UK Electricity Industry Privatisation and Price Cap Regulation, and the Rise of EDF

For an interesting review of UK electricity privatisation and the unanticipated replacement of state-owned utilities by state-owned EDF, and Spanish and German utilities, see James Meek, How We Happened to Sell Off Our Electricity, London Review of Books, September 13, 2012.

The New Electricity Trading Arrangements were designed to bring prices down by making the electricity market fairer and more open…. There is no evidence to suggest that any elected politician has ever understood how it worked (any more than they understood its byzantine predecessor, the ‘Pool’)…. Yet there was one important clue to how Neta worked: the electricity companies were all for it…. It was even more opaque than the Pool….

Littlechild seemed reluctant to accept that EDF’s move into Britain undermined the rationale for electricity privatisation ….

Of the three main sources of Britain’s future electricity supply – gas, wind and nuclear – the first two don’t require such urgent attention as the third, though we can expect any amount of rhetoric from the gas and wind lobbies while the energy bill is debated. The gasbags (of whom Osborne is one) will argue that the worldwide shale gas revolution is going to make gas cheaper and more widely available, that gas-fired power stations don’t need subsidies, and that gas is environmentally friendly because it’s less filthy than coal. The windbags, led by Davey, will argue that improving technology will make offshore wind cheaper, that it’s far cleaner than gas, and that wind energy makes Britain less dependent on imports from risky regimes. It’s an argument that Britain would be having whoever owned our electricity industry and it seems inevitable that the gradual end result will be more gas, more wind, and less coal. New nuclear power stations, however, are not only central to the government’s hopes: the companies who would build them say that the decision to proceed must be made by the end of the year.

The possibility that companies might get part-way through building a set of new nuclear reactors in Britain and have to stop due to cost overruns is less likely than the other variant: that, once begun, the new nukes will be finished whatever the cost. Which is the second problem.  Expensive to build and difficult to dispose of, nuclear reactors aren’t profitable. The only reason nuclear power is on the table is global warming. The only way it can be financed is by government subsidy. By the end of this year, the British government must decide how big a subsidy it is prepared to give EDF and Areva; EDF and Areva, in consultation with their main shareholder, the French government, will have to decide whether that’s enough.

But the subsidy won’t come from general taxation. It will come, as wind farm subsidies already do, from British customers’ electricity bills. It’s a stark illustration of the realities of privatising essential services – that what is being sold is not infrastructure, but bill-paying citizens, and what is being privatised is not electricity, but taxation. Effectively the French government is buying the right to tax British electricity customers through their electricity bills; to use British money and British sites to finance a world showcase for unproven French nuclear technology. And because the hidden taxes in electricity bills take no account of people’s ability to pay, the poorer you are, the bigger contribution you make to the programme….

Helm’s most devastating point about electricity (and gas) privatisation in Britain is that these are not naturally public industries; nor are they naturally private. ‘It is extraordinary,’ he writes, ‘that anyone could have regarded these as anything other than political industries.’

Electricity privatisation hasn’t been a success in bringing down prices…. a reliable, badly run British electricity system was destroyed, rather than being reformed, only so that a large part of it could be taken over by a foreign version of the original. And it has been a failure in terms of clarity, in the sense that in order to fund investment, governments that boast about not raising taxes, or of taking low-earners out of the tax bracket, permit predominantly foreign-owned electricity companies to collect flat-rate taxes that hit the poor disproportionately….

… a rootless elite that has no concept of duty or service except to itself is busy taxing the poor….

If you define the problem as the lights not going out, he said, you misunderstand everything about the way the new world of electricity markets works. The ideal situation for private electricity firms is one where there is only just enough electricity to go round. Then they can charge as much as they like, and people will have to pay. ‘People think insecurity of supply means will the lights go off or not – but that is not the issue,’ he said. ‘It is what happens just before the lights go off.’

More than twenty years after the great electricity experiment was launched, it can be seen that although it was an act of privatisation – of taxation, principally – it was most significantly an act of alienation, lowering an impenetrable barrier of complexity, commercial secrecy and sheer geographical distance between the controlling interests of electricity companies and the customers they serve. It’s easy to switch suppliers. But behind that barrier citizens and small businesses have no way of knowing that they aren’t being fleeced as egregiously by the cheapest provider as they are by the most expensive.

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