00:00:02
Speaker 1: Bloomberg Audio Studios. Podcasts.
00:00:05
Speaker 2: Radio.
00:00:06
Speaker 3: News.
00:00:08
Speaker 2: How do you make electricity cheap again? It's the question that is bedeviling policymakers around the world, particularly so in the US and Europe. Some countries, though, have figured it out. Those include Iceland, Norway and China. Many call them electrostates because more and more of their energy system runs on electricity. The power plants, transport, increasingly industry. But how do you get there? What is the role of government? And what is the role of technology? This is Zero, I am Akshat Rati, and this week, how to build an electrostate. Joining me this week on Zero is Arthur Downing, author of Power and the People, a book published this month that looks at what history can teach us about how to structure the electricity system so that it can be both cheap and clean. Welcome to the show, Arthur.
00:01:06
Speaker 1: Hello.
00:01:06
Speaker 2: So you and I are obsessed with electricity, fair to say. I mean, something to do with our jobs, I guess, but also the bend of our minds. But you argue everyone should have a better understanding of the electricity system. Why?
00:01:22
Speaker 3: I think it's become something of a truism to say that electricity is an everyday essential, the pillar of civilization, foundational to economic activity. Without it, modern life would be inconceivable. So those are some reasons why you might think it's a good idea that more of us understand it. But I guess the argument that I make is that it's more pronounced than that, that the way the electricity industry both has developed over the past 100 years and the way it may develop is pivotal to civilization strategy for dealing with climate change that you could really summarize our approach as to decarbonize generation and electrify demand and there's lots of debate within the industry as to whether that's entirely the right approach but i think it's fair to say that it is the approach that almost all global institutions and governments have committed to this.
00:02:26
Speaker 2: And a lot of our focus over the past two decades has been on the clean part, especially in the West. And it's paid dividends, you know, given whatever the politics, wherever it is, you can't argue with the sheer amount of renewables that have been built and in many, many places have shown to actually reduce power prices. I mean, the latest example from Australia using batteries is just stunning how much gas consumption at peak hours they've been able to shave off by deploying batteries. But there just hasn't been the same focus on electrifying the end use of energy. Why is that?
00:03:04
Speaker 3: So it is undeniable that renewables have grown at a dramatic pace in many geographies at many scales, both from rooftop solar to large scale solar, onshore wind to massive offshore wind. But it isn't always the case that the cheaper or the lower marginal cost of renewable generation has translated into what end consumers or citizens see, which is an all-in electricity price, a price per unit accommodating everything from the production, generation, transmission, distribution, storage. And I think that therein is a clue to why there hasn't been the same focus on the demand side. which is there was an assumption that if renewables had a lower marginal cost, that that would translate into a lower overall price per unit for the end consumer, and that.
00:03:57
Speaker 1: Would be what would drive electrification.
00:04:01
Speaker 3: I think it's fair to say that there's a very uneven geographically, uneven rate of success on that measure. In some countries, electricity prices have risen very dramatically, that that has eroded demand growth. I think there's a debate as to the extent to which some of that has been increased energy efficiency, or deindustrialization, and so changes to the structure of an economy, or is just genuine demand reduction. And I think it's a bit of all three, actually.
00:04:32
Speaker 2: And it's worth saying here that the marginal cost is the cost most people are told of deploying solar on the grid, but that really is the cost of the additional power added to the system, not the system cost of integrating it with maybe batteries, but also transmission.
00:04:48
Speaker 1: Right.
00:04:54
Speaker 2: That means somebody is paying for it, which in this case would be the grid paying you to consume that power. So all those costs inclusive have not translated into lower bills. I mean, the UK is a good example of that. We've had a lot of renewables added to the system over the past two decades, exactly the same time when power prices have been going up. But in places where electricity prices have fallen, even those places have don't quite have the focus on electrifying end use. Why is that?
00:05:23
Speaker 3: In some countries, the way that the climate regulation and sort of political regulatory consensus was very, very focused on a combination of measures to get emissions down. And some of that meant that demand reduction was seen as good, right?
00:05:42
Speaker 1: And that is true. That is true.
00:05:44
Speaker 3: I mean, I think it's an important distinction between the energy service that a light bulb provides and the energy input into the light bulb. Those are distinct things. Light bulbs have got dramatically more efficient over the last 50 years, particularly with LEDs. Fridges have got dramatically more energy efficient. Homes generally have got more energy efficient. In many countries, I think that even though prices were rising and demand was falling, people thought, well, this isn't a problem because it's mostly being driven by energy efficiency. I would argue that the other reason is because there hasn't been sufficient attention to the institutions, markets, and regulation of the system. And that one of the downsides to being so focused on the energy transition as a technological problem is that you think that if only you get more renewables on the grids, prices will magically fall. And that clearly isn't the case unless you have the right institutional arrangement. And so there is a sense in which that political elites, business elites, and companies kind of took their eye off the ball. I also think that one of the problems is that now in some countries, we do have a kind of negative spiral, which is that as you move to a renewable-based system, a greater share of the costs become fixed. If you therefore undershoot your demand projections, then prices go up for everybody because the cost has to be spread over fewer units. And then that drives a further incentive for more energy efficiency, and et cetera, et cetera, et cetera. And so I think it's both a kind of, I wouldn't say it's conspiracy, it's sort of a combination of a sort of screw up and a natural break in the energy transition where we need to divert attention to the demand side.
00:07:26
Speaker 2: And this particular year with what has happened in the Strait of Hormuz in the Middle East has made people at least countries which do not have access to fossil fuels really think hard about what to do next. And most of it is, what can we do at home? If you do have any fossil fuels, try and dig those up. But if you don't, well, you're electrifying. And the discussion about electrostates comes up a lot in these questions. People call China as an electrostate just because of the sheer amount of technologies it's building, but also Norway and Iceland and Often it is referred to as the country with a large fraction of their energy coming from electricity. How would you define an electrostate?
00:08:11
Speaker 3: Well, I think the best way to define an electrostate is to focus on the state part. So what I mean by an electrostate is a country in which the state, be it municipal or national level, is deeply embedded in the making, moving, selling of electricity. You might go as far as to say that the means of electricity production are owned and operated by the state. I think that that's a meaningful way to define an electrostate like China because because it doesn't get you kind of locked into debating about metrics and whether, you know, is electricity's share of final energy consumption the right metric? On that measure, China has a very, well, relatively high, although lower than Norway. But then you would say that there are other things about the Norwegian economy that would make it something like a petrostate. And so I think that this kind of techno focus on the electricity part is the wrong bit. The question should be about the political economy of the electricity system.
00:09:18
Speaker 2: I would take a different definition here because it would help us answer the main problem we are facing right now, which is the cheapness of electricity coming from clean sources hasn't really delivered. And in a way, I'd like us to answer the question of how to build an electrostate. But we define that electrostate as a country building a grid that provides reliable and affordable electricity.
00:09:43
Speaker 1: How does that sound?
00:09:43
Speaker 3: I mean, I like that a lot on the basis that it's what citizens care about is, you know, a falling price of the, you know, the commodity that they buy, the electricity.
00:09:56
Speaker 1: So I'm very, very sympathetic to that.
