Britain created the first electric light bulb and a pioneering national grid. Then, in 1990, it built one of the rich world’s most liberalised energy markets. For years it enjoyed low prices and lectured other countries about the virtues of cone crusher deregulation. Not for it French-style state-owned monopoly utility firms. But the country has gradually lost faith in a free energy market. A bill published on May 22nd signals a drastic change.
The bill is a response to two developments. One—particularly worrying to politicians—is rising electricity prices. The second, further off, is a looming capacity crunch. Roughly one-fifth of Britain’s existing power stations are due to be retired within the next decade, and if the country is to meet its EU targets, new capacity must come from low-carbon sources.
The best way to encourage green energy is to tax carbon. Australia took that brave step in 2011, admittedly with plenty of giveaways and exemptions for the early years. Under the European emissions-trading scheme carbon does have a price in Britain, but it is too low to be effective and is hard to increase. If Britain commits itself to unilateral action, the early price would still be low, but the government could promise to increase it over time. It is the price of carbon in 20 or 30 years, not now, that determines investment decisions. This move would encourage cleaner technologies but allow the market to choose which it favours and how much to pay. It is simple and more likely to endure than complex interventions.
The government’s solution to all these problems is to replace a deregulated market with a command-and-control one. It has stated how much it expects each renewable technology to generate by 2020, as well as how many nuclear plants it wants, and where. It will create long-term contracts for supplying low-carbon energy, setting a minimum price for solar power, another for offshore wind and so on (ball mill). The hope is that this will give energy firms the assurances needed to invest in new forms of generation. The certainty is that David Cameron’s Conservative-led coalition government is rowing hard against the free market. This is odd, and wrong.
Rather than interfere with and second-guess the market, the government should strengthen it. For investors to view the electricity-generating business with enthusiasm, they must be able to find out what the real price of electricity is. At present that is impossible, because most electricity in Britain is “traded” between the generation and supply arms of the same firms. The government should have threatened to split them up (a gambit that worked wonders with British Telecom) and forced trading onto open exchanges, as happens in Germany.