(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON May 7 Britain is abandoning its market-based model for electricity and opting for much greater state control, as politicians intervene more aggressively in response to concern about rising bills, climate change and supply security.
For a brief period in the late 1990s and early 2000s, Britain had the most liberalised and market-based electricity system in the world, but now politicians, experts and many voters seem to want a return to more central planning.
In a report for the right-wing Institute of Economic Affairs, Colin Robinson of the University of Surrey described the emerging system as "central control without (so far) state ownership" ("From nationalisation to state control: the return of centralised energy planning", December 2013).
Robinson complained: "Policy towards energy is moving full circle in the sense that, although state ownership is not, for the present, on the political agenda, government is once more deeply involved in major energy investment decisions."
The level of political intervention in the electricity industry appears set to increase even further in the next few years, as politicians from all parties seek greater control over how electricity is delivered and how much it costs.
Ed Miliband, leader of the opposition Labour Party, has pledged to freeze gas and electricity bills for 17 months while there is a root-and-branch review of the energy industry if his party wins the general election due in May 2015.
Miliband's intervention in September 2013 was almost universally condemned by experts. But it proved popular, and forced the country's ruling Conservative and Liberal Democrat parties to come up with their own proposals, all of which involved more intervention, including a competition inquiry into the gas and electricity sectors.
Miliband has tapped into a mood for more activist government. According to a recent poll, 56 percent of voters think "governments should be more willing to intervene in the market and control prices". Just 29 percent of voters think the government should generally allow the free market to set prices for things such as electricity, gas and private rents.
The majority of voters in all age groups, social classes and regions of Britain support more intervention and government regulation (YouGov poll for the Sunday Times, May 1).
There is strong support for more intervention from supporters of almost all the main parties: Labour at 85 percent, Liberal Democrats at 49 percent, and the UK Independence Party at 48 percent. Only Conservatives favour letting the market set prices, and even one-third of them told pollsters they wanted more regulation.
Experts too want the government to take more control over planning and investment decisions in the power industry.
"The energy challenges we face today are so complex and long term that the government should establish an independent, expert body who can act as an overall system architect for our energy system," said a report published on Tuesday by Newcastle University's Institute for Sustainability ("Energy policy briefing note", May 5).
"The UK has an unbundled and some would say fragmented energy industry," the authors of the Newcastle report observed. To remedy the problem, they advocated creating an expert group "to take a holistic, long term view about what is required and inform technical decisions and energy policy in a more effective manner than is currently being achieved".
The creation of an overall system architect would undo 25 years of liberalised, market-driven reforms. It would represent a return to the system of central planning that dominated Britain's electricity industry before 1990.
Between 1948 and 1990, the state-owned Central Electricity Generating Board (CEGB), and its forerunner the British Electricity Authority (BEA), planned, built and operated all the country's power stations as well as the transmission system.
The CEGB knitted together the small and disorganised pre-war private power companies, built most of the coal-fired and nuclear power plants that still supply the bulk of Britain's electricity, and created the network of high-voltage power lines known as the National Grid.
Before 1948, blackouts were common as the electricity industry struggled to balance supply with fast-growing demand. But the CEGB built a network that became renowned for its reliability.
Even now, blackouts and power shortages are far less common in Britain than in the United States - where power networks were designed and built in a much more fragmented fashion by private utilities with no central planning.
Most of that reliability is thanks to the generation and transmission assets, as well as the operating procedures, inherited from the CEGB. The organisation's remarkable story is told in a superb history written just as it was broken up and the parts transferred into private ownership ("The CEGB story", March 1990).
POLITICS AND INVESTMENT
The CEGB succeeded in its primary mission of keeping the lights on.
Electricity also became cheaper over its 40-year history, after allowing for inflation, and despite a huge increase in the price of fossil fuels such as coal, gas and oil which it used to generate power.
But despite the current nostalgia for the old centrally planned system, it was also criticised as inefficient and subject to enormous political interference from ministers.
"There was so much wastage during the CEGB days. It was like they had money to burn. The stores were always full and we had spares for everything," one former employee recalled ("How we happened to sell off our electricity", London Review of Books, September 2013).
"Bureaucracy was part of the problem. If you had signed stuff out of the stores, even if you found you'd got the wrong bits, you couldn't sign them back in. The system didn't allow that. There was nothing to do but put the parts straight in the (rubbish) skip," he explained.
In theory, the electricity business, like other nationalised industries such as gas and water, was run at "arms length" from ministers with managers given day-to-day operational freedom. In practice, ministerial meddling was rife.
Governments froze electricity prices to keep inflation under control, interfered in investment decisions, banned generators from using foreign coal or North Sea gas to support the domestic mining industry, and disastrously instructed the CEGB to use an unproven design for a new generation of advanced gas-cooled reactors, which went wildly over budget.
"Ministers do not and cannot in practice keep their involvement restricted within predetermined guidelines," an official report observed in 1978.
"The lesson to be learned from the last 40 years of nationalisation is that the real task is not to control the industries but to control government itself," argued Stephen Littlechild, one of the architects of privatisation ("Ten steps to denationalisation", 1981).
Privatisation aimed to "restrict the scope for political pressures and to give more weight to the automatic forces of the market", according to Littlechild, while encouraging the electricity industry to be more efficient and avoid expensive investments in high-technology projects that often failed.
PRESSURE TO RE-REGULATE
Surrey University's Robinson argues that pressure to re-regulate has come from special interest groups including senior civil servants (anxious to increase their role), research scientists (looking for project funding), and the utility companies themselves (keen to restrict competition and extract extra subsidies).
More regulation has usually been justified by citing a need to correct market failures. Critics argue that the market will not invest in enough spare capacity to maintain supply security and is not providing the right incentives to reduce carbon emissions and combat climate change.
The amount of spare generation capacity available to meet unexpectedly high winter demand has shrunk over the past decade, and could be as little as 2 percent in the winters of 2014/15 and 2015/16, prompting the government to intervene by proposing a new capacity mechanism.
On the climate side, critics argue that without carbon taxes or a cap-and-trade system to internalise the cost of carbon emissions, generators will continue to rely too heavily on fossil fuels.
The EU Emissions Trading System has failed to provide a sufficiently high carbon price to encourage a shift away from fossil fuels, so the government has intervened with a carbon price floor, mandatory emissions limits, and a range of subsidies for wind, solar and nuclear power.
"There has been a tendency to pile measure on measure in the hope that something will work," according to Robinson.
"The liberalised energy market is becoming a distant memory. It seems to have virtually no defenders, and hardly anyone now questions the government's assumption of the right to make major decisions about the future of electricity generation in the corridors of Whitehall." (Editing by Dale Hudson)