Energy markets: the more they change, the more they stay the same

Insanity is doing the same thing over and over and expecting different results.

Which, with baroque variations, is the story from the UK domestic energy market.

As we’ve reported before, the market is suffering from the unfortunate conjunction of soaring input prices and a populist price cap.  As suppliers collapse into the consumer-funded government safety net, the regulator is thrashing around trying to cobble together a fix which might avoid prices rising to their true level too fast, without offending voters or damaging long-term supply.

One of the less destructive ideas being mooted would be to allow the price cap to be adjusted more frequently in response to ‘exceptional events’.

But the Guardian can be tenacious in support of muddled thinking.

Having cheered the imposition of government controls over most aspects of the UK’s energy market, it might not be a surprise that it thinks the problem is – not enough controls.  

Or to be more precise, getting rid of the wrong sort of controls and, with the benefit of hindsight, bringing in the obviously right ones. (In this case, requiring energy suppliers to have more financial backing in case prices go up.  Good idea but … what might that do to the cost base?)

There is much to be said for constructive criticism and learning from experience.  

But the right experience in this case might be our understanding of markets and controls.

Which tells us that prices give signals to move resources around. That governments need to think about security of supply.  And that the vulnerability of some of our people to high or unpredictable energy prices is part of a bigger issue of social welfare.  One that can rarely – if ever – be addressed through direct price controls.

Britain’s price cap debacle is just one aspect of a UK energy policy driven largely by inconsistent and inefficient climate policies.

But it’s a stand-out reminder to right-of-centre politicians who think they can buy short term political relief by letting their clever advisors do a little market tweak.

Because when it fails, you’re in more trouble than before and the Guardian won’t be there for you.

One thought on “Energy markets: the more they change, the more they stay the same

  1. The really important thing about the UK (and most other) energy market are they are massively distorted by subsidies. In the UK, windfarms can dump power onto the grid because the guaranteed subsidy is higher than the energy price. And they get paid if they have to switch off. Heads I win, tails you lose. And the consumer pays for it. The fossil fuel plants that have to fill in the gaps for the unreliables have carbon taxes and uncertain income to contend with. That means when they are needed to generate, they charge a very high price.
    It would be easy to fix. All you need is for there to be no subsidies and generators having to guarantee their generation two hours ahead otherwise they have to pay for the shortfall. It works and would give a lot cheaper energy price. But the unreliables would never accept it. They keep on telling us that wind and solar are cheaper, but they won’t prove it. Funny that.


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