Guidance and Commitment: Persuading the Private Sector to Meet the Aims of Energy Policy

Tue Dec 17 15:24:38 EST 2002
By Graham Shuttleworth and former NERA Special Consultant Gordon MacKerron

The UK government is currently reviewing energy policy with an eye toward revising the direction of future policy. The government's most important stated objectives in setting energy policy are economic efficiency, environmental and social protection, and security of supply. In the 1990s the government was able to focus almost exclusively on economic efficiency, because the pursuit of economic efficiency appeared to meet the desired environmental and security objectives as well. However, this favorable set of circumstances is unlikely to be sustained in the present decade. The UK government has already set out updated policy targets, including ambitious climate change targets, the alleviation of fuel poverty, and the continued development of a competitive market framework for the energy system. When combined with new threats to security supply, energy policy-making is very likely to achieve greater complexity than in the past.

This report was commissioned by Powergen plc to address their key concern that the current discussions of energy policy underestimate the difficulty of encouraging private sector investment to meet government policy targets. The authors discuss the fact that because the government must rely on private investment to implement the bulk of its policy, it must now enact policy (and changes to policy) that will provide a stable environment that offers incentives for private investors to commit funds to long-term projects. The authors argue that the needs of long-term investors can be summarized as simply as a reasonable prospect of cost recovery. This "revenue standard" is an economic concept that the authors define in relation to the economic conditions of the industry, drawing on observations of energy policy and regulation in other countries. To support it, the authors also propose a "procedural standard" to ensure that methods of decision-making by the government are both stable and predictable as well as transparent.