00:09:59
Speaker 3: But I think that the reason that I'm interested in a definition which focuses on the institutions is because it means that we all focus a bit more on what we have to do to create institutions, ownership models, and markets that serve citizens and that translate the benefits of renewable technology, which I completely agree with, into prices for end consumers. I would also argue that that's the way that previous system builders have thought about the system.
00:10:27
Speaker 2: Well, that's exactly what you've done in the book, right? I found it a really refreshing read because a lot of the discussions around this topic do start with technology. But your focus in Power and the People has been on history.
00:10:41
Speaker 1: Why history?
00:10:42
Speaker 3: Well, first and foremost, because that's the way that I see the world. I did history at university. I remember once debating with someone, why was this strange thing in Japan where the frequency of the grid is totally different in two halves. When you dig into it, you discover that the reason behind that is because back in the 1890s, there was division in the country between whether to buy German technology or US technology. This completely incoherent approach to managing the grid is just a product of history, an accident of history, you might say. That is the other reason why I wanted to write this book about history, is because the energy system is history. It's a system where each generation layers infrastructure on the infrastructure built by the past generation. And the choices available to us are heavily constrained by the weight of history. And I think that the reason why we need to understand the energy system as a product of its history is because it allows us to, with confidence, understand the magnitude of what we're attempting. And I think the need to move beyond debates just about energy. technology naturally just percolating through the system and lovely S-curves taking you all the way to utopia. And also that the system builders of the past did also think in these terms, that they understood that at certain moments in history... it was incumbent on that generation to intervene in systems, to reset the rules of the game, to change the markets, the institutions, the ownership models, in order that something new might grow.
00:12:22
Speaker 2: When you put it that way, and of course, when you read the book, you realise, actually, we do think about a lot of our infrastructure in historical terms. Cities are shaped by history. Our roads and our food systems are shaped by history. And there's so much discussion about them in any type of book you would pick up about London.
00:12:41
Speaker 1: That'd be about history.
00:12:42
Speaker 2: But in energy systems, not so much. The book focuses on networked energy. So you do both the history of gas networks and electricity networks, but you do it in the UK. And of course, while electricity systems are different in different countries, there are lessons from the UK that translate into others. So let's just start with the UK's history. You divide it in four parts. Give me a brief four-part summary of what the UK networked energy has been. Sure.
00:13:14
Speaker 3: So from 1813, which marks the beginning of networked energy with the first gas network in the world on Westminster Bridge, to about 1926, we have what I call a localised system. Lots of small-scale... local, city-level, sub-city-level gas and electricity undertakings. They are vertically integrated, so they do everything along the value chain from production and generation through to supply. That works fairly well, but it starts to run out of road in the 1920s in particular, when Britain becomes increasingly concerned that its electricity system is very fragmented and that the country is losing out to other countries, particularly America and Germany. because of its high electricity prices, something very reminiscent of our concerns today. So the second phase is what I call rationalised energy, and that operates between 1926 and 1947, and that's where the central state intervenes for the first time and builds the first national grid between 1926 and 1935. The third phase is what I call nationalised energy, which really begins with Clement Attlee's government post-war. Both the gas and the electricity systems are brought into national ownership. you get the formation of the British Gas Corporation, then CEGB. What the nationalised period represented was an extraordinary period of asset building from not just networks and nuclear and hydroelectric coal-fired power stations, but on the gas side, the British Gas Corporation effectively invented LNG, oversaw an extraordinary programme of converting the system from using gas made from coal to natural gas found in the North Sea. Now that phase starts to run out of steam in the 70s. I argue that they kind of enter a phase of technocratic drift. It becomes increasingly bureaucratic. And so the fourth phase is what I call, is what anybody would call privatized energy. And that's kind of what we have today. And it's got four basic principles. The first was moving ownership from public to private. The second was to change the way you coordinated the system from central planning to using markets and prices. The third was to break up the system. For a generation, people had thought an electricity system was one indivisible thing. But the innovation of privatization is to say, no, we can split off the bits that could be competitive, generation and retail, from the bits that remain natural monopolies, the networks in the middle. And the fourth pillar was independent regulation. So moving control out of government departments and ministers into independent regulators. And that phase has kind of lasted up until today, although in the book I argue that privatization enters a kind of stagnation or a zombification phase in the 2010s.
00:16:04
Speaker 2: Let's come to the current moment because it is the current moment that gets us into the trouble era. There is that chart you have in the book about how power prices kept falling from the 1920s and kind of plateaued in the 1990s. And then They've just kept going up since the 2000s. And there doesn't seem to be any end to the power prices going up, regardless of who is in power in the government. Why?
00:16:32
Speaker 3: Wow. That's the $ 50 billion question in the sense that, you know, that's roughly the cost of running the system every year or maybe a bit more than that. There is undoubtedly a technological explanation for this. Some of the increase in prices over the 2010s through to today is driven by rising gas prices and the way that gas sets the price in the market.
00:16:57
Speaker 1: That is.
00:16:59
Speaker 3: a portion of the cost increases. But of course, the wholesale price is only a third of the bill. There are other things that drive the bill, network costs, and those have risen. Part of that, I think, is that there was a catch-up that some of the cost savings and price end reduction, for end consumers, the reduction in price is in the 90s and early 2000s, was partly kind of deferring capex, capital expenditure that you'd kind of deferred and delayed, you'd kick the can down the road, and then it boomeranged back in the 2010s onwards. There is also the increase in policy costs. So these are various sort of support schemes for social or environmental policies, things like renewable obligations, so the price support mechanisms for renewables, and those were added back to the bill. That's one way of explaining this. And I think it's an interesting debate, but I think that it's one that's become somewhat stale.
00:17:52
Speaker 2: And it's the one that people have heard about because it's recent history. But if you take those four principles of privatization, they don't sound bad to me. But you're saying they've been the cause of the ill.
00:18:06
Speaker 3: I wouldn't argue that privatization has caused the ills of today. What I would say is different, which is that the way the privatized model has been retrofitted and adapted to try and deal with the dual problems of energy security and climate change has driven up bills. and that that is eroding trust in the system and is eroding goodwill for decarbonisation in particular. Let me highlight two areas where I do think though that the way the privatised model develops does matter. The first is fragmentation. So the way Britain does privatisation is it unbundles the system and privatises it to an extent that no other country does.
00:18:47
Speaker 1: Unbundling.
00:18:48
Speaker 3: We literally break apart transmission to the onshore and offshore. Distribution is partly unbundled because you've got independent distribution.
00:18:56
Speaker 1: Retail was separated. Generation was separated. Other countries.
00:18:59
Speaker 2: And just to explain these parts, the transmission network is the large power network that takes power plant level electricity to... towards towns etc but then there's distribution at the town level that needs to be done yeah retail being the people who give you the bills they might not always be the people who are generating the power so there's generators and exactly then there's overlap between them because some of these companies have multiple roles in in the system.
