BELIEVE it or not, I have a plan for these blogs.
And part of that plan was, this week, to write about Michael Gove – truly a pygmy among dwarves if ever there was one (and there was. It’s him) – and the future for education under his raptor-like gaze.
But a couple of things came up over the last week to change my mind.
First, in a remarkable move, Richard Flint, chief executive of private water firm Yorkshire Water claimed there were ‘too many’ water companies, making it ‘harder’ to supply homes with water.
Now, I am not a monster. My first thought, as I’m sure yours is, was ‘Oh, you poor, poor baby. Come here, let me hold you, stroke your hair and coo soft reassurance into your tiny, shell-like ears, kiss the tears from your golden cheeks and massage the stress from your furrowed brow.’
After I had sat down and wept salt tears at the sheer unfairness of it all, a second thought occurred to me. You see, I think I know what we can all do to free young Richard from his Gordian trial…
But we’ll come back to that.
The second was the announcement that 12 – that’s 12 – areas of the UK have such poor air quality that the EU is set to fine us several million pounds. (London, which is NOT one of the 12, as it has been given longer to reach the EU-set targets, has the worst air of any capital city in Europe, so it’s nice to know we still lead the world in one area).
The quality of air in the 12 regions is so bad – due mainly to car-use – it’s likely to cut life-expectancy, on average, by eight months.
Not only that, air quality causes health problems which cost the UK £20bn per year – more than double that estimated to be caused by obesity.
The coalition, never a government to take its eye off the main prize, asked if it could have ‘more time’ to meet the targets. Because it’s the fine that’s important, not the impact on public health or the wider environmental damage this hints at. So, as ever, well done there.
Thing is, one way we could help sort that out is if we reduced bus and train fares. That way, people who need to travel could hop on a bus or a train, rather than in their car, cutting emissions at a stroke.
So, why don’t we just do that? Saves money, and saves us a fine, even cuts congestion in inner-city areas, and people live healthier, longer lives so they can work even longer before their two weeks’ of pension before they die. Bingo! Trebles all round!
But, sadly, no. Not bingo. No trebles, for anyone.
Because the bus companies and train firms are privately run. So the government (or local authorities) CAN’T cut their fares. And bus and train companies are RAISING their fares, because that will help make it more expensive to travel anywhere and encourage people to use their cars more. And it means we can get fined…
The Privatisation Experiment
So how, exactly, did we manage to stumble from a situation in which the government – and by extension we, as taxpayers – owned the means by which we travelled around the country we live in, the water which fell from the sky (and ran through our taps in our houses), and, for that matter, the electricity which lit lights to read by, and powered irons to iron with, cookers to cook with, and TVs to um, TV with, into one where we own none of them?
Starting in 1986 – and to all intents and purposes ending in 1994 – Thatcher’s Conservative Party privatised the previously publicly-owned railways, bus services, water, electricity and gas suppliers.
There is some debate as to why it did so.
On the one hand, the argument used by the government was that privatisation would offer ‘choice’ to the consumer (this clip: www.youtube.com/watch?v=6T2zUEiVQU4 offers an analysis of this idea).
It was argued that ‘choice’ would drive prices down and improve services, as companies driven by the need to make profits would continually improve and offer services for decreasing sums of money to attract more custom. The fact that after a certain point – that is, when a very small number of firms have ‘defeated’ the competition – there is no longer a requirement either to improve or to lower bills for the consumer was, strangely, absent from this line of arguing.
It also argued that ‘experts’ would be better placed than the government to run such services, and that government’s involvement in running them made them expensive and inefficient. Again, the elephant in the room – that it was experts who already provided these services, not MPs, and that MPs’ only role was to be directly answerable to the people for the delivery of such services – was also politely ignored, because EVERY idea is worthy of the same respect, even if it is founded on a basic misunderstanding of reality.
But it would be negligent of me not to include here the other possibility: privatisation is just a part of the wider monetarist economic ideology.
Monetarism teaches that the state – which is, so the argument goes, hopelessly bloated and inefficient – should be removed from all areas of public life. That the individual should use their own skill and judgement to make all of the decisions which affect them.
It also teaches that the free movement of money in society is of itself a good thing, and has the added benefit of producing economic growth as a consequence of its movement.
The problem is, because it teaches the state should not interfere with people’s lives, it follows that the state cannot inject cash into the economy ‘to get things moving’ as it were (ironically, Keynesianism, which Thatcher and others replaced with monetarism, allows exactly the state intervention which would inspire growth. A topic for another time).
In order to help money start moving freely, Thatcher tried (amongst other things) tax cuts, meaning in theory that people could spend more money on consumer goods, thus helping the private sector to grow.
But she had also found that her state-reducing policies had tripled unemployment, meaning the government had less tax revenue AND had to pay more in benefits than a ‘large’ state would do.
