What if the UK runs out of power?

By Benedict De Meulemeester

By Benedict De Meulemeester on 10/08/2009

When I started working in energy procurement consultancy ten years ago, the UK was always cited as an example of how energy markets should be organized. Anglo-Saxon liberalism had inspired policymakers on the other side of the Channel to create open energy markets much faster than their continental colleagues. It is therefore startling for me to find an article in this week’s Economist with the title ‘Britain’s energy crisis: how long till the lights go out?’ (read here). Apparently, liberalization English-style, shouldn’t be considered as being so exemplary after all.

It is indeed true that the UK is heading for trouble as for its energy supply. Power plants are not built quickly enough to deal with rising demand due to:

-        The nuclear path being blocked for a long time due to a political decision for nuclear phase-out,

-        Investment in coal-fired power plants also difficult due to the ambitious carbon dioxide reduction targets,

-        slow development in renewable energy due to planning restrictions and lack of coherent policy.

This leaves only investment in gas-fired power plants open as a possibility. And we do observe that the proportion of gas-fired in the UK’s power production is growing rapidly. The trouble is that this ‘dash for gas’ coincides with a development where the UK is more and more dependent on imports of gas as its own production is in decline. The outlook for the UK power market is grim: under-diversified, overly dependent on imports of electricity and fuel (natural gas). And strangely enough, even if the rest of Europe is actively building new power lines to other countries, the UK is also slow to build import capacity. This brings the prospect of the lights going out uncomfortably near.

I fear that many anti-liberalization forces inside Europe will use the UK example as an argument in favor of less energy market liberalization. The events in the UK power market will be to many just another sign that the Anglo-Saxon model doesn’t work. And these anti-liberal voices have already started to sound louder due to the financial crisis.

We should indeed reflect upon the way we organize energy market if we observe what happens in the UK. It does prove that the neo-liberal adagio that markets should function wholly independent of the policy-making level is not true. The trouble with the UK power market is due to a lack of interest in it by policy-makers. UK politicians have refused to face the problems and to take the policy decisions that were necessary to deal with it. The renewable energy policy is a clear example of this. Tony Blair and Gordon Brown have always sounded very ambitious when it came to greenery. But we simply observe that development of e.g. wind power is dwarfed when compared to countries such as Germany and Spain.

If one thing is made clear from the experience in the power market across the Channel, it is that an energy market needs good policy decisions to function like it should. The long term development of the power supply portfolio is one of those domains where politicians need to do the necessary things. The market in itself cannot deal with that.

Does this mean that we should exchange our Anglo-Saxon economic textbooks for French ones? Should we go in the direction of ‘le dirigisme’ like we observe in the French energy market where the government is involved at every level of energy market decision making? I don’t think so. Too much policy-making can be harmful as well. Just think about EU agricultural policy if you need to get convinced of that. And liberalization of energy markets is not necessarily a failure, just think about the Nordpool market in the Scandinavian countries. The trouble in the UK’s power market shows us that we should rethink the roles of private initiative and collective decision-making, of economics and politics, in energy markets. Just like we should do it for our financial markets.

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