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More must be done to restore competition to an inefficient system When the UK’s coalition government came into power in 2010 it faced many challenges. Not the least of these was the need to inject some purpose into Britain’s languishing energy policy. The previous Labour administration had allowed the UK’s power infrastructure to run down in the 13 years after 1997, dithering about setting a sensible framework for renewal while intervening selectively to stimulate investment in costly renewable energy. The incoming administration offered a more hard­headed strategy. It would bolster energy security by building the new capacity Labour had neglected to foster, while simultaneously decarbonising the economy. Nearly five years on, it is possible to judge the coalition’s progress, and the verdict is not kind. In spite of rising household bills, energy security has declined to the point where the energy regulator is now warning of a possible crisis, with the supply margin falling to between just 2 and 4 per cent next winter. As for the money thrown at decarbonisation — a contributor to those rising bills — progress has been minimal. On the government’s own figures, greenhouse gas emissions are down only fractionally – a fall mainly attributable to low economic growth. Coal consumption is up more than a fifth. True, the lights are unlikely to blink off in the near future. Under most scenarios Britain will muddle through, perhaps by placing some restrictions on industrial customers, albeit at a risk both to the recovery and to the prospect of further investment in more energy intensive businesses in the UK. But the bigger concern is the framework the government’s reforms have put in place. It is hard to see how Whitehall could avoid becoming more intimately involved in directing power investment, given the obligations Britain has entered into to reduce its emissions. Imposing a carbon floor price would, of course, be the cleanest way to achieve these aspirations, allowing the market to decide which new technologies to pursue. But this is hard without international agreement – given the opportunity for mobile users simply to switch their operations to places where the rules are less stringent. And such co-­ordination remains beyond reach. The next stage on Britain’s decarbonising journey anticipates heavy investment in renewables such as offshore wind, and in nuclear energy. To make private generators bow to public plans, Whitehall proposes to offer deals guaranteeing revenue for long periods to private investors without imposing significant incentives to cut their own costs in future. The new nuclear power station at Hinkley Point, for instance, will enjoy indexation from a start point well above current market prices for the next 35 years. Utilities will need to be given incentives to build the back­up capacity a market more dependent on intermittent renewables will require. A better course would see Britain loosen the environmental corset, while investing in science to deliver the sort of technologies that can decarbonise at reasonable cost. In this context, the Labour party’s promise to go the other way, delivering zero carbon electricity by 2030, shows it has not lost its taste for green posturing. Short of changes to Britain’s commitments, however, more must be done to restore competition to the system, not least by imposing performance incentives that would allow consumers to benefit as costs come down. The rules need to be rewritten in order to spur investment in the most efficient way. What is clear is that the coalition’s reforms require a thorough review before more commitments are entered into. When the next election is over, this must proceed without delay.

More must be done to restore competition to an inefficient system When the UK’s coalition government came into power in 2010 it faced many challenges. Not the least of these was the need to inject some purpose into Britain’s languishing energy policy. The previous Labour administration had allowed the UK’s power infrastructure to run down in the 13 years after 1997, dithering about setting a sensible framework for renewal while intervening selectively to stimulate investment in costly renewable energy. The incoming administration offered a more hard­headed strategy. It would bolster energy security by building the new capacity Labour had neglected to foster, while simultaneously decarbonising the economy. Nearly five years on, it is possible to judge the coalition’s progress, and the verdict is not kind. In spite of rising household bills, energy security has declined to the point where the energy regulator is now warning of a possible crisis, with the supply margin falling to between just 2 and 4 per cent next winter. As for the money thrown at decarbonisation — a contributor to those rising bills — progress has been minimal. On the government’s own figures, greenhouse gas emissions are down only fractionally – a fall mainly attributable to low economic growth. Coal consumption is up more than a fifth. True, the lights are unlikely to blink off in the near future. Under most scenarios Britain will muddle through, perhaps by placing some restrictions on industrial customers, albeit at a risk both to the recovery and to the prospect of further investment in more energy intensive businesses in the UK. But the bigger concern is the framework the government’s reforms have put in place. It is hard to see how Whitehall could avoid becoming more intimately involved in directing power investment, given the obligations Britain has entered into to reduce its emissions. Imposing a carbon floor price would, of course, be the cleanest way to achieve these aspirations, allowing the market to decide which new technologies to pursue. But this is hard without international agreement – given the opportunity for mobile users simply to switch their operations to places where the rules are less stringent. And such co-­ordination remains beyond reach. The next stage on Britain’s decarbonising journey anticipates heavy investment in renewables such as offshore wind, and in nuclear energy. To make private generators bow to public plans, Whitehall proposes to offer deals guaranteeing revenue for long periods to private investors without imposing significant incentives to cut their own costs in future. The new nuclear power station at Hinkley Point, for instance, will enjoy indexation from a start point well above current market prices for the next 35 years. Utilities will need to be given incentives to build the back­up capacity a market more dependent on intermittent renewables will require. A better course would see Britain loosen the environmental corset, while investing in science to deliver the sort of technologies that can decarbonise at reasonable cost. In this context, the Labour party’s promise to go the other way, delivering zero carbon electricity by 2030, shows it has not lost its taste for green posturing. Short of changes to Britain’s commitments, however, more must be done to restore competition to the system, not least by imposing performance incentives that would allow consumers to benefit as costs come down. The rules need to be rewritten in order to spur investment in the most efficient way. What is clear is that the coalition’s reforms require a thorough review before more commitments are entered into. When the next election is over, this must proceed without delay.