Guest post by David Porter, former CEO of UK’s Association of Electricity Producers and Energy UK. David has recently published a book chronicling the UK electricity generating industry that he previews here.
Most of what I read in Energy Matters fits nicely in my comfort zone. Some of it, however, collides with my prejudices and at times I am swept out of my depth by the mathematics. Never mind. Many of the subscribers to Energy Matters apply more rigour to today’s issues than those who decide our energy policy; and with policy for electricity supply, in particular. The recent questioning here of conventional thinking about the comparative level of CO2 emissions from gas- and coal-fired power stations, for example – with serious people being prepared to admit that they might have been wrong – is not the kind of thing witnessed very often at the tables where our policy-makers sit. More’s the pity.
17 minute interview with David on Energy Live News.
As a spokesman and lobbyist for the sector for many years, I used to describe electricity supply as ‘vital’. But, that under-valued it and as Bill Shankly might have said, ‘Listen, it’s more important than that’. What most electricity customers want (beware – this is an assertion, not a finding from a research project) is for it to be reliable and affordable. In that respect, public policy for the industry was always meant to be helpful. But, it lost its way. Today – 25 years on from electricity privatisation – industry figures talk openly about the increasing risk of power shortages and customers complain that they pay too much for the reliable supply that they enjoy. Power shortages and higher prices, incidentally, are exactly what many critics of the British electricity privatisation said we would see if the industry were to be taken out of the hands of government. Although the outcome may have been what they expected, the reasons for it are not. Public ownership has gone, but, public policy for the industry has replaced it. In fact, there is a vast amount of it; it is far more exposed to the public gaze than it used to be; is more volatile; is often of questionable cost-effectiveness and is apt to lead to unintended consequences.
One of the more legitimate concerns about electricity privatisation was that the privately-owned industry would face a higher cost of capital that the state-owned industry. The privatised industry would make up for that in other ways, however; for example, by being more efficient and by demonstrating its competence. It went without saying that it would also benefit from a stable regime where it enjoyed the confidence of government. But, governments have not delivered that stability and one day, research will reveal that customers are paying the price. I am not advocating re-nationalisation, of course; simply that greater maturity in energy politics would be a good thing.
At the risk of stating something that – for subscribers to Energy Matters – is patently obvious, electricity supply is an industry that relies heavily on engineering and investment to serve its customers. The industry, of course, has a wealth of expertise in those areas and the people who pay the bills can take some comfort from that. But, in the last 25 years, it has been driven less by what those customers want than by politics – and for most politicians in Britain, engineering is a mystery and their understanding of investment tends to be somewhat hit and miss.
There is also an awkward mis-match between the investment horizon of a steady, long-term, capital-intensive industry and the capricious nature of politics in a five-year election cycle. Investments are more risky because of that. Not that the industry is meant to be risk-free – far from it. But, its ‘normal’ business risks are substantial enough – judgements about long-term demand, choosing the best technology, procuring fuel, securing customers and competing effectively – so, the industry employs bright people and engages good advisers and ensures that most of those risks are manageable. The political risks, however, are harder to cope with and can be even more damaging.
One of the reasons for privatising the industry was to free it from the day-to-day influence of government and make it customer-driven. That was soon forgotten, though. A one-off windfall tax and two or three threats of another (one-off) windfall tax; coal-fired electricity being favoured, then virtually banned; investment in gas-fired generation being encouraged, subjected to a moratorium and eventually rendered too difficult to contemplate; new nuclear power, previously too sensitive politically to mention becoming quite suddenly the ‘must-have’ technology; the EU requirement that, in effect, 30 per cent of our electricity should come from renewables by 2020; an ambitious target for combined heat and power, followed by a huge change to electricity trading arrangements that penalised it; hefty social obligations not just on retailers but on some generation-only businesses; subsidy schemes that arrived on a wave of enthusiasm and were swept away when priorities changed – all this, by governments that often said that they were ‘giving the industry the certainty that it needs to invest’. And when the already unpopular industry was pilloried by the press and the public, many of our politicians joined in and whipped up the anger of the crowd.
I have heard political figures strongly refute charges that governments cause uncertainty by arguing that their energy objectives – at least since the global warming issues arrived on the agenda – have been the same for years. In fairness to them, that is true. So much so, that the energy policy ‘triangle’, which has featured in the opening lines of countless articles, reports and speeches, has become a cliché of energy politics. But, energy ministers and some of the leading figures in the energy industry are apt to cite it in a way that implies that all three of its components can be delivered harmoniously. Two of them – security and prices – could, and probably were. The third – reducing carbon emissions – could also have been in harmony if we had simply priced the emissions and left the companies to get on with investment decisions. That would have been in tune with the aims of privatisation and compatible with the EU’s single market ambition. At first, it seemed that we were doing that through the EU Emissions Trading Scheme (EUETS). But, the EUETS was considered to be undemanding and even with an agreed trajectory for tightening of the cap, was thought likely to take too long to steer the industry into the politically-desirable new investments. The Scheme had hardly got under way, of course, when the EU issued its Renewable Energy Directive. This legally-binding requirement for rapid growth of renewables promptly undermined one of the main principles of the EUETS – that the carbon price should drive a technology-neutral, cost-effective, response.
