In the UK, the news headlines yesterday were about gas and electricity suppliers putting up prices and the problem – both political and financial – of how policymakers can keep down the cost of living while ensuring that energy utilities make enough money to be incentivised to invest. The Labour Party opposition has promised to freeze energy prices if elected, but many power stations are reaching the end of their life and need replacing, at the cost of tens of billions of pounds.
I’ve had an idea, which I haven’t worked up in any way, as to how this dilemma could be solved.
On Thursday, energy minister Greg Barker insisted in a radio interview that this investment had to come from the utilities:
Interviewer: “Their point (the opposition) is that if you want to build more power stations… then you must do that from general taxation, where at least the wealthiest pay more instead of… a flat rate levy on everyone’s bill, which is not fair”
Barker: “No, let’s be clear, we’re not going to build new power stations from general taxation. That sort of command-and-control 1970s view of the world might be the sort of socialist utopia that Ed Miliband wants to take us from [sic], but that’s got to come from the private sector, and companies have got to make profits in order to reinvest.” (You and Yours, BBC Radio 4)
All the energy suppliers are in some way vertically integrated – involved in both electricity generation, distribution and supply to the domestic or business consumer (‘supply’ referring to the all-electronic act of selling it to them)*. So they can all, rightly or wrongly, make noises about investing less if their profits are threatened.
One solution – and I admit again I haven’t thought it through that much – would be to remove the profit motive from the people investing in the new generation. Separating the generation business from the supply business has been suggested before, but not entrusting generation to not-for-profit regional companies.
These companies could be private regulated utilities like big UK airports, the French gas distribution system, or the national gas and electric transmission company National Grid. They would charge suppliers enough to cover the cost of generation and of investment over a long period, perhaps 10-30 years, with that investment agreed with the energy regulator, Ofgem. Any surplus would be reinvested in generation.
Like those regulated utilities, they would have strong infrastructure-like characteristics, low revenue volatility and low correlation to economic cycles, and would be able to borrow long-term to finance new power plants cheaply. With the right regulatory framework, even pension funds and insurers (who don’t currently much want to pay for new power stations except in circumstances that are very difficult to replicate) could finance them, and the resulting economies of scale would be cheaper than financing power plants one by one.
Meanwhile, stripped of the investment excuse, suppliers could have their prices regulated and price rises capped. I don’t know whether this would make prices much lower for the consumer, but it might work politically and would recognise that providing enough power generation is a national, strategic priority, the kind of thing the government is paid to ensure, and could perhaps ensure with such a policy.
*but not including transmission over the high voltage networks, which is run by the private and publicly listed company National Grid. More info here.