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31 October 2013

It took John Major to say it: the government is badly wrong on energy

While rejecting Ed Miliband's proposed price freeze as "a con", David Cameron has offered no substantial alternative.

By New Statesman

After the Fukushima disaster in 2011, the world retreated from nuclear power. Not just Japan but Germany, Italy, Switzerland and Spain all announced that their plants would be phased out. By announcing the construction of a new reactor at Hinkley in Somerset, the first to be built in Europe since Fukushima, the British government has defied this trend and rightly so. Faced with the threat of irreversible climate change, the UK cannot afford to reject a low carbon energy source that at present accounts for 19 per cent of all electricity production.

But if the government is right on this essential question, it has mishandled the Hinkley deal in every other respect. Having promised in the coalition agreement that there would be no “public subsidy” for new reactors, it has guaranteed EDF Energy (85 per cent owned by the French state) and the China General Nuclear Power Group an inflation-indexed price of £92.50 per megawatt hour, nearly twice the current market rate for wholesale energy, for a period of 35 years.

It is not the principle of subsidy that is objectionable; given the risks involved in constructing a new plant, it is doubtful that any could be built without some government guarantee. Rather it is the decision to rely on foreign over national investment and to do so on such generous terms. As in the case of the private finance initiative (PFI), a similar off-balance-sheet ruse, the government has devised a policy under which profit is privatised and risk socialised. Should wholesale prices rise by less than expected (as many analysts predict), it is British voters who will pay in the form of higher bills or higher taxes, while their French and Chinese counterparts benefit.

The new plant could almost certainly be constructed at a lower cost by the UK government but given the coalition’s decision to prioritise deficit reduction above all else this option was never seriously considered. There is rich irony in the Conservative ministers, who have denounced Labour’s proposed two-year freeze in energy prices as “Marxism”, guaranteeing socialist France and communist China prices for 35 years.

The coalition’s hope is that a new generation of nuclear plants will reduce bills in future decades, but as Keynes sardonically observed, “In the long run we are all dead.” Ministers’ immediate priority should be providing relief to the ever greater number who are forced to choose between heating their home and feeding their family. While rejecting Ed Miliband’s proposed price freeze as “a con”, David Cameron has offered no substantial alternative. It took John Major to point out what should be uncontroversial among Conservatives: that the energy market is not working in the public interest and that the excess profits of the “big six” should be curbed.

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The former prime minister’s preferred response is a windfall tax, rather than a price freeze, but both reflect the need for companies to bear a greater burden. Mr Major said: “The private sector is something the Conservative Party supports, but when the private sector goes wrong, or behaves badly, I think it’s entirely right to make changes and put it right. Governments should exist to protect people, not institutions.” That it is impossible to imagine Mr Cameron or George Osborne using such language says much about the party’s rightward drift since Mr Major held office.

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When Labour proposed a windfall tax on the privatised utilities before the 1997 general election (opposed by Mr Major at the time), the energy companies responded by warning that they would have to cut investment, a threat that proved empty. Today, the same argument is made against a price freeze. The Conservatives’ error has been to take such rhetoric at face value and to reject a temporary freeze as an illegitimate imposition on a market that is not free but rigged. Yet as interventions from Help to Buy to subsidies for nuclear power demonstrate, for Mr Cameron’s party, all markets are free but some are freer than others. The Tories should not assume that the public will tolerate this inconsistency for long.