The Price of Power: Reforming the Electricity Market
Chapter 1: Introduction
“In the last Parliament, we passed a law to encourage the private generation of electricity. In the next Parliament, we shall seek other means of increasing competition in, and attracting private capital into, the gas and electricity industries.” Conservative Party Manifesto, 1983
“We have brought full competition to the gas and electricity markets.” Labour Party Manifesto, 2001
“[The Government] has decided to intervene in the market in various ways. Has that changed the idea? Is it less of a competitive market than it was 15 years ago? Undoubtedly, yes.” Dermot Nolan, chief executive of Ofgem, November 2016
1.In 1982, after decades of state planning in British energy markets, the Conservative government sounded a retreat. It would be left to market forces to dictate prices and investment in electricity generation. The role of government would be confined to setting the framework within which a competitive market could operate.1 This liberalised vision of energy markets had achieved wide acceptance by the end of the 1990s; it was embraced by the Labour government and formed the basis for the European Union’s internal energy market.2
2.But just over a decade later, a succession of policy interventions has led to the creation of a complex system of subsidies and government contracts at the expense of competition.3 Nobody has built a power station in Britain without some form of government guarantee since 2012.4 The current level of intervention cuts across the competitive market.
3.How and why has this happened and what are the consequences for consumers? This report shows how poorly designed government interventions, in pursuit of the decarbonisation of electricity generation, have put unnecessary pressure on the electricity supply and left consumers paying too high a price (Chapter 3). We make recommendations to help the Government reintroduce competition in the market—putting downward pressure on prices—while at the same time ensuring supplies remain secure in a manner consistent with reducing carbon emissions (Chapter 4).
4.This report concentrates on the electricity market. Electricity represents around 20 per cent of the total energy market and it has been the main focus of public policy since the Second World War.5 The reduction in the use of petroleum and natural gas necessary to meet long-term carbon emissions targets is likely to lead to electricity becoming the main fuel used by energy consumers. We received some evidence on the challenges of decarbonising heating and transport but feel they warrant the attention of a full inquiry to do them justice. We may return to these areas in a future inquiry.
5.We also received evidence on energy efficiency, in particular the failure of the previous Government’s green deal initiative, energy infrastructure, the future of North Sea exploration and development and shale gas. These issues have all been the subject of recent reports and we do not cover them in this report.6
6.As stated in the call for evidence for the inquiry, the Committee did not seek evidence relating to the science of climate change and we take as a given that the UK will remain committed to reducing carbon emissions.
1 Nigel Lawson MP, The Market for Energy, speech to the British Institute of Energy Economics, Cambridge, June 1982 (reproduced in D Helm, J Kay and D Thompson, The Market for Energy (Oxford: Clarendon Press, 1989)
2 Q 3 (Professor Dieter Helm)
4 Q 73 (Peter Atherton)
5 Electricity accounted for 18 per cent of total fuel consumption by final consumers in 2015 (measured by million tonnes of oil equivalent). Petroleum made up 48 per cent and natural gas 29 per cent.
6 Committee of Public Accounts, Household energy efficiency measures (Eleventh Report, Session 2016–17, HC 125); House of Lords Science and Technology Committee, The Resilience of the Electricity System (1st Report, Session 2014–15, HL 121); Sir Ian Wood, UKCS Maximising Recovery Review, 24 February 2014: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/471452/UKCS_Maximising_Recovery_Review_FINAL_72pp_locked.pdf [accessed February 2017]; Economic Affairs Committee, The Economic Impact on UK Energy Policy of Shale Gas and Oil (3rd Report, Session 2013–14, HL 172)