Local Energy Pricing – Another madcap idea from the free-marketeers threatens to derail net-zero progress

For once I am moved to agree with big power companies and denounce the schemes for local energy pricing as a bad idea. This stupid idea has been dreamt up by the National Grid in a lazy effort to deal with the problem of balancing increasing quantities of renewable energy. It is stupid because it will both reduce the amount of solar and wind projects coming forward and make them much more expensive for the consumer.

The idea, much loved by economists armed with ludicrously over-simplified models of the world, says that it would be good to replace national wholesale power markets with local ones. This means that the National Grid wouldn’t have to spend money on network improvements and co-ordinate with other agencies to balance renewable energy. Rather it would simply let markets do the job of locating renewable energy plant in those places where they could earn the highest prices for generating electricity. Meanwhile consumers (including industry and services) could go to areas where energy prices were lowest. In this simple uni-dimensional world of an economist’s spreadsheet calculations everyone’s a winner. Meanwhile, in the real world, there would be chaos and misery!

In the real world competitive markets are driven by institutions (using a very loose definition) of various sorts. So for instance when you increase the uncertainty of what renewable energy companies in any one area might earn, you damage the existing institutions, including ways of funding renewable energy. In short investors and banks will charge much higher rates to give developers their money for projects. Renewable energy schemes thus become more expensive which means that either there will be much fewer of them or energy consumers will have to pay more for them. Probably both of these things.

The spreadsheet modellers won’t bother to incorporate such an effect into their models because they can’t produce understandable answers if they include such uncertainties. On top of this their fairyland world ignores the impact of other important institutions. It assumes, for example, that the windfarms will be able to move from places like Scotland to Surrey where local energy prices will be higher. Of course, windfarms are actually banned in Surrey, and even if they were not, there is (really!) more room for many of them in Scotland. That should be pretty obvious, but I don’t see it mentioned in the economists’ papers anywhere.

The effects on the local businesses and populations will also be perverse. Initially the inhabitants of windfarm-rich rural Scotland will enjoy low energy prices given the presence of wind power. But nobody is going to build new windfarms in Scotland because the generation prices are too low and the uncertainty about future prices is too great. Meanwhile businesses and people will not relocate to rural Scotland because they know that the existing windfarms will not be replaced and that energy prices will rise. Then people in rural Scotland will get very angry. Maybe more of them will vote for the SNP!

Of course it is a good idea to have competition in provision of energy services. But we need competition that exists in the real world, not in some simplified free-market fantasy world that is, moreover, untroubled by the priorities of social and environmental objectives.

David Toke

Sign the petition for mandatory solar panels on buildings and fossil fuels to be banned in new buildings. See the petition page here.

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