

Energy markets

The charges of the light brigade

The market, not the government, should determine the price of electricity in Britain

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Readers' comments



Once again the flawed reasoning and blind faith of the Economist in the free market.

It's really starting to be irritating.

Try to show a modicum of intelligence and do your research properly too


Oh dear. The Economist's unswerving faith in the peerless virtues of these 'free markets' is touching, but it is also frightening and denagerous, because it helps to feed the prejudices of those on the Government benches and in Whitehall who know very little but think they know a lot.

Evidence of the failure to grasp the fact that an exclusive and excessive application of the narrow canon of neoclassical economics is inappropriate for the energy industry - or, indeed, for any of the infrastructure and utiltity industries which are characerised by specific, long-lived assets - abound. The institutional framework in which economic decisions are made is the key. And devising this framework has been amde more difficult by rolling out full retail competition (since 1998) and eliminating any regional or local supply businesses that would have protected the collective interests of millions of final consumers - who are now the playthings of the 'Big 6'.

Probably the only sensible thing in this article is the suggestion that the government could have threatened to break the Big 6 into generation and supply bsuinesses. But it is totally negated by the notion that, were the government to set a prices for carbon, it could promise to increase this price over time. Do you really expect investors in long-lived, specific assets to take such a promise seriously and to invest billions on the back of it? Far better to let investors bid in their commitments to provide capacity, for the government to accept the least cost combination of bids (subject, perhaps, to some CO2 target) and to guarantee investment recovery.

WT Economist

From todays' Bloomberg News:

"Wholesale electricity jumped in New York as hot, humid weather from Massachusetts to Maryland prompted households and businesses to crank up their air conditioners. Spot power in New York City rose to an average of $706.33 a megawatt-hour for the hour ended at 12 p.m., after soaring as high as $1,647.56 at 10:55 a.m., according to the New York Independent System Operator Inc., which manages the state grid. Electricity traded yesterday for delivery in the 10 a.m.-to-noon period today was priced in the $50-range."

That is 70 cents to $1.65 per kwh, wholesale, today at mid-day. Is that the price of power?

It just so happens the solar cells on my roof are putting out far more power than my house is using right now, since none of us are home. The reverse is true at night or in winter.

Not only are they putting out net power at the time when there is a strain on the amount genrated, but they are also tossing power into the grid in my neighborhood that can be used locally, reducing strain on the distribution system at a time of peak demand.

My solar panels were heavily subisdized, based on the average price of electicity over a year. But perhaps everyone else is getting a pretty good deal if the timing of solar power production is taken into account. I generated a surplus of 1000 kwh last year. I got paid 6 cents per kwh for it.

Public Dude

Britain created the first light bulb? Pray, who? All these years I believed Thomas Edison created the first light bulb. Are you sure about your claim? May be a fact check is required.


The Economist editors should get their facts straight. It is utter nonsense to argue that the British electricity prices are among the lowest in Europe. The lowest retail and commercial electricity rates in western Europe are in nuclear powered France (just check The Dutch electricity rates are actually among the highest.

The love affair of The Economist with free markets prevents the editors from seeing straight. Love is blind, apparently. Electricity is not like competition between supermarkets or ice cream parlors.

Utilities are natural monopolies and that is the reason why most utilities are state-run/regulated or collectively owned. Power plants are capital intensive and also require planning horizons of decades, which is far beyond the horizon of ordinary "free market" investors. Furthermore, electricity is very essential to modern societies which is why political involvement is logical. Brownouts are not acceptable in a modern society. Electricity is also a special case because electricity cannot be stored like ordinary goods. These issues seem to be understood by French technocrats but not by the editors of The Economist.


I worked for a large UK utility in the early 1990s and I ran the financial models to decide what types of generation to build. In those days, the numbers showed that only gas fired projects made financial sense. Unfortunately, everybody else had the same idea and within 10 years the UK was over-supplied with gas fired generation and prices collapsed. The banks ended up owning lots of power plants.

