Government must step back from energy markets to lower prices, argues new report

New IEA report calls for genuine competition in the energy market

Policymakers are addressing the symptoms of a dysfunctional energy market but patently failing to get to grips with the reason for failure: a lack of genuine competition.

A new paper, From Nationalisation to State Control – The Return of Centralised Energy Planning, charts the failure of state interventions in the UK energy market and looks at how powerful interest groups have led governments to fall back on centralised planning, at the expense of consumers nationwide.

The report debunks arguments for government intervention in the energy market and warns against statist solutions such as a price freeze or windfall tax. Not only would these policies seriously undermine the incentives to invest in the UK energy sector, they would also have the perverse effect of increasing demand whilst restricting supply.

The failures of intervention:

  • Interventions push up prices for consumers. For a very short period around the turn of the millennium, the UK energy market was highly competitive and offered consumers choice and low prices. Interventions in both the 1970s and 1980s, and in the past ten years have continuously failed to provide consumers with the best outcomes.
  • Government promotes wasteful investment. Centralised planning has created a complicated network of administrative subsidies to promote renewables and nuclear power, at a significant cost to the consumer. This has played a large part in spiralling living costs, rising fuel poverty and decreasing disposable income for families across the country.
  • Energy security is best provided by the market. Taking responsibility for energy security away from suppliers and to government is more likely to reduce security than to increase it.  A liberalised market would provide strong incentives for producers to diversify supply and respond to consumer demand. Market ‘failure’ as a reason for government intervention for security in supply is a misnomer.
  • Rigid planning assumes the future contains only a narrow range of possible outcomes. Relying primarily on markets is the best way to achieve flexibility and adaptability. There is simply no need to look decades ahead and make long-term commitments which may go awry, or to wait for politicians to act. Only markets will deal with problems as soon as they are perceived.
  • Vested interests can capture the policymaking process. Government tendencies towards centralised planning stem from the power of pressure groups including the green lobby and existing energy producers. Large incumbent companies are often all too happy to be regulated, as it raises potential rivals’ costs and restricts market entry.

Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:

“For too long consumers have been ripped off because of government interference in energy markets. Politicians need to realise that more controls are not the answer to energy companies not behaving in a manner they see fit. Proper privatisation and a return of market forces are the best ways to ensure both security of supply and the lowest possible prices for consumers.”

Notes to Editors:

To arrange an interview about the report please contact Stephanie Lis, Communications Officer: slis@iea.org.uk or 07766 221 268.

The full report, From Nationalisation to State Control – The Return of Centralised Energy Planning, by Colin Robinson, can be downloaded here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

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