How Not to Do an Energy Transition

For a case study in how not to regulate a power market as it moves to incorporate lower-carbon energy, look at the U.K.

European natural-gas and power prices surged to new highs Tuesday, raising fresh pressure on the region’s energy suppliers. Last week another three U.K. power companies went bust, bringing the total to nine in September. British suppliers have been squeezed between a government-mandated cap on retail power prices and skyrocketing wholesale prices for natural gas, which is used to produce about a third of the country’s electricity. More bankruptcies are expected, particularly if the coming winter is cold.

Utilities are generally a local business given differences in regulation, but the U.K. experience provides two broad lessons for other countries. First, the energy transition requires a new set of rules; tinkering with the old ones likely won’t work. Second, flexibility is the key to creating a resilient low-carbon system.

Twentieth-century power networks used a few big fossil-fuel plants to produce electricity on demand. Most low-carbon ones will likely rely on lots of widely dispersed and intermittent renewable energy sources managed by a smart grid to balance supply, demand and two-way power flows.

In 2008, Britain legislated to decarbonize its economy by 2050. Instead of overhauling the structure of the country’s energy system, though, regulators played around the edges while maintaining their habitual focus on the hot-button problem of energy bills. In 2016, officials estimated that energy had cost consumers roughly $1.9 billion a year more than it should and adjusted the rules again to bring new suppliers into the market. They arrived, but most Brits remained with one of the six legacy providers and were still paying too much. In response, the government in 2019 capped the unit price of energy that could be charged to most consumers.

The awkward combination of a price cap and intense competition between dozens of subscale providers laid the groundwork for today’s crisis. New suppliers sold fixed-price energy that they bought on spot markets. The model was profitable for a while, but lost money when gas prices rose.

“It’s a bit of a mixed market, rather than anything that might be called a fully liberalized market at the moment,” says Malcolm Keay, a researcher at the Oxford Institute for Energy Studies.

A coherent reassessment of market structure and regulation is now needed to create a resilient low-carbon energy system. Above all, this requires flexibility, which can come from many things: links with trusted neighboring power markets; customers willing to taper their usage at peak times; and backup plants and energy storage to bridge gaps in renewable generation. Mixing the type and location of renewables also helps.

The right solution depends on local conditions. Britain has some flexibility: a mix of power sources, industrial customers willing to dial back their use when asked and multiple connections to neighboring grids. It is also investing in green hydrogen for energy storage and as a clean fuel. However, the country is overreliant on imported gas and has underinvested in electricity storage, given its plentiful but variable wind and marine resources. Correcting those would help insulate it from future tight gas markets, which are likely to remain volatile.

Britain has succeeded in shrinking its carbon footprint but doesn’t yet have a resilient low-carbon energy system. Others should learn from its early mistakes.

Write to Rochelle Toplensky at [email protected]