Facts, Analysis and Comment.

Energy Regulation

Climate Change and the Dash for Gas (and Nuclear)

In the light of the developments summarised here, and in particular concerns about greenhouse gases and climate change, the post-2010 Conservative/LibDem Government announced what amounted to a 'dash for gas' whilst simultaneously forcing customers to subsidise maybe £200bn investment in new generation (gas as well as nuclear, wind etc.), probably increasing typical domestic bills by £100pa by 2020, and having an even more severe effect on business' energy bills. The Government's 'gas strategy' included (a) continuing to close coal-fired power stations and (b) continuing to encourage investment in carbon-free nuclear and wind etc. power, as well as (c) also encouraging investment in gas-powered stations so as to provide peak-load back-up to nuclear, wind etc. One problem with this policy was that it damaged the competitiveness of energy-intensive industries such as steel, chemicals and cement. These industries pointed out that the French and German governments, for instance, are being much slower to load the cost of renewables onto their industries. Sceptics also pointed to the difficulty (verging on impossibility) of doubling nuclear capacity, trebling onshore wind farm capacity, and multiplying offshore wind farm capacity fifteen-fold over the next 15-20 years - unless the European Commission can be persuaded to allow substantial 'state aids'.

The mechanisms under which these outcomes are intended to be achieved (including CFDs - Contracts for Difference) are complex and have been the subject of much criticism from those who think that it is quite wrong to bestow government Ministers with extensive planning powers, who point out that Government intervention in markets creates political and regulatory risk which inevitably feeds through into higher prices, and and who believe that the whole CFD edifice will one day collapse under the weight of its own contradictions. It is well worth reading Professor George Yarrow's 2011 submission in which he argues that 'government policies based on fixing the results of competitive processes are chimeras: it is like fixing the result of a general election and seeking to pretend that this is democracy.'

Interestingly, concern over the effect of these prices increases on industrial competitiveness eventually led the government to decide that energy intensive industries would be partially exempt from these future price rises, thus adding another economic illogicality to the regulatory edifice. Commentators also noted that green taxes which increased the cost of, say, steel produced in the UK would simply lead to increased imports from coal-fuelled economies such as China. Clear evidence of this emerged in late 2015 with the announcement of many thousands of job losses in the UK steel industry.

Biomass power stations were also being encouraged via generous subsidies - although they lead to substantial CO2 emissions - possible more than coal. Their green credentials depend on forests - which provide the biomass - being 'renewable' - which makes long term sense but worsens the greenhouse effect in the shorter term.

The government also supports improved energy efficiency, in which the UK lags far behind e.g. Germany. But its strategy seems rather half-hearted, perhaps because of not wanting to appear over-regulatory. And the government may be over-optimistic in its assessment of the likely results of those policies that have been announced. This is because the 'compensation effect' will inevitably lead consumers who have, for instance, improved the insulation of their buildings to respond to their lower energy bills by turning up their thermostats. Similarly, most of us have no doubt become less assiduous about turning off our lights after we have invested in energy efficient bulbs, 'though the phasing out of incandescent light bulbs led to a 29% drop in the demand, from 1007 to 2012, for electricity for lighting.


Despite initial Lib-Dem hesitation, the coalition government eventually developed an increased interest in generating electricity in nuclear power stations. The full story is here.

Martin Stanley