The UK is currently reforming its electricity sector. This gives rise to some pertinent questions: Do the reforms go far enough and can more reforms be expected in the near future?
The UK is not alone in its attempt to transform its electricity sector. The European Union has made three successive bids to reform the electricity market within the last two decades. The latest, namely the Third Energy Package, follows the previous two packages. The electricity sector has proved difficult to reform due principally to the competing demands of competition, energy security and climate change mitigation. Achieving all three in unison remains beyond the capabilities of most government administrations.
After some two decades of pushing the competition agenda it appears near certain that competition has reached the end of its current journey. It has delivered high prices for consumers, little investment in new energy infrastructure, reduced spending in research and development and an oligopolistic market structure. Meanwhile, the rate of carbon dioxide emissions continues to increase exponentially across the world.
Nevertheless, one must ask the question, was real competition ever present? It is claimed that the traditional fossil fuel market incumbents had and still have too much influence. For example in the US, during the presidential election year of 2012 a New York Times analysis revealed that $153 million was spent on television advertisements by the lobby promoting coal, oil and gas and/or criticizing clean energy; this is in stark contrast to a mere $41 million by the clean energy source lobbyists. The EU policy of 20:20:20 by 2020 also distorted competition. Too much faith has been placed in the policies of privatisation and competition. The expectation that the private sector would have motives other than profit was misguided. To achieve aims beyond the profit motive, government intervention is needed. Was the banking industry in the UK not saved by direct government intervention and subsidized support?
Reform should not be limited to just the restructuring of the electricity market, but should also extend to transforming the philosophical underpinnings of the market. For too long the Chicago School approach has dominated thinking in law and economics. It is now time to consider its limitations and move to reform the approach to law and economics and the development of markets. There are other worthwhile goals than just profit. This is the case in the electricity market now more than ever especially in relation to climate change mitigation. With the effects of climate change being accepted it is the considered view of leading scholars across the world that it is happening at an increased pace. For example, a third of the summer sea ice in the Artic has disappeared while the effort to keep below a 2°C temperature increase globally is likely to be exceeded despite the latter being agreed at the Copenhagen Accord.
An electricity market needs to encourage the development of new energy infrastructure. The latter can provide competition to existing energy infrastructure, help lower prices, develop technology, provide employment and contribute to the lowering of CO2 emissions. In addition, research and development needs to be supported by market participants and should not be overly reliant on public sector funding. Consumers should to be able to afford electricity, unlike the current situation where the number of people classified as suffering from fuel poverty is increasing while others choose between fuel and food or, in the most severe cases, some face death.
In examining the EU approach it is increasingly evident that the Third Energy package, since the onset of the financial crisis, is being applied in a rather lax manner. There is perhaps the realization that the pursuit of competition is not a goal to which every economic market needs to adhere to. The legislative changes proposed by the UK for its electricity market reforms are likely to be approved by the European Commission. This is despite the clear incentives and intervention in the electricity market which will favour nuclear energy and renewable energy sources.
It is questionable whether the UK reforms go far enough. Based on the EU experience, it is likely that new reforms will be introduced sooner rather than later. The composition of these reforms deserves rigorous examination and debate. The solution lies in economics and the creation of new economic markets. Different energy sources use different technologies. Also, there are different environmental goals and different safety legislation for different energy sources. The nuclear sector, for instance, has its own safety regulator. The electricity market should be divided up. In this way the competing demands of competition, energy security, and climate change mitigation can be achieved with a higher degree of certainty.
A new outline electricity market would see it notionally divided into five principal parts: (1) Gas; (2) Coal; (3) Nuclear Energy; (4) Renewables; and (5) an Open Market. A percentage of the electricity market would be assigned to each part. Until a designated percentage was met, there would be clear government support for that energy source. Any excess would be traded in the Open Market. This would mean competition for firms within a market for a specific energy source, and one with all the energy sources in an open market (which could include the capacity margin).
A government could then set out to achieve a low carbon economy (such is the aim of the UK government) and over the years reduce the percentage share of coal and gas while increasing that of nuclear energy and renewables. The excess provided by gas and coal to the open market could be charged at a premium with this in turn being used to support the low carbon sources.
The new market would have a number of benefits. It would allow for competition among companies providing the same energy source thus potentially improving the efficiency of each energy source. It would promote new low-carbon technology and give it a sustained chance of success. It would enable an improved method of replacing old technology in particular where nuclear energy is concerned. It would also offer security to investors and encourage them to invest and provide investment for long-term energy projects.
Overall, this approach would serve the core elements of EU energy policy. In separating the energy sources into individual economic markets competition would be increased, CO2 emissions would decrease over time while governments could directly support new energy infrastructure development and increase their own energy security.
Raphael J. Heffron, BA, MA, MLitt, MPhil, Barrister-at-Law, PhD.
Lecturer in Law, Stirling Law School, University of Stirling, Scotland,