Critical Issues: Cost of Living Crisis – The Energy Issue

In this mini-series, I’m looking at the critical issues of our time. You can’t get more critical than being able to afford to heat your homes, or pay rent.

The UK energy price cap has been announced. It is a depressing £3,549 for the average household, projected to rise to between £4-5k in 2023. This has the potential to create a domino effect with people losing homes and even their lives as a result. Government assistance is a balancing act between encouraging yet more inflation and leaving people to fend for themselves.

The energy and utilities sector is a unique one in that we all need power and water to live in the modern world but it costs money to supply these services, so we pay for them in some way or another: either through taxation when services are nationalised or by buying them from suppliers that we choose in the market (as in the UK). These are largely ideologically-based decisions, with the UK’s driven by the policies of the Thatcher government.

Since then, It may be argued that the UK government has taken a specifically ‘economic’ approach, or ‘light touch’, to regulation and wider public utility management. Financial institutions have got involved as energy companies hedge and use a variety of trading instruments. Shareholders have been well-rewarded. The flip side to the returns to energy companies is supposed to be investment that they are supposed to into the infrastructure and development of the sector. Competition is meant to encourage this innovation. Whilst this may work when the price of commodities is high and the incentives are there, it tends to break down when commodity prices are low. This has been even more of an issue for the water sector (much more about the troubles of the water industry in future posts).

Whilst we have light touch regulation, we also need strong regulation when things start going wrong, not veiled attempts to support inefficient companies rather than customers. We have plenty of evidence now from 30-40 years of UK utilities operating as private industries of the reality of whether market competition really has led to the projected gains for customers, resulted in the projected innovation and is dealing successfully with sustainability challenges. Regardless of government, these challenges will continue and there is no magic bullet to solve them.

The regulation and strategic management of any resource presents problems in terms of reconciling the interests of different stakeholders; the regulation of energy potentially presents challenges related to classification as a ‘hybrid’ – an economic good, with elements of being a public good and growing concern about security of supply as a result of factors such as wars. For water, security of supply is also impacted by climate change and demography.  Sustainability issues will become THE most pressing factors across utilities supply.

Regulators are not in an enviable position. The dilemmas that utilities face in terms of reconciling different elements of sustainability – economic, environmental and social are hard. However, this terrible phase of history is exactly the time for regulators to earn their keep. They have had a relatively easy ride for 30 years. Now we look to them for solutions. Creativity and action are needed, not cronyism (something that some regulators have been accused of in the past).

England and Wales provides a unique example of a wholly privatised utilities sector which includes water; a model that has attracted considerable international attention as countries struggle to resolve the many challenges that the management and regulation of utilities presents; inviting the question of whether it presents a suitable model for other countries. The jury is out.

Keep in touch!