Britain’s privatisation model for energy and water is “broken”, according to a former Conservative government adviser who has called for an overhaul of the sectors’ regulators.
Sir Dieter Helm, professor of economic policy at the University of Oxford, said that energy and water were “too essential to be treated like any other commodity, as some of the architects of the privatisation, liberalisation and competition paradigm believed”.
“It is not accidental that both the water and the energy privatisation models have run into serious trouble. After more than 30 years, neither is fit for purpose. Nor are their regulators,” he told the Financial Times in an interview.
Speaking as an 80 per cent increase to the energy price cap triggered public outcry over soaring electricity bills last week, Helm said both the watchdog for energy, Ofgem, and water, Ofwat, should be replaced with new wide-sweeping regulators that cover each entire system.
The comments also followed criticism over water companies pouring an unknown quantity of sewage into England’s rivers and seas, and implementing hosepipe bans while wasting water through leaks during a national drought.
Water and energy in the UK should be thoroughly overhauled “based on investment in the assets and the systems, not one based on financial engineering and short-term network price caps,” said Helm.
Both the energy and water sectors had become prone to “revolving doors and pork-barrel politics, heavily influenced by vested interests, with an interest in complexity, which is a lobbyist’s dream,” Helm said.
This had led to the “inevitable consequences of poor regulation and bad outcomes for customers”, he added.
Since 2010, the government has gradually become the main purchaser of all electricity, Helm said, with almost all new generation coming with a state-backed contract or subsidy, which is the “polar opposite of what the architects of privatisation had in mind”.
Helm questioned the predominant narrative that high energy costs are solely the consequence of rising wholesale gas prices owing to the war against Ukraine. Despite not importing much gas directly from Russia, the UK has been among the hardest hit.
“Customers faced with high bills are paying too much because the government failed to reform the market,” said Helm, who wrote the 2017 Cost of Energy review for government.
In terms of solutions, he said the price of electricity should be tied to the cost of production, rather than always to the marginal cost of gas, which had enabled many renewable producers to make “supernormal profits” linked to the higher price of gas while their own costs “haven’t changed one iota”.
This was “every bit as much an unearned windfall as the oil and gas producers are getting”, he said.
Although the government should press ahead with added windfall taxes on renewable and nuclear energy generators “you wouldn’t need this if you had a proper tax regime for the North Sea or an electricity market, which is priced on the basis of costs,” he said. Many of these measures are “sticking plasters on a failed model,” Helm added.
The UK will still need to rely on gas in the short term, he said because of the intermittency of wind energy, and the fact that new technologies such as battery storage will not be able to compensate for at least a decade.
He added that wind power was also not necessarily the cheapest form of energy at present once the intermittency and network costs are added back in.
“Ofgem is not the right vehicle,” Helm said. “Energy needs system regulation, not an institutional muddle with Ofgem in overall charge.”
On the water sector, the former government adviser called for a new system of regulation based on catchment areas, which would cover everything from flood management to water supplies, leakage and the protection of the environment.
This body would be in the public, not private sector, but be given independence and encouraged to put work out to competitive tender, as most water companies already subcontract labour. “If you did that I don’t really care whether they are nationalised or not,” Helm said.
Ofgem said: “We are confident Ofgem regulation is robust — tackling any unfair practices by suppliers and putting consumer protection at the heart of what we do.”
Ofwat declined to comment.