Sometimes cleverness can’t get you out of a hole

Kwasi Kwarteng – Britain’s top business minister – is smart. 

King’s Scholar at Eton; Double first from Cambridge; University Challenge winner; Kennedy Scholarship and a PhD in Economic History – from Cambridge.  With prizes along the way.

Whew!

But as the Daily Telegraph reminds us, smart people can be responsible for not-so-smart things.

And smart and even capable ministers can be carried away from deep beliefs and natural instincts by a flood of orthodoxy, channelled through the civil service machine and reinforced by private-sector rent seekers.

The Telegraph story is a nice little vignette of the confusion and cost which ensues when one government decision to interfere with market signals (in this case, the reallocation of 2G and 3G spectrum) clashes with yet more government work on our behalf (an earlier decision to roll out ‘smart’ power meters that rely on, you guessed it, 2G and 3G spectrum if they are to be ‘smart’).

Nor is this the first problem to arise. Per the Telegraph’s columnist:

“The first smart meter specification was intended for a small scale trial and was never supposed to be widely adopted. But the UK then seized upon an EU energy directive (2009/72/EC) and gold-plated it.

In 2012, the Commission said it wanted 80pc of homes to have a smart meter by 2020. The UK insisted it could do 100pc, and rushed ahead. A big error – this design of meter stopped being “smart” and sending back readings when you changed supplier. But the junk device still found its way into 9m homes.”

It’s the sort of situation where a minister with Kwarteng’s creds should be asking: what is the market solution?  Because that will generate the most productive outcome, identify if anyone vulnerable needs special support and expose the vultures hunting for a concealed subsidy.

But perhaps a combination of PM Boris Johnson’s relentless net zero pressure and the vicissitudes of Europe’s energy crisis is clouding his judgment.

Did he flick through the 92-page cost benefit analysis on the smart meter programme when he joined his department back in 2019?

He might have spotted a few things.

First, the costs (net present value of £13.5 billion) are front-end loaded (peaking at roughly £1 billion p.a. between 2020 and 2026).  An economic historian might think that there is a risk of under-estimation here, with a developing consumer technology and a private sector prevented by regulation from experimenting and adapting.

Secondly, the estimated benefits (net present value of £19.5 billion) are somewhat more speculative, as well as being pushed out into the hazy future (from £1 billion p.a. in 2021 to £2 billion in 2034).

There are supposed to be £8.1 billion of supplier benefits from things like reduced customer contact and site visits.  It sounds sensible but it’s a puzzle why profit-hungry businesses can’t find a way of realising these on their own, in response to market signals.  Not least because they would be incentivised to target areas of greatest benefit, with the most impact on their business strategy.

Then there’s an estimated £7.6 billion of customer benefits.  

Of this, energy savings of 2-3% of consumption are worth £6.2 billion. Just to be clear, this is people paying for better info to make their houses colder, showers shorter and rooms darker.  Assuming of course that they haven’t already reduced energy use in response to rising cost, public service advertising, subsidised insulation or love-of-planet.

And time savings are thought to be worth £1.4 billion.  Although a political economist like Kwarteng might ponder the implications of the biggest time savings accruing to the poorest – and coldest – voters (for whom lack of time is not usually their biggest problem).

But hey it’s not all green smoke.  A techo-enthusiast looking at the economic history of new technologies might regard the estimated £1.7 billion of demand shifting and network benefits as seriously underestimated in the long run – provided of course time-of-use energy prices are allowed to send the right signals.

So you might ask yourself why a rigorous economic and financial analyst of Kwarteng’s calibre is sticking with a one-size-fits-all programme, which assumes ministers, big business and consumer advocates will come up with the energy equivalent of the iPhone.  With a smart thermostat costing less than half the estimated price of a smart meter, why not allow supplier experimentation and customer choice to point the way to both the energy-efficient and the low-cost outcome.

It might even allow for more privacy options with regard to the 17,000-odd annual data points transmitted by your smart meter – which can give a surprisingly good picture of what is happening inside your home to anyone determined enough to find out.  

To be fair, this is just one of the problems Kwarteng has to solve to deal with an energy crisis, which the Financial Times tells us is expected to cost £723 for each UK household, or:

“ … roughly 3 per cent of disposable income after housing costs for a household at the middle of the income distribution, a hit to living standards equivalent of a [sic] sizeable recession.”

That 3% of disposable income seems to be roughly the amount the government will be taking in higher taxes at about the same time.

The situation looks to be beyond short-term fixes.

Might Kwarteng be tempted to take a radical approach?  He could confess failure; explain that the crisis comes from impeccably orthodox and bipartisan policy (Labour and Green all the way); and explain the realistic and painful way out.

This could be one of those rare moments when truth is the best policy.

Because in a post-Covid world, it looks like there are going to be more moments of truth for Kwasi.  And Boris.  And most governments.

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