Why energy prices are a test of government leadership

I have been enjoying Matt Rennie's LinkedIn posts about various topics relating to the energy sector. Matt is a former colleague of mine at Ernst and Young, and their Global Leader for Utility Market Reform and Unbundling.

His latest post talks about topics I have covered in this blog so far about trying to balance economic efficiency with equity and access. From his post:

For governments, the challenge is to create an environment conducive to reform while managing social equity. A fine balance must be struck between:

  • Obtaining the economic growth benefits of long-term movements towards cost reflective retail tariffs by segment, caused by more accurate price signaling
  • Ensuring that vulnerable segments of the community ā€” particularly susceptible to impacts in tariff changes ā€” are protected against hardship

Source: Why energy prices are a test of government leadership, Matt Rennie

When Matt says that energy prices are a test of government leadership, he is underlining the fact that politics is an integral part of determining the optimal tariff structure. A government with a strong mandate from its citizens will have a much easier time convincing those citizens that its balance of cost-recovery and equity is the right one, than a government that is distrusted by its citizens. A good adviser will know how to run the numbers, but also be able to help governments think through ways to take into account their political context to make the right decision.

If you are interested in reading more about these issues, I recommend following Matt on LinkedIn.