First-past-the-post Politics is a Major Barrier in GB to a Legitimate, Long term Energy Policy Framework

Catherine Mitchell, IGov Team, 2nd April 2015

A recent IGov Discussion Paper argued that GB needs a fundamental restructuring of its energy institutions to better suit the newly available energy technologies, and to better meet the long term needs of transforming the energy system. It argues that the current energy institutions are so enmeshed in the current energy system that they think and act in ways which suit the current system, thereby perpetuating it. The discussion paper put up a straw model for an energy institutional framework called Public Value Energy Regulation [1] (PVEG) and asked for comments by the end of June. The straw model argues that there are three fundamental issues of our current regulatory process which needs to be dealt with:

• the lack of legitimacy within our energy policy process which leads to an increasing separation between the policy wishes of Government and/or the energy industry incumbents and with society
• the lack of nimbleness in its decision-making, which means that there is a gap between removal of regulatory barriers and technology take-up, so that practice change is slow; and
• the way that its rules and incentives suits the characteristics of fossil and nuclear technologies and business practices, thereby undermining new business models and competition and perpetuating the current system and current ways of thinking

Some of the comments already received about the discussion paper relate to the first bullet and the complicated problem of ensuring policy legitimacy within the short term, first-past-the-post process of British politics. PVEG argued that a legitimate energy policy requires that decisions that have major societal distributional impacts should be taken by politicians. However, because of the first-past-the post process, Governments (and their underlying philosophy) change reasonably often. So while, in principle, it is absolutely right and legitimate that Governments take decisions about energy policy – it can also lead to a flip-flopping of energy policies and direction as Governments change, and this (political risk) can, in practice, be very difficult for companies investing or trying to build up companies.

A regulatory process, with delegated ‘Independent’ Regulators who take decisions on economic or competitive grounds, was set up in 1990 (when privatisation of the energy industry was complete) to ‘remove’ the uncertainty of energy policy direction and political risk which might occur from energy policies being directed to privatised stakeholders from elected Governments. Taking decisions on economic grounds was argued to be ‘objective’ and would, de facto, lead to the best outcomes for society.

Now, of course, the drivers and situation of energy policy have changed since 1990 and we need to move to a low carbon, secure and affordable energy system – which cannot be like the current energy system which has in effect caused the climate problems. Moreover, we have to change at a much quicker rate than ‘economic’ decisions in theory would take us, and we have to have citizen/customer buy-in because they have to pay for the changes, and their behaviour makes a difference to its success. Finally, the rhetoric of effective economic and competitive based decision-making has differed widely from reality – as the discussion paper shows – whereby this ‘independent’ system has also been shown to have its own problems.

This leads us in GB to a new energy policy situation where we need to find a new institutional basis for our energy and climate policy which both provides legitimate energy policy making but which also minimises the risk of radically changing energy policies every time the Government changes, and which enables change and buy-in. This implies rethinking the roles of the Regulator, utilities, consumers, citizens, businesses and so on as well as a restructuring the institutional framework, in order to provide long-term cross party buy-in for legitimacy and to provide sufficient certainty in policy longevity so that in practice investors are prepared to be involved.

PVEG suggested an institutional framework of a new overseeing body, which would be responsible for co-ordinating energy policy of a number of institutions which, on the whole, are already in existence in some form (ie in or outside of Ofgem). These institutions include a more focused (read smaller, less powerful) economic regulator and a state owned, not for profit system operator/architect. This overseeing body would be directed by DECC – which would legitimate the energy policy decisions – and should not be delegated, as occurs now whereby ‘independent’ agencies work to legal Duties set out in an Act, and take guidance but no more from Government. And the institutional framework would be set up in such a way that: it would not just focus on short term economic questions; there would be a system operator which had longer term, technical and security responsibilities of meeting the necessary timescales of change; which should be able to take decisions more quickly; and which would be a better fit to the new energy and ICT operational technologies.

This is a fundamentally different institutional framework. Another question asked was whether taking the necessary effort to implement it would be worth it? Would a much easier, and nearly as good, outcome be that the current institutional system is retained but the Regulator is sorted out to the extent it could keep up with technological change and make decisions more quickly (which seems to be accepted as a major problem with Ofgem) – thereby sorting out bullet 2 and some of bullet 3 above. It would not sort out the legitimacy problem, and it would be a fudge between the old and new technology basis of the changing energy system – but would it be sufficient?

As this blog started off, we think the current system is deeply flawed and we don’t think a half way fudge is the right way forward. The energy system is essentially made up of a multitude of institutional sticking plasters. What is needed is a restructuring back to institutions which fit the need of the energy system. We think PVEG is a good first point from which to stimulate discussion.

However, we do recognise that the current British political system is a fundamental problem for a legitimate, cost-effective energy and climate policy:  it is very hard to get the deep, long term political and societal consensus needed to establish a legitimate, long term framework for change if there is limited, long term political consensus. The Climate Change Act 2008 (and the Committee on Climate Change and the carbon budgets) was born out of a particular time. Welcome as it was / is – the current situation is not nearly as positive (see here and here) as it was. The Green Alliance recently managed a joint agreement between Labour, the Lib Dems and Conservative but its wordings are a long way from a deep political and social consensus on how to undertake the transition of the energy system.

GB is stuck in the current chicken and egg situation where (1) current energy policy is illegitimate – because it does not bring a societal consensus together and because it focuses too much on narrow, economic issues; and (2) if GB were to change to an institutional framework set out in the straw model above (or another agreed model), whilst the process itself is an improvement on the current framework, ultimately it is still subject to political risk albeit much less than the current system.

This conundrum implies that the needs of successful energy and climate policy is a combination of institutional change (whether as set out in our straw model or another one) but also a change to the GB political system from first past the post to a more consensual type of politics so that long term societal issues can be better dealt with. There are many possibilities for how this could occur (eg a proportional representation type political system and / or more devolved powers). Whatever the choice, the sooner we as society achieve some consensus on this issue the better for energy and climate policy.

[1] There are already lots of comments on the name: PVEG, and a blog will follow shortly on suggestions.

Posted by: rhoggett

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