(John Kemp is a Reuters market analyst. The views expressed are
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
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
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
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",
POLITICS AND INVESTMENT
The CEGB succeeded in its primary mission of keeping the
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
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,
"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
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
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)