|POLICY TRAIN WRECK|
Tuesday, April 25, 2017
PRICE CAPS. HYPOCRISY GOES INTO OVERDRIVE, BUT ARE WE WITNESSING THE DEATH OF NEO-LIBERAL PRINCIPLES FOR THE ENERGY SECTOR?
As we head at increasing speed for the policy train wreck of the forthcoming Brexit negotiations, the British political class (and MPs by an overwhelming majority) has chosen to divert our attention into one of the most pointless general elections of all time. This will inter alia call a temporary halt to the searching examination of false promises and expectations, and simple untruths, that Hillary Benn’s House of Commons Select Committee on Leaving the European Union has been conducting. Readers not looking for the usual energy policy content of this blog may wish to read no further and refer instead to the Committee’s recent reports. These tend to be understated, but the material is there. In due course we will no doubt learn more about the effectiveness of EU exit in curbing immigration, boosts to our national income, the wonderful new trade deals on offer from Donald Trump, and much, much more.
However in the meantime the campaign will provide a useful opportunity for our leaders to hide from reality. Nevertheless connoisseurs of duplicity, smoke and mirrors, and hypocrisy, if not satiated by other aspects of the Brexit debate, can still find some rich material in campaign discussions on the subject of energy prices. The subject of energy price caps has come to the fore, just as it did before the 2015 election, with Ed Miliband’s promotion of the idea.
2015. RED ED'S POLITICS OF THE BANANA REPUBLIC. … like the pledge to cap energy prices, [these policies] … merely serve to stoke up the politics of division. [Daily Mail]. “And despite the criticism of many experts, he remains committed to the principle of using State power to cap energy prices, with bills frozen by law until 2017, which strikes me as economically illiterate.” crowed another Mail columnist. BACK TO THE BAD OLD DAYS, the Daily Mail front page had screamed earlier in September 2013 on the same price cap issue. For the Spectator it had been MILIBAND'S LA-LA LURCH TO THE LEFT.
2017. But when the Mail reported earlier this month on Tory plans to take action on bills in the face of the latest rise by one of the big six energy companies, such statist intervention had become CRACKDOWN ON ENERGY RIP-OFFS. The Telegraph said prices would go up before Miliband’s freeze, while the Times and the Sun warned the “lurch to the left” risked blackouts. The Times’s editorial described his plan as “flawed in practically every detail”. [But] on Sunday, the Sunday Times welcomed May’s price cap as an “attempt to capture the political centre ground”. [Guardian]
The ironies in the contradictory treatment of the same policy when promoted by different factions are amusing. But actually there is a deeper significance to this volte face from the party of market fundamentalists.
As it happens I regard the use of price caps as misguided under most circumstances, now putting myself at odds with both Labour and Conservative. Obvious reasons are the risk that interventions confined to price will reduce supply and deter investment, and that it is better to address the disease (market failure) rather than the symptom. Nor do I entirely buy the view that the energy companies are making excess profits (see an earlier posting). But the endorsement by the Conservative party of such a quintessentially statist, interventionist approach signals something more than simple electoral opportunism. It arguably represents the end of the road for the pretences of market liberalisation. This is certainly so in the UK, arguably the pioneer of deregulatory principles and their application.
Network costs, which can account for a third or more of a domestic consumer’s bill, have always been heavily regulated, even after privatisation in 1990. Generation investment is now almost entirely dictated by government, either directly through support for nuclear or renewables, or more indirectly through centrally controlled capacity auctions. The remaining element of the electricity supply chain, retail supply, has always been at best pseudo competitive, but that too is now being taken under the umbrella of government. What all this amounts to is the complete capitulation of the neo-liberal approach, at least in the energy sector.
It is surely time to recognise that this is a sector beset by market failure and that we need, not a series of ad hoc sticking plasters but a complete re-think of how we want the sector to operate and how we can better structure it to use the real dynamics that can come from competitive markets in driving efficiency and innovation. There is no point in pretending that we are still operating a laissez-faire competitive system, or that government can remove itself from the multiple policy choices and commitments that the sector, and particularly a low carbon power sector, will require.
There are further ironies and further opportunities for amusing speculation. The UK is not alone in wrestling with the paradoxes of the flawed neo-liberal paradigm. My last posting discussed a significant issue arising in a German and EU context. The EU followed the UK up the hill of unbundling and market solutions, but at least 15-20 years behind. The dawning realisation in the UK of the need to reverse direction and head downhill will shortly see it meeting an EU still struggling towards the summit.
But will this be an element in Brexit or future trade negotiations? And if we struggle to get back into the EU in (say) 2025 will be obliged to make further reverse policy changes to meet the EU energy sector and competition and state aid rules at that time. Or will the EU by then also have learned something from our experience as well as their own?
 This is after all the party of the ayatollahs of free market fundamentalism such as Redwood, Lawson, Lilley et al.