Energy: here’s to more competition

On October 31st, one of the main topics on Question Time was the state of our energy market.

The panel and audience were generally in agreement that the industry needs more competition, with everyone acknowledging that the so-called ‘big six’ have far too much influence on the supply and pricing of our energy. I was left rather mystified, then, when the suggestion to renationalise the industry was met with a rapturous round of applause.

Nationalisation involves the government taking ownership of an industry which previously operated in private hands. This results in the control of an industry being transferred from multiple organisations to one central authority, thus to renationalise the energy market would not create ‘more competition’, but would eradicate it completely.

There is no doubt that there are structural problems in the UK energy sector. Bills for consumers are rising which, coupled with stagnating wages, is causing damage to households’ standards of living.

Critics of free market capitalism point to the ‘excessive profits’ of energy firms and conclude that privatisation has not worked. This is simply not true. When energy was privatised in the 1980s, gas and electricity bills started falling in real terms. Wholesale markets were liberalised and competition was encouraged as consumers became free to switch to cheaper suppliers.

Today, market forces have been taken over by central planners. It is now the bureaucrats in Whitehall that dictate investment decisions by picking which fuels and technology should be used to produce energy.

Furthermore, green initiatives such as the EU’s Emission Trading Scheme (ETS), are adding around 11% to consumers’ energy bills. In summary, it’s the promotion of uneconomic forms of energy and layers of complex regulation which are the real causes of malaise in the energy industry, not the free market.

Rather than increasing state intervention in the industry, the government needs to give companies more control over which technologies they employ to generate energy. Subsidies for low carbon renewables should be cut, along with regulatory schemes that make the cheapest sources of energy more expensive to harness.

Many will argue that these measures are vital for fighting climate change, however, there are far more efficient ways of internalising the social costs of carbon emissions. A well-designed carbon tax, for example, would encourage investment in greener technologies without severely disrupting the market.

In addition, regulators such as Ofgem need to be given greater powers to ensure a competitive environment so that energy companies can’t just raise prices with the assurance that other firms will follow.

Improving the state of the energy market is not a simple task but the answer is liberalisation not nationalisation. David Dimbleby and his friends ought to be careful what they wish for.