06 Apr 2010

(by ) The British Conservative Party has produced an energy policy document titled . They argue that if governments provide a clear energy policy, they reduce uncertainty in the market and so also the cost of capital for the substantial investments required in generation, transmission and distribution. The result will be lower prices. The general idea is sound, but it relies fundamentally on the credibility of the proposed policy.

Unfortunately, ‘Rebuilding Security’ ignores an important challenge in energy policy, namely the trade off between its various objectives. The four they identify are very like Ofgem’s current three – Security of supply, Sustainability and Affordability. The Conservatives call Affordability ‘Economy’, and they add a fourth – rather mysteriously called ‘opportunity’ to “develop and deploy [the sector] to create new wealth for the country”.

Ministers of any political hue are notoriously reluctant to make explicit uncomfortable choices between competing objectives in any area, but this is increasingly necessary in energy. The challenge is both to appreciate conflicts in high level objectives, and to identify the most appropriate instruments for achieving them. The Conservatives rightly criticise leaving such decisions to agencies rather than elected ministers, and the proposal to ‘recall them’ to government is welcome in both the Conservative proposals and the Energy Bill currently before Parliament. But the minimum requirement for elected decision makers is then to acknowledge where the hard choices need to be made.

The most painful choice is between Security and Sustainability on the one hand, and Affordability on the other. The first two will both involve higher prices; as finance is raised for new investment, upstream costs rise to reflect the true cost of carbon, and both are passed on to customers and final consumers – so threatening ‘Affordability’. Are politicians prepared to face an extremely vocal poverty lobby, the media and the electorate with honesty over the necessary continued upward trajectory of energy prices?

There is also a more subtle inconsistency over the means to achieve objectives. Eight principles of energy policy are laid down. The first and last are that “Conservative energy policy will… BE market-based” and “Promote competition” …. (their emphasis). Unfortunately, the other six include the provision of prudential oversight, increased diversity, taking an internationalist approach – all of which are constraining the outcomes in a way which is inconsistent with competitive markets. It is ironic that this is the same , which the manifesto criticises, in introducing .

The strength of markets is that if they have unbiased information and incentives they can deliver outcomes which are better for the economy as a whole (and for most of the participants). Competitive markets identify and provide solutions which central planning can never deliver. But if they are constrained to deliver particular outcomes, the consequent strain and distortion may well make everyone worse off.

So, one cheer for recognising that the government needs to make the policy decisions and that consistency can reduce investment costs (not only in energy but across the utilities). These issues are exactly those which the have been raising and discussing with stakeholders and policy makers. It is good to see both major parties taking these ideas on board. But decision making cannot be stable or predictable if it is internally inconsistent, so more work is needed before the other two cheers can be voiced.