healthier, happier and richer

This month, the UK’s energy regulator, the Office of Gas and Electricity markets (Ofgem), has published Project Discovery. This grandiose title accurately reflects the fact that Ofgem has finally ‘discovered’ that its previous approach - leaving as much as possible to the market – has not worked and will not enable the UK to meet the challenges of climate change and energy security, while also protecting consumers.

The document begins by stating that:

“Over the two decades since privatisation and liberalisation, the electricity and gas markets in Great Britain have delivered secure supplies and substantial investment.”

This is true, though it is notable that Ofgem does not mention consumers. In the past, keeping tariffs as low as possible has been seen as the main attraction of markets. The market and Ofgem have largely failed in this respect.

The report does go on to state that:

“… significant action will be called for to deliver both security of supply and environmental objectives at affordable prices longer term.”

So consumers are not entirely forgotten. “Significant action” is not itself a revolutionary phrase but, coming from a regulator after two decades of deregulation, it is certainly a change, and welcome. The free market would deliver only more UK coal and gas power stations, without any CCS, so would make climate protection impossible.

Ofgem sets out five options for reform, from the least interventionist Targeted Reforms (though the report stresses that even this option would require “significant changes”) to a radical Central Energy Buyer option:

“… to deliver prescribed outcomes for security of supply and decarbonisation by co-ordinating future investment through a single entity.”

This is a consultation document, so Ofgem does not say which of the five options it favours. However, it does say that only the two most radical (Central Energy Buyer plus Capacity Tenders, which would “target prescribed outcomes for security of supply and decarbonisation by specifying the generation mix and tendering for capacity”) would have a good chance of delivering the necessary investment, which it estimates to be £200 billion.

The consultation runs until the end of March. Then, while Ofgem is considering the responses, there is a General Election. A future Conservative government might change Ofgem’s role. However, the Conservatives accept the need for government intervention so, whatever the election result, there will be some form of energy regulation and it will be stronger than it has been for the last 20 years in the UK.

Ofgem says that the more interventionist options carry the risk that innovation will be reduced. This is a fair warning. The nationalised monopoly in the UK was certainly not good at innovation. The market and competition have delivered more innovation, though not enough. Therefore, an energy market can be good, but must be properly regulated. However, the idea of a free market in energy is, in the UK at least, now dead.