00:19:22
Speaker 3: Yeah that's right and that's a degree of fragmentation that very few other countries have britain is on its own when it comes to pushing unbundling, and private ownership. And I would argue that that drives up bills in two ways. The first is that it increases the cost of capital, because in systems where you have state-owned assets, the state can borrow at a lower rate than capital. And that means that very capital-intensive things like nuclear or networks, they're more expensive and less likely to be built in a system with high degree of private ownership. The second is fragmentation. so many bits of the system, and you don't have a mechanism, as we didn't for many decades, to coordinate those different bits. It's a bit like that kind of Jesus feeding of the 5,000, but in reverse. Everybody adds a little bit of cost here, here, and here, and here, because it's good for their revenue. And so everybody adds costs into the system, and then we become surprised at why the bill has gone up. I think there has been a lack of overarching cost control as a consequence of fragmentation. And both of those things, I think, are a function of privatization.
00:20:30
Speaker 2: And you also point out in a chart showing how much investment in these infrastructure, both gas and electric, but also in this country, water networks, after privatization went down, you know, half or even a third of what it used to be under nationalized control. circumstances, how much did that contribute?
00:20:52
Speaker 1: Yeah.
00:20:53
Speaker 3: I mean, it's difficult to compare investment levels between decades and periods because If you have changes in the price of the capital assets or you have an increase in the cost of building things, are you comparing like for like? But I think that the evidence is pretty compelling that if you look at overall investment as a share of GDP, so the share of the country's gross national product that's reinvested in energy, it does fall quite significantly from the 1970s onwards. And it has been doggedly fairly low. So even though we think of the system at the moment as representing lots of investment is mobilizing and in historical terms, it's not as significant as what happened in the 1950s and 60s.
00:21:39
Speaker 2: After the break, more of my conversation with Arthur Downing, author of Power and the People. If you're enjoying this episode, please take a moment to rate and review Xero on whichever platform you're listening on. A lot of the time, the UK electricity system is seen as doing really well in decarbonization. But reading your book, you come away with a much darker assessment of the UK's electricity networks. At one point, the comparison is really with UK's water networks, which under privatization have decreased. ended up in terrible places, dumping sewage in the seas and rivers, and now at the brink of maybe a bailout from the national government to the tunes of hundreds of billions of pounds. And you say that the current electricity system is at its breaking point. It doesn't feel like it. It's not like people in the business are walking about panicking that this system's going to break. Why are you panicked and nobody else?
00:22:56
Speaker 1: That's a good question.
00:22:58
Speaker 3: The reason I'm nervous is because I think about fundamentally what we've been doing over the last 10 years is organized around security of supply and decarbonization. And so those are the objectives for the system in the future. And the reason I worry is because if I look to the near-term future and look at the path we're on, I am concerned that there are two big problems that Demand has gone down really a lot over the last 10 years, right?
00:23:28
Speaker 2: And you're talking about this sort of pre-AI electric cars coming through. It's going up now again, but really it has for the last 20 years been going down.
00:23:36
Speaker 3: Sure, but very anemic, right? We're talking about at most 1% growth in electricity demand last year. If you look at electricity demand per capita, 2000 to 2019, there's only like five countries in the world, including.
00:23:50
Speaker 1: Syria, Tajikistan.
00:23:52
Speaker 3: Puerto Rico, Tanzania that have had bigger reductions in electricity demand. So if what we need from the system today is to unlock demand, I think there's reasons to be sceptical. The second thing is prices. It's great to point to the huge... Or you can point to the huge increase in renewable capacity, but you would also have to admit that prices have inexorably gone up. And again, we can have a debate as to the relative contribution of different technologies and parts of the bill. But I would argue that for end consumers, a lot of that is moot, that what they care about is prices.
00:24:27
Speaker 1: And so.
00:24:28
Speaker 3: If what we need for the next phase of the energy transition, and by the way, if we want to reduce our dependence on imported fossil fuels, we are going to have to accelerate electricity demand, particularly in things like heat, and that requires us to get control of bills. And I would say that on demand and on prices, the last 10 years have not been good. And I have yet to see evidence that we are turning the corner. Or at least I would say that whether we do turn the corner is going to be dependent on political and policy decisions and collaboration across the industry to do things in a different way. We can't just keep going. And that's why I call it a crisis, because it's a moment of decision.
00:25:08
Speaker 2: And to be fair, the crisis has come through in the politics to some extent, right? You have a right-wing growth in this country where they are using the increase in power prices as a way of arguing against net zero because this is the social contract that they want to break because they want to tell you that it is decarbonization, not anything else that is raising your power prices. And the response from the left and the Labour government in power has been, well, we know renewables will be cheaper and we'll just try and get you those lower bills at some point. But your analysis is much deeper in that that fix that even the Labour government is trying to make right now isn't solving for the major challenges that the system has. And you then paint these two futures that are possible for the UK. What are those two futures?
00:26:00
Speaker 3: So the first scenario I call the central return generating board, which is a bit of a play on that in the nationalised area we had the central electricity generating board. I should say that this is purely a speculative vision of how things might develop. And I think predicting anything in British politics is difficult. But I think that it's characterized by the state taking an ever more deeper role, a more active role in centrally planning the system. What gets built where? And importantly, the state's role becoming to de-risk investment for private sector investors. And so that's why I call it the Central Return Generating Board. It's a system that's primary purpose is to generate returns for investors. And that's provocative, but I think that it highlights that there isn't enough attention on bills, living standards, what this means for citizens. The second scenario is what I call mutualized energy. And I call it a mutualized system because it's a way of just highlighting that I think we need a system to be based on mutually beneficial relationships between citizens, capital, the state, consumers, and investors. And we need to reset the relationships. I would argue that at the moment, the system doesn't work for many participants. And whilst people publicly in the industry may put on a brave face, privately, many people are also kind of seeing that the system we've got is fraying and it's not serving, nobody is happy with it, right? Or I mean, a very small number of companies are very happy with it, but that's probably the problem. The mutualized system would involve kind of firstly recognizing, you know, We can't go back to a nationalized model. I'm not suggesting that. The techno-economics of the system are not the same. There is far more decentralized production of energy than ever existed under the CEGB. We have far more advanced technology and digital devices and cars that are hooked up to the internet and that can flex their demand. And these are thoroughly good things. And I think that people on the left and people in the climate movement shouldn't be afraid of prices. Prices are a marvelous way of orchestrating activity. and they're very compatible with public ownership. I think this idea of a mutualized system is one that's built around, firstly, a smaller central state. I think we need to rationalize the institutions and the activities around what I call the regulatory state. We need to reduce complexity. We need to eliminate lots of zombie programs that are kind of just rumbling along, but nobody really knows how that all adds up. The second pillar would be to set up public corporations. I'm not suggesting that we roll these out for all types of asset classes, but clearly there are asset classes where if we don't start bringing the states sort of backing into them, it's going to be very difficult to scale them up. Nuclear is the best example, right? I mean, right now, Sizewell C is on a kind of mixed model of part state investment, part private investment. So, we clearly know that we're going to need some form of public corporation to scale up nuclear. I would argue that gas-fired generation is another asset class that, in the not-too-distant future, we'll need to have a different approach to. It's going to become incredibly commercially difficult for a private investor to put money into a gas-fired plant that's running two, three minutes a year. It's not that extreme, but you get the point. There are asset classes where public ownership would go neatly, I think, with a model. The third pillar is I call unleashing prices. I think we need, you know, locational pricing, or at least we need ways of organizing the electricity market in a way that creates more location.
00:29:40
Speaker 1: Signals.
