Lessons from Labour

It is difficult to give a clear overview of New Labour energy policies — there were many of them and they never reached a conclusion.  Partly as a result, the Coalition government is now facing some major challenges in the energy sector — tight, binding targets on climate change with no convincing strategy for achieving them; growing dependence on hydrocarbon imports; a looming (though not inevitable) crisis in electricity generation; failing policies on renewables; and uncertainty over the future of nuclear.  

The main message it should draw from the experience of the previous administration is that it must get a grip on the issue at an early stage, develop a coherent strategy — and effective means of delivery — and then stick to them.

In New Labour’s defence, the need for such a strategy was not so pressing when they came to office.  In 1997, energy supplies seemed abundant, energy prices were relatively low (oil was still below $20), and fuel poverty seemed to be a dwindling problem.  The UK was self-sufficient in energy; greenhouse gas emissions were falling; and the UK was seen as a model of energy liberalisation — the World Bank was promoting it throughout the developing world as part of the so-called ‘Washington consensus’.  

There seemed to be little left to do except spread the liberalisation model across Europe and ensure better access for UK companies there; otherwise, the government thought it could stand back and let the market work its magic.  Little attention was given to energy policy until, as inevitably happens, events intervened.

The first such challenge to complacency was the impact of the ‘dash to gas’ in power generation which had been under way since the early 1990s.  At first this seemed a benign phenomenon — adding to diversity in the generating system and contributing most of the (substantial) emissions reduction which took place during the 1990s in a painless manner.  But by 1997 the cries of pain and unfair treatment from the coal industry as it felt the impact of gas competition had reached such a pitch that the government felt it had to act.  The outcome was the 1998 white paper — the Review of Energy Sources for Power Generation.

This was in essence a short-term fix to give coal a breathing space but some longer-term measures were included.  Coal’s problems were ascribed to two major defects in electricity markets: the dominance of the two big players National Power and Powergen, and the structure of the electricity trading system in place at the time (the Pool).  

Ironically, the measures introduced to address these defects may themselves have generated as many new problems as they have solved (a common dilemma with energy and one reason why an overall strategy is needed).   In particular, while the replacement of the Pool by new electricity trading arrangements may have helped coal, it has also created difficulties for the sources the government now wants to promote, such as CHP and renewables, because of their intermittent and unpredictable nature.  

In addition, many experts believe that it encourages vertical integration of electricity companies and company mergers, as investors seek to manage risk, and has promoted a trend to an uncompetitive oligopoly.

The next fundamental challenge was climate change. After the ratification of the Kyoto Protocol and the burden-sharing agreement across the EU, the government had formal emissions targets.  Because energy is far and away the largest source of greenhouse gas emissions, it needed an energy policy consistent with those targets.

What it came up with was a new white paper in 2003: Our Energy Future — creating a low carbon economy.  But this seemed designed mainly to polish the government’s green credentials.  It relied heavily on the promotion of energy efficiency and renewables — not in itself an intrinsically unsound approach, but one which requires serious analysis of the options; identification of the consequences, particularly in terms of costs and the degree of intervention needed  (these can be quite heavy); and effective means of delivery — perhaps the main challenge.  

All the UK’s and EU’s renewable targets have been missed; none of their energy efficiency programmes has delivered serious reductions — most do little more than restrain the rate of demand growth, if that.  Without serious analysis and effective implementation mechanisms, any policy is really no more than a wish-list, and this proved the case with the 2003 white paper.  

Both it and the 1998 white paper had brushed aside the issue of nuclear power, saying that it didn’t seem to be needed.  Events — again — soon demonstrated that the issue could not be ducked.  The government’s next go at an energy policy in 2006,  The Energy Challenge, noted in a revealing but well-hidden footnote that, since 2003, projected 2020 emissions had increased by nearly ten per cent despite the government’s climate change measures, and the gap against target had nearly doubled.  

In other words, whatever impact the 2003 measures were having (probably none) they were being swamped by market movements, in particular the increased competitiveness of coal.  A slow and tortuous plod towards a fully-fledged nuclear policy followed over the next few years.

The details of that process (which included a successful challenge to one of the government’s consultations from Greenpeace) are too complex to be described in detail here but they ended up with the government’s energy policy in a state of some confusion.  

On the one hand, it took on some rigid and challenging targets under the Climate Change Act  — with opposition support — which imply huge changes in energy markets.  On the other, it still professed to believe that markets could deliver these results.  The overall position was unclear.  

In August 2009 for instance, Malcolm Wicks, Gordon Brown’s special representative for international energy issues, launched a report on energy security announcing that ‘the time for market innocence is over’.   

While not admitting to picking winners, the government set up three offices: for Renewable Energy Development, Nuclear Development and Carbon Capture and Storage in order to promote its favoured options.  It developed a vision for the electricity network ‘including the investments that would help to contribute to the government’s policy objectives’; set up a new planning system designed to facilitate energy facilities which promote policy objectives; and proposed changing the regulator Ofgem’s duties from a focus on competition and consumers to include energy security and environmental issues.  (Ofgem estimates that fully half of its spending in the coming years will be devoted to ‘E-Serve’, the energy efficiency and environmental activities which it carries out on behalf of the government.)

The fundamental problem is that the market, on its own, cannot deliver the desired investments in nuclear and renewables, while interventions to promote those investments will themselves change market dynamics.  Analyses by consultants and Ofgem suggest that the introduction of these sources on the scale required to meet climate change targets would stretch existing market design to breaking point.  

In response to these concerns, both Ofgem and the New Labour government iss ued documents earlier this year suggesting a range of possible market interventions, ranging from a minimum carbon price to the replacement of the market by a single central purchaser.

In other words the muddling through from one energy policy to the next in response to external events and challenges has resulted in a messy set of compromises and confusion about the role of the market. The outcomes have been uncertainty and a reluctance to invest, in electricity generation in particular.  

About one third of the UK’s generating capacity is due to be closed down over the next ten years or so.  Most of the plants in the pipeline are gas-fired.  As in the past, renewables targets are not being met, and nuclear plant will almost certainly not be built without government support in some form.  So we are heading for a situation where diversity is being reduced; energy security is put at risk; and environmental targets will be missed.

Faced with these challenges, the Coalition government has to avoid New Labour’s mistakes.   Difficult though it is, it cannot duck the nuclear issue but must face up to the need for government support if new nuclear plants are to be built; similarly, insofar as it is relying  on renewables and energy efficiency, it needs to develop effective means of delivery because existing measures are not working.  

It must also clarify the roles of government and markets.  It is not enough to elaborate a list of the things the government would like to happen, then stand back and wait for the market to deliver — that is not the way markets work.  

One option is an effective system of market incentives for the desired energy investments, along with measures to reduce the investment risks.  Alternatively, the government could introduce some more directly interventionist measures to deliver that investment.   Whichever course is chosen, spin and fudge will not do; a coherent and deliverable energy strategy is needed — and soon.

Malcolm Keay is Senior Research Fellow at the Oxford Institute for Energy Studies.   He was Director of Energy Policy at the UK Department of Trade Industry in 1996-99.