Suddenly, the state was in financial trouble. In response, she turned to the publicly-owned services. Their sale would give the state a cash injection, which could then be passed on through low taxes to people, who could then spend the money, etc., etc., etc. (There is of course another massive flaw in this argument, namely, if you sell off service provision to private firms, your tax cuts are not really giving money to people to spend on consumer goods. Rather, you are asking them to pay money into a new area of the private sector, ‘services’, which previously existed in the public sector).
Of course, each of these services also cost the government money to run. But in all honesty, this is such a transparently half-argued case that it can be answered in one sentence: If a private company can afford to deliver a service by charging for it, so can the state.
In any case, ‘choice’ was the one-word catchphrase, with the added benefit of the government receiving cash, services costing less for the consumer, tax falling for the taxpayer, and service provision being operated in a more efficient, less wasteful manner.
In exchange for these benefits, we gave up control over how transport services were run, how electricity was produced, how and when water was available and the knock-on effects, such as pollution, involved in each service.
Roughly a quarter of a century on, how’s that gone?
I’m starting with gas, because a) it’s the simplest, and b) it was one of the first services to be privatised, in 1986.
Now, to be perfectly honest, if the world had ended, as all kinds of visionary prophets (and people who believed in the Millenium Bug) predicted, in the year 2000, the privatisation of British Gas could have been judged an unmitigated success.
The problem is, for its first 14 years, this privatisation was not really a ‘privatisation’ in the classic sense of the word, at all.
In 1986, the government floated British Gas on the stock exchange. The sale of shares raised £9bn in today’s money. The new firm was split into two, Transco, which worked on extracting gas, and safety, and Centrica (which kept the name British Gas), which delivered it to the public.
By 2000, no faults in supply had developed, Transco had proved capable of dealing with ‘leaks’ and other scares, and, perhaps crucially, the average gas bill for consumers had dropped 32 per cent.
In fact, the only real complaint to be made about the privatised British Gas was its advert, in which someone sang ‘E-e-e-e-lectricity – that’s the beauty of gas’ which was a bit like if I opened a shop called Hats and Cheese and sang ‘Chee-ee-ee-chee-ee-ee-ee-eese, that’s the beauty of hats’. Even so, I admit this was a small price to pay.
But there was NO competition. So the cut in bills and sensible service provision was achieved despite the central argument of privatisation – that competition was necessary to cut bills and provide an efficient service – never having been tested.
Fortunately, in 2000, Labour stepped in and ‘completed’ the privatisation process. Today, as ‘over 18’ (as the gasguide.co.uk website helpfully puts it. Keep it vague, kids, keep it vague…) companies compete for your business, the average gas bill is 60 per cent higher (on top of inflation – as with all figures I use in this blog) in real terms than it had been in 1986.
So, 14 years of no competition, a 32 per cent drop in price for the consumer. Twelve of competition, driving prices down, and we’re 60 per cent worse off every time a gas company sends us a letter than we would have been if we’d just left it all alone.
As a footnote, gas charges rose a further 20 per cent in 2011. A victory for the private sector, n’est pas?
Before we look at buses, I’d like to make something clear: I think that inner-city bus and rail transport should be free. In fact, I think all public transport operating at peak times should be free.
This is not, I admit, my own idea (you have Myles Na Gopaleen to thank for that. Look him up. He’s good…). But basically, it comes down to this: We are told that employment and business are good. People have to travel to work, in order to do their jobs. The beneficiaries of such travel are the companies which employ people to make them money, and society as a whole, which gets to benefit from the resultant economic growth employment and production brings.
But across the country, people appear to be expected to spend a portion of their wage for the privilege of travelling to work, to earn money which, in part, is spent on travelling to and from work.
Now, I don’t really mind how free travel to and from work is achieved. But my suggestion would be this: Companies buy bus and rail passes (bikes for those who live close enough to ride each day) for their employees, which are valid for the entire journey to and from work, on the days on which each employee works.
Or: companies pay their employees not only for their scheduled work hours (let’s say 9-5) but also for the time it takes to travel to their place of work – but pays them EXACTLY the amount the train or bus fare to and from work would cost. This payment would be clearly marked as a separate payment on wage slips, and could be paid directly to bus/rail operators if employees wish.
People in both these scenarios can of course choose to drive instead if they wish, but in that case they voluntarily forego these payments. Instead, they are paid 9-5 as at present.
Or, the government could choose to renationalise bus and rail services, and accept that from 7am-9am, and then say 4.30pm-6.30pm each weekday, any local services are the realm of commuters, and are non-chargeable services (passes would have to be issued to firms which have night- and weekend-workers).
This would cost a little money (though, as we will see in the Rail section, that’s achieveable either by companies, or more easily if public transport is renationalised), but the advantages are obvious: fewer vehicles on the road, cutting congestion and pollution, and the payment of workers for the time they actually spend in a working day, as opposed to the time they spend at their desks.