The three main objectives may be un-changed, but, the political mood changes and the priority order of those objectives certainly changes, usually in response to ‘events’. Power cuts and price rises are good candidates for a change in priorities. But, when times seemed good economically, our government’s desire to assume world leadership on climate change put carbon emissions reduction in pole position. Ministers were able to announce calmly that bills would go up as a result, but, with the implication that we would not mind paying. When the financial crisis hit household budgets, however, the message changed. The Secretary of State told us that implementing the green policies would actually cost us less than continuing with existing policy – in fact, £77 per year less by 2030. The government’s ability to forecast energy prices as precisely as that and so far ahead probably came as a surprise to subscribers to Energy Matters. It did not cut much ice with the customers, though. With energy bills in the news every day, the government accepted responsibility for some of the costs that companies were incurring and relieved them of certain green obligations. There was a real and almost immediate saving of about £50 – rather more meaningful to the bill payers than saving £77 in seventeen years’ time.
We are currently witnessing a massive transition in electricity supply, but, it is neither customer-driven nor centrally-planned. So, it is hardly surprising that we are in a bit of a muddle. Electricity customers are not fully aware of what is going on, but, some of the transition is highly visible. They will have noticed their neighbours’ rooftop PV systems and will have received the same sales calls that I get from PV installers, promising ‘money from the government’. The sales pitches often expose spectacular misunderstandings, but, so what? An Energy Minister in the Coalition government told us confidently that the Feed-In Tariff for PV was a better investment than a pension. And, on their holidays or weekends away, urban folk may have enthused about the wind turbines that they saw in the rural back yard, or, out to sea. But, very few people will have been aware that perfectly good gas-fired power stations – the industry’s rational response to expectations of a few years ago – have been closed because they cannot earn enough to stay in business. It is not that they were uncompetitive, or, that they did not produce electricity when it was wanted – demand is lower than it used to be and some of what remains is taken up by the technologies that our legislators have given preference to and have required customers to pay a premium for.
I spent many happy years representing the interests of a wide range of electricity-producing technologies, from hydro to nuclear power and fossil-fuelled to wind, so this is not an attack on renewable energy per se. It is, however, an expression of unease about the way that large amounts of it were forced onto a system – the physical infrastructure and the market-place – that was not ready for it; with an astonishing lack of regard for the consequences.
When I retired from full-time work in 2012, I wrote a book – Electricity supply: the British experiment – which was published earlier this year. Euan Mearns kindly invited me to summarise it for Energy Matters. But, if you have read this far, you do not need me to do say very much more about it. You already have a good idea of what the book is about.
It begins by describing my experience from 1987 to retirement in 2012 – for 21 of those 25 years as a trade association Chief Executive, representing independent electricity producers (i.e. not the state-owned ones) of electricity, then electricity producers generally (including the ex-state ones) and finally the producers and the retailers. It is the story of a trade association that began life before privatisation in a tiny terraced cottage on a Cornish hillside and eventually, as part of a merger, became ‘Energy UK’ in London SW1.
Although I enjoyed writing the rather folksy stuff, the book also comments on the way that energy policy evolved during those 25 years and highlights some of the problems that have emerged. I knew when I started that there was a risk in trying to combine – between the covers of one book – the story of the growth of a trade association with more serious comment about energy policy. I did make clear in the Introduction that it is not a text book; other, more distinguished authors (Dieter Helm and Alex Henney, for example) have written those already. Instead, it describes how things looked from my desk. More precisely, that means recollections of meetings with government, anecdotes, regulatory battles and encounters in the news media (successes and failures) as the industry contended with 25 years of changing energy policy; from Acts of Parliament to the political mood swings. People that work in the industry, or, who invest in it, will not need telling that those mood swings can often have more impact than fully-fledged legislation.
The spate of reports and announcements that hit the headlines in July 2015 made it clear how much of a muddle we are in. The main stories – the competition investigation, the cooling of support for renewables and the statement from National Grid had no formal connection with each other. But, below the headlines lurked the influence of the ever-present conflicts between the three strands of energy policy – reliable supply, keeping down prices and reducing carbon emissions.
The Competition and Markets Authority found the market to be broadly competitive, that customers were not over-charged, but that they were paying too much. It seems that they did not switch to a cheaper supplier when they might have been expected to. The findings also suggested that vis à vis the government, the independence of the regulator, Ofgem, might have been diminished by legislation, but, the significance of that did not make any headlines.
National Grid’s announcement, about the tight capacity margin next winter, did make headlines, but, few commentators seemed to question why investment in new plant had not come forward when the closure of old oil- and coal-fired plant had been known about for years. They needed only have asked some of the companies which had plans to build gas-fired plant what had become of those plans and why.
Regarding the reduction of carbon emissions and the changes in support for renewables, the government referred to the importance of doing things ‘cost-effectively’ in future. Customers should be pleased about that, but, remind me, was there ever an argument for doing it other than cost-effectively?
The most important relationship for the electricity supply industry is with its customers. Any business gets that relationship wrong at its peril. But, it seemed to become so focused on what government wanted that it may even have thought that the customer was the government; its reputation suffered and it is working hard today to restore it. Government, though, will always be a major presence. It cannot turn its back on energy. But, it is probably fair to say that even after 25 years, it has not learned how best to handle its relationship with a privatised, customer-driven electricity industry. We are paying for that.
David Porter was Chief Executive of the UK’s Association of Electricity Producers and Chief Executive of Energy UK before retiring from full-time work in 2012. The views which he expresses here are his own and should not be associated with any organisation that he works for today, or, has worked for in the past. His book Electricity supply: the British experiment (ISBN 978-1-86151-385-4) was published by Mereo Books and is available from www.mereobooks.com and Amazon.