The coalition's proposed electricity market reform is radical, but Labour could go further with a green growth strategy
In the midst of Murdochgate, you'd have had to be wearing a pretty big anorak to have been excited by the government's proposals for reform of the electricity market. But this announcement has huge implications for how Britain tackles climate change, and even wider significance for the political battle over economic policy.
The problem the government needed to address was stark: how to get private-sector energy companies to invest �110bn over the next decade to replace a quarter of Britain's power stations, while cutting the nation's carbon emissions by a third, reducing dependence on imported gas and keeping energy bills low enough to prevent a consumer revolt.
It was a problem the last Labour government realised could only be addressed by fundamental reform; it's fallen to the coalition to implement it. And the results could not be more radical. The plans finally do away with the liberalised electricity market created by the Thatcher administration a quarter of a century ago.
The Tories believed that the private sector would provide, and competition would keep prices down. And for a while, in an over-supplied market, it worked. Energy prices fell and consumers and businesses enjoyed the benefits.
But that world is gone. Now, to ensure the lights are kept on, Britain's electricity industry needs a huge wave of new investment. And for reasons both of climate change and energy security, most of this has to be not in traditional fossil fuels, but in low-carbon technologies ? renewables (onshore and offshore wind, biomass and solar), nuclear power and carbon capture and storage, along with major investments in transmission lines, smart grid technologies and energy efficiency to reduce demand.
The problem is that the current industry arrangements will simply not deliver this. So the government's white paper envisages a completely new kind of publicly shaped energy market. Private sector companies' investment will be guided by a series of government interventions: a minimum carbon price; contracts with energy suppliers for low-carbon energy; a regulation setting maximum emissions levels; a set of payments to ensure sufficient capacity; and a new energy efficiency obligation.
One energy company chief executive has complained that this will make him less like a businessman and more like an administrator of the government's energy plan. That's an exaggeration: the private sector will still be able to innovate to win market share and profits, and the government wants more competition to keep prices down. But Britain is definitely moving towards a much more interventionist, quasi-planned energy system.
That this should be introduced by a Tory-led government, which is elsewhere attacking and abolishing a whole series of economic regulations, is remarkable. It's a testament to the inescapable logic of tackling climate change: it cannot be done simply by minor market adjustments. Precisely for this reason, we can expect to see the plans criticised by the Tory right, whose climate scepticism is exceeded only by their attachment to free-market economic policy.
It's vital, therefore, that the coalition seeks Labour's support for its reforms. Labour has a difficult balancing act to play ? rightly articulating consumers' concerns about rising prices, but broadly supportive of the new system. In fact, without Labour's agreement the reforms cannot work. Only if investors know the plans have cross-party backing, and will therefore be long term, will they provide the funds.
But Labour has a chance to go further. For the real prize is not just to install the new low-carbon energy systems, but also to make sure British-based firms become leaders in the technologies and services needed for them, so that the UK gets the maximum jobs and export benefit from the investment. In Labour's final year of office, its low-carbon industrial strategy began this process, notably in providing support for offshore wind turbine manufacturing. But there is much more to be done.
Internationally, "green growth" strategies of this kind are now gaining increasing traction, in economies as different as those of Germany, China and Korea. At a time when the British economy is desperately in search of new sources of growth, the potential for a green industrial revolution here too is huge. But this will require a much more active role for government. As Mariana Mazzucato shows in a new Demos pamphlet, almost all the technological revolutions that have spurred new waves of growth in the past have sprung from government activity. They require what she calls an "entrepreneurial state", willing to shape the technological and economic future.
An active industrial policy to stimulate green growth in this way looks like a step too far for a coalition wedded to orthodox economic theory. But it could be Labour's opportunity. Here lies the makings of an alternative economic strategy, focused on growth, skilled job creation and a revival of Britain's manufacturing sector.
Source: http://www.guardian.co.uk/commentisfree/2011/jul/18/labour-green-electricity-market
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