All off-peak journeys would be charged for, as would all inter-city travel by bus or rail – employees have to be paid, vehicles and fuel bought, improvements made and maintenance carried out. Though again, these things become far easier if both bus and rail travel are re-nationalised.
The only thing which saves the privatised bus service from public wrath is, I would humbly suggest, the absolute failure of privatised rail.
The national bus service was broken up and sold off in 1986.
At first, the competition this generated caused the so-called ‘bus wars’ in which companies sent buses on the same routes, at the same times, to try to ‘win’ business.
This manufactured inefficiency eventually righted itself (oh, the glorious self-regulating market!) and today we have roughly nine companies providing services across the UK (though this in itself raises a question. If the UK is a big country, and there are nine companies running its bus services, how much competition can there actually be? The only way you could change company is by moving house. Bus users are as much a ‘captive audience’ as they ever were).
And how have they done? Well, since privatisation, bus use has fallen by 37 per cent (in fairness, it was already falling, but not at anything like the same speed), bus fares have increased by an average of 40 per cent and the number and frequency of services has plummeted. Next year, a 20 per cent increase in fares is planned.
Bus companies currently receive roughly £800m per year in subsidies, paid by the taxpayer – itself a curious version of a ‘private’ industry, though in many cases, as we will see, this money appears to be the difference between an abysmal service and no service at all.
Within bus companies themselves, the rate of pay for drivers has dropped 16.5 per cent, compared to an average wage increase across the UK of 19.4 per cent, while bus conductors are no longer employed in most places, an effective 50 per cent wage saving per bus right across the country (for a far better assessment of this last point, head for Will Hutton’s excellent The State We’re In).
So, bus companies are paying less to their employees, and charging far more for a massively reduced service (fuel costs have increased, undeniably, but bus companies receive a fuel tax rebate, so they spend less per litre of fuel than you, despite repeated announcements, many of which I covered as a reporter, that ‘fares must increase because of fuel duty increases’. No, they mustn’t. It’s an excuse to make more money, in the hope no-one will check…)
And what of the subsidies?
Well some are well-intentioned government attempts to improve fuel efficiency with newer vehicles – though these should surely be paid for by a private firm? Otherwise, the government might just as well take the companies back.
But it should be noted that every local authority across the country pays private companies to operate ‘subsidised services’. For those two words, read ‘any off-peak or weekend service outside of a very small area within a city centre’ and factor in the fact that the reason private companies refuse to run these services, for example routes to shops from remote country villages, is not because they will lose money by doing so, but because they won’t make high enough profits from them. Without subsidy, in effect, there simply wouldn’t be buses for anyone a private bus company deems to be insufficiently profitable. And this is why public services should not be owned by private companies.
Equally, the provision of free bus travel for pensioners is not paid for by private bus companies. It’s paid, in full, by the government. It may be unfair to call that a ‘subsidy’ per se, but it’s one of the best things about the modern bus service, and it’s paid for by you, not the people who make money from running bus companies.
The money these firms make, sadly, goes not on improvements, but on ever-increasing wages for private business owners – some of whom are, perhaps, shifting that cash out to Guernsey before it can be taxed at UK rates – and shareholders. We’ll come back to this when we talk about Rail.
Any of you who know me, know that from December to March this year I lived and worked in Sirte, Libya. This isn’t the place to talk about what had happened there, but I would just like to mention one interesting thing I discovered when I was there: water is free for the citizens of Libya.
Now I’m not saying Ghaddafi was a good man, or we should emulate his regime. I’m just saying that in Libya, a country which is more than 90 per cent desert, you turn on the tap, clean drinking water comes out, and it’s free. No-one pays for it. I even saw people using hoses. To spray water at stuff, not as a kind of plastic ‘spider zoo’, like here.
Water, I’m pretty sure we can all agree, is a basic necessity for life on this planet. It’s also (and I’m sticking my neck out a bit here) good to be able to have a wash regularly.
And in all fairness, it’s not as if we’re short of it here. It falls from the sky (seemingly 97 per cent of the time) and no-one’s charged for that.
On the other hand, I freely concede that its transport and treatment costs money, as does employing staff to perform those tasks, make sure everything runs as it should, and improvements can be made.
The problem is, well, it falls from the sky. Every day. And yet we’ve had hosepipe bans in some cases from a remarkably wet April up to and including the wettest June on record. This isn’t really acceptable.
Water privatisation was pushed through in 1989.
Before this, water supply was run on a local basis, by local authorities. I’m not painting this as some kind of utopian vision of a golden past, but to be honest, the system seemed OK. You paid a water rate, and got water in exchange. If there were supply problems, you’d complain and if nothing was done, you could vote for someone else, so the system could be run properly. Like I say, it wasn’t perfect, but it worked…
Today, we have 22 water companies. Ten provide water and sewerage, 12 just supply water (unless it’s not raining. Or it is).
