Chris Huhne: we need smart regulation in the energy sector

Yesterday Chris Huhne spoke at the Social Liberal Forum‘s conference on smart regulation for the energy sector:

It’s a pleasure to speak at the first conference of the Social Liberal Forum.

We Liberal Democrats have always prided ourselves as a party of ideas – and they’re needed more than ever now that we’re in government. Whatever your view of The Orange Book back in 2004, it did at least trigger a debate about Liberal ideology, about what it means to be a Liberal Democrat in today’s Britain. I was pleased to contribute both to The Orange Book and to its social liberal counterpart, Reinventing the State, and I hope the Social Liberal Forum can continue the debates about philosophy and policy that a vibrant party needs to renew itself and its thinking.

Now, it’s natural that I should focus this afternoon on the ‘fuel’ element of the triple crunch which this session [The triple crunch: credit, fuel and food – how we ensure that the economy that emerges post-crisis is sustainable] is about – but I want to use it to illustrate some conclusions applicable to all three areas.

The energy crunch is painfully obvious. We’ve seen it in recent gas and electricity price rises. Whatever the climate-deniers pretend, this is the end result of increases in the global prices of oil and gas. It is an outcome of production levels at or near their peak, and rapidly rising demand from growing economies such as China. It is not the cost of green policies, but the cost of not doing enough to get off the fossil fuel hook onto clean, secure energy.

People have been saying for years that the era of cheap energy is over. Now we’re seeing what this means. Domestic energy costs have doubled since 2000. And of course the impact on low-income consumers is severe. The poorest fifth of households spend 9.4 per cent of their income on energy, compared with just 4.4 per cent for the richest fifth.

Any party concerned about social justice and equality must be alarmed by these trends – and that’s before we consider the environmental impacts of energy use, which provide just as compelling a case for action.

So what should we do? I have three priorities.

First, make the market work better, promoting competition and driving down prices. Consumers need to shop around more; although it’s easy to switch suppliers, only one in five households actually do. And contrary to myth, there are real benefits. Bills really can and do come down. Ofgem calculated that last year a dual fuel customer saved an average £240 a year switching to the cheapest standard credit offer with the same supplier.

But we need to make it even easier. Energy companies need to simplify their confusing tariff structures and make it plain to their customers when they’re not on the cheapest tariff. We need to make it easier for new entrants to compete for business. The small companies, and the big foreign ones.

Second, we will make sure that our policies deliver the most affordable low carbon electricity. One of the main aims of our proposals for reform of the electricity market, which I’ll be publishing very soon, is to create a clear set of incentives to develop renewable energy in the most cost-effective way possible.

And, third, and much more fundamental, is to get our economy and our society off the fossil fuel price hook once and for all.

Dependence on oil for transport and gas for power puts us at the mercy of international markets over which we have no control. Almost everything I’ve done since entering government has the aim of decarbonising Britain’s energy supply – not just for climate security, but for economic security and energy security too. Security against middle east supply disruption, but also security against unexpected price hikes. This is what we have done:

• The Green Deal energy efficiency programme, aimed at reducing the need for energy for heating homes and buildings by ambitious pay-as-you-save plans.
• Electricity market reform, creating clear long-term incentives for low-carbon power generation, stimulating renewables of all varieties.
• The Green Investment Bank, using public money to unlock private investment, steering major new sources of capital into offshore wind farms and energy efficiency investments.
• Feed-in tariffs for microgeneration, and the world-first Renewable Heat Incentive.

Energy efficiency and renewable power can be costly to implement, but they’re very cheap to run. Once we’ve made the initial investment, consumers and businesses will benefit from protection from escalating oil and gas prices. There’s not much we can do about fossil fuel prices – but we can do quite a lot about energy bills.

There’s a common theme to all these policies – and also to the measures we need to tackle the food and credit crunches. None of these aims can be achieved through the market by itself. As Nick Stern said, climate change is the biggest market failure of all time. Our policies to tackle carbon emissions and energy security at affordable prices need regulation – to promote competition, to create the demand for low-carbon power, to set the efficiency standards for buildings.

Liberal Democrats fought the election last year on the promise to ‘reduce the burden of unnecessary red tape by properly assessing the cost and effectiveness of regulations before and after they are introduced, using “sunset clauses” to ensure the need for a regulation is regularly reviewed, and working towards the principle of “one in, one out” for new rules’.

That is a sensible approach, and one I stand by. In the European Parliament I was the first MEP to introduce sunset clauses into EU legislation. And as our Shadow Home Secretary I proposed a ‘stop unit’ in the Cabinet Office to stop departments passing duplicate offences. After thirteen years of a Labour government that introduced a new criminal offence every day – 4,300 new ones in total – we clearly needed a way to stop legislation and regulations aimed at quick headlines rather than real problems. Clearly bad regulation can be a problem. Government failure can be as big an issue as market failure.

The government’s Red Tape Challenge is therefore right to feature a website of laws and regulations currently in force, and to invite comments on which ones should be kept. Its default assumption is that ‘if Ministers want to keep them, they have to make a very good case for them to stay’.

