Japan Follows the UK Down the Power Deregulation Rabbit-Hole

March 2, 2022|Energy Policy

Britain’s experiment with privatization in the 1980s, followed by successive bouts of energy market reform throughout the 2000s and 2010s, became a global reference. Unbundling vertically integrated monopolies and exposing incumbents to upstream/generation and retail competition was seen as a winning formula. Cutting the red tape unleashed market efficiencies, which lowered prices for end consumers — until energy markets crunched, that is.

One wonders what Japanese economists and regulators will make of the implosion of the UK energy retail segment. Regulator Ofgem recently approved an eye-watering 54% increase in the retail price cap, which will push millions of households towards energy poverty. Further rises are expected in October, and with increasing frequency thereafter to keep up with an erratic market.

The regulator was caught between competing priorities: protect customers, or allow loss-making suppliers to recover ballooning wholesale costs from consumers. After bailing out major independent utility Bulb, political appetite for further intervention is low. Ofgem chose to hike the cap to prevent further supplier failures. Cue much hot air from politicians (although sadly not enough to keep the homes of energy-poor Britons warm this winter).

The 2021-22 winter won’t be a one-off. The combination of liberalization and decarbonization is a recipe for volatility. The switch to short-term market-based gas pricing slashed billions of dollars off European import costs over the past decade, only for those savings to be almost entirely wiped out in a matter of months when global LNG prices spiked last autumn. Wholesale gas and power prices remain inflated and the cost to consumers will keep stacking up until the market cools off and losses are settled.

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