Britain’s energy market is so dysfunctional that to even call it a market at all is something of a misnomer. It is so distorted by state intervention that there is very little left of it that could be described as ‘free’. Whereas Nigel Lawson envisioned an energy market beyond the remit of government, Ed Miliband sees it as a core lever, if not an outright possession, for the tentacles of state.
The blame for this malaise does not rest entirely at the feet of the Energy Secretary, however – many of our current predicaments trace their origins back to the previous Conservative government. Only the most true blue Tory supporter can overlook the fact that it was under Theresa May that a direct price control was first introduced – the energy price cap.
The path that has led us here is a clear example of the road to hell being paved with good intentions. Government intervention was seen as necessary to kickstart the introduction of renewables into the system, bound in law by the Climate Change Act in 2008. The Renewables Obligation (RO) and Feed-in-Tariff (FiT) schemes were introduced to fund massive expansions of renewable capacity – whereas the UK had next to no solar in 2011, it now has 21 gigawatts (GW) of solar capacity nationwide.
But intervention tends to beget more intervention, as unintended consequences arise and events blindside governments. The RO was closed off to new entrants in 2017 as its financial sustainability was increasingly doubtful, replaced by the new Contracts for Difference (CfD) scheme. The FiT scheme ended in 2019. And then there is the energy price cap. Created in 2017 to protect consumers from being unwittingly gouged by their suppliers switching them to variable tariffs, the price cap then became a blanket price for the whole market after Russia’s invasion of Ukraine – removing even a perfunctory veneer of competition between firms. Even today, the retail market remains highly concentrated: 91% of it is made up of six firms (nearly 20 percentage points higher than 2020), while the number of total suppliers has collapsed from 49 pre-crisis to just 18 today.
Britain now has some of the highest energy prices in the world. Compared to our major European neighbours, British industries and British households are paying bills that are 90% and 20% higher on average, respectively. The average household energy bill now costs £963 a year. A third of that (£324) is due to wholesale costs, which Ed Miliband would gleefully point out is due to our dependence on gas, which sets wholesale prices 97% of the time.
Some lay the blame for this on the privatisation of the energy market back in the 1980s and the dash for gas in the 1990s. Labour agree, and have set up Great British Energy (GBE) to increase public ownership of the country’s energy assets, secure in the knowledge that 62% of the public backed the idea at the last election. GBE will also have its role to play in Ed Miliband’s Clean Power 2030 passion project, which aims to expand renewables capacity further and faster, while squeezing out gas.
That might sound nice, but as a new report from the Centre for Policy Studies points out, the schemes are deeply flawed. Given that they are not energy-dense forms of generation (compared to gas and especially nuclear power), a lot of solar and wind installations will need to be built. And they will all need to be hooked up to the grid, necessitating a corresponding expansion of our transmission and distribution networks – which don’t come cheap. The CfD scheme, which replaced the unsustainable RO scheme, recently funded 14.7 GW of new capacity at the most recent subsidy auction round. Despite offering lower wholesale costs, with the price of gas expected to fall over the rest of the decade, these new installations will effectively have their revenue guaranteed for the next 20 years, and strike prices have risen at the last two auction rounds. This also costs – and that’s forgetting the legacy costs of the RO and FiT schemes that we’re still paying.
These charges are all levied on consumers, with policy costs making up £186 of the annual household bill mentioned above, and that’s overlooking the £207 that network costs contribute. We’re paying for yesterday’s decisions and we’ll still be paying for them in 20 years. All as a result of greater state meddling and the erosion of price signals in the market.
However, there is one bit of good news: there is an alternative, and it’s already being implemented. The alternative is a Power Purchase Agreement (PPA) – a private contract between a corporate buyer and generator and/or supplier for electricity. An example of this in action is Cleve Hill solar farm in Kent which, at 373 MW, makes it the largest solar installation in the UK. Only one third of its power is backed by a CfD – the rest is paid for by Tesco as part of a PPA. It’s not a feature limited to the UK; Spain has the largest PPA market in Europe and has seen most of its new-build solar funded by PPAs.
So there is scope for the private market to fund new energy generation, without the spectre of government behind it. Expanding the private market will be vital, as policy costs are now a major driver of bill increases at a time when energy demand is rising for the first time in 20 years. By 2050, it could be 175% higher than it is today.
But that won’t materialise if bills remain prohibitively high. Nor will the number of EVs, heat pumps and data centres that are touted. So mature technologies should be made to stand on their own commercially; taxpayers no longer need to foot the bill for them.
Britain can be a country of energy abundance – if only government gets out the way.
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