Since the 1980’s, the prevailing view within government was that governments should not intervene because they were likely to pick the wrong winner. Whilst that is understandable, the other extreme is no better. In my last Blog I explained why there is no natural market in electricity. Leaving energy decisions to a market designed for a different era is bound to deliver the wrong outcome.
How can governments make good energy policy?
People who have spent a working lifetime studying energy recognise they don’t know it all, so political instinct is clearly not up to the job. The two traditional alternative solutions of central planning vs. free markets don’t work for today’s reality, let alone the even more complex future.
State controlled central planning cannot optimise so many changing factors. Something this complex cannot be micro-managed successfully. However it is important for governments to set a clear sense of direction.
Some are calling for a return to nationalisation of energy. Changing ownership won’t change the issues. The old utility model is long gone and historic lines between suppliers, networks and service providers are being blurred by technology and ‘sector coupling’. If you wanted to renationalise parts of today’s energy industry, it is far from clear which companies you would even want to own?
Competition works. It encourages everyone to improve efficiency and deliver what customers need. Wherever possible competition should be part of energy policy. Sometimes however competition is seen as an end in itself rather than an enabler. There have been periods when the British government’s stated aim was ‘to have a market’ rather than to have an energy policy and use competitive market mechanisms to deliver it.
Markets are blind to issues not captured in the price. They also don’t deal well with long term issues such as climate change. Mark Carney, the Governor of the Bank of England described this as “the tragedy of the horizons.”
Governments inevitably intervene in energy markets. Those who claim they will not, eventually end up being forced to do so. Usually this is in haste, reacting to headlines. Such policy U turns disrupt businesses and result in long term damage for customers.
A far better strategy is for governments to accept that they will intervene and work out how best to do it. That means thinking about why, when and with what (long term) objective.
Energy investments are long term so the political risk from future government policy changes is important for investors. Policy needs to be consistent from one Government to the next. The best way to achieve that is to be clear about long term direction and work collaboratively with the energy industry to develop a common understanding of how we get there. It is OK for policy detail to change over time but it needs to do so in a predictable way and for sound reasons.
Ideally governments should involve stakeholders in their thinking and where possible ‘show their working.’ One policy announcement will not create investor confidence but consistent messages over time, backed by consistent behaviour can make a country a better place to invest.
Good energy policy often involves a combination of a clear end goal, plus regulatory limits, plus market measures that create cost signals. e.g. clear end goal – no more coal power generation after 2025, plus emissions performance standards, plus a carbon floor price. When all these are present they make a convincing case for changing investment behaviour. I’ll say more on investment in a future blog.
‘Grandfathering’ old policies for those who made investments in good faith at the time also helps build a reputation for stable, investable energy policy.
Governments will intervene in energy markets; energy is too important not to. The best governments do it in a predictable way and in partnership with industry.