Far from a return to nationalisation, more liberalisation of energy markets is required

The British energy industry has gone from nationalisation to privatisation and back to government control in the space of 25 years. Although the energy industry is nominally in private hands, we have exactly the same approach of government picking winners and dictating investment plans that was followed with disastrous consequences from the second world war to the mid 1980s.

In the 1970s and early 1980s, the consumer got a raw deal because long-term investment plans and contracts promoted by the government required electricity companies to use expensive indigenous coal. Government planning also dictated the development of a nuclear programme that is probably one of the most expensive government project disasters in history, losing £32bn.

The energy industry is, once again, controlled by the state. The same underlying drivers dictate policy in the new world of state control. It is not rational economic thinking and public-interested civil servants that determine policy, but interest groups. Going back 30 years, it was the coal industry – both management and unions – and the nuclear industry that dictated policy. Tony Benn said he had "never known such a well-organised scientific, industrial and technical lobby". Today, it is green pressure groups, EU parliamentarians and commissioners and, often, the energy industry itself that are loading burdens on to consumers. When the state controls the energy industry, whether through the back or the front door, it is vested interests that get their way and the consumer who pays.

So how did we get to where we are today? In the late 1980s and early 1990s, the industry was entirely privatised. It was recognised that there were natural monopoly elements and so prices in these areas were regulated. At the same time, the regulator was given a duty to promote competition. From 1998, all domestic energy consumers could switch supplier for the first time and then wholesale markets were liberalised, allowing energy companies to source the cheapest forms of energy. Arguably, this was the high water mark of the liberalisation of the industry.

Privatisation was a great success. Instead of investment policy being dictated by the whims of government and interest groups, it became dictated by long-term commercial considerations. From 1986 to 1997, domestic gas bills fell by an average of 2.6% a year in real terms – a very large cumulative reduction. From 1990 to 1999, electricity charges for domestic consumers fell by 26%, with a larger fall for industrial users. There is no point arguing that this was due to falling world energy prices – until privatisation, electricity companies had to use expensive domestic fuels. The political special interests under nationalisation required the use of expensive and dirty fuels.

Sadly, the era of liberalised markets, rising efficiency and lower bills did not last long. Both the recent Labour governments and the coalition have pursued similar policies of intervention after intervention to send the energy industry almost back to where it started.

The full article is available at The Observer.

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