They don’t receive subsidy from the UK government, though 13 of them do share £4.9m per year in EU Farm subsidy, for some reason.
But interestingly, when we sold them we wrote off £5bn of debts, and handed £1.6bn to them as a ‘going-away’ present. Even then, we couldn’t encourage enough people to buy the system, so we also reduced the cost by 22 per cent of the agreed market value. But hey, this was 1989. Crazy days. We did things different then…
It also goes without saying that the water companies took all the expert employees already working in the system, trained at taxpayers’ expense, and directly employed them. In fact, you can apply that in EVERY case we look at here. It’s not the world’s most important thing, but to be honest, this is what’s meant by ‘hidden cost’, so it’s worth remembering.
It’s becoming depressingly repetitive, but water bills under the new ‘competitive, price reducing’ regime had, er, increased by 44 per cent by 2012. Again, this is 44 per cent ON TOP OF the rate of inflation. They’ve gone up another 5.6 per cent this year. But that’s just consistency, which is so important.
And ‘subsidy’ is an interesting term. One of the few promises the Lib Dems have managed to deliver on in their ill-advised holiday in power is to get rebates for the customers of the highest-charging water company in the country.
South West Water charges its customers £517 per year for water and sewage services. In London, by contrast, the figure is £394. So the coalition has stepped up to the plate. Those customers, next year, will receive £50 each as compensation.
Only thing is, South West Water isn’t paying this money to the customers it has fleeced. The government is. The government is effectively fining South West Water for overcharging its customers, but then paying the fine on its behalf. SWW keeps the money it has unfairly stolen from its customers and the government pays for the wrongdoings of a private company. But hey, it’s 2012. Crazy days. We do things different now…
Which brings me back to Richard Flint. Now, on the same BBC News South East broadcast little Richard was talking on, a helpful chap from South West Water popped up, to explain to us ill-informed water users that the reason water supply is so difficult is because while it has rained a lot in some places, it has, simultaneously rained a bit less in other places.
So here’s the thing: Richard, you’re right. There are too many water companies. There are 21 too many. What we need to do is take all the water companies, which have proven expensive and inefficient, and roll them into one company, which can also deal effectively with problems such as slightly different levels of rainfall in different areas of the UK, by, for example, getting all the water in the country and distributing it so that everyone has enough water at all times.
This company could also set policies on issues such as the level of water we use, to help with the massive environmental problems associated with consumption of natural resources.
Now I know what you’re going to say: ‘But, but, but, who could possibly operate such a company?’ Richard, my dear fellow, I’m glad you asked. The government. It already exists, and already runs the whole country, as well as existing solely to serve its people, so it’s pretty well-placed to take this job on.
It’s also fully elected, so we can get rid of it if it’s useless, and replace it with a better one, and its accounts, unlike yours, would have to be completely transparent, so we could actually see what the money we spend is being used for. I’m so glad to have helped you out. Please close the door on your way out…
(I have to give some credit here where it’s due. On the same broadcast, Green MP for Brighton Pavilion Caroline Lucas said she recommended one water company for the whole country. I’m afraid you’ll just have to take my word that I had already thought of it before I heard her say it).
We’ve still got trains and electricity to come – if anything even worse performers than gas, buses and water companies – so it’s worth a quick note on shareholders here.
See the problem is, every year every one of these private companies pays millions of pounds to its shareholders. And it’s dead money. Once you pay your bill, that portion of it which is handed to them is lost to whatever service you’re paying for.
Now it would be unfair to blame these companies for this. Because a curious quirk of UK company law is that a company’s first priority, legally, must be to its shareholders, ensuring they receive a payout on their investment.
This is fine if you run a chain of restaurants, or sell bits of nylon with a badge tacked on laughingly referred to as ‘sportswear’. But it’s no good if you provide a service, for two reasons.
First, because these are services. People can’t do without water, gas or electricity. And very few can do without transport. As a service provider, your priority when supplying something without which people will die must be to the people you serve, not to someone who happened to bung you a bit of cash 15-20 years ago. You have to make sure your service runs efficiently and is available at an affordable rate for all, as your sole priority.
Second, we just can’t afford to pay through the nose for a service, then pay subsidies to the companies which provide it, and then watch a significant proportion of those payments leach out of the service we are paying for. That money must be used to improve services, both for reasons of improving technology and because in many cases, there are serious environmental factors to be considered.
Like I say, this is not an accusation that these firms are evil. They have done a poor job, certainly not what they were brought in for, but asking them to restructure their priorities is tantamount to asking them to break the law.
We can’t, in all conscience, ask that. So take the companies back, run them as nationalised entities and as if by magic, the ‘dead money’ problem is gone.
The money can be used to improve, and change where change is needed.
Rail privatisation took place in 1994. The Labour Party said it would reverse it, but when it won the 1997 General Election, changed its mind and kept it in place instead.
On all counts, we can only conclude that rail privatisation has failed.
