Picking winners and nuclear power

February 17, 2013

Faced with ambitious climate change targets, the government has decided that nuclear power will play a leading role in supplying the UK’s future electricity needs. Ten new plants will be built in the next decade or so, which should provide about a quarter of total supply.

The nuclear option appears to be far more sensible than an equivalent expansion of wind power. Indeed, the unreliability of wind energy means that it must be backed up with conventional capacity, while its dispersed geographical distribution imposes additional costs on the network infrastructure.

Yet nuclear has its own problems. If the new plants are built on schedule and on budget then the impact on electricity prices is likely to be relatively small. Historical experience, however, does not support such optimism.  

Britain’s previous nuclear programmes were economically disastrous. They were plagued by delays, cost overruns, and design flaws. In today’s prices development losses amounted to at least £20 billion, while decommissioning may end up costing another £75 billion.

It is quite plausible that the latest plans will face similar problems. If capital costs rise significantly there will be upward pressure on bills. As a result of political obstacles to new fossil-fuel plants, there is also a severe danger that electricity prices will be pushed higher still by an artificial shortage of capacity if there are delays to the nuclear plant coming onstream.

Then there is the risk borne by the taxpayer if nuclear consortia run into financial difficulties. Given the centrality of the programme to environmental policy, the government will be obliged to ensure construction is completed at almost any cost. And, of course, the difficult-to-price long-term burdens of decommissioning and waste-storage will be loaded on to the taxpayer or electricity consumer.

If the government is determined to reduce carbon emissions then it would surely be more cost effective to set a general framework within which energy companies would be free to choose the most efficient methods of generation. The well-known economic calculation problems facing central planners and the powerful role of special interest groups mean that policies based on micro-management and picking winners are almost always unsuccessful.

1 December 2009, IEA Blog

Filed under energy Tagged with , ,

Slam the brakes on bailouts

February 17, 2013

Following the bailout of several banks, the government is now considering measures to ‘save’ the British car industry.
Such a bailout would be wrong in itself but would also set a very dangerous precedent. The political pressure to support other struggling industrial sectors will be immense. And given the impossibility of bailing them all out, how should the government decide which firms should survive and which should fail?

Politicians are notoriously bad at picking winners and there is a high risk that rent-seeking behaviour will play a bigger part in the decision-making process than economic considerations. But, even if that were not the case, government simply does not have the ability to decide which businesses have been unlucky but are sound long-term prospects and are therefore deserving of support.

Worse still, the increased government borrowing and higher taxes needed to finance further bailouts will remove capital from healthy businesses and some of those will fail as a result. Overall, a greater share of economic resources will be allocated to ‘lame ducks’ rather than vibrant, high-growth sectors.

Corporate failure is an essential part of the creative renewal that drives market economies forward. Moreover, firms that behaved recklessly must face the full consequences of their actions if moral hazard is to be avoided.

State rescues hamper this self-correcting adjustment process. They risk prolonging the downturn and creating perverse incentives that will make future crises more likely. Of course this all goes back to Bastiat’s distinction between the “seen” and the “unseen” – there is a action to save the noisy businesses who campaign for support but less obvious are the thousands of businesses that struggle as a result.

16 December 2008, IEA Blog

Filed under political economy Tagged with , , ,