The U.K. miracle

Lawrence Solomon
National Post
September 26, 2007

In Canada, our electricity systems operate like little islands, isolated from the world around them, oblivious to innovation and insulated from the real economy by regulators that administer prices. Our horizons extend as far as our power monopolies, and their government masters, permit. 

The United Kingdom, in contrast, is no island. It is plugged into the real world, for better or worse. As it turns out, the real world has generally been, and remains, the better place to be.

Electricity prices are dropping in the United Kingdom, and have been all year. British Gas – last year one of the country’s priciest providers – cut its gas prices 17% and its electricity prices 11% in March and saw 900,000 customers switch to it by May. Not satisfied, it cut electricity prices another 6% in June, making it now one of the United Kingdom’s least-expensive power providers.

Among the other major power companies, Powergen and Scottish and Southern Electric dropped power prices by 5%, while Npower dropped them by 3%. The cuts are not about to end, despite foot-dragging from private companies reluctant to part with their profits. With new gas supplies from the North Sea, Belgium and elsewhere beginning to flood into the U.K. market, the downward pressure on prices is expected to last until 2012.

The United Kingdom’s independent regulator, Ofgem, has been helping prices drop, not by imposing regulatory power but by urging consumers to switch to energy suppliers providing better prices.

“Our research shows that a big price gap has opened up, leaving EDF Energy and Scottish Power customers paying over £100 [$203] a year more for their energy for remaining loyal,” Ofgem’s chief executive announced in June. “Competition is all about customer power – any supplier that tries to buck the market by not lowering their prices or failing on service risks an exodus of customers.”

Until recently, with energy prices worldwide spiking and the United Kingdom subject to market forces, power prices in the United Kingdom saw several years of dramatic price spikes. But for the most part, the trend has been down, starting with the breakup of the United Kingdom’s state electricity monopoly in 1990.

Prices fell almost immediately, first for the residential consumers and small businesses that had been especially gouged by the government-owned system, then for large industries as well. Thanks to competition, a decade after the monopoly breakup and privatization, residential customers were not only paying far less for their power than they had under government ownership, the power was safer, cleaner and more reliable, too.

Numerous nuclear power and coal-fired generating plants had been shut down and replaced by cheaper, cleaner alternatives, and – under the enlightened rule-setting of the country’s independent regulator – blackouts and other service disruptions became rare events.

A study 15 years after the power system became clean, efficient and competitive found that cumulative cost savings amounted to some £18-billion. Prices for residential, commercial and industrial customers in the United Kingdom – after accounting for inflation – dropped by 25% to 35% since privatization, with residential customers being particular winners.

Those savings continue, thanks to the world’s most competitive power market. Unlike Canada, where customers are captive to their local provider – typically government monopolies with names like Toronto Hydro or New Brunswick Power – customers in the United Kingdom can choose from more than 70 licensed retailers, each with numerous different offerings. All told, each homeowner has several thousand different options in purchasing power, each option seeking an advantage by servicing one niche or another, each having the effect of finding efficiencies in the system that deliver some better combination of service and price.

U.K. customers can have their power metered or not, in different shades of green or not, bundled with gas or other services or not, at guaranteed prices or not, financed through different payment plans or not. They can also shop for better prices, or not, either online, or not, or they can take the advice of environmental organizations such as Friends of the Earth, who do a brisk business directing their supporters to energy decisions that please them both.

The retailers to these numerous niche markets, in turn, seek out suppliers who can best meet their customers’ particular needs. Far from being passive middlemen, they seek out generators with which to trade, often smaller ones or on-site generators that large monopolies would never consider approaching. These retailers also encourage new entrants into generation – companies not normally in the energy business that can provide power when and where they need it, for example, or farmers or other individuals that have well-situated, untapped resources. The relentless pressure to find and serve niche markets has made the United Kingdom the world’s most competitive and decentralized electricity system, providing power customers with previously unheard-of choice.

In one area, however, power customers in the United Kingdom do not have choice: climate change. By government decree, U.K. consumers pay four separate taxes – transparent to all – in order to meet the government’s policy for combating global warming. The “renewables obligation” now adds £7 per year (rising to £20 by 2015) to electricity bills in order to encourage wind and other sources of renewable energy. A further £5.50 is spent on beefing up power networks to make them reliable for renewable energy. The “energy-efficient commitment” costs another £9 per year. And emissions trading adds an amount that varies with the European Emissions markets that have been created.

These explicit and transparent environmental policies, which Canadian environmentalists can only dream of in our moribund monopolized systems, are also a fruit of competition and decentralization. Under the old government-run monopoly in the United Kingdom, as with the continuing government-run monopolies in Canada, government and business were in bed with each other, and the power systems were run chiefly for the benefit of big industry. Subsidies abounded, but they were neither transparent nor provided for causes that had public support – they were hidden subsidies to the country’s biggest polluters provided via uneconomic coal and nuclear plants, the country’s most polluting.

The miracle is that, even loaded with all these environmental charges, the U.K. system today delivers power at lower prices than those that came of the old-style monopoly. It is the miracle of competition.

Lawrence Solomon is executive director of Energy Probe and Urban Renaissance Institute.

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