The Economist has this touching faith in markets, and assumes that they are infallible and they always set the right signals, this isn't the case in markets like electricity. The wholesale electricity markets in the early 1990s worked well because the government had built all the power plants in the country. Supply and demand was in balance and there was a good diversity of technologies. When you are making a decision to build you can't really forecast prices for coal, uranium or natural gas much beyond the next 5 years. However, a coal fired plant will last 60 years, and the cost of a new 1,000 MW plant is about $3.5 billion. Relying on spot market prices to make long term investment decisions just doesn't work. The bankers will no longer lend money on this basis, the large US banks have been burned too many times.

At the end of the today the politicians need to play a role. If you left it to the market the next generation of power plants wouldn't get built. Electricity is too important a commodity.

Jorge Del Rey

The Economist seems to ignore, or willing to ignore, that long term investment is not necessarely synomimous of good investment. In fact the if it was not so there was not such a thing as High Frequency Trade on the market, and with such an oportunity to get rich today who is gonna spare a second considering long term investment?
Take for ezample, just to remain in the fossils energy sources the comparison in between the traditional Oil&Gas and the "non-conventional" one. One of the reasons why the most of the investment went diverted to shale gas is in the rapid ROI. Yes, it is rapid indeed but it does not last at all. Once the little pores in shales has been put in comm to a fracture it rapidly come up to your poket but then it's done. The production has been proved to fall un a meeter of months not years as the traditional. So what? So you need to call for other investments and in the same time the cost of gas fall by two, which makes the investment no longer effective.
Regulate or not regulate? Well it depend. If you support not economical investment such as the nuclear power, so expensive that only with government support it could be maked, then you need a sort of government driven investment and the privat market will take advantege of the public spending. Such a good thing, for few.


Well said Economist. Forcing the market in electricity trading to be transparent is long long overdue. Leaving the market to sort out how to invest is also sound. However, one further bit of regulation is essential. The most profitable way to run a utility is to have almost enough capacity, so that capacity is fully utilised but at the cost of lower reliability. This is particularly relevant in the UK where so much new capacity is needed. A substantial financial penalty for failing to maintain supply is all that is needed for the market to really work its magic.


Let the stupid British government inflict high solar and wind energy prices on their voters. Then the voters will have the satisfaction of knowing they were the victims in the largest fraud in the history of mankind! The IPCC theory "anthropogenic CO2 causes global warming" is NOT proven. What has been proven is that many of the lead IPCC researchers are fraudsters, as are the U of East Anglia and Penn State groups that investigated the emails of Drs. Jones and Mann respectively. It is well past time that the warmers and their supporters were all severely punished for their evil greedy misdeeds.


It is reassuring that the Economist can be as sloppy in its research as anyone. Though, as a fan of the Economist, a little disappointing.

Your graph suggests UK electricity prices are significantly lower than in the EU15 countries. And uses this to support the proposition that the market is working well in the UK. Quite apart from the abuse of statistics and graphs, your point also hides another little known secret.

Electricity prices are indeed lower in the UK. But this is because government taxes on electricity are lower (energy taxes on top of VAT). The energy companies in the UK pocket more in profits than their European equivalents - with retail prices about the same, and wholesale costs lower (UK is more self sufficient, and has lower delivery costs for natural gas) delivering a bigger margin. Details are provided here:

UK energy companies manage to keep their wholesale costs hidden mainly because they treat OFGEM (the UK energy regulator) like a whipped dog. Last year OFGEM commissioned a study on how to make energy companies' costs more transparent. Of the eight recommendations, OFGEM dropped six and watered down the remaining two. I wonder why.


A massive investment in generation of any sort needs a rising market and currently the UK's is declining fast, 11.7% since 2005 when the generation was 398.3 TWh to 2011, then it had fallen to 351.8 TWh of which 62.7 TWh was nuclear (IAEA PRIS database).

