Although uncertainty prevails in today’s global energy market, one thing has become clear: governments are reasserting their central role.
The motive is pragmatic rather than ideological, and the details vary from one country to another, but the trend is unmistakable. Governments of all political hues are taking back control of a market that had largely been left to private firms with only limited regulation. In many Western economies, this arguably represents the largest shift in the balance of public and private economic power since World War II.
The state’s newfound assertiveness stems partly from huge price increases that threaten large-scale energy poverty and the collapse of some energy-intensive businesses. After years of underinvestment in the sector, the surge in energy demand in the wake of the Covid-19 pandemic, especially in Asia, inevitably caused prices to jump. The cost of natural gas to consumers in the European Union rose by 12 per cent in the second half of 2021.
But this was merely a prelude to the current price spikes resulting from Russia’s invasion of Ukraine. The EU’s plan to cut its imports of Russian natural gas by two-thirds by 2023, together with Russia’s reduction of supplies to countries including Germany and Finland, caused the European benchmark price to increase fivefold over the 12 months to June of this year. On one estimate, average consumer energy bills in Britain – which imports little Russian gas but relies on the global market for 50 per cent of its daily needs – were predicted to be four times their 2021 level by early next year.
A second powerful factor compelling government intervention is climate change. The surge in energy demand over the past year has been led by coal, which remains the dominant source of power in Asia, causing greenhouse gas emissions to return to their pre-pandemic level. Despite strong growth in renewables such as wind and solar, the world’s continued reliance on hydrocarbons means that, absent further government intervention, emissions will continue increasing for several years to come.
None of these challenges can be addressed by market forces alone. Without a carbon price or other regulatory measures that only governments can put in place, people will continue to use gasoline-fuelled cars. Market forces can do little to help families facing a sudden rise in the cost of an essential commodity. Nor can markets redistribute the windfall gains made by companies such as Saudi Aramco, which reported a record profit of $48.4 billion in the second quarter of this year, to the many smaller businesses for which energy is a crucial input.
State intervention in the energy market is taking many and varied forms. The German government has announced plans for 2 per cent of the country’s land area to be used for the production of wind power, and is devising emergency rationing schemes to manage anticipated winter energy shortages following Russia’s cutoff of gas supplies.
All British households initially received a £400 ($450) handout, to help them cope with rising energy bills, partly funded by a windfall tax on oil and gas producers. But that proved insufficient and upon becoming Britain’s new prime minister, Liz Truss capped household energy bills for two years and offered short-term support for business users. To increase domestic energy supplies, she granted new North Sea oil and gas licenses and lifted the moratorium on fracking. The United Kingdom’s green agenda nominally remains in place with no new gasoline- or diesel-powered cars to be licensed from 2030, but, for the moment, government intervention is focused on price controls and increased hydrocarbon production.
Across the Atlantic, United States president Joe Biden’s recently enacted Inflation Reduction Act provides $27 billion to help low- and middle-income American households convert to cleaner energy, as well as funding to maintain the country’s loss-making nuclear-power sector. In France, President Emmanuel Macron is in the process of fully nationalising the power utility EDF, a former flagship of French industrial strength that has suffered two decades of managerial and technical failure. And energy-price controls have been tightened there and across much of continental Europe.
Unfortunately, these and many other recent government initiatives are piecemeal responses to the fundamental challenges of energy insecurity and climate change. Too many measures are insufficiently thought through, provide poor value for money, and fail to address underlying obstacles to change.
For example, a major shift to electric vehicles makes sense only if both charging networks and secure supplies of the advanced materials on which EVs depend are available. Small universal cash handouts are costly and do not address concentrated long-term energy poverty. Policies to increase wind power generation are irrelevant unless the infrastructure to cope with distributed electricity supplies is in place.
Governments reach for short-term solutions that demonstrate that they are acting. But the resulting policies are not always the cheapest or the most effective, and many turn out to be no more than temporary fixes. In none of the countries mentioned above is there a settled consensus on the shape of long-term energy policy.
Nonetheless, the trend toward greater government intervention in the energy sector is well established. As the limitations of particular policies are revealed, policymakers will respond with more intervention, not less. The role of the state will have to expand further, not least to address the investment gap that has emerged. Additional funds are needed to meet future demand for all forms of energy and associated infrastructure. Financing the transition to a low-carbon economy will require vast sums.
Governments are likely to be the main source of the necessary capital, as well as supplying guarantees and subsidies to the private sector. But whether governments, many with finances already overstretched by Covid-19, will respond adequately is far from certain. In the UK, the opposition Labour Party, now well ahead in the polls, has promised to create a new publicly owned Great British Energy company to deliver a carbon-free electricity sector by 2030.
None of this is a recipe for an ideal outcome. The task of ensuring a continuous and affordable energy supply is too important to be left to the market and too complex to be taken over by ministers and bureaucrats. The involvement of both is necessary, but neither, alone, is sufficient.
Logic points to cooperative arrangements whereby governments set energy objectives and standards, and private-sector firms compete to play a part in meeting the overall goals. But achieving such collaboration and balance currently seems no more than a distant aspiration.
Nick Butler, a visiting professor at King’s College London, is Founding Chair of the King’s Policy Institute and Chair of Promus Associates.
Copyright: Project Syndicate, 2022.