First, there has been a massive reduction in services, as ‘non-profitable’ lines have simply been dropped.
Ticket prices have shot up well above the rate of inflation, so that it now costs, as standard off-peak rate, £93.50 to travel return from Brighton to Liverpool. If there’s two of you, it’s cheaper by car. If there’s four, it might well be cheaper by taxi, and despite ‘targets’ which must be met for the rail companies to renew their franchises, 40 per cent of all long-distance services, 30 per cent of all services in operation across the UK, which ran in 2011-12 arrived late at their destination.
This is despite companies’ illegal practice of cancelling services mid-journey to meet their ‘punctuality’ targets.
There is an interesting point to be made about safety. It is widely held that post-privatisation, train travel has become less safe. Statistically, this is in fact not the case. There were, for example, more fatal crashes (12) in the eight years before privatisation than in the eight years after it (nine).
But what is interesting is to look at the causes of these crashes. In 11 of the 12 fatal accidents to have taken place in the eight years up to 1994, the cause was driver misjudgement of one kind or another. In four out of the nine to have taken place since, the causes were maintenance issues. Of course, this makes little difference if you are one of the people affected by such a crash, but it’s hard to escape the conclusion that these were accidents which could have been avoided if rail – and train – maintenance had been carried out properly.
The most famous example of this was the Hatfield rail crash of October 2000, when a section of rail disintegrated under a travelling passenger train. Not only could Railtrack, which at the time ‘owned’ the railways (the transit companies own stations and trains) not explain how such a damaged piece of track could have gone unnoticed, or been left unrepaired, it was also unable to say how many other sections of railway this might be true for. It was hard not to conclude that a drive to make profit had seen the company neglect its sole duty – ensuring the track and its signals and points were safe enough to carry trains.
It is not as if this was because Railtrack had received no assistance. It had been handed government subsidies of £10bn between 1995 and 2001. It paid 41 per cent of its profits to its shareholders in the same period. Labour acted, replacing Railtrack with Network Rail, a ‘non-dividend’ firm, in 2002.
Subsidies for rail companies are the most often voiced problem with the privatised rail service (and with justification, as we shall see) and have, in combination with the coalition, caused the most recent anger over fares. But before we come to them, it’s worth a quick note on the reasons why rail privatisation didn’t deliver – and couldn’t have delivered – any of the benefits the government promised.
Train users are an almost uniquely captive audience. It is possible for two water companies to compete directly with one another, delivering water to your house at a reduced rate. If bus companies wish to compete, they can run buses on the same routes as other companies (though built into this is that when one firm ‘wins’ it stands alone, with freedom to dictate fares and service provision as it wishes, as has in fact happened).
But the train franchises were split geographically, meaning one company controls all services on a particular route. The problem here is obvious immediately. If one firm controls all journeys between Reading and Manchester, for example, and that’s the journey I need to make, I can’t very well say ‘oh, well, the Glasgow to Aberdeen service is cheaper, I’ll go for that.’
As we have seen, competition between service providers does not and has not delivered the reduced prices and improved services it was promised to in any area, but that competition never even had a chance to exist in the rail privatisation.
As a result, rail in the UK is today not only Europe’s least reliable, it is also its most expensive. On average, the cost of a day return ticket in the UK costs 26p per kilometre, compared to 17p in Germany, the next most expensive country, and eight pence per km in France, the cheapest. For long-distance journeys, in the UK, the cost is 49p per km, while the next most expensive, Switzerland, works out at 39p per km. France, again cheapest, costs 15p per km.
And so, once again, to subsidies. First of all, it’s vital to reiterate that in a truly privatised system there would be no subsidies paid to private companies. I can only assume the reason we do so in these cases is that successive governments have realised that these are public services, not free enterprise, and have a vital part to play in the life of the nation. Which then raises the question of why they were ever privatised to begin with, but on such questions, sadly, the fate of nations is decided.
In 1989-90, the British government spent roughly £1bn on British Rail. In 1994-95, the first year after privatisation, it spent £2.2bn subsidising private rail operators. In the years since, the lowest subsidy has been £1.2bn, paid by the Labour government in 2000-01, and the highest, £6.3bn, paid by Labour in 2006-07.
The coalition paid £5bn in 2010-11 but decided in the face of public pressure and financial imperative to reduce this for 2011-12 to £3.96bn. They had every justification to do so. But once again, they chose a remarkable means by which to make the saving.
The government decided to cut the subsidy by allowing train companies to make above inflation rate increases in ticket prices. These were at one per cent higher than the 5.6 per cent rate this year, and will be three per cent above inflation for the next two years (though inflation is predicted to fall in these years).
On the one hand, this is an awful piece of policy-making, as it makes rail travel (and bus travel, as explained above) less attractive to potential users. People won’t travel by train if they have to pay more than they can afford to do so. In all honesty, in terms of the effects on the train companies, it’s not really an issue – they must stand or fall for themselves.
