6. Conclusions
I have argued that the future of electricity (and related gas) regulation involves new processes for doing economic regulation, a wider interpretation of the requirement to promote competition and a clear shift of emphasis to the effective internalization of the environmental externality of greenhouse gas emissions. This is not to say that independent regulators, such as Ofgem, have not been extremely effective in delivering their mandates to date. It is to say that that mandates (and their interpretation and power to deliver them) were born of an era of electricity (and gas) deregulation following inefficient state intervention in the operation of the industry and prior to the era of climate change concern. This implies
that current mandates need to be reconsidered and, as necessary, challenged. It is therefore encouraging that Ofgem has recently recognized this by announcing
a major review of its system of RPI-X price control. This ‘RPI at 20’ review explicitly
asks whether a system that has worked well for 20 years is fit for purpose
going forward (Buchanan, 2008).
In the specific context of the UK I offer a couple of concluding sets of
observations for national government and energy companies.
While much can be done within Ofgem’s existing mandate, it does seem
to be the case that Ofgem’s mandate and hence its powers do need some clarification
(see also Sustainable Development Commission, 2007). I have argued that
the current primary focus on the promotion of competition is no longer appropriate
for a specialist energy regulator like Ofgem. This is not to say that competition
is no longer important. It is to say that other issues require relatively more attention
and that a significant part of the current competition agenda can be handled
by the general competition authorities. I think that something like the promotion
of economic efficiency in the delivery of energy services better captures all of the
trade-offs between supply and demand, production costs and price, and environmental
and financial costs that need to be covered by Ofgem. The UK government
needs to clarify CO2 targets for the electricity (and heat) sector in particular and
there may be a role for government in some of the public-private partnerships
that would seem to be necessary to deliver some socially valuable CO2 reducing
investments. Helm (2005) and Maugis and Nuttall (2008) go further and argue the
need for a new UK energy policy – which would also include to nuclear policy
and primary energy supply security – based around concentrating the existing,
dispersed, civil service and ministerial effort either in a single agency (Helm) or
under a single minister (Maugis and Nuttall). What is clearly needed is an economically
competent regulatory agency that is neutral towards any given technological
solution and that is focused on delivering the twin long term goals of CO2
reduction and lowest cost energy supply.
For companies there are two pieces of good news. First, fair rates of
return can be guaranteed on existing investments and low risk investors can focus
on established network investments. At worst, policy towards climate change will
give rise to the need to allow for stranded asset recovery (as was the case with
electricity deregulation in the presence of private monopolies). Second, investment
requirements are rising. Yago et al. (2008) estimate that environmentally
inspired investments will add £28bn of investment to 2020 in the GB electricity
sector alone above the base case. This implies opportunities for incumbents and
entrants alike in the presence of a level playing field.
In closing it is important to recognize that national approaches to the twin
issues of economic regulation and tackling climate change differ enormously. For
the UK a strong economic energy regulator provides one obvious institution to
build on. For other countries, other institutions may be the most obvious ones to
entrust the achievement of long term policy goals towards energy and emissions
to. However it remains the case that competition and effective monopoly regulation
are the friends of static and dynamic efficiency in the energy sector even in
the presence of emissions externalities (when supplemented by markets for the
externalities). Any jurisdiction which fails to recognize the importance of markets
risks ignoring the substantial lessons from the period of energy market reform as
it faces up to the new challenges of delivering a policy to reduce climate change
related emissions.
I have argued that the future of electricity (and related gas) regulation involves new processes for doing economic regulation, a wider interpretation of the requirement to promote competition and a clear shift of emphasis to the effective internalization of the environmental externality of greenhouse gas emissions. This is not to say that independent regulators, such as Ofgem, have not been extremely effective in delivering their mandates to date. It is to say that that mandates (and their interpretation and power to deliver them) were born of an era of electricity (and gas) deregulation following inefficient state intervention in the operation of the industry and prior to the era of climate change concern. This impliesthat current mandates need to be reconsidered and, as necessary, challenged. It is therefore encouraging that Ofgem has recently recognized this by announcing
a major review of its system of RPI-X price control. This ‘RPI at 20’ review explicitly
asks whether a system that has worked well for 20 years is fit for purpose
going forward (Buchanan, 2008).
In the specific context of the UK I offer a couple of concluding sets of
observations for national government and energy companies.
While much can be done within Ofgem’s existing mandate, it does seem
to be the case that Ofgem’s mandate and hence its powers do need some clarification
(see also Sustainable Development Commission, 2007). I have argued that
the current primary focus on the promotion of competition is no longer appropriate
for a specialist energy regulator like Ofgem. This is not to say that competition
is no longer important. It is to say that other issues require relatively more attention
and that a significant part of the current competition agenda can be handled
by the general competition authorities. I think that something like the promotion
of economic efficiency in the delivery of energy services better captures all of the
trade-offs between supply and demand, production costs and price, and environmental
and financial costs that need to be covered by Ofgem. The UK government
needs to clarify CO2 targets for the electricity (and heat) sector in particular and
there may be a role for government in some of the public-private partnerships
that would seem to be necessary to deliver some socially valuable CO2 reducing
investments. Helm (2005) and Maugis and Nuttall (2008) go further and argue the
need for a new UK energy policy – which would also include to nuclear policy
and primary energy supply security – based around concentrating the existing,
dispersed, civil service and ministerial effort either in a single agency (Helm) or
under a single minister (Maugis and Nuttall). What is clearly needed is an economically
competent regulatory agency that is neutral towards any given technological
solution and that is focused on delivering the twin long term goals of CO2
reduction and lowest cost energy supply.
For companies there are two pieces of good news. First, fair rates of
return can be guaranteed on existing investments and low risk investors can focus
on established network investments. At worst, policy towards climate change will
give rise to the need to allow for stranded asset recovery (as was the case with
electricity deregulation in the presence of private monopolies). Second, investment
requirements are rising. Yago et al. (2008) estimate that environmentally
inspired investments will add £28bn of investment to 2020 in the GB electricity
sector alone above the base case. This implies opportunities for incumbents and
entrants alike in the presence of a level playing field.
In closing it is important to recognize that national approaches to the twin
issues of economic regulation and tackling climate change differ enormously. For
the UK a strong economic energy regulator provides one obvious institution to
build on. For other countries, other institutions may be the most obvious ones to
entrust the achievement of long term policy goals towards energy and emissions
to. However it remains the case that competition and effective monopoly regulation
are the friends of static and dynamic efficiency in the energy sector even in
the presence of emissions externalities (when supplemented by markets for the
externalities). Any jurisdiction which fails to recognize the importance of markets
risks ignoring the substantial lessons from the period of energy market reform as
it faces up to the new challenges of delivering a policy to reduce climate change
related emissions.
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