Video

Introduction

In formulating their energy strategies all countries face much the same challenge – addressing what has been variously described as the ‘trilemma’, the 3 ‘A’s2 or the 3 ‘E’s,3 that is, seeking to achieve energy security, environmental protection and economic efficiency at the same time.

In addition, they are all parties to the Paris Agreement on climate change and, for those countries in the European Union (EU), all are involved in the development of an increasingly European approach to energy policy and moves to- wards an energy union (Buchan and Keay, 2016). So, at first sight, it would be following much the same energy policies.

But of course that is far from the case. There are two main reasons for the differences:

The first is that all countries have different resource bases geographies, national priorities etc. This is reflected in different attitudes to particular sources – for instance, nuclear or coal, which are important in some countries but rejected in others.

Less obviously perhaps, is a further dimension to the trilemma – in that that the factors (and the balance between them), change over time, yet energy policy is to a large extent about the long term. Energy investments (like power stations, pipelines, terminals and grids) are very long-lived and this increases the risk of ‘asset stranding’ when policy changes; furthermore, developments in one part of the energy sector affect other parts (e.g. the growth in renewable generation affects gas and coal markets directly by displacing those fuels but also has significant indirect effects.

At any particular moment, a country is in many ways a prisoner of its past, with an energy asset base which may not be optimal for current energy policy objectives, and policies which are responding either to past challenges or (increasingly frequently) to the unintended consequences

UK Energy Policy Limbo

Many developed countries are facing this issue and, whilst it is not alone in this, the UK is facing the challenges in particularly acute form – on the one hand, it has been more strongly committed to liberalisation, over a longer period of time and on the other, it has created a particularly rigorous environmental straitjacket for itself via the Climate Change Act

Energy policy in the UK has undergone a paradigm change over recent decades – from the free market stance of the 1990s to the more interventionist measures of the 21st century. However, the two approaches have not been reconciled – even as the Government intervenes, it reaffirms its goal of creating more competitive markets. The contradictions are most apparent with electricity, which has been the main focus of intervention to date. But to explain how the UK got into this limbo a little history is in order.

As is well known, the UK was a pioneer in liberalisation, in particular in energy. The strongest expression of this view came in the early 1980s when Nigel Lawson, then Secretary of State for Energy described his role in the following terms: ‘I do not see the Government’s task as being to try to plan the future shape of energy production and consumption …. rather to set a framework which will ensure that the market operates in the energy sector with a minimum of distortion.

The timing was fortunate for such an approach. For most of the 1980s and 1990s, energy markets were well supplied, prices were low, and the growth of gas meant that environmental objectives were being met more or less automatically. In short, ‘there was little or no energy policy to make in the 1990s.

But this golden age could not last. With the turn of the 21st century, problems started appearing – markets got tighter, the UK moved from being an energy exporter to energy importer and rigorous emissions restrictions started to bite. All this led to what many have seen as a ‘paradigm change’ in UK energy policy making as the emphasis moved back to intervention.

By 2011 the word ‘planning’ had come back into the official lexicon and even the Economist newspaper, normally a firm believer in free markets, argued that the UK faced a power crisis as a result of an ‘almost criminal planning failure

Market Interventions

The starting point for the more interventionist approach, particularly for electricity, was the growing significance of greenhouse gas emissions targets. In 2000 the Royal Commission on Environmental Pollution recommended a target of a 60% reduction in CO2 emissions by 2050. This led to the publication in 2003 of the White Paper Our Energy Future which was the first attempt at an energy policy for some 20 years.

It recognised that environmental concerns were henceforth going to be a major driver of energy policy; nonetheless it continued to rely mainly on market-led measures, plus a little support for renewables and carbon trading, which it thought would be enough to deliver the reductions envisaged.

Energy policies then started coming thick and fast. In 2006 the Government had a new go at a long term planning in its report ‘The Energy Challenge’, and whilst it propsed a number of things, it mainly attempted to clarify the role of nuclear power. The small print of the document noted that the ‘gap’– the level of emissions reduction needed by 2020 – had actually increased (nearly doubling) since 2003; in other words, even if the policies introduced just three years earlier had any positive effect, they had been swamped by the impact of market forces.

