Market magic in the energy and water sectors: all that glitters is not gold

Sustainability First’s New Energy and Water Public Interest Network (New-Pin) has been exploring how far market-led approaches can deliver our desired long-term public interest outcomes in energy and water.  Sharon Darcy shares some of the thinking from the recent New-Pin workshop on this topic.  Although energy and water are at different ‘moments’ in terms of their experience with markets, many of the lessons from the workshop are generic across the sectors.

Markets can deliver many benefits – they can reveal new information and bring in new skills and partners leading to innovation, efficiency, and more responsive and flexible services.  However, they are not risk free.  Markets by their very nature create winners and losers; whether this is individuals (who may or may not be vulnerable) who are expensive to serve and therefore less likely to be targeted by marketing departments or companies that in a dynamic competitive environment may quickly find themselves with stranded assets.

The New-Pin Network has identified six possible desired long-term public interest outcomes for the energy and water sectors: value for money; quality services; cleanliness; resilience; ‘place;’ and fairness.  Market-led approaches can deliver against most of these outcomes but not necessarily all of them.  And even when they can be beneficial, in these sectors, along with many others, they need clear frameworks and rules if their effectiveness is to maximised.

Working out how to capture the beneficial ‘magic’ of markets whilst also being prepared for the potential pitfalls requires clear thinking and careful communication. Given the fact that markets are unlikely to emerge spontaneously in these sectors, and will require some degree of oversight and planning, it is clearly important that market-led approaches are focused where there is a need, and opportunity, to do things differently.  Being clear about whether there is a case for change (such as new technologies coming on stream), and if there is consensus that there is a problem and what the possible solution is, is a first step.

Focusing market-led approaches where the net benefits are greatest is also important.  Although markets can have beneficial ‘trickle down’ and indeed ‘trickle up’ impacts, and can drive wider behaviour change across the sectors, not all ‘knock-on’ impacts will necessarily be beneficial.  And introducing market-led approaches can be tremendously time-consuming.  There is likely to be an opportunity cost involved.  Paying heed to where the greatest costs in the sectors lie would seem sensible when deciding where to target activity.

All too often, discussions about markets get stuck on questions of competition in the market and giving individual consumers the choice of providers.   There are clearly a far wider range of market-led approaches available in the sectors than the opportunity to switch suppliers.  These include competition for the market (such as auctions) – as well as approaches that enable local co-operation and collaboration.  Choosing the right mix of approaches to deal with each part of the value chain, whilst recognising the environmental and social externalities and systemic risks in the sectors, is important.

Markets struggle to deliver fairness and ‘place.’  It is therefore vital that policy makers and regulators are clear about what they will do about winners and losers in advance of introducing change.  The sectors, after all, provide essential services with very limited substitutes.  Understanding whether they will put protections in place up front, or only once problems emerge, can help manage expectations and enable all stakeholders prepare for change.

In the end, however, part of the magic of markets is that they are dynamic – a journey.  As no one knows what the final destination will be, building consensus on the rules of the road up front, and how to respond to the ‘bumps’ along the way as they emerge, is essential.  Stakeholders need to agree what the red lines and risk tolerances are and what they will do when events happen.

Lastly, in order to maintain public trust in a changing market environment, it is important to engage those that will impacted on how you will monitor behaviour, enforce rules and explain decisions.  Communicating why you are doing things – even if it is a decision not to intervene – is vital for such essential services.  Learning the lessons from market-led approaches and transparently sharing these insights not only helps refine future approaches but crucially also builds public confidence and hence reduces political risk.

A detailed slide deck providing information on the theory and practice of market-led approaches in the sectors, different perspectives on the issue and spider diagrams illustrating how far market approaches can deliver on our long-term public interest outcomes is available here on the Sustainability First web site.

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