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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MPs Seema Malhotra and Stephen Kinnock lay out a 6-point plan for Brexit:

Time for Theresa May to lay out her priorities and explain exactly what “Brexit means Brexit” really means.

Angela Merkel has called on Theresa May to “take her time” and “take a moment to identify Britain’s interests” before invoking Article 50. We know that is code for the “clock is ticking” and also that we hardly have any idea what the Prime Minister means by “Brexit means Brexit.”

We have no time to lose to seek to safeguard what is best in from our membership of the European Union. We also need to face some uncomfortable truths.

Yes, as remain campaigners we were incredibly disappointed by the result. However we also recognise the need to move forward with the strongest possible team to negotiate the best deal for Britain and maintain positive relationships with our nearest neighbours and allies. 
 
The first step will be to define what is meant by 'the best possible deal'. This needs to be a settlement that balances the economic imperative of access to the single market and access to skills with the political imperative to respond to the level of public opinion to reduce immigration from the EU. A significant proportion of people who voted Leave on 23 June did so due to concerns about immigration. We must now acknowledge the need to review and reform. 

We know that the single market is founded upon the so-called "four freedoms", namely the free movement of goods, capital, services and people & labour. As things stand, membership of the single market is on an all-or-nothing basis. 

We believe a focus for negotiations should be reforms to how the how the single market works. This should address how the movement of people and labour across the EU can exist alongside options for greater controls on immigration for EU states. 

We believe that there is an appetite for such reforms amongst a number of EU governments, and that it is essential for keeping public confidence in how well the EU is working.

So what should Britain’s priorities be? There are six vital principles that the three Cabinet Brexit Ministers should support now:

1. The UK should remain in the single market, to the greatest possible extent.

This is essential for our future prosperity as a country. A large proportion of the £17 billion of foreign direct investment that comes into the UK every year is linked to our tariff-free access to a market of 500 million consumers. 

Rather than seeking to strike a "package deal" across all four freedoms, we should instead sequence our approach, starting with an EU-wide review of the freedom of movement of people and labour. This review should explore whether the current system provides the right balance between consistency and flexibility for member states. Indeed, for the UK this should also address the issue of better registration of EU nationals in line with other nations and enforcement of existing rules. 

If we can secure a new EU-wide system for the movement of people and labour, we should then seek to retain full access to the free movement of goods, capital and services. This is not just in our interests, but in the interests of the EU. For other nation states to play hardball with Britain after we have grappled first with the complexity of the immigration debate would be to ignore rather than act early to address an issue that could eventually lead to the end of the EU as we know it.

2. In order to retain access to the single market we believe that it will be necessary to make a contribution to the EU budget.

Norway, not an EU member but with a high degree of access to the single market, makes approximately the same per capita contribution to the EU budget as the UK currently does. We must be realistic in our approach to this issue, and we insist that those who campaigned for Leave must now level with the British people. They must accept that if the British government wishes to retain access to the single market then it must make a contribution to the EU budget.

3. The UK should establish an immigration policy which is seen as fair, demonstrates that we remain a country that is open for business, and at the same time preventing unscrupulous firms from undercutting British workers by importing cheap foreign labour.  

We also need urgent confirmation that EU nationals who were settled here before the referendum as a minimum are guaranteed the right to remain, and that the same reassurance is urgently sought for Britons living in mainland Europe. The status of foreign students from the EU at our universities must be also be clarified and a strong message sent that they are welcomed and valued. 

4. The UK should protect its financial services industry, including passporting rights, vital to our national prosperity, while ensuring that the high standards of transparency and accountability agreed at an EU level are adhered to, alongside tough new rules against tax evasion and avoidance. In addition, our relationship with the European Investment Bank should continue. Industry should have the confidence that it is business as usual.

5. The UK should continue to shadow the EU’s employment legislation. People were promised that workers’ rights would be protected in a post-Brexit Britain. We need to make sure that we do not have weaker employment legislation than the rest of Europe.

6. The UK should continue to shadow the EU’s environmental legislation.

As with workers’ rights, we were promised that this too would be protected post-Brexit.  We must make sure we do not have weaker legislation on protecting the environment and combatting climate change. We must not become the weak link in Europe.

Finally, it is vital that the voice of Parliament and is heard, loud and clear. In a letter to the Prime Minister we called for new joint structures – a Special Parliamentary Committee - involving both Houses to be set up by October alongside the establishment of the new Brexit unit. There must be a clear role for opposition parties. It will be equally important to ensure that both Remain and Leave voices are represented and with clearly agreed advisory and scrutiny roles for parliament. Representation should be in the public domain, as with Select Committees.

However, it is also clear there will be a need for confidentiality, particularly when sensitive negotiating positions are being examined by the committee. 

We call for the establishment of a special vehicle – a Conference or National Convention to facilitate broader engagement of Parliament with MEPs, business organisations, the TUC, universities, elected Mayors, local government and devolved administrations. 

The UK’s exit from the EU has dominated the political and economic landscape since 23 June, and it will continue to do so for many years to come. It is essential that we enter into these negotiations with a clear plan. There can be no cutting of corners, and no half-baked proposals masquerading as "good old British pragmatism". 

The stakes are far too high for that.