Earlier this month, UK Transport Secretary Alistair Darling announced the winding-up of the Strategic Rail Authority. This brought to a close the long drama of the UK’s failed attempt to privatise its railway infrastructure. The government will now once again determine the overall strategy for the railways.
Another major UK infrastructure privatisation has been the electricity industry, but thankfully this has not repeated the failures of the railways. As a result of privatisation and competition, significant economic benefits have been achieved: prices are lower, customer service is responsive and disconnection for non-payment is almost unknown. Such successes, however, are not sufficient to ensure a good energy policy and I see the need for a ‘Strategic Electricity Authority’.
My proposal addresses the need to ensure long-term security of electricity supplies. In England and Wales it is not clear where, if anywhere, the legal responsibility for electricity supply actually rests. The Office of Gas and Electricity Markets (Ofgem) has economic obligations to ensure sufficient investment in the network; however, it cannot require the building of power stations.
The regional electricity companies have no legal obligation to secure supplies. Nor do the generators, despite probably having the greatest impact on security of supply in England and Wales. The job of the system (the grid) operator is to ensure that supply and demand are in balance at all times. but if that is impossible, the chances are that legally it is not their fault. If the lights did go out, most of us would probably telephone our electricity supplier. These days, however, the suppliers for millions of customers have little to do with electricity. They simply read meters and issue bills.
Despite its tangles, this web has functioned reasonably well, and has survived the bankruptcy of small players and near bankruptcy of big players. I wonder, however, how resilient these structures would be in the face of an increase in severe blackouts.
The future of electricity will be dominated by gas-fuelled generation involving pipelines hundreds of miles long. The biggest growth in capacity will come from intermittent renewables, and the only other major contributor will be the increasingly elderly nuclear power plant fleet. Can OfGem’s commitment to the use of market-based mechanisms deliver secure long-term supplies? Or does their limited remit force them to miss key engineering and political realities? Some blackouts are probably a good thing. An electricity system can be too reliable, usually as a result of being too expensive.
Nationalised monopolies tend to have too great an aversion to blackouts and an insufficient aversion to high prices and over-engineered systems. For market investment there is a need for long-term price monitoring. In this market there is no better price signal than a blackout. However, I see the possibility of two types of blackout – the unlikely but predictable type, and the more worrying type quite unlike anything ever anticipated.
As such I can imagine a scenario of an extended blackout in a major UK city that does little to surprise the experts, but greatly annoys the public. This could easily generate a political storm, as the UK public has come to regard electricity as a right not a privilege.
A Strategic Electricity Authority could do much to reassure in such circumstances. Equally, however, I can envisage another blackout (quite possibly smaller in scope) that could come as a complete shock to policy makers. It could reveal a fundamental systemic vulnerability requiring high-level changes in the structure or operations of the industry.
My concern is that in the face of a tabloid feeding frenzy, and with the lights flickering in Whitehall, MPs would be unable to distinguish between the two scenarios. The Californian electricity experience surely warns us not to confuse an electricity crisis with an electricity problem.
The remit of Ofgem should be broadened to make it a true strategic authority. It should be founded in engineering and policy and have a wider regulatory function than simply market efficiency. While it should not be legally required to keep the lights on, it should ensure that the nation’s electricity policy is functioning as intended, and if need be it should determine the fuel mix for electricity generation.
When the lights are out in London or Manchester it should be the SEA spokesperson that explains to the media what has happened and whether, in fact, there is any blame to be allocated. A strong authority could reassure the markets and the voters in ways that none of the existing players in the industry, including politicians, is well placed to do.
William Nuttall is director of the MPhil in technology policy at Cambridge University.