00:29:42
Speaker 3: An electric vehicle is responding to price signals to shift around its demand to when the wind is blowing, sun is shining, and the grid is congested. And it's very hard to do that in the context of a national price. I think there are still options for how you do it. I mean, obviously, we had a huge debate in the British electricity industry about about this over the last couple of years.
00:30:03
Speaker 2: And you've decided to keep one national price and not move to locational prices.
00:30:06
Speaker 1: Right.
00:30:07
Speaker 3: But I still think that there are questions to be answered about the future market arrangements. And under a variety of different options, you could find ways of creating more locational specificity. If you have a wind farm that's just outside of a small hamlet, why can't they buy the power direct from that?
00:30:24
Speaker 1: The fourth pillar of a.
00:30:32
Speaker 3: Into houses, into local communities, into municipalities, and starting to shift ownership of those things as well.
00:30:39
Speaker 2: And so far, and we started with technology because so far it is technology that has forced change onto the system in a large way. The fact that renewable prices have come down and these decentralized technologies exist and that we can manage the grid in a better digital way. But what you are now calling on for is institutional innovation that drives change, which is darn hard. What are the chances any of this mutualized energy world comes to be a reality?
00:31:12
Speaker 3: I'm fascinated that you think it's darn hard. Something has gone wrong in our society if we are willing to be super optimistic about the infinite flexibility and possibilities around technology. but we just don't seem to think that we can change institutions and markets. These are human-made things. Also, I don't feel that way. It's hard, but that's not the same as saying that it has to take 10 years to do anything. My book is filled with stories of people, economists, engineers, citizens, politicians, who in the 20s, in the 40s, in the 70s, under capitalism, Stanley Baldwin, Clement Attlee, and Margaret Thatcher, that these groups of people came together, system marketers, builders, system architects, and realized that they were going to have to design an entirely new set of institutions and markets and policies. And so I find it strange that we kind of look at the arrangements we have today and we say, well, we can't change them because it would be very hard. If people had thought that way, we would have never had privatisation. We would have never had nationalisation. We would have never had the Central Electricity Board. We would have never had gas conversion. We would never have boilers in our houses because somebody would have gone, it would be too difficult.
00:32:21
Speaker 2: But in the near term, there's still that political challenge that needs to be addressed. The Labour government came into power in 2024 promising £ 300 lower bills and 95% clean power by 2030. It doesn't look like either of those will happen now. Some of it because of the war and where gas prices are, some of them out of their control. But it's going to be an attack line that the right uses to say this is because of climate. How do you address that in the near term?
00:32:51
Speaker 3: Well, I mean, I think one immediate lever that's available is the levies, right? So these are these kind of environmental, social policy costs that have been charged through bills.
00:33:02
Speaker 1: That's unusual.
00:33:04
Speaker 3: Other countries have split those between a combination of on bills and general taxation. And we haven't done that in the UK. And so there is a way of looking at, you know, a kind of intervening in that. And I mean, people for 10 years have been arguing that this doesn't make any sense because in particular, it's galling that, you know, you've got. price support mechanisms like, you know, renewable obligations, feed-in tariffs, and then the CFDs that are then added to bills. So you're disincentivizing the electrification that you want to happen to use the power from the renewables. So that strikes me as one area that you could look at. Look, I think another important question is kind of given that things have changed, not just Hormuz, but also, you know, in the pace of build-out, increases in the cost of certain infrastructure delays you know is there a point at which you can start to take out costs by just saying look you know certain projects are either maybe the needs case has changed maybe the cost has changed so much that a different or a set of arrangements would do Again, I mean, in the way that the system has become so fragmented, there's a sense that we need greater cost control, right? The design of the system and its cost and how it feeds through into bills is that responsibility for that is split over too many institutions. And I'm of the view that a more interventionist approach might grapple with some of that cost bloat and eliminate it from the system. The third, I think, option would be around demand. So it's kind of counterintuitive. But again, if you get these big blocks of demand that come in and that sop up more of the fixed cost, then that potentially provides alleviation elsewhere. And that's why I think that, you know, look, if we need to reduce our exposure to international imports of fossil fuels, decarbonisation of heat is such an important... strategic lever, and decarbonization lever.
00:35:06
Speaker 1: It's both.
00:35:07
Speaker 3: It's great to be scaling up renewables rather than turning on gas that you import, but if 85% of your homes are still on boilers, then by the winter, you have a problem. There aren't easy options here. I think that that's the argument that I'm making in the book, is that that's why you do have to think of this as We've run the course of a system. And in many ways, pushing very far and fast on decarbonisation targets has led us to the point of decision, this inflection point where we need to decide how do we want the system to be governed. What are the right institutions, ownership models, market arrangements? And how do we build something that's durable beyond the life of a parliament? We're at that point now. Now is decision time for how to arrange those things.
00:35:58
Speaker 2: Now, if we take a step back from all these lessons of the UK system that you have drawn, what are the lessons that any other country trying to build a reliable and affordable electricity system should take?
00:36:12
Speaker 3: One important lesson for other countries is to know when you are at a sort of system reset point. I think the lesson from the UK is that you can push very fast on deploying technologies, but if you don't recognize the point at which you need to change your institutions, change your market arrangements, and potentially change your ownership models, introducing partial or full state ownership into parts, you can go very far and then.
00:36:37
Speaker 1: You find yourself even more stuck in the mud.
00:36:40
Speaker 3: And I think that particularly countries that are looking at some of the bits of the European liberalized model that have worked very well, retail competition has worked very well in lots of countries, spot markets worked for a long time in lots of countries. I would actually argue that the first wave of independent regulation did work really well. And actually in lots of countries like the Netherlands and France has worked really well in combination with public ownership. So I guess I think that the book is supposed to present a kind of, this is a lovely buffet of ways in which that the energy system has been organized in the past. And we should be able to think creatively about what comes next with confidence that there are lots of options. We don't have to stick with the arrangements that we have. Just because we came up with them in the 90s doesn't mean we're stuck there forever. And I think that should be the lesson for other countries, that they should think more creatively about the way to arrange a power system in a way that serves citizens and creates the kind of returns that investors and governments will need. But it isn't as simple as... I think one of the follies of the last 20 years in lots of countries is kind of thinking that there is like a really neat and easy toolkit of like, you know, bish, bash, bosh. You stick in some markets, you sprinkle in some subsidies, you know, you put in a CFD, you get more wind or solar and then like everything will take and then your hard work is done. You know, I'm very lucky to work with someone who always says, I don't know what strategy means. All the hard work is in the implementation. And I think that that's where lots of countries are.
00:38:17
Speaker 2: That's a nice way of thinking about it, just given how complex the electricity system is and how it needs to be maintained in a way that is continuously matching supply and demand. And every country has such diversity of supply and demand profiles that are going to change over the century. Right. That's a good way of thinking about how to develop and to look at the basket case that is the UK. Thank you, Arthur.
00:38:42
Speaker 1: Thank you so much for having me.
00:38:46
Speaker 2: And thank you for listening to Xero. Now for the sound of the week. That is the sound of the smelting process at an electric arc furnace, which makes steel using electricity instead of coal. If you liked this episode, please take a moment to rate and review the show on Apple Podcasts, YouTube and Spotify. This episode was produced by Oscar Boyd. Special thanks to Somersadi and Alyssa McDonald. I'm Akshat Rati, back soon.