But in terms of the effects of removing mass public transport from the reach of people in the UK, there are three main concerns. One, people must travel. It is their right, but it is also vital for an economic system to operate. Two, the environmental effects of forcing more people into cars is potentially disastrous, and three, in purely pragmatic terms, it means we will be further than ever from meeting the air quality targets we must achieve, and therefore will continually be fined. Are we to count these fines as further subsidies for our privatised transport system?
But there is an upside. Because inadvertently, the coalition policy shows us something. It proves we can run a transport system, or a water system, or an electricity supply service, with little effort or financial cost. Because if the companies rely on subsidy, we are already paying it. And if more of their money comes from public use (in 2010, rail companies earned £7bn from ticket sales) the public will still use them, helping fund the very systems they use.
Indeed, if we drop prices a little (which can be done because we will not be paying hundreds of millions of pounds per year to shareholders), train use, and therefore customer revenue will increase.
Finally, of course, it means that money can be used by the government to carry out planned service provision to the UK public.
And the need for such policy has seldom been as vital as it is now, in electricity supply.
No-one could truly argue that electricity is not vital to human existence. But its production is a matter of crisis, in the UK and across the world. Yet, at present, its supply here is controlled by companies which have shown little to no inclination, let alone inspiration, to help us overcome a looming disaster.
Electricity services were privatised in the UK in 1990. In common with all other privatisations, and in direct contravention of the promises made when the process was undertaken, bills for electricity have increased alarmingly – by 40 per cent to 2011-12, and a further 20 per cent increase will come into effect next year.
There are now 4.7m households in ‘fuel poverty’ (spending ten or more per cent of their income to heat their homes to an acceptable level, rated at 18-21 degrees), more than double the number in 2003.
The reasons for this are varied, but paucity of supply of resources (which IS a factor) is not the sole reason, as EdF, a French firm, and the UK’s largest single producer of electricity, actually provides the cheapest electricity in Europe. Sadly, it does so in France. Here in the UK, its prices are amongst Europe’s highest.
Ironically, EdF is a nationalised company, owned by the French government. But here in the UK, it operates as a private firm, paying its ‘shareholders’ (in this case the French government) a premium, taken from the subsidies it receives as well as the money it charges for electricity supply. This is not EdF’s fault. It is a logical result of a system in which we have sold off our means of electricity supply. In all honesty, I can see no reason why the French government should not benefit from our electricity bill payments, if we do not. And we do not.
In any case, the pressures on electricity production are at least three-fold. First, the UK is now a net fuel importer. We simply do not have enough coal, oil and gas within our own borders to produce the power we need. You may also have noted there are very few piles of uranium lying around, so any nuclear energy we produce happens on the basis of importing fuel. In an era of ‘austerity’, this is potentially disastrous.
Second, our consumption levels are, at the present rate of growth, either going to bankrupt the state (which has not yet occurred, despite what the coalition may like us to believe) or alternatively will see the lights, literally, go out. Indeed, the coalition is at present scrambling to prevent a worst-case scenario in which the ‘lights go out’ by 2020.
Thirdly, well, look. I’m not going to get into a tedious debate with anyone who doesn’t believe in man-made climate change. If you’re willing to ignore physical and observational evidence, and contradict the opinions of climatologists the world over, then fair enough. I’ll also assume you’re planning to float home from work tonight, as gravity is probably a ‘myth’ as well.
But climate change is a zero-sum game. Either it’s happening, and we risk the deaths of millions of people through floods, displacement and starvation, not to mention the potential end of humanity as a species by unbalancing the eco-system in which we live, so we take action to stop that happening and save the world, or, we take exactly the same action, it turns out we were wrong, but we have gained an inexhaustible supply of electricity.
Because non-renewable resources are exactly that: non-renewable. And they’re running out. So, if we don’t find an alternative, fast, we’re without electricity whether we’re up to our waists in seawater or not. If you don’t believe in climate change it’s your call. But one way or another, we need renewable energy, as there’s very little else left.
The problem is, our electricity system is far too chaotically run at present to make any serious headway or progress in any direction whatsoever.
To begin with, subsidies for electricity companies in the UK are, to be honest, a shocking mess. There are almost as many arguments about what constitutes a subsidy as there are actual subsidies paid.
In brief, the rates it seems fairest to set the figures as follows: production of electricity from fossil fuels receives roughly £3.63bn per year from the government (in ‘preferences’ as well as direct payments. We’ll come to this…). Renewables receive roughly £1bn-£1.6bn, depending on your source, while nuclear power, depending on your view, receives anywhere from £4bn to £104bn, though none of this comes from direct subsidy payments, as EU regulations mean it is illegal to pay cash directly to nuclear energy producers.
It’s worth remembering here that while the fossil fuel components of the energy industry were sold off at close to their actual market value, and the renewable industry was basically non-existent, the nuclear industry was revealed, in 1990, to be a shambles.