But turn to the environment section of the Red Tape Challenge, and first on the list of the 278 regulations designed to protect wildlife and the countryside and tackle pollution is the Climate Change Act 2008, the law that underpins almost everything government does on climate change.

Whatever the good intent, we have mistakenly given the impression that an exercise designed to scrap unnecessary minor bureaucratic hurdles is now placing the cornerstone of climate protection under threat. Of course this is nonsense. Let me assure you: there is a very good case for our key regulations protecting the environment to stay. Far from there being a threat to the Climate Change Act, we recently adopted the fourth carbon budget for 2023-2027 under its provisions.

All departments have to apply the one-in-one-out rule when introducing new regulations – which means regulations of equal impact. This is a sensible approach, but there are some new areas, like climate protection, where we need to be realistic if there are no old regulations of equal impact to scrap.

How would a deregulation zealot have dealt with the Montreal Protocol, for example, the most effective international environmental treaty to date? Under the Protocol, in 1987 countries agreed to phase out the production and consumption of CFCs and other chemicals that destroy the ozone layer. These regulations didn’t replace anything, as no one knew until the 1980s that CFCs were harmful.

The deregulatory drive needs to focus on reducing costs to business and consumers. Just this week, for example, my department announced exemptions for smaller gas and electricity suppliers from some of the schemes that the larger companies are required to undertake. This will make it easier for small companies to enter the market and grow.

And we need to remember that deregulation can have unintended consequences. Take the example of digging up roads and pavements. Thirty years ago only about a dozen companies had the right to dig up public roads. Then in the 1990s, with the privatisation of utilities and the advent of cable TV, this ballooned to over 150. Streets were dug up repeatedly with no coordination or control. Plumstead Common Road was reportedly dug up no less than 500 times in the space of two years. This was no country lane, but a major thoroughfare – with an accompanying waste of time for businesses and the public. Congestion wastes time, and time costs money.

Similarly, the belief that regulation always implies costs is equally fatuous – something that’s obvious to Liberal Democrats who have never taken the view that the market is always right. Take mobile phones. In the early days of the technology, the US adopted a laissez-faire approach, with the result that American mobiles didn’t work outside state, or even city, lines. The technologies couldn’t talk to each other. At one point the USA had no less than sixteen 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 twenty mobile networks, six are European and only two are American – and they’re in 19th and 20th places. Regulation round the GSM standard created the foundations on which innovation and creativity could flourish. Regulation ensured that the European mobile phone sector grew far faster than the free market by itself could have achieved.

For another example, I’m indebted to US Energy Secretary Steve Chu, a Nobel Prize-winning physicist who has the best PowerPoint graphs at any summit. He’s looked at the impact of energy standards on US refrigerators over the last fifty years. For the first thirty years, fridges, and their energy use, got steadily larger. Then in 1978 the first energy standards were introduced. Fridges still got bigger, but energy use plummeted. But the most significant thing? The real price of the fridge to consumers fell steadily over the full fifty-year period, and the trend line was competely unchanged by the introduction of standards.

Regulation benefited the environment, but did not add a scintilla to business costs or the consumer costs of buying the fridge. Furthermore, thanks to the standards a fridge bought in 2010 cost a third less to run than a fridge bought in 1975. The savings achieved by the minimum standards amounted to a cool $300 billion by 2010.

Regulation can help make businesses globally competitive, drive down costs for consumers and realise benefits for the environment, society and the economy as a whole. Win, win, win. The argument shouldn’t be about regulation versus deregulation, more laws versus less. It’s about the kind of regulation we need.

As a party, we need to reclaim the concept of ‘smart regulation’, rules aimed at maximising benefits and cost-effectiveness. Smart regulation is long-term, predictable and non-discriminatory. It is built on open and flexible standards, maximising innovation.Compliance is enforced strictly and fairly, but the costs of compliance are minimised.

Look at what the Dutch government did when our sister parties, VVD and D66, were in power together ten years ago. In 2000 they established the Dutch Advisory Board on Administrative Burdens, Actal, with the aim of reducing the regulatory burden on businesses, citizens, institutions, professionals and local authorities. Actal advises the government and Parliament on the impact of proposed regulations, and provides support to programmes aiming to reduce their burdens. It doesn’t question the goals of any proposal, but aims to ensure that they can be achieved with maximum cost-effectiveness. It’s been such a success that there are now suggestions that its model could be replicated at the EU level. That seems to me to be a much more sophisticated approach to the problem than the rather crude attitude taken by some deregulators that any restriction is bad.

The interaction between business and government is a fundamental element of our society, and a key area for social liberals to think about and debate. Of course governments fail, but so do markets. Between the obsession with micro-management and target-setting displayed by the Labour Party, and the fixation with deregulation and scrapping rules just because they are rules on offer from some right-wing ideologues, we Liberal Democrats have a real chance to define an evidence-based, intelligent and distinctive approach.

It is based on the real world, and it is complex. But it also meets the real challenges we face. Thank you.