Back from the Socialist Republic to Red Ed’s Utopia

Enjoying the September sun amongst the sun-kissed bourgeois of Biarritz, it’s easy to forget that France has a Socialist government.

But you only have to turn on the power to see the light of the left is still shining.

Electricite de France (EDF) is still 85% owned by the French state and has grown to be the world’s largest producer of electricity.

Yet, even with this enormous low-carbon monopoly under its control (or perhaps because of it), France’s energy policy is not immune to controversy.

Hollande was elected on a promise (repeated while I was there) to reduce the share of nuclear energy in the mix to about 50% by 2025.Francois-Hollande-460x288

Hollande also came up with an eye-catching plan to reduce France’s energy consumption by 50% by 2050 and he is pushing for greater emissions cuts – 40% by 2030.

That last pledge, reminded me of another former Energy and Climate Change Secretary who steered the Climate Change Act through the UK parliament in 2008 – Ed Miliband.

So, I was not entirely surprised when I came back to find that the man who used to be in charge of reform of the UK energy sector (and had not reformed it a megawatt) had made a major speech including plans for reform of the energy sector.

What was surprising, astonishing in fact, was that while I had been away, Miliband had hoisted the tricolour and bought himself a beret.  The time has come for a bit of French home cooking, with the plat du jour being a healthy dose of market interference (or consumer protection depending on who you’re speaking to).

The French have a very strong (despite numerous attacks by the EU) system of price regulation controlled by the Commission de régulation de l’énergie (CRE).  If the CRE suggests a rise in prices to benefit the generator (or any other reason), the French government can say ‘Non’.

Even if you don’t like the political principle of price regulation, in theory it can work when the government owns the means of production – the generator – as in the case of the French government owning EDF. The French government can block price rises and has the ability to pump more money into the generator/supplier to deal with any shortfall or loss that results from the price cap.  Either the billpayer pays or the taxpayer pays.

Since the UK government does not own any of the suppliers in the UK the idea of price regulation is (under the current industry structure) flawed.  For example, if costs for a supplier should go up, for example as a result of a spike in the gas price, the billpayer won’t pay and the taxpayer is not going to pay, therefore the company takes a bath.

Will shareholders of a supplier take that sort of hit, or will they look to exit the market?

Will shareholders of power companies be in a position to support commitment of capital to investment in the period before the cap comes into force (rather than preserving capital to protect themselves from the cap)?

Ed Miliband gambles that in both cases the answer will be yes.  In the cautious slow-moving world of energy supply, I would expect that the answer will take time to become clear.  In the meantime this announcement adds a massive dose of uncertainty to an already jittery market.

Playing with energy prices may be a Labour leader’s fantasy, and one that allows him to reach across the channel in a fraternal socialist embrace.  Unfortunately, in a competitive market with major independent companies trying to make difficult multi-million pound investment decisions without the state safety net, the likelihood is this policy will lead to paralysis and further  withdrawal of capital from the power sector.ed-miliband_2541427b

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