It took until 1996 to find a company even willing to take on nuclear power in the UK, because it was making huge losses year-on-year. In the end, we actually disposed of it for nothing. We handed it, wholesale, to British Energy for no money at all, despite the billions of pounds of public money which had been spent on manufacture of nuclear power stations, and on the training of people who were supposed to ‘make nuclear power work’. We lost every penny we had invested in the entire industry.
Within the industry, as has happened during almost all mass sell-offs, groups of experts split into small companies, selling their services to British Energy. They are not to be blamed. Their services were needed, and they got the best price for them. It’s debatable how beneficial this was to the nation as a whole, however.
It doesn’t end with us handing over an entire industry for nothing, though. Because in 2003, after just seven years in charge, British Energy had to be bailed out with £4bn. I genuinely hope there has never, anywhere in the world, been a worse privatisation.
Internationally, issues such as safety and waste have been improved, and it’s to be hoped any move towards nuclear fuel in the future will be more successful than our previous attempts.
But in terms of carbon, nuclear power generates seven times the amount of CO2 created by wind energy, while the waste from the nuclear process is poisonous to almost all forms of life on the planet, and still must be ‘stored’ as it remains impossible to dispose of it safely.
In any case, the two major ‘subsidies’(perhaps more accurately, ‘financial advantages’) the nuclear industry now receives work as follows: First, the industry has a ‘cap’ set on the amount of repayments it has to make in the event of an explosion or other disaster – effectively a ‘maximum’ insurance pay-out, of just £140m (soon to be increased to £948m) – meaning it pays less for ‘insurance’ than other energy producers.
Bear in mind that the estimated cost of the clean-up after the Fukushima Daiishi nuclear reactor was struck by earthquake in March 2011 is just over £162bn and the Three Mile Island disaster in 1979 cost around £648m, and it’s pretty clear the industry is getting a cash ‘break’ from the UK government. As a side point, BP has so far paid out around £30bn in claims alone, following the Deepwater Horizon disaster in the Gulf of Mexico.
The second ‘indirect subsidy’ comes in the form of what happens to nuclear power stations when they finish their useful lives. In most industries, the ‘decommissioning’ of buildings and material when such things are no longer useful, is the responsibility of the business owner. Cash must be set aside for such an eventuality.
But not in the case of the nuclear industry. The government, and by extension, we, as taxpayers, have pledged to pay for all decommissioning of nuclear power stations. And the cost? £100bn.
So nuclear power has a ‘gift’ of £100bn from the taxpayer, even though the system is run and operated by private companies, which use parts of their income to pay shareholders. Even if we forget the billions of pounds which were pumped in to nuclear energy in the early days, and that we gave the business away, then paid an extra £4bn to keep it afloat, this £100bn ‘gift’ is a financial support which, at current rates, it will take 70 years for our subsidy of the renewable fuel industry to match.
Added to that, the government’s ‘carbon floor’ charge appears to have been set specifically to benefit nuclear energy. As policies go, it is, on the face of it, a good piece of environmental thinking – effectively, any energy production which causes large CO2 emissions will be penalised through a charge.
Certainly, this is aimed at fossil fuel production, and is designed to ‘inspire’ lower emissions. But the floor happens to have been set at a level where the nuclear industry will not have to make such payments – even though nuclear energy production causes emissions at least seven times higher than production using renewable sources.
It is puzzling, if it is not specifically designed to favour nuclear energy production, why the floor has been set at a level at which treats renewable energy exactly the same as a method which is seven times worse for the environment.
Subsidies for fossil fuels are also the topic of furious debate. The industry receives £3.63bn per year, in large part because VAT charged on such fuel production is five per cent, rather than the 20 per cent rate paid by almost all other businesses for goods and services in the UK.
Of course, in part it is possible that this is designed to be of benefit to customers – an attempt to reduce fuel poverty, for example. Meanwhile, Tim Worstall, of the Adam Smith Institute, repeatedly uses his role as sometime columnist in both the Daily Telegraph and the Forbes website to argue that this is not a ‘subsidy’ at all, just a matter of taxation. It is a staunch defence of fossil fuel-based energy production.
But it falls on two very important points: first, this quarter-rate of VAT payments means it costs LESS to produce electricity from fossil fuels than through other means – and Mr Worstall himself argues that any VAT increase would be passed directly to customers rather than covered by the profits of the companies which produce electricity this way, meaning companies are already charging with profit, rather than service, in mind.
And second, to put it another way: your electricity bills have increased 40 per cent since privatisation, and will increase a further 20 per cent in the next 12 months. Electricity companies benefit from a tax break no other industry does. Is the VAT rate an agreement to keep costs down for the consumer, or is it perhaps a concession to allow profit-building and increased pay-outs to shareholders?
