How to solve the energy crisis? Give power back to the markets
Solving the energy crisis needs the dynamism of the private sector, not more government subsidies and central planning, writes Emma Revell
Even before Russia invaded Ukraine in early 2022, years of government intervention in energy markets – not least the energy price cap introduced in 2019 – had been distorting electricity markets and pushing up energy costs.
The shock of the conflict sent wholesale prices surging and made rising costs impossible for politicians to ignore any longer. Yet now the initial shock has receded, electricity prices remain near record levels, sustained by accumulated policy burdens – which Labour and Ed Miliband only seem determined to reinforce. It is British consumers and industry paying the price.
Our industrial power prices are 90 per cent higher than the average of wealthy European economies, meaning we’ve seen heavy industry struggle and fold, or move production overseas, costing us jobs at home. Household bills are 20 per cent higher than elsewhere, despite the price caps and taxpayer-funded support, meaning families are feeling the pinch and increasingly the cold.
On top of that, demand for electricity is increasing for the first time in two decades. The National Energy System Operator forecasts that demand will increase by 14 per cent by 2030, 37 per cent by 2035 and anywhere from 93 to 175 per cent by 2050, as data centres are built and rail, cars, heating and industry are electrified.
It is clear that Britain needs new power generation and we need it soon.
Centralised planning will not solve the energy crisis
Any other sector, faced with news that demand was going to jump by a third in the next decade and could more than double in the longer term, would spring into action. But Britain’s energy sector isn’t like other markets. In fact it’s barely a market at all.
Energy secretary Ed Miliband has not skirted away from the fact that he wants the energy market to be controlled, and if possible owned, by the state. In just 18 months in office, Miliband has set up a state-backed investment outfit, Great British Energy; mandated that the grid be almost completely decarbonised by 2030, with little to no regard for how implausible or expensive this will be; approved, subsidised and taken co-ownership of a massive new nuclear plant; and mandated that grid connections should be prioritised according to the decisions of civil servants rather than the market.
Goodbye markets, hello central planning.
The politically motivated subsidies and state direction which began under previous Conservative governments have been baked in by the current Labour administration. Technologies cannot or will not stand on their own two feet and Brits are footing the bill twice over – once through their own higher household bills and again through their taxes.
If this is how Britain chooses to meet rising demand, we’ll fail. No government can foresee and plan for which new technologies will emerge, which will work and which will not. Nor, quite evidently, can it think long-term. Just months before becoming Deputy Prime Minister, Nick Clegg said nuclear power was “not even an answer” to Britain’s energy needs because plants take over a decade to build.
What we need is the dynamism of the private sector and an energy market that does what markets do best – boost choice, meet demand and lower prices. Lucky for us, we already have one.
Give power to the markets
A new report from my colleagues at the Centre for Policy Studies provides not just a comprehensive examination of Britain’s current energy quagmire and how we got ourselves into this mess but a market-driven plan to get us out of it.
For example, the report highlights the under-reported but growing amount of energy generation which is being built with strong support from the private sector, or is even entirely privately funded.
Renewables are often criticised as utterly dependent on taxpayer-funded subsidy. Yet how many people know that the largest currently operating solar farm in the UK, the 373 MW Cleve Hill project in Kent, has a private contract from Tesco for two thirds of its output? Or that the second largest, the 75 MW Llanwern farm in Wales, is entirely private?
These Power Purchase Agreements (PPAs) allow businesses to take long-term control over their energy and the price they pay for it – and more and more companies are looking to get involved. The European PPA market more than doubled between 2020 and 2025 but Britain only has the fifth largest market. We can and must do better.
The report goes on to set out guiding principles for market-driven energy policy, including recommending subsidy sunsets for new technologies so they can scale up then compete on a level playing field, and that the primary role for any government must be ensuring security of supply, not dictating the shape of the market.
Many of our energy-intensive industries have already been crippled by high energy prices and dirigisme in the electricity sector, with steel mills, refineries and factories closing left, right and centre. Without drastic change in the direction of our energy markets, the energy-intensive industry we have left might be bound to go the same way. That is why, as per the title of the report, it is time to give power to the markets.
Emma Revell is external affairs director at the Centre for Policy Studies