Why renationalising the UK energy system would not advance the country’s climate and energy goals.
By Professor Michael Pollitt, Professor of Business Economics at Cambridge Judge Business School
Along with rail, mail, water and broadband, the UK Labour Party has announced plans to bring energy back into public ownership in its election manifesto. Labour has big plans to reduce the UK’s carbon emissions by also investing in more renewable energy and it believes public ownership is the best way to do this.
But the evidence suggests the opposite. If we look at the plans in detail and the realities of the energy sector, re-nationalising the UK’s energy networks is a bad idea.
The details in the manifesto are relatively scant. But they nod to the more detailed plans that the party published in May with the document Bringing Energy Home and the vote at the 2019 Labour Party conference to nationalise the big six energy suppliers.
What is proposed?
The party proposes nationalising the wires that transmit electricity and pipes that feed the country’s gas supplies. Altogether there are 10 firms in the UK, including the National Grid, UK Power Networks and Cadent, which would return to public control. Six companies distribute electricity, three distribute gas and one transmits both electricity and gas. As well as nationalising these, Labour proposes significantly reorganising them.
It says it will create new regional energy agencies – combining gas and electricity – to manage distribution to houses and businesses. New municipal energy agencies and local energy community firms would be able to take control of local networks and enter energy supply and generation. There would be a National Energy Agency to maintain the grid and infrastructure, acting as an independent public body.
This would be a substantial reorganisation. Two large FTSE 100 companies – SSE and National Grid – would lose significant amounts of their existing assets and be vulnerable to takeover. UK grids were 40 per cent or more of both SSE and National Grid operating profit in 2018.
The impact on existing energy investment would also be significant, affecting some major global investors in the UK. This includes the Hong Kong-based CK Group, which owns the largest electricity distribution company in the UK.
Gas distribution would be completely reorganised within electricity distribution areas as regional energy agencies. There would be greater workforce and community involvement. And all the current senior executives and directors would have to reapply for their jobs, be subject to salary capping and new diversity targets – boards comprising at least 50% women – for their successor teams.
What is the intention?
The proposals aim to provide better value, accelerate and coordinate investment, provide democratic control and ensure that decentralisation occurs fairly.
A key issue is whether such a large reorganisation during a time of rapid decarbonisation on the path to net zero emissions is sensible. The answer to this must surely be no.
The current company boundaries have come about as a result of a long process of consolidation. They encapsulate existing economies of scale and scope, which differ in electricity and gas.
Forcing the two sectors to both fragment and then be reconfigured would almost certainly involve both significant reorganisation costs (independent of the costs of repurchasing the assets from their existing owners) and higher ongoing costs from the increased layers of bureaucracy that are being created. This is in addition to the exodus of talent and experience that will inevitably result from the forced removal of existing executives.
This reveals a central problem with the nationalisation proposals, which is that they are not primarily about energy policy. This is actually a multi-objective policy which has control of strategic assets and distribution at its heart rather than the traditional energy focus of low cost, high reliability and limited environmental impact.
The operations will not be run on a commercial basis. Local authorities will be able to claim the assets (presumably without paying for them) from the central government and workers will be given increased say in the running of the company. A Labour government also intends to purchase the assets at a substantial discount to the current price.
A better way
Evidence from the UK and around the world suggests private ownership results in more efficient companies and more investment in the long run. Among EU countries, more competitive energy markets are associated with higher amounts of renewables. Electricity and gas workers in the UK work fewer hours and are already paid significantly more than the average for the whole economy.
History is not on the side of energy nationalisation (from 1948 to 1990), with historians agreeing that the nationalised energy industry had a sorry record of high operational costs and misdirected investment. Energy firms owned by local governments are primarily vehicles for social capital building rather than serious instruments for achieving high level national and international energy policy objectives.
There are better ways to improve the UK’s energy supplies. Tighter regulation of existing companies by regulator Ofgem would deliver the same benefits with more certainty and no disruption costs.
Less radical intervention, such as the creation of a not-for-profit national energy system operator, could give greater government influence over a low carbon agenda. This would come at a fraction of the cost of completely nationalising the energy network. Meanwhile, a better approach to exploring the coordination benefits of operating electricity and gas networks in one company would be with one regional experiment.
Overall, there is little evidence that what is proposed would help with the UK’s energy and climate goals. They seem more like a recipe for distraction and delay. A truly radical plan to achieve the UK’s net zero target is not helped by an ideologically motivated – rather than evidence based – ownership change.
This article was originally published in The Conversation, which included the following disclosure statement:
Michael Pollitt is an Assistant Director of the Energy Policy Research Group, whose sponsors include National Grid, UKPN and Ofgem. Much of his work on the impact of privatisation has been supported by the ESRC.