Ofgem’s Project Discovery reveals the folly of the electricity free-for-all. Last month began with the conversion of Ofgem, the energy regulator, to the idea that major market reforms are required if Britain is going to keep the lights on over the coming decade.
While not specific about which reforms to go for, the general thrust was clear. The state is going to have to get a lot more involved in ensuring that the necessary levels of investment are delivered in order to build the new plant that is now urgently required.
But if February opened on a radical note from Ofgem, it ended on a familiar one. The helpless regulator was again bleating about the excessive profits announced by the big six energy suppliers, which are not, of course, a cartel. Of course.
Surprise, surprise, the suppliers had used the coldest winter in decades to boost their profits by a handsome 40%. Consumer bills soared, just as they did a year earlier when the same companies exploited the brief spike in oil prices to justify huge increases which did not then accompany the oil price on its downward journey.
At that time, we had the same outbreak of breast-beating from Ofgem followed by a complete lack of action. The reason for this is that they remain basically committed to the idea that the market can do no wrong. And if the market delivers such profits to the suppliers then who are humble Ofgem to interfere on the consumer’s behalf?
The companies blithely state that they need such profits in order to fund the £200billion investment programme over the coming decade which everyone agrees is required. This is now well established as the fig leaf for all increases in prices and profits – irrespective of where the extra money is actually going.
Ofgem is caught between stools. On the one hand, it does not dispute the need for investment. On the other, it knows as well as the rest of us that the companies are ruthlessly opportunistic when it comes to maximising profits and brazenly dishonest in the explanations used to justify them. So Ofgem takes the safe course of bleating, but not acting.
It is against this background that the earlier February pronouncement should be assessed. On the face of it, this is a fundamental change in Ofgem’s code of belief. It is the result of a substantial piece of work known portentously as Project Discovery, which aimed at establishing what our energy generation and supply industries are going to deliver over the next crucial decade.
We are uncomfortably close to the “for real” blackouts period as opposed to something in the distant future which could be wished away with the mantra on which Ofgem has always relied: “The market will provide”. Oh no, they have suddenly discovered via Project Discovery that the market might do no such thing.
There is no guarantee that the old power stations will stagger on long enough, even if environmental laws allow. Equally, there is no guarantee that new power stations, whether “clean coal” or nuclear, will be delivered in time. And, by the way, we have not done nearly enough about security of gas supplies either.
Renewables? Well, actually, you can’t rely on them for much – though, of course, they are a good thing.
I am not given to saying “I told you so”, but maybe on this occasion, I could be forgiven. Essentially, Project Discovery has led Ofgem, very belatedly, to the point that I was arguing for in the early part of this decade as energy minister. Quite simply, energy supply is too important to be left to the market.
For the first 20 years post-privatisation, the illusion was created of competition driving down prices to the benefit of the consumer while at the same time generating the profits required for new in vestment. But it was never really as simple or joyful a story as that.
The state sector bequeathed prudently massive overcapacity to its successors. In the privatised environment, over-supply forced costs down and “inefficient” operators were sent to the wall – or at least that was the theory.
In practice, cheap electricity deterred new investment. It also led to the unnecessary near-collapse of British Energy, for which the taxpayer continues to pay a heavy price. For a few months in 2003, the nuclear company simply could not reduce its costs to the absurdly low point dictated by the market – so it had to be rescued at public expense – a folly created by Ofgem’s dogma.
Now all of that has been stood on its head. Ofgem is right to have reached the conclusion, however counter-intuitive it may be, that the state will have to intervene to ensure that we have the capacity to maintain security of supply up to and beyond 2020.
But Ofgem is only the regulator. Ultimately, Government – of whichever complexion – will have to buy into the same conclusion and then act upon it. If not, we will all pay the price.
It has taken a while, but it’s nice that Ofgem and I can finally agree on something.
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