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Fractions on fracking: David Cameron at a future drilling site (photo: Crown Copyright)

British government energy policies instituted by the last Labour administration and carried on by the Coalition have driven up prices for the consumer, at the same time discouraging investment in essential infrastructure. It is unlikely — though not impossible — that the lights will go out this winter as a result, but the situation will get worse before it gets better. Altogether, it provides a classic example of ill-directed government action in response to changing political fashions.

Government has a duty to ensure a safe, continuous and affordable supply of energy to people and businesses. This is the case as much with an energy system based on free market principles — as in the United Kingdom — as it is in authoritarian command economies. The question is how best government should fulfil its duty, when and if it should intervene, and what instruments it should use.

The coal and steam energy that powered the industrial revolution was developed by private enterprise in often chaotic and dangerous conditions. Yet it utterly transformed Britain and the world, lifting mankind out of poverty and dependence on wind, water and wood energy. Intervention was first addressed, in the early 19th century, to improving safety in the mines, and to controlling the age at which children could be sent down them. The first attempts at regulation were moral rather than economic. Later, with the arrival of petroleum and electricity — also at first privately developed — central government began to take a more proprietorial interest. Winston Churchill as First Lord of the Admiralty was behind the establishment of the company, now known as BP, which discovered the first Iranian oilfields in 1908. The idea was to secure the fuel required by the Royal Navy as it shifted from coal to oil.

The postwar Labour government nationalised the mines as well as the generation and distribution of electricity. It built the National Grid, and many new coal-fired power plants. These were great and necessary achievements. Succeeding administrations added the nuclear power programme, the world's first but alas not the most effective. Private industry discovered and developed the North Sea oil and gas reserves, but was excluded from the marketing of the gas. By the 1970s the state controlled — in a manner of speaking — an expensive and inefficient energy complex centred on the National Coal Board, British Gas, the Atomic Energy Authority and the Central Electricity Generating Board. Astonishingly, the government still owned a large chunk of BP shares.

During the 1980s, the triumph of the free oil market over the Organisation of Petroleum Exporting Countries (OPEC) cartel was brought about by the UK's Brent crude benchmark, encouraged by the Treasury. Mrs Thatcher's privatisations and market liberalisations slashed the Gordian knot at the heart of British energy and handed control of the gas and power markets to private companies — including formerly state-owned ones. With intelligent regulation, the industry developed well-functioning wholesale markets — although gas was always more liberated than power — which delivered the cheapest energy prices in the European Union for more than a decade.

But while rising prices naturally rouse protest, falling or low prices are taken for granted. Politicians had created the conditions that led to a benign market revolution but the very fact of liberalisation meant that they took their hands off the levers and, over time, lost interest. Until, of course, the shadow of global warming grew too dark to ignore, and a new moral imperative (however dubious) entered into political calculations.

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