13 July 2010
Malcolm Grimston
(Former Chatham House Expert)


Since the liberalisation of the early 1990s it has been unclear whether British governments regard electricity primarily as a commodity or as a social and industrial service.

If the former, one might expect that once a market had been established with stable rules, to include proper valuation of externalities such as carbon emissions and measures to prevent market over-concentration (vertically or horizontally), then that market should be left to deliver the outcomes according to its own logic. This might lead to short-term problems but in the long-term the balance between overall costs and levels of 'spare' capacity needed to 'keep the light on' should in principle be struck at a level with which broadly speaking participants in the market are comfortable.

If the latter, however, one might expect that governments would, as a matter of clearly stated policy, intervene regularly in the marketplace to 'guide' outcomes towards specific social and industrial goals, coupled with mechanisms to compensate investors for 'stranded costs' that might arise from changes in the market framework which undermined the initial business case on which the decision to invest was taken. Possible measures might include up-front guarantees of compensation or a return to something akin to the vertically integrated 'command-and-control' models of electricity delivery prevalent in the years before liberalisation, which tended to deliver secure electricity supplies though not necessarily at lowest cost.

UK governments have often tried to imply both of these, though usually coming back to claiming that they are committed to competitive markets. For example, with respect to nuclear energy, sometimes the previous UK government spoke as though it had decided that new nuclear stations would be built:

'The Government has today concluded that nuclear should have a role to play in the generation of electricity, alongside other low carbon technologies' (Gordon Brown, 2008).

At other times it made it clear that this was not a decision for government at all.

'It would be for the private sector to initiate, fund, construct and operate new nuclear plants' (Alistair Darling, 2006).

Though not with reference to nuclear in particular, some of the statements of the new coalition government seem to reveal a similar ambivalence, with talk both of making the market work and of promoting particular technologies such as offshore wind energy and energy from anaerobic digestion of waste.

Investment in electricity generating plant, most notably nuclear, is very heavily capital intensive, with very long payback periods. Any impression that the rules will change several times before the initial costs have been recouped will again make investment less attractive. Investors may well be prepared to take on the risks inherent in a marketplace (for a suitable return) but the prospect of unpredictable regulatory turbulence is another matter.

Ironically, then, a hybrid such as the UK one, nominally a market but riddled with special measures such as the Climate Change Levy, tradable carbon permits, European renewables targets, Renewable Obligation Certificates at various levels and so on may prove less effective in delivering social and economic goals in the long term than either a relatively 'straight' market or a command-and-control model. There is a long list of examples of where interference such as price caps has had the opposite effect of what was intended. Electricity may well be a case where the middle way is worse than either extreme.

Further resources

Electricity - Social Service or Market Commodity? The Importance of Clarity for Decision-making on Nuclear Build
Programme Paper
Malcolm Grimston, June 2010