Speaker 1: Bloomberg Audio Studios. Podcasts.
00:00:05
Speaker 2: Radio.
00:00:06
Speaker 3: News.
00:00:08
Speaker 2: How do you make electricity cheap again? It's the question that is bedeviling policymakers around the world, particularly so in the US and Europe. Some countries, though, have figured it out. Those include Iceland, Norway and China. Many call them electrostates because more and more of their energy system runs on electricity. The power plants, transport, increasingly industry. But how do you get there? What is the role of government? And what is the role of technology? This is Zero, I am Akshat Rati, and this week, how to build an electrostate. Joining me this week on Zero is Arthur Downing, author of Power and the People, a book published this month that looks at what history can teach us about how to structure the electricity system so that it can be both cheap and clean. Welcome to the show, Arthur.
00:01:06
Speaker 1: Hello.
00:01:06
Speaker 2: So you and I are obsessed with electricity, fair to say. I mean, something to do with our jobs, I guess, but also the bend of our minds. But you argue everyone should have a better understanding of the electricity system. Why?
00:01:22
Speaker 3: I think it's become something of a truism to say that electricity is an everyday essential, the pillar of civilization, foundational to economic activity. Without it, modern life would be inconceivable. So those are some reasons why you might think it's a good idea that more of us understand it. But I guess the argument that I make is that it's more pronounced than that, that the way the electricity industry both has developed over the past 100 years and the way it may develop is pivotal to civilization strategy for dealing with climate change that you could really summarize our approach as to decarbonize generation and electrify demand and there's lots of debate within the industry as to whether that's entirely the right approach but i think it's fair to say that it is the approach that almost all global institutions and governments have committed to this.
00:02:26
Speaker 2: And a lot of our focus over the past two decades has been on the clean part, especially in the West. And it's paid dividends, you know, given whatever the politics, wherever it is, you can't argue with the sheer amount of renewables that have been built and in many, many places have shown to actually reduce power prices. I mean, the latest example from Australia using batteries is just stunning how much gas consumption at peak hours they've been able to shave off by deploying batteries. But there just hasn't been the same focus on electrifying the end use of energy. Why is that?
00:03:04
Speaker 3: So it is undeniable that renewables have grown at a dramatic pace in many geographies at many scales, both from rooftop solar to large scale solar, onshore wind to massive offshore wind. But it isn't always the case that the cheaper or the lower marginal cost of renewable generation has translated into what end consumers or citizens see, which is an all-in electricity price, a price per unit accommodating everything from the production, generation, transmission, distribution, storage. And I think that therein is a clue to why there hasn't been the same focus on the demand side. which is there was an assumption that if renewables had a lower marginal cost, that that would translate into a lower overall price per unit for the end consumer, and that.
00:03:57
Speaker 1: Would be what would drive electrification.
00:04:01
Speaker 3: I think it's fair to say that there's a very uneven geographically, uneven rate of success on that measure. In some countries, electricity prices have risen very dramatically, that that has eroded demand growth. I think there's a debate as to the extent to which some of that has been increased energy efficiency, or deindustrialization, and so changes to the structure of an economy, or is just genuine demand reduction. And I think it's a bit of all three, actually.
00:04:32
Speaker 2: And it's worth saying here that the marginal cost is the cost most people are told of deploying solar on the grid, but that really is the cost of the additional power added to the system, not the system cost of integrating it with maybe batteries, but also transmission.
00:04:48
Speaker 1: Right.
00:04:54
Speaker 2: That means somebody is paying for it, which in this case would be the grid paying you to consume that power. So all those costs inclusive have not translated into lower bills. I mean, the UK is a good example of that. We've had a lot of renewables added to the system over the past two decades, exactly the same time when power prices have been going up. But in places where electricity prices have fallen, even those places have don't quite have the focus on electrifying end use. Why is that?
00:05:23
Speaker 3: In some countries, the way that the climate regulation and sort of political regulatory consensus was very, very focused on a combination of measures to get emissions down. And some of that meant that demand reduction was seen as good, right?
00:05:42
Speaker 1: And that is true. That is true.
00:05:44
Speaker 3: I mean, I think it's an important distinction between the energy service that a light bulb provides and the energy input into the light bulb. Those are distinct things. Light bulbs have got dramatically more efficient over the last 50 years, particularly with LEDs. Fridges have got dramatically more energy efficient. Homes generally have got more energy efficient. In many countries, I think that even though prices were rising and demand was falling, people thought, well, this isn't a problem because it's mostly being driven by energy efficiency. I would argue that the other reason is because there hasn't been sufficient attention to the institutions, markets, and regulation of the system. And that one of the downsides to being so focused on the energy transition as a technological problem is that you think that if only you get more renewables on the grids, prices will magically fall. And that clearly isn't the case unless you have the right institutional arrangement. And so there is a sense in which that political elites, business elites, and companies kind of took their eye off the ball. I also think that one of the problems is that now in some countries, we do have a kind of negative spiral, which is that as you move to a renewable-based system, a greater share of the costs become fixed. If you therefore undershoot your demand projections, then prices go up for everybody because the cost has to be spread over fewer units. And then that drives a further incentive for more energy efficiency, and et cetera, et cetera, et cetera. And so I think it's both a kind of, I wouldn't say it's conspiracy, it's sort of a combination of a sort of screw up and a natural break in the energy transition where we need to divert attention to the demand side.
00:07:26
Speaker 2: And this particular year with what has happened in the Strait of Hormuz in the Middle East has made people at least countries which do not have access to fossil fuels really think hard about what to do next. And most of it is, what can we do at home? If you do have any fossil fuels, try and dig those up. But if you don't, well, you're electrifying. And the discussion about electrostates comes up a lot in these questions. People call China as an electrostate just because of the sheer amount of technologies it's building, but also Norway and Iceland and Often it is referred to as the country with a large fraction of their energy coming from electricity. How would you define an electrostate?
00:08:11
Speaker 3: Well, I think the best way to define an electrostate is to focus on the state part. So what I mean by an electrostate is a country in which the state, be it municipal or national level, is deeply embedded in the making, moving, selling of electricity. You might go as far as to say that the means of electricity production are owned and operated by the state. I think that that's a meaningful way to define an electrostate like China because because it doesn't get you kind of locked into debating about metrics and whether, you know, is electricity's share of final energy consumption the right metric? On that measure, China has a very, well, relatively high, although lower than Norway. But then you would say that there are other things about the Norwegian economy that would make it something like a petrostate. And so I think that this kind of techno focus on the electricity part is the wrong bit. The question should be about the political economy of the electricity system.
00:09:18
Speaker 2: I would take a different definition here because it would help us answer the main problem we are facing right now, which is the cheapness of electricity coming from clean sources hasn't really delivered. And in a way, I'd like us to answer the question of how to build an electrostate. But we define that electrostate as a country building a grid that provides reliable and affordable electricity.
00:09:43
Speaker 1: How does that sound?
00:09:43
Speaker 3: I mean, I like that a lot on the basis that it's what citizens care about is, you know, a falling price of the, you know, the commodity that they buy, the electricity.
00:09:56
Speaker 1: So I'm very, very sympathetic to that.
