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Thursday, July 10, 2003

Winters of Discontent

In last week's Spectator Simon Nixon says that Britain may face an energy crisis as soon as this winter:

As things stand, we will be dependent on gas transported thousands of miles from some of the most politically unstable countries on the planet, such as Algeria, Iran and Russia. What’s more, these pipelines must first pass through many other gas-needy countries. And Britain has not got the facilities to store the gas when it gets here. Most European countries have the capacity to store up to 20 per cent of their annual needs, but Britain can store only 4 per cent — or enough for about 48 hours’ supply in winter. If we don’t start building new storage facilities now, we won’t be equipped to cope with a cold winter in three years’ time, says Nial Trimble. ‘The lights will go out. I guarantee it.’

Nixon's concern in prompted by a report by Britain's Institution of Civil Engineers, which warns of dire consequences if the government does not do something about energy security. The thing is Britain's energy regulator, Ofgem, has done a great service to the consumers of energy by reducing regulation; it no longer regulates energy prices, for example. It's approach to market design has been very successful at lowering prices, which has fallen by 13 percent in real terms since 1999; this has made nuclear energy, for instance, more uncompetitive than it already was. It has also improved environmental outcomes, by pushing the shift from coal to natural gas. Ofgem's creditable focus is on improving final outcomes for energy users, not on on the structure of the system.

None of this is to say that the future will be the same, but neither is it cause for panic. Britain will have to adjust to a period when it can no longer rely upon North Sea gas; this need not be a disaster, though, and in all likelihood the shift to foreign sources could well be accomodated within current energy market arrangements. The market for natural gas is a world market, not one in which Britain operates in isolation. In the end there is the price mechanism--prices will adjust towards a market-clearing level, in energy more than in other markets. There therefore should not be any "shortage"--as long as they're willing to pay the prevailing price, Britons should not suffer for lack of energy.