However, the 2006 report also proved something of a false start – the Government still claimed to be neutral about what plants investors chose to build, and did not set out a full case for nuclear. Greenpeace challenged the Government on the grounds that it had showed bias and failed to offer the ‘fullest possible information’. This said the case for nuclear was compelling – but still left it to investors whether they chose to build or not, leaving open the question of what happened if they chose not to.

Momentum built up yet again with the , which set a target of an 80% reduction for greenhouse emissions by 2050 and required the Government to come up with plans to meet the goal and a series of interim targets. This concentrated the Government’s mind wonderfully. One realisation was that markets alone would probably not be enough to address what had been described colourfully as, the ‘greatest and most wide-ranging market failure the world has seen’ and that additional support for renewable plants would be needed.

However, intervening in markets has consequences. Investing in low carbon generation is not just a matter of slotting in one sort of plant for another – the new sources have their own economic, technical and operational characteristics and they change the whole dynamic of the electricity system.

A number of reports from Ofgem pointed to the problem and after the 2010 General Election, the Government agreed on a package of Electricity Market Reforms (EMR), – Feed-In Tariffs (FiTs) for renewables to replace the former Renewables Obligation; emissions performances standards for new power plants (designed to prevent the construction of unabated coal plants); and a floor price for carbon. The proposals took time to elaborate, and a further element was added in the Energy Act 2013 in the shape of ‘capacity markets’.

These were in effect designed to offset the impact of the support for renewables. Adding zero marginal cost intermittent new sources reduces the income and operating hours of conventional plants, making in- vestment unattractive, and so creating a security risk. The capacity market was designed to encourage investment in conventional plants.

Capacity markets have yet to prove themselves. In the first auctions, prices were lower than the Government had forecast – but this was because they were in effect getting the wrong sort of capacity. Most of the participants were either old plants, whose capital cost h ad been written off, or new and environmentally unattractive diesel plants. The plants the Government actually wanted – new gas-fired plants – did not feature significantly, leading the Secretary of State in a so-called ‘reset’ speech to make it clear that she would tweak the rules if necessary to produce the right result. The Government’s position seems to be that it wants market mechanisms – but only if they give the outcomes policy-makers want.

As regards nuclear, the future remains uncertain at the time. Existing nuclear plants, even with life extensions, are due for retirement over the next couple of decades and without new nuclear construction it will be difficult to replace them with low carbon generation while maintaining power system security. However, support for new nuclear has been complicated by a combination of politics and the unfavourable economics of new nuclear plants.

As it was, given that the Government had made clear its view that nuclear was needed, while the developers had no compulsion to invest, the Government’s negotiating position was weak and the deal eventually agreed with Electricité de France (EdF) is at a price which looks high by comparison with current market prices or nuclear costs elsewhere – and even then it is not clear whether the project be completed on time because of the weakness of European electricity markets and the strains on EdF’s balance sheet.

EMR Failure?

Perhaps the biggest failure of Electricity Market Reform is that it has not achieved what it set out to do. Electricity wholesale markets remain unreformed; they are still based on marginal costs and on the ability of price incentives to promote efficient generation, at a time when the new generation sources are capital-intensive and unable to operate flexibly in response to price signals.

The result, across Europe, is broken electricity markets, weak power companies, power station closures and a growing need for intervention if security is to be maintained. There is no ‘exit strategy’ in the absence of true market reform, the situation remains half-planned, half market-based, but with the disadvantages of each approach.

Conclusion

Many have argued that the UK’s energy policy is not fit for purpose and that it remains stuck in a limbo. They suggest that the way forward is not clear for any of the fuels or sources (except coal).

The Government is making all the decisions about investment in power generation, but without a mechanism to optimise investment or generation. It is paying a high cost for the low carbon sources it is introducing, while doing little to secure diversity; there is no coherent long term view of electricity system development, despite the fact that all concerned now recognise that some planning is needed.

The Government needs to decide whether it is serious about markets – if so, it should look at electricity market structures, at developing a coherent approach to the demand side, and at new market-friendly policy instruments like carbon intensity targets. If it accepts that intervention is needed on a continuing basis, it needs to spell out a clear way forward for nuclear, CCS, gas and other sources and develop an overall coordination mechanism. But simply muddling through erratically, according to the needs of the moment, will not work if the Government is indeed committed to the fundamental changes in the sector which decarbonisation will involve.

1 COMMENT

I'd love to hear what your thoughts are...please feel free to leave a reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.