00:09:59
Speaker 3: But I think that the reason that I'm interested in a definition which focuses on the institutions is because it means that we all focus a bit more on what we have to do to create institutions, ownership models, and markets that serve citizens and that translate the benefits of renewable technology, which I completely agree with, into prices for end consumers. I would also argue that that's the way that previous system builders have thought about the system.
00:10:27
Speaker 2: Well, that's exactly what you've done in the book, right? I found it a really refreshing read because a lot of the discussions around this topic do start with technology. But your focus in Power and the People has been on history.
00:10:41
Speaker 1: Why history?
00:10:42
Speaker 3: Well, first and foremost, because that's the way that I see the world. I did history at university. I remember once debating with someone, why was this strange thing in Japan where the frequency of the grid is totally different in two halves. When you dig into it, you discover that the reason behind that is because back in the 1890s, there was division in the country between whether to buy German technology or US technology. This completely incoherent approach to managing the grid is just a product of history, an accident of history, you might say. That is the other reason why I wanted to write this book about history, is because the energy system is history. It's a system where each generation layers infrastructure on the infrastructure built by the past generation. And the choices available to us are heavily constrained by the weight of history. And I think that the reason why we need to understand the energy system as a product of its history is because it allows us to, with confidence, understand the magnitude of what we're attempting. And I think the need to move beyond debates just about energy. technology naturally just percolating through the system and lovely S-curves taking you all the way to utopia. And also that the system builders of the past did also think in these terms, that they understood that at certain moments in history... it was incumbent on that generation to intervene in systems, to reset the rules of the game, to change the markets, the institutions, the ownership models, in order that something new might grow.
00:12:22
Speaker 2: When you put it that way, and of course, when you read the book, you realise, actually, we do think about a lot of our infrastructure in historical terms. Cities are shaped by history. Our roads and our food systems are shaped by history. And there's so much discussion about them in any type of book you would pick up about London.
00:12:41
Speaker 1: That'd be about history.
00:12:42
Speaker 2: But in energy systems, not so much. The book focuses on networked energy. So you do both the history of gas networks and electricity networks, but you do it in the UK. And of course, while electricity systems are different in different countries, there are lessons from the UK that translate into others. So let's just start with the UK's history. You divide it in four parts. Give me a brief four-part summary of what the UK networked energy has been. Sure.
00:13:14
Speaker 3: So from 1813, which marks the beginning of networked energy with the first gas network in the world on Westminster Bridge, to about 1926, we have what I call a localised system. Lots of small-scale... local, city-level, sub-city-level gas and electricity undertakings. They are vertically integrated, so they do everything along the value chain from production and generation through to supply. That works fairly well, but it starts to run out of road in the 1920s in particular, when Britain becomes increasingly concerned that its electricity system is very fragmented and that the country is losing out to other countries, particularly America and Germany. because of its high electricity prices, something very reminiscent of our concerns today. So the second phase is what I call rationalised energy, and that operates between 1926 and 1947, and that's where the central state intervenes for the first time and builds the first national grid between 1926 and 1935. The third phase is what I call nationalised energy, which really begins with Clement Attlee's government post-war. Both the gas and the electricity systems are brought into national ownership. you get the formation of the British Gas Corporation, then CEGB. What the nationalised period represented was an extraordinary period of asset building from not just networks and nuclear and hydroelectric coal-fired power stations, but on the gas side, the British Gas Corporation effectively invented LNG, oversaw an extraordinary programme of converting the system from using gas made from coal to natural gas found in the North Sea. Now that phase starts to run out of steam in the 70s. I argue that they kind of enter a phase of technocratic drift. It becomes increasingly bureaucratic. And so the fourth phase is what I call, is what anybody would call privatized energy. And that's kind of what we have today. And it's got four basic principles. The first was moving ownership from public to private. The second was to change the way you coordinated the system from central planning to using markets and prices. The third was to break up the system. For a generation, people had thought an electricity system was one indivisible thing. But the innovation of privatization is to say, no, we can split off the bits that could be competitive, generation and retail, from the bits that remain natural monopolies, the networks in the middle. And the fourth pillar was independent regulation. So moving control out of government departments and ministers into independent regulators. And that phase has kind of lasted up until today, although in the book I argue that privatization enters a kind of stagnation or a zombification phase in the 2010s.
00:16:04
Speaker 2: Let's come to the current moment because it is the current moment that gets us into the trouble era. There is that chart you have in the book about how power prices kept falling from the 1920s and kind of plateaued in the 1990s. And then They've just kept going up since the 2000s. And there doesn't seem to be any end to the power prices going up, regardless of who is in power in the government. Why?
00:16:32
Speaker 3: Wow. That's the $ 50 billion question in the sense that, you know, that's roughly the cost of running the system every year or maybe a bit more than that. There is undoubtedly a technological explanation for this. Some of the increase in prices over the 2010s through to today is driven by rising gas prices and the way that gas sets the price in the market.
00:16:57
Speaker 1: That is.
00:16:59
Speaker 3: a portion of the cost increases. But of course, the wholesale price is only a third of the bill. There are other things that drive the bill, network costs, and those have risen. Part of that, I think, is that there was a catch-up that some of the cost savings and price end reduction, for end consumers, the reduction in price is in the 90s and early 2000s, was partly kind of deferring capex, capital expenditure that you'd kind of deferred and delayed, you'd kick the can down the road, and then it boomeranged back in the 2010s onwards. There is also the increase in policy costs. So these are various sort of support schemes for social or environmental policies, things like renewable obligations, so the price support mechanisms for renewables, and those were added back to the bill. That's one way of explaining this. And I think it's an interesting debate, but I think that it's one that's become somewhat stale.
00:17:52
Speaker 2: And it's the one that people have heard about because it's recent history. But if you take those four principles of privatization, they don't sound bad to me. But you're saying they've been the cause of the ill.
00:18:06
Speaker 3: I wouldn't argue that privatization has caused the ills of today. What I would say is different, which is that the way the privatized model has been retrofitted and adapted to try and deal with the dual problems of energy security and climate change has driven up bills. and that that is eroding trust in the system and is eroding goodwill for decarbonisation in particular. Let me highlight two areas where I do think though that the way the privatised model develops does matter. The first is fragmentation. So the way Britain does privatisation is it unbundles the system and privatises it to an extent that no other country does.
00:18:47
Speaker 1: Unbundling.
00:18:48
Speaker 3: We literally break apart transmission to the onshore and offshore. Distribution is partly unbundled because you've got independent distribution.
00:18:56
Speaker 1: Retail was separated. Generation was separated. Other countries.
00:18:59
Speaker 2: And just to explain these parts, the transmission network is the large power network that takes power plant level electricity to... towards towns etc but then there's distribution at the town level that needs to be done yeah retail being the people who give you the bills they might not always be the people who are generating the power so there's generators and exactly then there's overlap between them because some of these companies have multiple roles in in the system.
00:19:22
Speaker 3: Yeah that's right and that's a degree of fragmentation that very few other countries have britain is on its own when it comes to pushing unbundling, and private ownership. And I would argue that that drives up bills in two ways. The first is that it increases the cost of capital, because in systems where you have state-owned assets, the state can borrow at a lower rate than capital. And that means that very capital-intensive things like nuclear or networks, they're more expensive and less likely to be built in a system with high degree of private ownership. The second is fragmentation. so many bits of the system, and you don't have a mechanism, as we didn't for many decades, to coordinate those different bits. It's a bit like that kind of Jesus feeding of the 5,000, but in reverse. Everybody adds a little bit of cost here, here, and here, and here, because it's good for their revenue. And so everybody adds costs into the system, and then we become surprised at why the bill has gone up. I think there has been a lack of overarching cost control as a consequence of fragmentation. And both of those things, I think, are a function of privatization.