The fall of 46.5 TWh is 3/4 of the 62.7 TWh nuclear provides so as the trend continues the progressive closure of the remaining UK fleet will provide no difficulties. (Sizewell B was off in 2010 for 6 months and with no perceptible brown-out)

The energy secretary has not mentioned the rapid decline of North Sea oil and gas production (22% in 2011) nor the passing of the Saudi oil prodcuti9on peak in 2005, exacerbated by its rrising internal consumption. The commensurate oil price hike has started to empty the roads and skies as the UK's crude oil consumption fell 12% from 2005 to 2010. DfT reports that since 2007 the UK's road transport has fallen 7%, while takeoffs/landings have fallen 16%. Inviting the private sector to invest in roads and runways or nuclear power in an overall declining energy market is a bizarre, blinkered approach.

The coalition is harking back to Edward Heath's "mixed economy", whereby the state provided the projects and the private sector profitted from the work, presumably to reward its industrial sponsors.

As the article avers, a diversion from a free market for no good purpose is to be deprecated.


Even more green than solar power and wind power is... people power. As Britain is suffering from a combination of obesity epidemic and high unemployment, and as unemployed people are more likely to be overweight or obese, the solution seems obvious: put exercise bikes in every home with a small dynamo of the sort that, in days long past, used to power the front lamp. Although the wattage generated by a single pedalling porky would be modest (perhaps 75w) the cumulative effect of millions of Britains pumping for prosperity would be enormous. As an inducement, each household could be connected to a smart meter which automatically cut off the supply of mains electricity whenever the occupants failed to generate sufficient power of their own. Not only would this be a very green way to generate sustainable power, it would also address the UK's growing health problem most effectively.


Maybe this newspaper should get its fact straight. It states that the UK has the lowest price for electricity save Greece & the Netherlands for the old EU15.
Yet, if one goes to eurostat, one finds this:
In the 2d semester of 2010, 3 countries of the EU15 has lower prices than the UK: Greece, France & Finland
The story is the same if one goes to the database instead to find data for the 2d semester of 2011.

Greece is the european countries that emit the most CO2 per kWh. France is using nuclear power, the dreaded high cost solution to eliminate GHG emissions from electricity production. Finland is also a fan of nuclear power.

Besides, going for gas is not enough to solve the CO2 emission problem the world faces. For that, emissions would have to drop by a factor of 4 or 5 (more like 5 for the UK). That means electricity production will have to be almost totally decarbonized. Once again, this newspaper should stop advocating unabated gas as a lasting solution, as it is obviously not true. Wind power does not do the trick either even when combined with gas...


Government has to be more involved, simply letting the market rip won't reduce emissions and leaves us dangerously exposed to gas prices, which are very likely to remain high until 2020 at the least, shale gas or not. But the government could be less prescriptive by specifying the amount of carbon the power sector can emit by 2030 (creating the conditions for fair competiton) and putting pressure on manufacturers to lower costs by promising support with built in digression.


Uh, it is true that the American Thomas Edison was only one of many people who contributed to the development of the light bulb. A lot of British folks were involved. So were a lot of Americans other than Edison. One of the most important developments--the use of tungsten--was invented by a Croatian (when Croatia was part of Hungary under the Hapsburgs). There were French and Germans involved as well. The Economist should avoid the American (and Russian) habit of over-stating their home country's historical contributions to engineering.


The number of coal mines and oil wells is finite. This makes taxing carbon at the source so much simpler, less expensive and less intrusive than any other carbon control scheme. That must be why governments avoid it.

Connect The Dots

Price of electricity though important is not the only way to evaluate a nation's power grid.

Sustainability, carbon footprint, ability to scale up production for heavy industry, peak reserve capacity, efficiency of producers and consumers, radioactive waste, and density footprint must also be considered.

Every type of power generation has its advantages and disadvantages. If cost were the only consideration, Britain would still be using sooty, black coal for 90% of power production as it did a century ago.

The French lead the British in sustainable and wise green energy policy. Go Nuclear!


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