year that state-owned banks should be forced to lend money to renewable-energy projects. Sam Laidlaw, head of Centrica, a big generating company, has admitted that nuclear and renewable power will struggle under the current arrangements.
On the surface, this sudden enthusiasm for the firm hand of government seems strange. Britain’s markets, freed by a Conservative government in the mid-1990s, are among the most liberal in the world. Investments in power stations are made on purely commercial grounds; half a dozen big firms compete to sell power to consumers. Price controls are unheard of and state ownership is confined to a couple of old, rickety nuclear-power plants. Politicians used to boast that Britons paid less for their electricity and gas than the rest of Europe, and Britain has been lobbying hard for other European countries to follow its lead.
A dose of dirigisme
Three things are casting doubt on the free-market approach. The first is climate change. The CCC thinks—as do ministers—that a big expansion of renewable energy and the construction of carbon-capturing coal plants and new nuclear-power stations is the way to decarbonise electricity generation. But it isn’t happening: despite spending £872m ($1.4 billion) in the financial year to March 2008 on subsidies, Britain generates far less renewable energy, as a proportion of the total, than most of its European neighbours. New nuclear reactors are promised, but many doubt that such high-cost, long-lived projects can work in a messy, unpredictable market without price guarantees.
At the same time, and secondly, energy firms must replace around a third of Britain’s power-generation capacity over the next decade. Dozens of old coal and nuclear power plants are due to close. Plugging the hole will be expensive: Ofgem, the industry regulator, estimated on October 8th that the total bill could be between £90 billion and £200 billion, pushing up household bills by as much as 60%.
Yet firms are leaving all this building rather late. Energy-watchers now fret about possible blackouts as power stations close and are not replaced. Such tardiness lends strength to an alternative reading of the past 15 years: that low prices were as much a result of firms sweating their assets as of competition and ingenuity.
Finally, most of the new power stations being built are gas-fired. With 40% of Britain’s power already coming from gas plants, that is causing worries about over-reliance on a single fuel, particularly since dwindling North Sea stocks will force Britain to import more gas from overseas.
But despite the rehabilitation of the case for regulation, politicians may find it hard to get a grip. A deregulated industry is useful: ministers can bask in the benefit of low prices while deflecting blame for price rises on to rapacious energy giants. Reimposing central control at a time when bills are rising to pay for new power stations and other infrastructure risks attracting the odium of a hard-pressed public.
Yet blackouts at home and embarrassment abroad are even worse, and so government pronouncements have been growing increasingly prescriptive. Ministers are beginning to specify how many new nuclear-power stations and wind turbines they want built. The government has already tweaked the planning system to allow Whitehall to overrule local objections to new power stations, and a new Infrastructure Planning Commission is supposed to take a more dirigiste approach to big building projects.
Still, a return to full-on state control is not on the cards. The CCC’s suggestions—some good, some bad—would only bring Britain roughly into line with other European countries. France has imposed a minimum price on carbon, for instance, and Germany and Spain give subsidies directly to renewable-energy firms. Yet to row back on deregulation would be intensely shaming for a country that pioneered the idea in the first place, and has been preaching its benefits ever since.