Thursday, June 7, 2012

Even Conservatives in Britain Have Seen the Folly of De-Regulation of Electricity Production and Distribution

But U. S. Conservatives Will Never Admit They Were Wrong

Public utilities are what are called natural monopolies.  Because the fixed costs of producing and generating electricity, for example, are so great, the economics of electricity dictate that there be only one supplier to an area.  Duplication, which works in most competitive markets simply does not work in natural monopolies.

In the United States the solution to providing everyone with electricity at a reasonable price had been to allow private firms to enjoy their monopoly subject to public regulation.  Electrical firms were guaranteed a profit (bad for consumers, good for the company and its investors) but the profit was regulated to the level that would exist had competition been present in the market (good for consumers, acceptable for the company and its investors).

This system was a fantastic success, so much so that it was hated by proponents of the philosophy that free and unregulated markets were the only system to have.  So these forces argued for de-regulation and sold the concept as one that would produce lower prices for consumers and higher profits for the industry (yes everyone but Conservatives can see that contradictory idiocy).  The result in one word, Enron.

The same policy was adopted in Britain, with roughly the same failure.

Britain currently has an unusually deregulated, competitive energy market. But leaving the system as it is “would not be in the national interest”, noted Ed Davey, the energy secretary, when introducing a draft bill on May 22nd. Many of the country’s power plants face closure because they are inefficient, polluting or old. Energy firms have tended to sweat their assets rather than invest in new facilities. As a result, some 20% of generating capacity is due to come offline within a decade. 

The British Conservatives are much more pragmatic than their American cousins.  So they seem to have no trouble in turning 180 degrees and going back to a regulated market.

The bill introduces long-term contracts for low-carbon generation. These will set a minimum price for electricity generated for each technology, paid by consumers through their bills, to assure firms they will recoup high upfront costs. The contracts are intended to spark investment in clean and nuclear power—which will help the country hit its emissions targets—while also expanding the portfolio of generating sources and replacing declining capacity.

See British Conservatives have recognized that the free market will not produce the needed investment in less polluting capacity.  So the government is stepping in to create a regulated electrical industry.

The draft bill represents a huge about-turn from the current deregulated market to a centrally-planned one. In a renewable energy “road map” in July 2011 the government specified how much energy it hoped to generate from different sources by 2020. The coalition is openly pro-nuclear. The new bill adds to the state intervention—in 2013 a minimum price for each technology will be specified. Some contract prices may even be decided on a project-by-project basis. That “makes a nonsense of competition”, says Tom Burke of E3G, an environmental consultancy.

The laws of economics are much like the laws of physics.  They can be violated but only with disastrous consequences.  A person can choose not to believe in the Law of Gravity, for example, and jump off a 20 story building.  The result will be much the same as choosing not to believe the laws of economics. 

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