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If we must have another review, look at the big picture

3 February 2010

Interviewed in The Times this week, energy and climate change secretary Ed Miliband suggested another review of the energy sector was on the cards. He signalled a change to Great Britain's "Betta" trading arrangements, a new review of regulator Ofgem, and the introduction of capacity payments - apparently to benefit low-carbon generation.
The energy and climate change department is very busy these days. It is currently steering an Energy Bill through the legislative process that will, among other things, introduce a levy on electricity customers to pay for "up to four" carbon capture and storage demonstration projects. The Bill will also redefine the amount of subsidy paid to various types of generation under the Renewables Obligation. And that's not all. The government is consulting on a renewable heat obligation and setting in place feed-in tariffs for local generators.
It is an exciting time for the energy industry, which after all has to undergo a revolution if it is to meet the UK's objective to switch to low-carbon forms of power production.
It's not that Miliband is wrong. We do need to examine (again) the duties and structure of the regulator to make sure it is fit for purpose.
We certainly need to consider whether our market is well designed and whether capacity payments may be necessary. But once again we are in danger of looking at a single aspect of the energy industry as if it is the only issue, and trying to solve the problem without considering the industry as a whole.
It's the way we have always managed our industry. It's the reason we always seem to be firefighting, or having to rebuild policy instruments such as the Renewables Obligation. It's why we have a climate change levy, a Renewables Obligation, a feed-in tariff, a soon to be decided renewable heat obligation, an emissions trading scheme and a levy for carbon capture and storage - and that's just on the generation side.
The industry needs a rethink. But the time to rethink it was the time when the building blocks for the new industry were being decided.
Ofgem may have its faults, but one thing it has got right is its new emphasis on output measures. No-one cares how many kilometres of wires a company has strung, it says, or how many trees it has cut back. The question is whether everyone has the connection they need and whether line faults are at an acceptable level.
It's amazing to think that we began - and ended - a consultation on plans to wholly rethink the way we source our power without examining whether the industry as a whole was able to take the strain of such a change.
It's a lesson for Decc and for Ed Miliband. The government should have re-examined the structure and functioning of the new industry when it put forward proposals to alter its nature.
The industry does need another review, but not one that looks individually at capacity payments, or the role of Ofgem, or the market. Instead of starting with a decision to add, for example, a levy for carbon capture and storage and then dealing with the consequences, it needs to consider the outputs we want and the ­necessary subsidies across the industry.
The government's 2050 road map, due later this spring, should provide the holistic view about the future shape of the energy market, its regulation and those crucial outputs. The question is whether it will do that convincingly.
Source: Disconnector

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