There is a risk of blackouts in the UK in December or January due to issues with the electricity grid. The grid relies on a delicate balance of supply and demand being met continuously. Environmental policies that promote intermittent wind energy and the closure of coal plants, combined with regulatory uncertainty and a lack of long-term planning, have exacerbated risks. While there is no evidence of price gouging by generators, investment has been deterred by unstable regulation. The document argues politicians need to prioritize reliable, affordable, and clean energy and empower a strong independent regulator to develop stable policies.

1. Blackout Britain
Richard S.J. Tol
http://rateyourlecturer.co.uk/brighton/university-of-sussex/richard-tol/

5. Blackout Britain
• There is a real possibility of brown-outs or black-
outs in December or January
– Brown-out: Controlled black-out
– Uncontrolled black-outs may damage the grid
• The immediate causes are obvious, but how did we
get here in the first place?

6. Electricity
• Electricity cannot be stored
• Supply meets demand every minute
• A spinning reserve is needed against faults
• A sudden drop in power would bring down the
entire network, so all pay and the regulator buys
reserve power in an auction
• Frequency regulation requires coordination
• Electricity grid is a natural monopoly
• Power market is and should be heavily regulated!

7. Electricity -2
• The spot market works with merit curves

8. Electricity -3
• Base load plants earn lots, mid-merit plants less,
peakers very little
• Yet, peak supply is important
• Experiment in California showed that market does
not tolerate extreme price volatility
• The market in England and Wales is based on
bilateral contracts, assuming that these create a
property right over public trust
• Elsewhere, all pay levy to finance capacity
payments
• England and Wales moving there

9. Electricity -4
• Problem exacerbated by environmental policy
– Wind is at the bottom of the merit curve

10. Electricity -5
• Problem exacerbated by environmental policy
– Wind is at the bottom of the merit curve
– Old coal plants closed for acid rain
• Power generators have been sweating assets
• Regulator has focussed on
– Interruptable supply contracts
– Wind
– Nuclear
– Diesel generators

11. Electricity -6
• Labour government announced 10 new nuclear
power plants by 2020

12. Electricity -7
• Labour government announced 10 new nuclear
power plants by 2020
– Infeasible
– Wind and nuclear do not mix
• Coalition government insisted on zero subsidies
until all but one candidate had left, and then
argued that saving face is more important than
getting consumers a good deal
• Current government continues with Hinkley C, and
plans two more nuclear plants on yet to be decided
conditions

13. Regulatory uncertainty
• Power market heavily regulated
• Expected profits thus depend on future regulation
• Regulatory uncertainty deters investment
• A weak regulator and excitable politicians do not
inspire confidence
• Oil exec: Venezuela more dependable than UK

14. Electricity -8
• Power generators have been sweating assets
• Will the lights go out?
• We’ll see. Coal and gas plants have been
mothballed rather than decommissioned, but so
far little sign of revival. Instead, we have good ol’
diesel.
• Meanwhile, political attention has been with retail
market, because that is where the voters are

15. Monopolistic behaviour?

16. Monopolistic behaviour?
• There is no sign of price gouging
• The returns to investment are low: 4-5%
• This is what you would expect with 6 large market
players, many small ones, and easy entry
• The retail market is not perfect, because customers
do not like the hassle of switching, particularly the
elderly and less educated
• Government forbade price discrimination, so
companies no longer give discounts to lure new
customers
• Less competition, higher prices

17. Government response
• Government ordained that there can be four tariffs
only, but increased transparency did less good that
reduced consumer choice
• Government called to put everyone on the lowest
tariff, so lowest tariffs were taken off the market
• Labour promised to freeze retail prices, so prices
rose to hedge this risk

19. A way forward
• Bear it and grin
• Politicians have been playing politics at the
expense of energy policy
• Instead, Parliament should set parameters: Energy
should be
– Reliable
– Affordable
– Clean
• A strong and independent regulator should fill in
the details

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