Energy chaos – coming to a market near you

If the great Russian novelist, Leo Tolstoy, had been an economist he might have written: “All happy market outcomes are alike, but each policy error is disastrous in its own way”.

Certainly the implosion of the UK’s energy market manages to combine many familiar bad policy interventions, while nonetheless contriving its own unique set of outcomes.

The immediate headache is a near-quadrupling of the natural gas wholesale price over the last six months.  Boris Johnson’s government is scrambling to avoid big domestic price increases, but without queering the pitch for the COP26 climate conference which opens in Glasgow on 31 October (in partnership with Italy for some reason).

The underlying issue is that its policies (and, to be fair, those of its predecessors) have created an unholy mess of contradictions.

First problem, big price increases for fossil fuels are baked into government forecasts and policies for CO2 abatement. Indeed, they are necessary to reduce consumption.  

Voters were supposed to be appeased by energy efficiency, which meant that swingeing price increases would be matched by hefty consumption reductions.  That hasn’t worked in line with the modelling.

Second problem, Britain’s governments have been directing from the centre more and more of the once-decentralised energy market: from specifying generation requirements to subsidising inefficient technology; rolling out poor quality smart meters while failing to get a grip on a cost-effective nuclear option.  The cost of these adds 10% to power prices and no one is expecting this to go down.

Third problem: the government has tried to promote a competitive energy supply market, while simultaneously rigging it to avoid unpopular outcomes.  So power companies are not allowed to charge unreliable customers in line with expected costs; a domestic price cap cramps supplier margins and slows down adjustment; insufficiently-capitalised companies have been encouraged into the market by making the rest of the industry pay should they go bust.  Which is happening in spades – with five going under in five weeks, and more expected to follow.

For now, it looks like the government wants to park the problems, in the admirably short-term fashion we have all become used to over the Covid crisis, using taxpayers’ money to stop matters getting out of hand over Christmas.  In what must be a first, they are negotiating to pay fertiliser manufacturers to produce more carbon dioxide (for stunning chickens and making soft drinks, since you ask)

That might be enough for now, if gas prices subside more quickly than expected.

And perhaps there is even a chance that the government might use the breathing space to stop tinkering and go for a sensible fix?

That might look like a long-term schedule for a steadily-increasing carbon tax (preferably with revenues rebated to citizens); letting energy companies decide the generation mix; and focussing government spending on least-cost abatement projects. It would encourage more cost-effective switching from carbon than command-and-control.  

Discouragingly, Canada’s Conservative party failed to make much ground in Monday’s general election with a policy drawing on these principles.

On the other hand, Boris has shown a willingness to take risks where he sees long-term political logic.

And, as he prepares to parade his green credentials in Glasgow in a month’s time, he can reflect on the confessions of the great Tolstoy: If you want to be happy, try only to please God, not people”.

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