Grappling with market forces

In the 1980s Margaret Thatcher launched a radical programme of privatisation of national assets, culminating in 1989-90 with the privatisation of the bulk of the electricity industry. Subsequently, the electricity market was opened to full competition. Dieter Helm has produced a retrospective review of what has become known as the British electricity experiment, coupling it with coverage of parallel developments in the gas sector. He is well placed to do so, having sat on a range of government committees as an academic adviser, and he brings critical insights to the troubled interactions between the state and market forces.

The privatisation programme was at base ideological - it was about rolling back state ownership in the belief that private ownership would allow market competition to operate efficiently and reduce prices.

Helm argues that the commitment to free-market competition, continued under new Labour, became obsessive and counterproductive. While prices fell in the 1990s, the issues confronting the energy industry were related to security of supply and environmental constraints. With climate change becoming increasingly worrying and access to cheap oil and gas beginning to be constrained, diversification into a range of energy sources was important, and that required positive government intervention.

Subsequently, as market failures have multiplied, it became impossible to ignore the need for policy change. But, Helm argues that what has emerged so far has been patchy and reactive. He is critical of the review carried out in 2001-02 by the Cabinet Office's Performance and Innovation Unit (PIU). He argues that it avoided making difficult choices and simply offered something to all parties - more renewables, more energy efficiency and possibly, later on, more nuclear power, with the whole thing glued together by more and more imported gas.

Instead, he says we have to face up to the fact that there are inevitably fundamental conflicts in energy policy - between the needs for economic sources of energy, for energy security and for environmental sustainability. Focusing just on any one of these will, he insists, be counterproductive. So he is as unhappy with a policy that seeks low prices via competitive markets as with one that focuses solely on renewable energy technology, or one that assumes that international energy markets can be relied upon to continue to supply gas (which is what the PIU and the new energy white paper have claimed).

However, Helm does not provide a blueprint for the "right" policy, other than to hint that a carbon tax might provide a framework for resolving some of the conflicts. What he does offer is a useful corrective to the belief that competitive markets will solve all problems. For example, he notes that much of the electricity industry is now owned by three major European companies and the gas sector is similarly concentrated. This indicates that "private ownership has recreated the sorts of concentration that the process of electricity privatisation and subsequent legislation in the gas sector was designed to reverse".

That is not to say he is against private ownership. Rather, he says it needs to operate within a more tightly regulated framework. For example, whereas the regulation introduced as part of the privatisation and liberalisation programme was focused on stimulating price competition, what we now need to recognise is that "the creation of market power will, if unchecked, undermine such markets". In addition, we need to be clear about our aims. If, for environmental reasons, we want more renewables, then it may be appropriate to have a subsidy system with long-term contracts for energy suppliers, providing them with market security. But we have to realise that, in either case, consumer prices will be increased. The problem is that, given the past 20 years of rhetoric about how market competition will lead to ever-lower prices, few politicians feel able to talk out loud about the need for price increases.

David Elliott is director, Energy and Environment Research Unit, Open University.