UK Regulator Says Free Market Has Failed And The Lights Will Go Out

Posted on 05. Feb, 2010 by Ross in Energy Prices, Policy News, United Kingdom

UK energy market regulator Ofgem, once the strongest proponent of applying free market economics to energy companies, has waved a white flag and acknowledged that the system is failing the country, and that UK energy prices will go up by 20%.

In an amazing about-turn, Ofgem is now recommending a new part-nationalisation of the energy markets in order to prevent the massive energy shortages which the country now faces in the second half of this decade.

The liberalisation of the energy market in the UK has led to short-term supply contracts and volatile prices, making the significant investments needed in new nuclear and renewable power sources too risky for the power companies involved, who have been more willing to simply profit from existing sources.

However, a swathe of elderly coal and nuclear plants are due for decommissioning over the coming ten years, leaving the UK facing a gigantic shortfall in energy generating capacity. The construction of new power stations need to be begun imminently to avoid widespread energy shortages and rolling blackouts which would cripple British businesses and cause unrest in a country not used to being deprived of power.

Both the government and energy companies have dragged their heels over the construction of new power stations: the former over the unpopularity of such buildings with local communities, and the latter over uncertainty over returns on investment. The result is that the window of opportunity to avoid UK energy shortages is almost certainly closing, and Ofgem has finally held up its hands and acknowledged that the free market energy system which was supposed to guarantee investment and lower energy prices has failed to produce the expected results.

Instead, it is now advocating a more nationalised system whereby electricity and gas could be sold to consumers through a state-controlled body supplied by private energy companies who would be under minimum supply obligations as part of their contracts. This would ensure minimum rates of return on new power plant construction and make pricing less volatile.

However, energy prices would certainly increase in order to pay for the £200bn investment necessary to safeguard the UK’s power generating capacity. Ofgem and other energy analysts agree that a 20% rise by 2020 is the most likely scenario, although the Department of Energy and Climate Change prefer a more politically acceptable estimate of 8%.

Such price rises would add a huge burden onto consumers, with household bills averaging around £2000 a year. Businesses would face a substantial rise in operating costs as well, making investment in energy efficiency projects such as energy-saving warehouse lighting even more important and with an even greater return on investment too.

According to a recent survey carried out by the Carbon Trust, 49% of all UK businesses are concerned about the prospect of energy price hikes this year, making energy costs and how to control them one of the key hot topics for UK business in 2010