Great British Energy: The devil in the detail
A few days ago, the Times published a piece by Patrick Maguire which said what a lot of Labour-watchers had been thinking: the party has suddenly gone very quiet on its £28 billion green investment pledge.
Speaking in Washington last week, Shadow Chancellor Rachel Reeves discussed Labour’s green prosperity plan and so-called ‘securonomics’. On the same trip, she “did not deny that the £28 billion is still, despite its exalted place in Labour’s thinking, liable to be cut under her own fiscal rules, which stipulate that government debt must fall over the lifetime of a Starmer government”.
As a general election looms, the party seems to be feeling more keenly the pressure to avoid being tarred by political opponents as the party of massive borrowing.
The tension over the £28 billion pledge has been brewing for some time, but the same is not (yet) true for Labour’s other major energy policy announcement – a publicly owned energy company.
Indeed, Sir Keir Starmer has a lot of reasons to be optimistic about the reception to his promise to establish a new state-owned energy generator within a year of taking office.
First announced in September last year at a Labour Party Conference that had the feel of a party preparing for government, it managed to deliver on two political fronts – uniting most of the party behind it, and accurately reading public mood in the face of ultra-high gas prices and the ensuing energy price crisis.
Starmer, Ed Miliband and other shadow ministers have been eager to draw comparisons between the UK and its European counterparts, many of which have state-backed or partially state-backed energy generation companies. In his conference speech, Starmer cited “the largest onshore windfarm in Wales”, which is Swedish-owned, adding “energy bills in Swansea are paying for schools and hospitals in Stockholm”.
Indeed, according to the TUC, if the UK had a state-backed energy generation company comparable to EDF (France), EnBW (Germany) or Vattenfall (Sweden), it would bring in between £63bn and £122bn in revenues over the next two years. Government could use these revenues - equivalent to £2,250-£4,400 per UK household - to reduce bills or accelerate home insulation roll-out.
However, there is an internal contradiction at the heart of the party’s messaging around Great British Energy.
If it is to be the UK’s EDF or Vattenfall, we would expect it to invest in well-established renewable energy technologies and large-scale generation plants, to turn the sort of profit required to be considered in a similar league – and to deliver sufficient revenues for a Labour government to reinvest.
In contrast, Labour has highlighted that Great British Energy would make “strategic investment that the [private] companies shy away from”. If the focus of Great British Energy is to be on riskier investments, including investing in new technology in emerging industries like tidal energy, or in modular reactors, that would likely be of significant benefit to R&D and scale up prospects in less-well-established industries. But this would almost certainly mean a while before Great British Energy turned a profit and might mean it would require further investment from a Labour government before any financial benefits.
Moreover, the question is not so simple as Labour deciding how much Great British Energy should invest in established versus emerging technologies. While the company would have operational independence, there is no reason why a Labour government could not enshrine in its mandate both objectives to invest a proportion of its funds in proven technologies that will make more profit – and greater impact on decarbonisation – more quickly, and also to invest a proportion of its funds into emerging and riskier technologies.
The more challenging issue is that the UK does not lack for private investors with an appetite to invest in renewable energy – especially in established technologies such as wind and solar. There is a risk that a new state-backed company might simply jostle with private actors rather than actually accelerate the build out of renewable energy capacity. Labour appears to have anticipated this predicament and has emphasised that Great British Energy could co-invest with the private sector – and that it would focus on riskier investments, which takes us back to the profit versus R&D/scale up dilemma.
This issue around how Great British Energy would interact with private sector investment is particularly acute where it concerns the Contracts for Difference (CfD) scheme (the government’s main mechanism for supporting low-carbon electricity generation) which has supported significant growth in renewable energy capacity since its establishment in 2014.
CfDs incentivise investment in renewable energy by providing developers of projects with high upfront costs and long lifetimes with protection from volatile wholesale prices, and they protect consumers from paying increased support costs when electricity prices are high. The most recent CfD auction round was described by the government as the most successful ever, with more than 11GW of renewables capacity securing contract.
Developers of renewable projects who are successful in a competitive CfD auction enter into a private law contract with the Low Carbon Contracts Company (LCCC), a government-owned company.
Would Great British Energy bid into future CfD rounds? While Labour’s plan is for Great British Energy to have operational independence, the matter of a UK Government-backed energy generator bidding into competitive auctions for private contracts with a UK Government-owned company requires serious thought.
Might it instead look to develop renewable energy projects on a merchant basis? Volatile wholesale prices make this challenging, but far from impossible for well-established renewable energy technologies such as wind.
Labour does not need to answer these specific questions immediately, but as we draw closer to a general election the party now thinks it stands a good chance of winning, it needs to be able to articulate a general argument for how Great British Energy will work that is not circular. The broad premise holds true that, in terms of European nations that have invested heavily in renewable energy, we are an outlier in lacking a state-backed energy company that can invest in new plants.
Nevertheless, just as Labour is looking to pre-empt attacks on its £28 billion green investment pledge as we look ahead to autumn 2024, it needs to be prepared for more probing questions from the media and the energy industry on Great British Energy as we come to the long campaign. It also needs to have answers on the challenges ahead in launching Great British Energy in the event of a Labour victory