In February 2017 British supermarkets ran short of vegetables. Unusual weather in Southern Europe and some supply chain problems left shelves bare. But no one was seriously calling for the government to step in. Why should energy be any different? Why don’t we just leave energy to the market?
Firstly, as I wrote in my last blog, the consequences of a shortage of energy are immediate and serious. It is said we are all just five meals away from the end of civilization. Electricity, for example, may be more vital than broccoli. But that’s not the only thing which makes it special.
Electricity is intangible. It must be created and used instantaneously. The whole supply chain has to work synchronously and seamlessly, moment by moment, and be ready to do so at all future moments for decades to come. Somehow we need to create a market and governance system to manage all that in an efficient way.
Unlike some other commodities the market for electricity is not a ‘natural’ market, it is a political creation. In fact all electricity markets in the world are ‘made-up’.
Energy economists talk of market design, crafting the form of the market and how things are traded, to send signals that will deliver good outcomes for customers.
Over time, governments notice that markets are delivering the ‘wrong’ outcomes. They start to intervene by tweaking market rules. Those changes have unexpected consequences, leading to more market changes. Modern energy systems are complex and often counter intuitive and the markets that drive them have become equally complex. Even experts find it hard to predict outcomes.
We need a balanced mix of generating technologies in our power system. Inevitably, electricity markets start to favour one technology over others. On the British electricity system we have seen this happen several times. In the mid-1990s and early 2000s there was a ‘dash for gas’ and recently, when an old subsidy scheme was closed, we had a ‘rush for ROCs’.
In my view, 28 years of experience since privatisation of electricity in the UK have shown that it is impossible to design a perfect market. There aren’t even the right units of measurement to signal all the related things that make a power system work efficiently. A price for kWh (energy) alone does not deliver other things like sufficient capacity to meet demand, electrical inertia, frequency response, network constraints and various other ‘balancing’ services. There can also be conflict between local and national needs.
Trying to design a market with all the right levers and adjustments so that each generating technology can compete fairly is like trying to design a fair race between horses, camels and greyhounds. The choice of track and duration of the race will inevitably favour one species over another.
Even if we could design a perfectly fair electricity market, the rapid changes in the industry would quickly upset that balance.
Leaving it to the market simply locks in existing bias.
Governments and regulators need to recognise that they will never design the perfect energy market. Good energy policy will always be hands on. Instead of seeing that as a problem, policy makers should embrace this as a fact of life and think about how best to go about it.
We need active intervention to guide our energy system through the transition. That means agile regulation and policy which keeps pace with technology developments and emerging trends in customer behaviour. Some intervention is vital. Getting it right is not easy but there are some good examples to follow