Beesley Lectures

Floors and flaws

Last week we published our Low Carbon Economy Index report -  which highlighted the dirty recovery in 2010.  For the first time since 1996, UK carbon emissions growth exceeded economic growth – in other words the carbon intensity increased.  We also compared the scale of investment that the UK Government says is necessary for a green transition with the current level of investment by the big six utilities and National Grid.

The International Energy Agency (IEA) also released their World Energy Outlook last week.  The IEA show that the world will lock in high carbon infrastructure and fail to avert dangerous climate change unless there is stringent action in the next few years to change investment patterns. 

A key pillar in the UK Government’s strategy to shift investment towards low carbon technology is the carbon floor price. 

Paul Dawson (RWE) set out the case against imposing a carbon price floor at the Beesley Lecture on the 10th November.  The carbon market is working – we are achieving the emissions cap.  And rather than question whether the price is right, we should cheer that we are doing this at a lower cost than originally anticipated.  If the price signal is currently weak, the EU should agree tough targets for Phase 4 of the Scheme (starting in 2020).  Paul went on to show the futility of having a carbon price floor in the UK alone when EU-wide emissions will remain the same after it is introduced. 

The perceived flaw in the Emissions Trading Scheme is that it is not promoting capital investment in low carbon power generation today.  However, tough emissions targets to Phase 4 may not provide a clear emough price signal while there is significant uncertainty about economic growth in Europe, the potential to link the EU ETS with other national trading schemes, and the possible introduction of avoided deforestation credits (REDD+) to the carbon market.  The UK’s carbon price floor is intended to provide this signal. 

Decisions need to be made about how to replace older power generation assets in Europe over the next few years.  The risk, as the World Energy Outlook highlights, is that we lock in higher carbon generation for decades.  Our view is that an EU-wide floor price set through a reserve price in EU Allowance auctions is a better hybrid (of tax and trading) to address this investment challenge than either Phase 4 targets or the UK’s carbon price floor.

Rail value for money

We asked Sir Roy McNulty to share his thoughts on the key challenges in getting his rail Rail Value for Money study recommendations implemented.
In this video, Sir Roy talks about how to align incentives to ensure all stakeholders are focused on a common purpose, and shares his views on how the rail industry of 2026 will compare with the industry today.

Click here to view the video - http://www.pwc.co.uk/eng/issues/rail-value-for-money.html

An holistic approach to rail

At the recent Beesley lecture on rail regulation, Sir Roy McNulty presented an overall upbeat outlook for the future of the railway.  He opened by saying that the railway needs to earn its licence to grow. The main challenge that it faces now is to establish how to grow in an efficient way.  While other sectors have been achieving efficiency savings of 1-2% per annum, the railway has lagged behind and is now at the same point as it was in 1996 in efficiency terms.  Under a 'should cost' model the current railway would be 20-30% cheaper.

Sir Roy McNulty summarised some of the main points which he made in his report.  He said that there are a range of barriers to efficiency. He noted that one of the main barriers is the inefficient working of the multiple interfaces.  Interestingly, he said that in aviation there are many more interfaces but that these operate much more efficiently than in rail. 

Sir Roy suggested that existing behaviour is logical in the current environment.  One of the reasons he cited for the difference in the efficiency of interfaces is that incentives appear to be misaligned in rail.  To achieve greater efficiencies, incentives need to be better aligned. There needs to be a clearer definition of roles and responsibilities, with Government stepping back from having a direct say over railway operations.  A single regulator should be allowed responsibilities across the sector.  Stronger industry leadership is required.

In his speech, Sir Roy noted that most of the industry parties that he had spoken to agreed the areas for reform.  He said that the prospect of growth creates an opportunity for the railway.  The industry is ready for change but it needs to bring the energy to make that change happen.  The main objective of the various parties should be to improve the frequency and quality of their dialogue.  This will help to develop a common purpose.

Tom Winsor, from White & Case, who was the Rail Regulator between 1999 -2004, gave a hard-hitting response. Tom criticised the Department of Transport for continuing to try to 'micro manage' the rail industry, rather than leaving the rail industry to deliver policy objectives.  Tom also criticised the current Office of Rail Regulation (ORR) for failing to implement reforms from his time as Rail Regulator, and for failing to adhere to standards of regulatory protection that the ORR had set for itself. Tom concluded his response by warning that both the Government and the ORR needed to support Sir Roy's proposals to avoid the fate of previous reforms.

There was a lively discussion following the speeches, with questions surrounding whether regulatory incentives are currently aligned.  Do trains operating companies have an incentive to consider the cost of track access, to utilise track assets better and to act on customers' views (e.g. in contrast to aviation, where customers' feedback is built into the regulatory framework)?  The audience was also interested in the definition of good "outcomes" in regulation (and whether the regulator rather than the Government should eventually define these), whether the Government is ready to reduce and decentralise its role in the industry, and the complexity of public subsidies to rail franchisees.

The case for healthcare competition

We asked Nick Bosanquet, Professor of Health Policy at Imperial College London, to share his view on the case for healthcare competition, how competition is evolving and the role that Monitor can play in supporting greater competition.

You can watch the video on the link below
http://www.pwc.co.uk/eng/issues/the-case-for-healthcare-competition.html

Ed Bramley-Harker

Banks - too big to share?

The Independent Commission on Banking proposals on ring-fencing are just one facet of global pressure to define orderly resolution plans. Against this shifting landscape, how can banks balance operational efficiency and self-sufficiency?

Read out latest point of view paper:

http://www.pwc.co.uk/eng/publications/too-big-to-share-balancing-efficiency-and-self-sufficiency.html