The British Electric Industry 1990-2010:
The British Electricity Industry 1990–2010:
The Rise (and Demise) of Competition
A new book by Alex Henney
Review by Roger Barnard
Alex Henney is a hard man to pin down. I first met him over thirty years ago, just after he had left Haringey Council in north London to work for the Department of the Environment on national housing policy, and our paths have continued to cross at erratic intervals ever since. Whether analysing the bloated costs of the public sector, or raging against Transport for London’s persecution of the private motorist, or dissecting the Treasury’s scandalous treatment of the victims of the Equitable Life debacle, he has many of the traits of the best Grub Street pamphleteers of the eighteenth century––courage, an individual mind, vehement opinions, an instinct for stirring up trouble, and the art of combining original observations with sweeping generalisation.
But Henney is better than a mere pamphleteer for those who wish to understand the nature and consequences of the UK’s electricity supply reforms of the past two decades. His analytical mind, the product of a professional training in engineering and economics, and his mastery of the historical background and political context, make him a stimulating guide to an industry that has seemed to be in a permanent state of structural and commercial revolution since its market floatation in 1990. He writes in a lucid, almost conversational style, with a remarkably independent but well-informed approach to his subject, and has a gift for saying things which others would more usually leave unsaid.
All of these features were evident in his 1994 book, A Study of the Privatisation of the Electricity Supply Industry in England and Wales. That was a blow-by-blow account which the industry’s official historian, Leslie Hannah, described as the finest contemporary study of a privatisation programme that we have had in Britain. And Henney’s unusual talents in these respects will be confirmed again with this month’s publication of The British Electricity Industry 1990–2010, a dense but incisive review* of how a potentially competitive industry operating at arm’s length from the Government has nevertheless evolved into an oligopolistic agent of wider public policy and social welfare objectives.
Since the industry’s privatisation––which opened a Pandora’s box of financial engineering, foreign takeovers, and corporate consolidation––the history of electricity supply in the UK has also been the history of regulation, and of the way in which Ofgem’s values and personalities have directly moulded the industry’s operations and activities. Ofgem has consistently been at the forefront of utility regulation throughout this period in terms of innovation and intellectual leadership. But as Henney shows, what began as a supposedly benign mechanism designed to promote competition and ensure that prices increase by no more than the annual change in inflation, minus a targeted factor for efficiency improvement, has now become a profoundly dynamic process. It has had its own discretionary agenda, reaching into and shaping almost every aspect of national energy policy, and it has built up a forward momentum that neither the industry nor the institutions of government have been able to roll back.
Henney charts the complex course of this mutation in a scholarly way, with copious references and footnotes, all marshalled into a very readable narrative. While he is careful to give credit where it is due (Ofgem’s development of a robust methodology for network price controls is particularly commended), he is critical of the most expensive failures of regulatory activism––the chaotic introduction of competition in supply to business sites in 1994, the wasteful opening of the competitive mass retail market in 1998, the bulldozing of the industry into badly designed new trading arrangements in 2001. And he is scathing about the lack of significant consumer benefit in these reforms. His chapter on Ofgem’s (and the Government’s) endless dithering on the subject of smart metering over the last five years should be required reading for those who believe that the proposed national roll-out will usher in a bright new dawn of improved customer service and general consumer empowerment.
These analyses at the heart of the book (shrewdly subtitled “the rise and demise of competition”) are a salutary reminder that the market-based approach to electricity regulation was adopted not because it had been “proved” to be correct on the basis of some serious objective test, but because it fitted in with a particular pattern of academic and administrative wisdom on the subject that happened to be in vogue at the time. This regulatory paradigm was already well past its sell-by date by the time that Ofgem belatedly launched its supply market probe under political pressure three years ago. But it has now been further discredited by the growing realisation that the greening of generation and transmission on the scale implied by the Government’s acceptance of the European renewables targets will effectively require the electricity industry to be turned on its head.
As Henney points out, greening the industry while maintaining security of supply has been made much more difficult by the legacies of the regulatory focus on competition. What he calls the “naive marketism” of the post-privatisation project––the ideological extension of the principle of competition into areas where the benefits do not justify the costs ––has left the industry ill-equipped to handle these formidable challenges. He concludes that a competitive electricity industry is too complicated for political and regulatory authorities to manage, and that the market in the traditional sense of the word is finished because it cannot deliver the expensive decarbonisation and security goals of government policy. Energy investment will increasingly be driven by central planning and subsidies, as the enduring question of energy policy the world over––how to keep the lights on at affordable cost––reasserts itself.
Perhaps that is how it should be anyway. It is impossible to read Henney’s book without recognising that the dogged pursuit of competition in energy markets under the GB system has been essentially a contrivance, sustained only by regulatory artifice and the sometimes egregious spin of the industry itself. Consumers themselves have never been fully engaged with this vision, and there is not a single benefit they have gained from it that could not have been delivered at lower cost and with greater speed and less complexity by direct regulation. The imminent introduction of the Government’s proposed electricity market reforms tacitly acknowledges these awkward truths. This will probably be our last chance to get security of supply right while adapting sensibly to climate change at a price that does not impoverish both individual citizens and society as a whole.
Against that background, it seems likely that future historians of the British electricity industry will look back on the post-privatisation era as an interesting but ultimately bizarre deviation from the fundamental rule that energy policy is always political and that regulation must be subordinated to national co-ordination and a strong element of strategic direction. Be that as it may, to produce both the opening and the closing bookends of an industrial era, as Alex Henney has done, is an impressive achievement. Different readers will come away from the sixteen pungent and packed chapters of his new book with diverse memories of its excellence, but with no doubt about its importance to the regulatory debate as one era ends and the next one, equally unpredictable but much more dangerous, begins.
* Published by EEE Ltd and available on order from www.alexhenney.com
Roger Barnard is a barrister and was head of regulatory law at EDF Energy until his retirement last year.