For renewable energy, the figure is £1bn-£1.6bn per year. This is no small amount, and is paid for directly by you, each time you pay your electricity bill. But it is between 25-33 per cent of what fossil fuel production receives, and is around one seventieth of the financial assistance received by the nuclear industry.
Bearing in mind the massive costs already laid out on setting up nuclear power (and energy produced using renewable fuels is still in its infancy – this is when it needs most money, to invest in efficient production), as well as the bail-out of 2003, the amount is tiny.
And yet renewable fuels offer us more advantages than either the production of energy from fossil fuels, or nuclear power. Even if you ignore or deny the possibility of man-made climate change and its consequences (and I believe it is foolish to do so) the economic benefits are clear – at the moment, we pay to import fuel from elsewhere in the world. We have reached peak oil, and gas and coal supplies are dwindling. Even uranium is a limited resource. These things will run out. The clue is in the ‘non-renewable’ bit of the name.
On the other hand, we have (a little) sunshine. And we have a great deal of wind. Water, it seems, is set to be our constant summer companion. These fuels will not run out any time soon. And they cost us nothing.
The economic imperative is clear, and the supply-side of the ‘supply and demand’ of fuels is fast approaching crisis point. Renewable resources are the ONLY sensible medium-to-long-term supply on which we can rely for energy production. Yet even though the lights are in danger of going out within ten years, we are sitting on our hands, as if in the hope ‘something else’ will happen.
And the reason, succinctly, is privatisation.
Early in June this year, the Guardian reported that the coalition’s response to EU-set targets to produce 20 per cent of our energy from renewable resources was to ask – behind the scenes – for those targets to be dropped. Its reason was that market forces meant this would cost too much money for UK companies, and it was unreasonable to ask these companies to spend more money on research and development.
Most of the debate around this topic centred on the irony that a government led by David Cameron, who promised his would be the ‘greenest government’ and Nick Clegg, whose party has traded for 15 or so years on being the ‘greenest’ of the three major parties in UK politics, should be asking for environmental policies to be dropped to make life easier for private businesses.
But we can look at this another way. Because this was a tacit recognition of the fact that since we sold electricity production 22 years ago, we have had effectively no say in how our energy is produced. We handed that over to a set of private companies, designed solely to make profit from the activities they undertake. (We will set aside for a moment the relatively small issue that it is intensely embarrassing for the leaders of the UK government to be reduced to messengers on behalf of big business, begging cap in hand for concessions to be granted to their ‘owners’).
So why don’t electricity companies just get down to it and start producing more energy from renewables? Basically, because they are private companies.
They must make money for their shareholders, or they are breaking the law. This has two major effects: First, they spend millions of pounds each year which could be used for research and development, on shareholder dividends, which is then lost to the industry forever. And second, the nature of making as much money as possible is by necessity short-term. The companies must make profits, year-on-year, for the benefit of their shareholders and to continue to operate in the market. Therefore, the necessity to invest exists only in so far as there is a short-term financial benefit. Anything which loses money in the short-term – even if it has a medium- or long-term benefit – must be given the lowest possible priority.
And as for wider global issues such as climate change? It’s a long time away, goes the argument, and there’s no financial imperative to act today, so, if we’re lucky, they’ll look at it tomorrow.
Being private companies, of course, the deal is that there is nothing the government can do to change the way that they act.
The final irony is that electricity production in the UK IS in a state of constant competition, as was the intention. We have already seen this has failed to produce lower bills for customers, but the experience of privatisation of services in the UK also directly contradicts the other main claim made by supporters of the private sector – that this is where innovation comes from.
In part, this is down to exactly the same financial imperatives – why do today what will cost money, when we can make money exactly the way things are?
But in part it is also because the ‘experts’ and innovators in the field of electricity production are now split between several competing companies. They do not work together to ‘develop’, they work in opposition, meaning the innovations which do arise are often piecemeal and deliver less benefit than if they were worked on by a wider group, and allowed to develop with input from many people, rather than just a few.
In any case, we are now at crisis point. The environment is in peril, and the very production of electricity, on which we all rely, is for other reasons under threat. Privatised electricity producers have proved unwilling and/or incapable of meeting the challenges we face. They should not be blamed for this, but it cannot continue.
Today, as never before, we need a central plan, a target (in this case the development of renewable fuel-based electricity) towards which everyone must work. And it can be done.
If we run electricity production centrally, we can set these targets. We can make them law. We can gather the experts to work as one, rather than in competition. We can remove the shareholders’ dividends from the equation, freeing more money for research and development, we can remove ‘subsidies’ because the companies will be ours, and it will just be our money, being used to develop a way to keep the lights on at minimal environmental (and financial) cost. It need not even cost very much, because the private producers have shown a company can operate – and make large profits – on the money they raise from bills and government subsidy. Without the necessity to make a profit, all that money can be put back into development and service provision. As it should be.
It must be done. And it can be done. So, who’s up for a challenge?