Tuesday, 18 February 2014

Will Miliband's price freeze backfire?

Politicians feel driven to ride populist tigers, but the simplistic solutions that such adventures often involve lead nowhere at best - or worse. The same may be the case with Labour's apparently bold energy policy to freeze energy prices and reform the electricity market. Now I don't want to impugn on Ed Miliband's motives here - indeed his motives whilst Secretary of State for Climate Change (2008-2010) were as close as it gets for Government (not that close!) to the policies preferred in this blog. He pushed through the proposals for the small feed-in tariff, and contrary to what usually happens, rejected a lot of the blandishments of the Big Six who wanted to limit the scheme as much as possible. He also tried to reform the market rules to increase competition to help energy consumers. But, as has tended to happen to most if not all of the efforts to change the electricity markets since privatisation, the Big Six have always managed to use changes, or secure compromises, in the legislative proposals to buttress their position.

Now independent consultants (who work in the independent sector) are warning that Ed Miliband's proposed prize freeze, as popular as it may be, will do no good in practice, and may backfire especially for the independent suppliers that presumably this drive is supposed to benefit in the name of increasing competition. Put simply, the Big Six are in a better position to manage the situation. See

Labour's proposals to separate the energy supply and energy generation markets are good in theory. In theory this could help to give an incentive to electricity suppliers to help balance renewable energy suppliers by offering incentives to consumers to consume when there is a lot of wind and solar power and consume less fossil fuels at other times. Those incentives do not exist in a market where the suppliers, as at present, are run by the generators and so will want to supply more energy from their power stations rather than encourage consumers to consume less at certain times. But in practice, as in the past, when it comes to shaping the new rules, the Big Six will quite probably squeeze through 'concessions' to allow them to carry on promoting power station production in preference to balancing, or energy efficiency for that matter.

Indeed, Labour's proposals seem to reduce most things to what passes as populism for the elites - promoting neoliberal soundbites about how it is that lack of competition is the problem. But pure competition is an elusive property guarded jealously by economists and their squiggles in a fantasy world, and in the real world 'competition' is something that is dominated and defined by existing institutions of myriad sorts. The Big Six who know how their businesses work are able to use and get the rules that favour their interests and their notion of competition will favour them. They will intervene with the civil servants and politicians (who do not, as a rule, know the business very well, especially its arcane complexity) to ensure that any proposals are tempered so as to maintain their interests in one way or another.

So when it comes to solving problems that can be solved (as opposed to making gas supplies cheap, which is almost solely dependent on international factors), Labour's narrative relies on the usual notions of improving 'competition'. Its solution to the problem of independent generators not having more contracts is to make the electricity markets more transparent and 'competitive'. In other words, the end result will be to allow the Big companies to continue to use the rules to their advantage.

A truly simple solution would be for the Government to ensure that independent generators had access to feed-in tariffs, much on the same basis as the small feed-in tariff operates, or some model as has been proposed like the 'Green Power Auction Market' (GPAM) suggested last year. That means taking action that increases the institutional clout of the independents so that they get contracts as of right, not proposing more competition that ends up being hijacked in the interests of the establishment.

So what is the solution? Well of course legislation is important, but as the campaign about small feed-in tariffs in 2007-2008 demonstrated, it is bottom up action by the grass roots to get alternative energy schemes going that will force the politicians to support their interests. So what should we do? Well if you are a councillor, use what powers you can to make developers build to the highest standards according to the 'Code for Sustainable Homes', get your company/organisation to build houses according to the 'Passivhaus' standard, start a community renewable scheme, put a solar panel on your roof etc. The political power of green activists, when they get their act together and ally with nascent or actual existing new energy interests and environmental NGOs such as Friends of the Earth is potentially considerable; in practice rather stronger than the leverage of independent suppliers or generators on their own.

But for the moment we are stuck with populism, whether promises of price freezes to encourage the masses or pleas for more competition to satisfy the elites.

You can read Labour's policy here, which, sadly, offers little hope that the diversion of funds from renewables to nuclear under EMR will be changed.

1 comment:

  1. David,
    I agree with your post, and the trouble is deeper than lack of competition, but lies in the accounting. The scarcity of electricity, and thus its intrinsic value, can vary within minutes or seconds. So accounting has to be done concerning very short periods, perhaps as short as once every 10 seconds or so. Such metering and related settlement is feasible at wholesale, such as the electricity of a city, region, town or perhaps village. It is not feasible at a retail level, at least not without intrusion into households similar to that of GCHQ (and NSA) of our telephone calls, and vastly expense.
    The electricity distribution system is fundamentally shared - a communal resource. The attempt to divy it up so that competing corporations can account for "their" customers creates many perverse incentives that gets in the way of "renewable friendly" consumer behaviour. We need a governance structure that is more "community regarding", and so to move beyond the simplistic notion that competition is the only route to efficiency. We do not need yet more corporate monitoring of our daily lives.