Britain’s Energy Policy Needs More Market Freedom together with a Resilience Fund
Britain has become accustomed to hearing about "headwinds". Brexit, Covid-19, Russia's invasion of Ukraine and the latest instability in the Middle East have each been invoked to explain economic disruption and rising energy costs. But there will always be another headwind.
The real question for government is therefore not how to prevent external shocks. It is how to design an economy that can absorb them. This is particularly important for energy. Britain has pursued increasingly ambitious Net Zero objectives through a growing framework of regulation, subsidies, market mechanisms and prescribed investment. The environmental objective may be legitimate, but the means of achieving it matter. A system can become less resilient when regulation constrains the ability of markets, investors and consumers to adapt when circumstances change.
Markets are imperfect. They can also be remarkably effective shock absorbers. Prices communicate scarcity, returns attract capital, competition encourages substitution and unsuccessful investments can be abandoned.
The danger arises when policy begins to determine not merely the destination, but the route. Government should set environmental objectives and the rules within which the market operates. But wherever possible, it should allow competing technologies, businesses and investors to determine how those objectives are achieved. A market with several possible routes to the same destination is more adaptable than one dependent upon a narrow set of regulatory assumptions.
This does not mean abandoning Net Zero. It means questioning whether every mechanism used to pursue it should be equally prescriptive.
Resilience also requires something else: financial capacity to absorb exceptional shocks.
The financial crisis of 2008 provides an instructive precedent. The banking system was recognised as systemically important, and governments subsequently strengthened safeguards, liquidity and depositor protection. The principle was not that banks should never fail or that losses should never occur. It was that a system upon which the wider economy depends must have mechanisms capable of absorbing extraordinary disruption.
Energy deserves similar thinking.
Instead, Britain repeatedly responds to energy shocks after they occur (through subsidies, emergency measures and arguments over windfall taxation). Yet taxing exceptional profits does not itself create resilience. Nor does it necessarily encourage the investment needed to expand future supply.
As such, it is proposed that the "UK Energy Resilience Reserve" be created. Major energy companies would make annual contributions into a ring-fenced, independently managed and interest-bearing fund. Contributions could be calibrated to the size and profitability of participating companies and increased during periods of exceptionally high energy prices.
In normal years, the reserve would accumulate and generate returns. Because major geopolitical and commodity shocks do not occur every year, it could build substantial financial capacity.
When an objectively defined external shock occurred, such as a major international supply disruption, the reserve could be deployed to prevent an exceptional increase in wholesale energy costs from being transmitted immediately and in full to households and businesses. This would not be a permanent subsidy and should not attempt to suppress normal market prices. Its purpose would be to soften the speed and magnitude of exceptional shocks.
The proposal would need careful safeguards such as clear activation criteria, independent governance, limits on government access to the fund, rules governing contributions and replenishment, and protection against companies simply passing the cost through to consumers. But the principle is worth considering.
Britain cannot prevent the next geopolitical crisis. We cannot control international commodity markets or guarantee that global supply chains will remain uninterrupted. It can, however, decide whether the next shock becomes another emergency requiring hurried government intervention, or whether the energy system has already accumulated the capacity to absorb part of the blow.
Sustainability cannot be measured only by how a system performs when circumstances are favourable. Economic, environmental and social sustainability must survive disruption if they are to mean anything over the long term.
Government should determine the environmental destination. Markets should, wherever possible, be allowed to determine the route. And resilience should be an asset built before the next crisis, instead of an emergency response after it arrives.
Dr Nikzad Oraee is a business executive, researcher and sustainability specialist with professional experience spanning heavy industry, corporate governance, business strategy, and environmental and sustainability policy. He is Chief Executive Officer of a major gypsum manufacturer and Deputy Chief Executive Officer of a cement producer, giving him extensive practical experience of the challenges faced by energy-intensive industries, including energy costs, industrial competitiveness, resource efficiency and the impact of external economic and regulatory pressures. He also serves as an Honorary Research Fellow at Imperial College London.
