22-23 September, 2010
For the past two decades, European energy policy has been based on the belief that markets are best able to provide secure supplies of energy at lowest cost. As a consequence, Governments have, to varying degrees, delegated the responsibility for the provision of energy to industry. Now that the participants are facing large investment programmes, on account of ageing asset replacement and the targets for renewable energy and greenhouse gas reductions, many are questioning whether these companies will be willing or able to make the necessary investments. After all, economic theory may suggest that “markets” are superior, but it is financial considerations, not economics, that determines whether assets get built. This conference examined whether the need to consider the financial issues raised by different policy measures could, or should, have implications for the design of the policy instruments required to meet the new energy economy.
With hindsight, those two glorious sunny days in September were something of a turning point in energy economics/politics. The agenda was designed specifically to contrast the difficulty of making investments in competitive electricity generation with the ease with which the oil & gas sector deploys capital. The problem, that markets deliver, not the lowest cost solution ,but those easiest to finance was raised during the plenary sessions and argued over coffees and teas, as well as the wine at dinner. However, there remained the Keynes/Hayek division over whether some central coordination was necessary to keep the lights on cheaply with limited greenhouse emissions, or whether a free market would deliver, if only we kept our nerve. The conference was successful in airing the problem, but less so in arriving at an agreed solution. It was also given an inspiring warning of the Jevons Paradox by James Smith at the conference dinner. Greater efficiency might not mean lower emissions; decarbonisation was the key.
Since the conference, a solution to the investment problem has emerged, in the UK at least, but perhaps it is rather late and is certainly not the one some would have liked. Before the conference, it was hardly possible to raise the idea of a “Single Buyer” for electricity in polite society without attracting ridicule. Since then, the subject has more or less become unavoidable as the UK’s Electricity Act effectively confers on the Secretary of State the role of Single Buyer for all non-fossil generation and that part of the fossil generation market required for “capacity”. So the UK now has its Single Buyer, though the governance leaves a lot to be desired. Holding the Secretary of State “answerable to parliament” for decisions on the quantity, type and timing of generation investment does not offer customers much protection from political shennanigans. Perhaps we should have explored alternative structures at St. Johns.
Other European countries are also flirting with capacity mechanisms and other interventions to deliver investment. It is as if all the nation states recognise the need for some central coordination and the shortcomings of completely liberalised markets. However, as if in another world, the European Commission is continuing along the same old “free market” road, as if the problems identified at the Oxford 2010 BIEE conference are just a bad dream. I hope it wakes up.