00:20:30
Speaker 2: And you also point out in a chart showing how much investment in these infrastructure, both gas and electric, but also in this country, water networks, after privatization went down, you know, half or even a third of what it used to be under nationalized control. circumstances, how much did that contribute?
00:20:52
Speaker 1: Yeah.
00:20:53
Speaker 3: I mean, it's difficult to compare investment levels between decades and periods because If you have changes in the price of the capital assets or you have an increase in the cost of building things, are you comparing like for like? But I think that the evidence is pretty compelling that if you look at overall investment as a share of GDP, so the share of the country's gross national product that's reinvested in energy, it does fall quite significantly from the 1970s onwards. And it has been doggedly fairly low. So even though we think of the system at the moment as representing lots of investment is mobilizing and in historical terms, it's not as significant as what happened in the 1950s and 60s.
00:21:39
Speaker 2: After the break, more of my conversation with Arthur Downing, author of Power and the People. If you're enjoying this episode, please take a moment to rate and review Xero on whichever platform you're listening on. A lot of the time, the UK electricity system is seen as doing really well in decarbonization. But reading your book, you come away with a much darker assessment of the UK's electricity networks. At one point, the comparison is really with UK's water networks, which under privatization have decreased. ended up in terrible places, dumping sewage in the seas and rivers, and now at the brink of maybe a bailout from the national government to the tunes of hundreds of billions of pounds. And you say that the current electricity system is at its breaking point. It doesn't feel like it. It's not like people in the business are walking about panicking that this system's going to break. Why are you panicked and nobody else?
00:22:56
Speaker 1: That's a good question.
00:22:58
Speaker 3: The reason I'm nervous is because I think about fundamentally what we've been doing over the last 10 years is organized around security of supply and decarbonization. And so those are the objectives for the system in the future. And the reason I worry is because if I look to the near-term future and look at the path we're on, I am concerned that there are two big problems that Demand has gone down really a lot over the last 10 years, right?
00:23:28
Speaker 2: And you're talking about this sort of pre-AI electric cars coming through. It's going up now again, but really it has for the last 20 years been going down.
00:23:36
Speaker 3: Sure, but very anemic, right? We're talking about at most 1% growth in electricity demand last year. If you look at electricity demand per capita, 2000 to 2019, there's only like five countries in the world, including.
00:23:50
Speaker 1: Syria, Tajikistan.
00:23:52
Speaker 3: Puerto Rico, Tanzania that have had bigger reductions in electricity demand. So if what we need from the system today is to unlock demand, I think there's reasons to be sceptical. The second thing is prices. It's great to point to the huge... Or you can point to the huge increase in renewable capacity, but you would also have to admit that prices have inexorably gone up. And again, we can have a debate as to the relative contribution of different technologies and parts of the bill. But I would argue that for end consumers, a lot of that is moot, that what they care about is prices.
00:24:27
Speaker 1: And so.
00:24:28
Speaker 3: If what we need for the next phase of the energy transition, and by the way, if we want to reduce our dependence on imported fossil fuels, we are going to have to accelerate electricity demand, particularly in things like heat, and that requires us to get control of bills. And I would say that on demand and on prices, the last 10 years have not been good. And I have yet to see evidence that we are turning the corner. Or at least I would say that whether we do turn the corner is going to be dependent on political and policy decisions and collaboration across the industry to do things in a different way. We can't just keep going. And that's why I call it a crisis, because it's a moment of decision.
00:25:08
Speaker 2: And to be fair, the crisis has come through in the politics to some extent, right? You have a right-wing growth in this country where they are using the increase in power prices as a way of arguing against net zero because this is the social contract that they want to break because they want to tell you that it is decarbonization, not anything else that is raising your power prices. And the response from the left and the Labour government in power has been, well, we know renewables will be cheaper and we'll just try and get you those lower bills at some point. But your analysis is much deeper in that that fix that even the Labour government is trying to make right now isn't solving for the major challenges that the system has. And you then paint these two futures that are possible for the UK. What are those two futures?
00:26:00
Speaker 3: So the first scenario I call the central return generating board, which is a bit of a play on that in the nationalised area we had the central electricity generating board. I should say that this is purely a speculative vision of how things might develop. And I think predicting anything in British politics is difficult. But I think that it's characterized by the state taking an ever more deeper role, a more active role in centrally planning the system. What gets built where? And importantly, the state's role becoming to de-risk investment for private sector investors. And so that's why I call it the Central Return Generating Board. It's a system that's primary purpose is to generate returns for investors. And that's provocative, but I think that it highlights that there isn't enough attention on bills, living standards, what this means for citizens. The second scenario is what I call mutualized energy. And I call it a mutualized system because it's a way of just highlighting that I think we need a system to be based on mutually beneficial relationships between citizens, capital, the state, consumers, and investors. And we need to reset the relationships. I would argue that at the moment, the system doesn't work for many participants. And whilst people publicly in the industry may put on a brave face, privately, many people are also kind of seeing that the system we've got is fraying and it's not serving, nobody is happy with it, right? Or I mean, a very small number of companies are very happy with it, but that's probably the problem. The mutualized system would involve kind of firstly recognizing, you know, We can't go back to a nationalized model. I'm not suggesting that. The techno-economics of the system are not the same. There is far more decentralized production of energy than ever existed under the CEGB. We have far more advanced technology and digital devices and cars that are hooked up to the internet and that can flex their demand. And these are thoroughly good things. And I think that people on the left and people in the climate movement shouldn't be afraid of prices. Prices are a marvelous way of orchestrating activity. and they're very compatible with public ownership. I think this idea of a mutualized system is one that's built around, firstly, a smaller central state. I think we need to rationalize the institutions and the activities around what I call the regulatory state. We need to reduce complexity. We need to eliminate lots of zombie programs that are kind of just rumbling along, but nobody really knows how that all adds up. The second pillar would be to set up public corporations. I'm not suggesting that we roll these out for all types of asset classes, but clearly there are asset classes where if we don't start bringing the states sort of backing into them, it's going to be very difficult to scale them up. Nuclear is the best example, right? I mean, right now, Sizewell C is on a kind of mixed model of part state investment, part private investment. So, we clearly know that we're going to need some form of public corporation to scale up nuclear. I would argue that gas-fired generation is another asset class that, in the not-too-distant future, we'll need to have a different approach to. It's going to become incredibly commercially difficult for a private investor to put money into a gas-fired plant that's running two, three minutes a year. It's not that extreme, but you get the point. There are asset classes where public ownership would go neatly, I think, with a model. The third pillar is I call unleashing prices. I think we need, you know, locational pricing, or at least we need ways of organizing the electricity market in a way that creates more location.
00:29:40
Speaker 1: Signals.
