If polling data is to be believed, Britain will have a Labour government on 5 July. In recent months Labour has made a series of bold policy claims that have been mostly directed at the betterment of living standards. Central to this betterment vision are lower energy bills and the acceleration of green energy, which Labour maintains are intrinsically linked. Ahead of the election being called, details on these policies have been vague, and faced with financial realities, some climate investment pledges have already been scaled back. But would energy policy change under a Labour government provide betterment or retrogression?
Ideologically, Labour believes in more state control and higher taxes. At the previous election in 2019 the Labour party manifesto included the nationalisation of the energy sector which would have been funded by windfall taxes on oil and gas companies. Five years later, Labour has watered down its nationalisation aspirations and now pledges to create the Great British Energy (GBE) company that it claims would be a publicly owned clean energy supplier, and which would be funded by a ‘proper’, i.e. heavier, windfall tax on oil and gas companies.
At this juncture it is worth remembering that a previous Labour foray into a publically owned energy company was less than successful. Nottingham council-run Robin Hood Energy (RHE) set out to help people struggling with their bills, but instead it failed to turn a profit, ended up losing millions and was closed, leaving 230 workers redundant. RHE maintained that because it was not trying to make a profit, it could offer a cheaper alternative to dominant ‘big six’ energy companies. But market balancing and the fluctuating cost of energy means that companies need ready access to large amounts of cash, which makes non-profit companies unviable. While RHE turnover went from £4.6m in 2016 to nearly £100m in 2019 this growth only translated to annual losses and by March 2019 it was in the red by more than £34m.
The driving momentum behind the creation of GBE is Labour’s belief that high energy prices are the root cause of Conservative government mismanagement that has left UK energy supply in hock to ‘dictators like Putin’. But the reality is that high energy prices are the consequence of a global energy crisis resulting from the COVID pandemic and Russia’s invasion of Ukraine, with the government not complicit in either. Also, the UK energy market has never been reliant on Russia unlike Germany or Austria, but British gas prices are influenced by Dutch prices as Britain needs to attract Norwegian production and LNG cargoes. Indeed, if a Labour government were to halt new North Sea licences Britain would become more dependent on gas imports and become less supply secure. And somewhat ironically, the demise of Britain’s North Sea oil and gas industry would also cut the tax income which is meant to fund GBE.
To claim, as Labour does, that it will cut energy bills is a vacuous statement. It needs to be qualified and quantified. How much will Labour reduce bills by, and when? And more importantly, how will it cut bills? These questions have not been answered.
A fully green supplier, with no exposure to natural gas, will have cheaper generation costs but the subsidies needed to incentivise the renewable generation investment required to supply 100% green energy will need to be recovered in either tariffs or general taxation. There is also a time issue. Labour has said it aims to have GBE operational within six to nine months. But the time required to negotiate PPAs alone suggests this timescale is fanciful. And existing suppliers will not sit idly by and allow GBE to take market share. These companies have also made significant investments in renewable energy and will aggressively compete with GBE for both customers and PPAs.
The current Conservative government has been slowly cutting bills as Ofgem progressively lowers the price cap. Additionally the government is currently consulting on its latest electricity market reforms that include implementing locational pricing and options to pass on the costs of renewables to consumers by separating the market. These reforms will progressively reduce energy prices while maintaining a competitive market that sends appropriate investment signals.
Britain’s energy market needs reform. It was conceived before large-scale investment in renewable energy, emission reduction targets, decarbonisation and net zero. A recent report from the Environmental Audit Committee concludes that planned renewable projects are being hampered by grid connection problems that include slow connections, limited capacity, inappropriate planning regulations and market uncertainty. Although renewable demand to access the grid is high, with more than twice the amount of generation required to meet the government’s target of decarbonising the energy system by 2035, if these projects are unable to access the grid this makes achieving the target harder. The report also found that the planning system risks being a bottleneck to the rollout of energy infrastructure, and recommends a plan is developed to ensure local authorities have the personnel and expertise they need to reach planning decisions quickly while engaging with local communities.
Yet rather than present a long-term vision for reform that will make Britain’s energy market fit for the future challenges faced, Britain’s likely new government is fixating on a partial return to nationalisation with a green makeover. While GBE will hopefully not make the same mistakes as RHE, what Britain does not need is a new energy supplier.
Author: Jeremy Wilcox, managing director of the Energy Partnership, an independent Thailand-based energy and environment consulting firm
