Friday, June 24, 2011

California's energy regulators make UK counterparts seem powerless

Energy prices in the UK, and the rest of Europe, are much higher than those in the US.

Residential rates from my energy supplier PG&E average $0.18549 per kWh. Business rates are equally low - I've even heard businessmen report that they tell factory owners in China to start manufacturing in the US because the price of energy is so cheap. But in the UK, my electricity tariff would be according to this comparison site between 8.7675p per kWh (Npower) and 23.6355p per kWh (British Gas).

In the US, these kinds of prices would spark a revolution.

The UK government is currently struggling with utilities to keep prices in check. But it appears to be failing.

Britain's energy secretary, Chris Huhne, recently tried aggressive tactics in urging customers to exercise their right to vote with their wallets in the "free market" energy sector by changing supplier.

Huhne is as free-thinking a politician as you'll see in the current British government. Last week he attacked his Conservative colleagues for placing environmental regulations on a list of red tape to be considered for scrapping. Regulation he argued, isn't always bad and often creates vigorous markets, citing the difference between the boom in European mobile telecomms that far exceeded the industry in the US:
"At one point the USA had no less than 16 separate and incompatible networks. In contrast, the EU adopted a single standard, GSM, which established global roaming. This was so effective that today, of the world's largest 20 mobile networks, six are European and only two are American – and they're in 19th and 20th places."
But Huhne's complaints against the UK's electric utilities suggests that the regulations aren't quite set right yet.

The Guardian reported earlier this month that Scottish Power announced it would raise gas prices by 19% and electricity tariffs by 10% from August this year, adding 48p a day, or £175 a year, to the average daily combined gas and electricity bill of its 2.4 million customers.

It is all very well for Huhne to publicly attack the "Big Six" - Scottish Power, nPower, EDF, Scottish and Southern, E.ON and British Gas - and urge consumers to go elsewhere. But where do energy customers go? The electric utilities in the UK appear to act like a cartel and all raise their tariffs after the first power company has broken ranks. Profits may have "slumped" last year at Scottish Power, but profits at its Spanish owner Iberdrola were a bouyant €2.87bn last year.

It is unthinkable that California's utilities would be able to act in this way without reference to the state's Public Utilities Commission, or its consumer watchdog, the DRA. Consumers in the UK by comparison appear remarkably unprotected and the country's defences against price hikes seem toothless - its energy minister and regulator Ofgem expose weaknesses in the system.

Michael Peevey and other commissioners at the CPUC would be able to put the brakes on …

But the UK energy industry's regulatory issues do not end there. Despite having the world's only legally binding targets on reductions in CO2 emissions and reasonably aggressive targets on renewable energy something really is amiss in the integration of policy and regulation across the energy industry when the National Grid has got itself into a power purchase agreement that means it had to pay wind farm operators £2.4m to switch off its turbines during a low period of demand thanks to an unusually warm May.

Perhaps coal-burning power stations are also compensated in this way, but I doubt it since they carry the UK's baseload. And I am still searching for an example in the US of a utility being compensated in this way.

But it raises serious questions about the UK government's strategy when it comes to integrating renewables into the grid. Premiums for renewable energy is an acceptable part of trying to bring the market to maturity and will eventually lead to price parity with fossil fuel energy.

But when Scottish Power receives £720,000 for not producing electricity and raises prices without reasonable explanation, then the UK consumer has every right to ask questions about the effectiveness of the government and the regulators to protect them - whether from oil shocks in the Middle East or unseasonally warm springs.

These snags in the UK's renewables sector really need fixing if it is serious about clean energy. Perhaps it's time Peevey shared some tips with his UK counterparts…

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