With or without Ed Miliband’s energy price freeze, the lights could soon start going out

The recent summary of the United Nations report on climate change, published on 27 September, only re-emphasised the urgency of the world taking action on emissions.

Ed Miliband’s pledge to freeze gas and electricity prices was hailed by his supporters as a masterstroke that cuts to the heart of the most important issue in post-crisis Britain: stagnant household incomes in the face of rapidly rising prices. His opponents called it a lurch to the far left that revives a brand of economic interventionism not seen since the 1970s. With any luck, it will at least encourage politicians of all parties to take a closer look at Britain’s overall energy policy.
 
In the 1950s and 1960s, Britain was in the midst of a postwar economic boom. The economy grew at 3 per cent a year on average and electricity demand at more than double that rate. It was the heyday of technocratic planning and no serious person believed that such rapid growth in demand could possibly be met by the uncoordinated private sector. By the 1970s, therefore, the supply of energy in Britain was controlled directly by the state from top to bottom. The government planned investment, provided finance and set prices; its plan was implemented by state-owned monopoly utilities.
 
At the beginning of the 1980s, however, this conventional wisdom regarding the optimal way of organising the energy industry underwent a big change. The primary reason was the general shift in economic ideology. In 1978, one of the leading British proponents of Austrian economics, Stephen C Littlechild, published a pamphlet, The Fallacy of the Mixed Economy, which became the classic statement of the economic case for privatisation and market liberalisation.
 
A planned economy, Littlechild warned, assumes extraordinary powers on the part of the planners. For planning or the planned part of a mixed economy to be efficient, the planners would have to know what people want, what technologies are available to meet their demands and where the resources are to deploy them. In reality, it is difficult for planners to discover the second and third of these and logically impossible to know the first.
 
Fortunately, he explained, society has devised an ingenious solution to this canonical informational problem in the form of the market: a magic machine for discovering consumers’ demands and the most efficient way of meeting them, in which no individual needs to know much at all.
 
A market economy might be organisationally more messy – in other words, requiring many competing firms instead of just one – but in terms of its informational requirements, it would be infinitely simpler (and therefore more efficient) than the existing planned system.
 
There were changes afoot in the UK economy that made the energy sector especially fertile ground for this new philosophy. The golden age of growth was over and the economy was busily moving from one based on energy-intensive manufacturing to the dominance of the service sector we know today. As a result, rapid growth in demand was no longer the problem. In 1970, it was predicted that Britain would require 100GW of generating capacity in 1995. In the event, only a little over half of that was needed.
 
Instead, the main challenge was how to improve the efficiency of the existing system. So, in energy more than almost any other sector, the trade-off from moving to a market system seemed to promise extraordinary economic gains.
 
The increase in organisational complexity as the nationalised behemoths were dismantled into their constituent parts and new institutions were created to regulate and operate the new energy markets would offset the far greater efficiency of resourcing, operations and investment guided by the decentralised decisions of market participants. It all took a while, but in 1998 the last vestiges of the old monopoly utilities were abolished with the introduction of competition in the retail supply of electricity and gas.
 
However, because of global warming and the new requirements of the post-Kyoto world, mitigating carbon-dioxide emissions was fast becoming the dominant challenge. As the decline of the UK’s indigenous natural gas fields came into prospect, ensuring security of supply and managing the energy sector’s impact on the balance of payments also became important concerns.
 
There was no reason in theory why the liberalised market alone was going to achieve these objectives automatically – and no evidence in practice that it would. It seemed that planning by the state would be required after all.
 
Yet successive Labour governments and the current coalition opted instead for an incremental approach: a persistent accumulation of directives, rules and subsidy schemes intended to cure the liberalised markets’ intrinsic indifference to decarbonisation and security of supply, all programmed and overseen by a growing army of regulatory bodies, quangos and advisory institutions.
 
So we have ended up with the worst result from both worlds: a Byzantine industrial structure theoretically co-ordinated by the market mechanism, but one that nevertheless requires omniscient policymakers to mastermind everything it does.
 
This situation is not sustainable. With or without a price freeze, we face the distinct possibility of a capacity shortage – that’s “the lights going out” to you or me – by the middle of this decade; and the recent summary of the United Nations report on climate change, published on 27 September, only reemphasised the urgency of the world taking action on emissions.
 
Do our politicians still believe in the model of a liberalised energy sector? If they do, then policy and regulation need to be simplified drastically. If they do not, they might as well give up and return to old-school state direction. An energy policy marooned in noman’s- land is not an option.
 
Felix Martin is the author of “Money: the Unauthorised Biography” (Bodley Head, £20). His column appears fortnightly
We are facing the distinct possibility of a capacity shortage, or "the lights going out". Image: Getty

Felix Martin is a macroeconomist, bond trader and the author of Money: the Unauthorised Biography

This article first appeared in the 07 October 2013 issue of the New Statesman, The last days of Nelson Mandela

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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.