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Three visions for reforming the electricity market

Would you buy a used energy market from these people? PA

Three visions for reforming the electricity market

Would you buy a used energy market from these people? PA

The impending third reading of the Energy Bill in the UK’s House of Lords marks the final stage of a long and intensive review process for legislation designed to overhaul the UK’s energy market. The question is whether the Energy Act, once enacted, can deliver the necessary changes that will make the UK’s energy industry fit for the 21st century.

The bill’s passage through parliament has been marked by heated debates over energy prices, rising fuel poverty and falling industry competitiveness, and warnings around future energy security and environmental sustainability. It’s reasonable to wonder whether the government – any government – can realistically plan for and steer an industry that must concern itself with so many different and often opposing needs.

At the heart of it, the fundamental question is what sort of industry arrangement is best to meet this multitude of consumer, industry and government demands? In my view, there are essentially three main options (perhaps with combinations of them possible).

The first option is re-nationalisation, a reversal of more than 20 years of privatisation and liberalisation policies which, despite people’s feeling of being ripped off, have resulted in Britons enjoying among the lowest energy prices in Europe. Regardless there are many who would advocate such a radical step, if only to increase the sense that people would regain some control over the industry. Even besides the major legal hurdles, it’s highly doubtful that these days the government has deep enough pockets to pay off the energy firms’ shareholders.

A second option would be to continue with the existing market arrangements, where a limited number of major (mostly foreign) companies run the market – and in many ways dictate the rules. This option favours large, centralised solutions involving power plants and transmission lines, and would continue to be subject to a high degree of government interference. Due to the perceived lack of transparency and accountability it would also be likely to further entrench the sense of an adversarial culture between consumers, providers, and regulators.

The third option might be to follow through with the process of liberalisation and create a genuinely open electricity market. This would be designed and served by a much greater number of “prosumers” – companies, and individuals, that are both electricity generators and consumers. Examples include homeowners producing electricity via solar photovoltaic panels on their roofs, a brewery using renewable waste products to generate gas, or a town or city buying back its distribution network. Many industry commentators would argue that to solve the complexities and challenges involved in producing and consuming energy in the future we will need much more proactive engagement from the public and from the industry.

Specifically, what’s needed is a greater sense of ownership of and responsibility for our energy; where it comes from, its significance to our livelihoods, and the economic and environmental costs involved. Such an arrangement should encourage many more homeowners, businesses, and local communities to benefit from an fundamentally open electricity market by raising their awareness of the various technological options available, but also allow them to share in the gains.

The Energy Bill’s Electricity Market Reform (EMR) creates incentives in the form of guaranteed electricity prices for various means of generating electricity. These are the so-called “contracts-for-difference”, bargains most recently seen being hammered out between the government and EDF over the price for electricity from Hinkley Point C nuclear power station. The question is whether forward-looking financing mechanisms like these are sufficient to attract the new energy entrepreneurs and “prosumers” to the market. Behavioural science tells us that, especially with incentives whose pay-off lies in the distant future, people are often unwilling to make the investment now for a payback later.

Perhaps a different set of financial incentives are needed, ones that would make investments in energy infrastructure more immediately attractive. How about tax rebates for all companies and stamp duty offsets for home owners that invest in decentralised energy generation such as rooftop solar and wind, or in energy efficiency measures? The aim should be to make the energy market more democratic by increasing the ways in which people choose and participate in, finance, and benefit from the decentralised solutions to the energy market’s problems, rather than leaving this to government and the Big Six.

The government is right to seek to reform the energy market; it remains to be seen who will be the main beneficiaries.