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Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)G8 Energy Ministerial Conference |
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THE UK - LEARNING LESSONS INTRODUCTION In many places, energy is viewed as necessarily a service provided by the state. In others, such as the US, it has always been largely a private sector business. We in the UK have seen it from both perspectives. Oil apart, our energy sector has gone from mixed municipal and private sector provision to state monopoly and now to private sector again. Public sector monopolies were thought beneficial for many years because they appear to guarantee stability and security of supply. It became increasingly apparent, however, that this security was being bought at a price, which could include inflexibility, complacency, "gold-plating" of facilities, lack of innovative drive, and higher prices to consumers. Although reform was urged, it was never achieved while these companies remained in the public sector. On balance, the recent liberalisation has brought greater benefits than were foreseen at the time of the change. But flaws exacerbated by the speedy and sometimes unheeding approach adopted to privatisation has meant that we are now having to revisit many areas to ensure that the market works to the benefit of the many rather than just of a few. PRIVATISATION Privatisation in the UK was driven by the former administration, principally at first on the ideological grounds that the state formed too large a slice of the economy. It also raised large amounts of money for the Exchequer. Though there was increasing acknowledgement of the importance of competition and consumer benefit, they seemed initially to be secondary considerations. This was particularly evident in the first major energy privatisation - that of British Gas - which effectively swapped a public monopoly for a private one. This underlying political expediency meant that the structure of the industries and of the new regulatory regimes were not properly thought through. The companies were sold too cheaply, and the early regulatory price caps were set too loose, so that huge windfall profits were made. What this experience has made clear is that privatisation alone can fail to resolve problems or can even create new ones. To bring benefits to consumers, you also need liberalisation of markets and the introduction of competition. BENEFITS One of the good things that the privatisation process did was to expose what the real costs of the energy business were - to bring greater transparency where none had existed before. For the industry, liberalisation has created opportunities for new companies to get involved in a range of areas - new electricity generators, new gas suppliers, new service companies. Gas supply is highly competitive, with the former monopolist, British Gas, now having a minority of the industrial market. Electricity generation has become increasingly competitive, which has exerted additional downward pressure on prices already falling because of changes in the costs of energy supply. Competition in generation has also helped to drive innovation, with more introduction of increasingly efficient and environmentally-friendly Combined Cycle Gas Turbine generating sets. The liberalised electricity market is also creating more opportunities for combined heat and power and for renewables. SUPPLY COMPETITION Competition is inherent in a liberalised market. For both gas and electricity, competition to supply large industrial consumers was allowed from privatisation. That competition was subsequently extended down to smaller industrial concerns, and is now being extended again to all consumers, down to individual householders. Competition for gas supply to households is well advanced, with electricity due to follow in the Autumn. ENVIRONMENT The switch from coal-fired to gas-fired technology for electricity generation has significantly reduced our emissions of carbon dioxide, sulphur and nitrogen oxides, and smoke and dust. These changes have been welcome - if unforeseen - consequences of the liberalisation process. But greater efficiency and lower consumer prices - in themselves good things - provide the wrong signals when concerns about climate change drive us towards trying to reduce energy consumption itself. This is a conundrum: we want both the benefits for consumers and protection for the environment, and getting both in equal measure may not be easy. SECOND THOUGHTS As I said earlier, liberalisation and regulation - or the UK version, anyway - was not entirely without flaw. I have mentioned the bargain-basement sale of the utilities. The privatised utilities were sold too cheaply, and the initial price controls were too lax. The result was a bad deal for consumers and taxpayers as excessive profits were earned, and regulatory uncertainty for the companies. This is why we levied the Windfall Tax. This has put right the failures of the past. But we need to ensure that prices and service standards reflect the right balance of consumer interest in future. A second concern is that the existing framework for regulation does not reflect the importance of these industries, the energy sectors in particular, to our social and environmental objectives. In particular, we must ensure that the benefits of competition in gas and electricity do not go disproportionately to the better off, and that poorer consumers are protected. The regulatory framework should also be set in a way which ensures a positive contribution by these industries to our environmental objectives. More generally, we have been concerned that without a proper framework for regulation, the regulators' decisions may be unconstrained or unaccountable. We need to be clear about the roles of Government and regulators. Government should set the objectives for regulation, and ensure the framework reflects these. Regulators should fulfil their duties at arms-length within this framework And finally, we need more open and accountable regulation, which is transparent, consistent and predictable. Only by doing so can we ensure that good and fair decisions are made, and are seen to be made. It is time to learn from experience of the existing regime, in order to serve consumers better in the future. This is why we published a Green Paper on 25 March called "A Fair Deal for Consumers; Modernising the Framework for Utility Regulation". The proposals in this Green Paper have four broad aims. Firstly, they set a clear framework for regulation, in which the roles of Ministers and regulators are well-defined. Secondly, they aim to safeguard the interests of consumers and give them a fair deal. Thirdly, they are designed to anticipate changes in market structure. These changes are particularly evident in the energy sector, where we are seeing both the development of competition and the emergence of multi-utility companies. And fourthly, they aim to build confidence in the regulatory system by improving the transparency, consistency and accountability of the regulatory process. Turning now to wider market issues, the market-driven rapid switch to gas fired electricity generation has also created concerns as well as bringing environmental benefits:
The market view is that the commercial pressures will suffice to ensure that companies will do whatever is necessary to meet likely future demand. That may or may not be the case. The present UK Government feels it needs to have a more informed view. We are therefore reviewing the whole question of energy sources for power generation. CONCLUSIONS When it comes to deregulating and liberalising markets, each nation starts in a different place. There are great challenges to be faced in reforming any large industrial structure. To realise the full benefits of that reform, the introduction of genuine competition is vital. The UK is clearly not the only model for liberalisation, nor can we claim to have got it completely right yet. But our experience does suggest that it is certainly possible to reconcile the introduction of competition with wider energy policy goals. Environmental objectives can likewise benefit: a commercially-driven system has inbuilt incentives to improve efficiency. Governments will need, of course, to satisfy themselves that their wider objectives are also taken into account. However, we conclude that the potential benefits of a liberalised market - to the nation, business, to individuals, and even to the world at large - are worth pursuing. We thus continue to pursue them in our own country and to advocate them internationally. We continue, too, to share with others the fruits of our experience so that they can learn both from our successes and from our failures. |
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Other speeches by Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)
(the following are available from the archive) |
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