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

Macroeconomist, bond trader and author of Money

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

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How can London’s mothers escape the poverty trap?

Despite its booming jobs market, London’s poverty rate is high. What can be done about it?

Why are mothers in London less likely to work than their counterparts across the country, and how can we ensure that having more parents in jobs brings the capital’s high child poverty rates down?

The answers to these two questions, examined in a new CPAG report on parental employment in the capital, may become increasingly nationally significant as policymakers look to ensure jobs growth doesn’t stall and that a job becomes a more much reliable route out of poverty than it is currently – 64 per cent of poor children live in working families.

The choice any parent makes when balancing work and family life is deeply personal.  It’s a choice driven by a wide range of factors but principally by what parents, with their unique viewpoint, regard as best for their families. The man in Whitehall doesn’t know best.

But the personal is also political. Every one of these personal choices is shaped, limited or encouraged by an external context.   Are there suitable jobs out there? Is there childcare available that is affordable and will work for their child(ren)? And what will be the financial gains from working?

In London, 40 per cent of mothers in couples are not working. In the rest of the country, the figure is much lower – 27 per cent. While employment rates amongst lone parents in London have significantly increased in recent years, the proportion of mothers in couples out of work remains stuck at about 12 percentage points higher than the rest of the UK.

The benefits system has played a part in increasing London’s lone parent employment rate. More and more lone parents are expected to seek work. In 2008, there was no obligation on single parents to start looking for work until their youngest child turned 16. Now they need to start looking when their youngest is five (the Welfare Reform and Work Bill would reduce this down to three). But the more stringent “conditionality” regime, while significant, doesn’t wholly explain the higher employment rate. For example, we know more lone parents with much younger children have also moved into jobs.  It also raises the question of what sacrifices families have had to make to meet the new conditionality.  

Mothers in couples in London, who are not mandated to work, have not entered work to the same level as lone parents. So, what is it about the context in London that makes it less likely for mothers in couples to work? Here are four reasons highlighted in our report for policymakers to consider:

1. The higher cost of working in London is likely to play a significant role in this. London parents are much less likely to be able to call on informal (cheaper or free) childcare from family and friends than other parts in the country: only one in nine children in London receives informal childcare compared to an average of one in three for England. And London childcare costs for under 5s dwarf those in the rest of the country, so for many parents support available through tax credits is inadequate.

2. Add to this high housing and transport costs, and parents are left facing a toxic combination of high costs that can mean they see less financial rewards from their work than parents in other parts of the country.

3. Effective employment support can enable parents to enter work, particularly those who might have taken a break from employment while raising children. But whilst workless lone parents and workless couples are be able to access statutory employment support, if you have a working partner, but don’t work yourself, or if you are working on a low wage and want to progress, there is no statutory support available.

4. The nature of the jobs market in London may also be locking mums out. The number of part time jobs in the capital is increasing, but these jobs don’t attract the same London premium as full time work.  That may be partly why London mums who work are more likely to work full time than working mums in other parts of the country. But this leaves London families facing even higher childcare costs.

Parental employment is a thorny issue. Parenting is a 24-hour job in itself which must be balanced with any additional employment and parents’ individual choices should be at the forefront of this debate. Policy must focus on creating the context that enables parents to make positive choices about employment. That means being able to access the right support to help with looking for work, creating a jobs market that works for families, and childcare options that support child development and enable parents to see financial gains from working.

When it comes to helping parents move into jobs they can raise a family on, getting it right for London, may also go a long way to getting it right for the rest of the country.