00:29:42
Speaker 3: An electric vehicle is responding to price signals to shift around its demand to when the wind is blowing, sun is shining, and the grid is congested. And it's very hard to do that in the context of a national price. I think there are still options for how you do it. I mean, obviously, we had a huge debate in the British electricity industry about about this over the last couple of years.
00:30:03
Speaker 2: And you've decided to keep one national price and not move to locational prices.
00:30:06
Speaker 1: Right.
00:30:07
Speaker 3: But I still think that there are questions to be answered about the future market arrangements. And under a variety of different options, you could find ways of creating more locational specificity. If you have a wind farm that's just outside of a small hamlet, why can't they buy the power direct from that?
00:30:24
Speaker 1: The fourth pillar of a.
00:30:32
Speaker 3: Into houses, into local communities, into municipalities, and starting to shift ownership of those things as well.
00:30:39
Speaker 2: And so far, and we started with technology because so far it is technology that has forced change onto the system in a large way. The fact that renewable prices have come down and these decentralized technologies exist and that we can manage the grid in a better digital way. But what you are now calling on for is institutional innovation that drives change, which is darn hard. What are the chances any of this mutualized energy world comes to be a reality?
00:31:12
Speaker 3: I'm fascinated that you think it's darn hard. Something has gone wrong in our society if we are willing to be super optimistic about the infinite flexibility and possibilities around technology. but we just don't seem to think that we can change institutions and markets. These are human-made things. Also, I don't feel that way. It's hard, but that's not the same as saying that it has to take 10 years to do anything. My book is filled with stories of people, economists, engineers, citizens, politicians, who in the 20s, in the 40s, in the 70s, under capitalism, Stanley Baldwin, Clement Attlee, and Margaret Thatcher, that these groups of people came together, system marketers, builders, system architects, and realized that they were going to have to design an entirely new set of institutions and markets and policies. And so I find it strange that we kind of look at the arrangements we have today and we say, well, we can't change them because it would be very hard. If people had thought that way, we would have never had privatisation. We would have never had nationalisation. We would have never had the Central Electricity Board. We would have never had gas conversion. We would never have boilers in our houses because somebody would have gone, it would be too difficult.
00:32:21
Speaker 2: But in the near term, there's still that political challenge that needs to be addressed. The Labour government came into power in 2024 promising £ 300 lower bills and 95% clean power by 2030. It doesn't look like either of those will happen now. Some of it because of the war and where gas prices are, some of them out of their control. But it's going to be an attack line that the right uses to say this is because of climate. How do you address that in the near term?
00:32:51
Speaker 3: Well, I mean, I think one immediate lever that's available is the levies, right? So these are these kind of environmental, social policy costs that have been charged through bills.
00:33:02
Speaker 1: That's unusual.
00:33:04
Speaker 3: Other countries have split those between a combination of on bills and general taxation. And we haven't done that in the UK. And so there is a way of looking at, you know, a kind of intervening in that. And I mean, people for 10 years have been arguing that this doesn't make any sense because in particular, it's galling that, you know, you've got. price support mechanisms like, you know, renewable obligations, feed-in tariffs, and then the CFDs that are then added to bills. So you're disincentivizing the electrification that you want to happen to use the power from the renewables. So that strikes me as one area that you could look at. Look, I think another important question is kind of given that things have changed, not just Hormuz, but also, you know, in the pace of build-out, increases in the cost of certain infrastructure delays you know is there a point at which you can start to take out costs by just saying look you know certain projects are either maybe the needs case has changed maybe the cost has changed so much that a different or a set of arrangements would do Again, I mean, in the way that the system has become so fragmented, there's a sense that we need greater cost control, right? The design of the system and its cost and how it feeds through into bills is that responsibility for that is split over too many institutions. And I'm of the view that a more interventionist approach might grapple with some of that cost bloat and eliminate it from the system. The third, I think, option would be around demand. So it's kind of counterintuitive. But again, if you get these big blocks of demand that come in and that sop up more of the fixed cost, then that potentially provides alleviation elsewhere. And that's why I think that, you know, look, if we need to reduce our exposure to international imports of fossil fuels, decarbonisation of heat is such an important... strategic lever, and decarbonization lever.
00:35:06
Speaker 1: It's both.
00:35:07
Speaker 3: It's great to be scaling up renewables rather than turning on gas that you import, but if 85% of your homes are still on boilers, then by the winter, you have a problem. There aren't easy options here. I think that that's the argument that I'm making in the book, is that that's why you do have to think of this as We've run the course of a system. And in many ways, pushing very far and fast on decarbonisation targets has led us to the point of decision, this inflection point where we need to decide how do we want the system to be governed. What are the right institutions, ownership models, market arrangements? And how do we build something that's durable beyond the life of a parliament? We're at that point now. Now is decision time for how to arrange those things.
00:35:58
Speaker 2: Now, if we take a step back from all these lessons of the UK system that you have drawn, what are the lessons that any other country trying to build a reliable and affordable electricity system should take?
00:36:12
Speaker 3: One important lesson for other countries is to know when you are at a sort of system reset point. I think the lesson from the UK is that you can push very fast on deploying technologies, but if you don't recognize the point at which you need to change your institutions, change your market arrangements, and potentially change your ownership models, introducing partial or full state ownership into parts, you can go very far and then.
00:36:37
Speaker 1: You find yourself even more stuck in the mud.
00:36:40
Speaker 3: And I think that particularly countries that are looking at some of the bits of the European liberalized model that have worked very well, retail competition has worked very well in lots of countries, spot markets worked for a long time in lots of countries. I would actually argue that the first wave of independent regulation did work really well. And actually in lots of countries like the Netherlands and France has worked really well in combination with public ownership. So I guess I think that the book is supposed to present a kind of, this is a lovely buffet of ways in which that the energy system has been organized in the past. And we should be able to think creatively about what comes next with confidence that there are lots of options. We don't have to stick with the arrangements that we have. Just because we came up with them in the 90s doesn't mean we're stuck there forever. And I think that should be the lesson for other countries, that they should think more creatively about the way to arrange a power system in a way that serves citizens and creates the kind of returns that investors and governments will need. But it isn't as simple as... I think one of the follies of the last 20 years in lots of countries is kind of thinking that there is like a really neat and easy toolkit of like, you know, bish, bash, bosh. You stick in some markets, you sprinkle in some subsidies, you know, you put in a CFD, you get more wind or solar and then like everything will take and then your hard work is done. You know, I'm very lucky to work with someone who always says, I don't know what strategy means. All the hard work is in the implementation. And I think that that's where lots of countries are.
00:38:17
Speaker 2: That's a nice way of thinking about it, just given how complex the electricity system is and how it needs to be maintained in a way that is continuously matching supply and demand. And every country has such diversity of supply and demand profiles that are going to change over the century. Right. That's a good way of thinking about how to develop and to look at the basket case that is the UK. Thank you, Arthur.
00:38:42
Speaker 1: Thank you so much for having me.
00:38:46
Speaker 2: And thank you for listening to Xero. Now for the sound of the week. That is the sound of the smelting process at an electric arc furnace, which makes steel using electricity instead of coal. If you liked this episode, please take a moment to rate and review the show on Apple Podcasts, YouTube and Spotify. This episode was produced by Oscar Boyd. Special thanks to Somersadi and Alyssa McDonald. I'm Akshat Rati, back soon.
