Conservative governments in the UK have usually been regarded as pro-private sector, and Labour governments pro-public sector.
However, the new energy policy statement from the Conservative/Lib Dem coalition seems to turn that assumption on its head. It implies much greater government intervention than we had during the prior 13 years under Labour.
Devising sensible energy policies for the UK is a difficult task. We have gone from being major producers of North Sea oil & gas to net importers. Many existing power stations are ageing and need to be replaced in the near future, at an estimated cost of £110billion by 2020, but it is far from clear how that investment can be financed.
The UK Government favours new nuclear stations but the SNP Government in Scotland opposes them. Both governments have set very ambitious renewable energy targets but without giving sufficient attention to how they can actually be achieved.
A few weeks ago, UK Energy Secretary Chris Huhne issued an energy policy statement which is intended to be the basis of a White Paper in March, and new legislation in 2012. It proposes much greater state intervention including guaranteed long-term prices for low carbon electricity generators covering both nuclear and renewables, and subsidised feed-in tariffs.
The UK energy industry was transformed in the 1980s by the then Tory government under Margaret Thatcher. Most notably there was a programme of privatising previously publicly-owned bodies, particularly in the electricity industry, with the emergence of new private sector companies such as Scottish and Southern Energy (SSE) and ScottishPower.
This is not an appropriate place to discuss in detail the impact of those policies but I believe it is fair to conclude that they were generally successful. They have been used as a model for other countries in Europe.
For example, I have worked for the past few years in Sarajevo, in Bosnia and Herzegovina, where virtually all energy companies remain in public ownership. There is an ongoing debate about the benefits of privatisation and the success of the British experience is frequently cited. I have also found that to be the case in other countries, including large energy consumers such as France and Italy.
However, cracks have increasingly emerged in UK energy policies, as recognised by the coalition. It is not obvious what are the causes of the deficiencies but in my opinion the main one is the recent implementation of the policies rather than the latter themselves.
The main one is the lack of investment in new power stations. Others include the failure to slow the decline in oil and gas production from the UK Continental Shelf.
A basic tenet of the privatisation policies was that the free market would lead to a much better allocation of energy and financial resources, because private sector companies would make better decisions than their public sector predecessors. For 20 years that was probably true but in the past decade there has been very little investment in new capacity. Why?
It has been generally accepted that some markets including energy require government regulation because they are not completely free or 100% competitive. The main reason for that is economies of scale which result in the creation of monopolies or oligopolies rather than competitive markets. There is a risk that such companies may not necessarily act in the public interest and therefore some of their activities need to be regulated.
The UK government therefore set up the Office of Gas and Electricity Markets (Ofgem) as the regulator. It seems to have worked on the whole, but with the notable exception of failing to ensure that the companies invested in new generating capacity to replace ageing power stations.
Other regulators in the UK have also failed in their duties, notably the Financial Services Authority (FSA), which did little or nothing to try to prevent recent financial crises.
The coalition has therefore been faced with the dilemma of how to overcome the problem of lack of investment and decided that much more public sector intervention was required. It is surprising that the previous Labour government did not reach a similar conclusion.
A key element of the proposed new energy policy is to promise companies guaranteed rates of return on investments in new power stations, notably nuclear. That is understandable given the capital expenditure and long lead times involved.
Another critical factor has been the volatility in energy prices, including gas and coal. I have often said in this column that for investment decisions stability in oil prices is almost as important as the level, and that is also true for the electricity sector.
The UK Government’s latest proposals concentrate on subsidies for low carbon energy. An alternative would be taxes on high carbon energy such as oil and coal. I don’t believe such proposals represent the best combination but they certainly mark a radical change in the UK’s free market energy policies. I wonder what Thatcher and her one time chancellor of the exchequer, Nigel Lawson, think of them?
Tony Mackay is MD of economists Mackay Consultants