Nationalisation of Power Lines

With the confirmation that a general election is to be held on 12^th December, we revisit the Labour party’s plans to re-nationalise the pipes and cables that transport gas and electric throughout the United Kingdom.

The proposal was first mentioned in early 2017 with Jeremy Corbyn is inevitably the face of the proposition. However, it appears to be John McDonnell (Shadow Chancellor of the Exchequer) that is fronting the scheme.

The first hurdle

Before Labour start making plans to nationalise power distribution, there’s the not so small matter of a general election. Although they don’t currently have a Parliamentary majority, the viability of any plans depends on the vote on 12^th December.

Opinion polls at the time of writing show:

Conservatives - 36%
Labour - 26%
Liberal Democrats - 17%
Brexit - 11%
Other - 10%

So, will the Labour Party be able to form a Government? Well, it depends.

Whilst the above isn’t encouraging for the Labour Party, a lot of different scenarios are possible. The Conservatives may win the most seats but fail to hold and an overall majority. As in the previous election.

Conservatives would then negotiate with another party or parties to attempt to form a coalition. But Brexit may prove to be a stumbling block in this scenario. Due to apparent differences instances, Labour and the Liberal Democrats, at a first glance, appear not to be suitable candidates for a coalition. Conservatives may seek support from a smaller party or parties if they can get enough seats between them. Such as the DUP in 2017.

If this isn’t feasible, then it may be passed to the leader of the opposition (Labour) to form a Government of their own. This could lead to a coalition between Labour and the Liberal Democrats. Although both parties have publicly ruled this out in the run to the election, aiming for an overall majority of their own.

To answer the original question then… Who knows where we will be after 12^th December! The opinion polls suggest there won’t be a Labour party majority though, so the nationalisation proposals put forward are likely to require backing from another party or parties if Labour does get the opportunity to form a coalition.

Swiftly moving on…

Why re-nationalise?

John McDonnell’s primary argument for re-nationalisation revolves around profiteering by foreign shareholders.

Truth be told, the data supports his claims. Four of the largest organisations in the sector are mostly owned by overseas companies. Between them, they paid out over £1.1 billion in dividends over the past year. Ultimately at the expense of the UK consumer paying higher bills.

Nationalisation will lead to all money raised within the sector to be reinvested into providing a better service, reducing consumer bills and tackling climate change.

Reinvestment is claimed to be a key factor to kickstart a ‘Green Industrial Revolution’ using renewable energy sources. With the government committing to a net-zero greenhouse gases by 2050 target, the need for investment is apparent.

How did the industry respond?

‘Surpassing worst fears’

‘An outrage’

‘Seriously concerned’

‘Sparked fears through the city’

These are just a few of the printed reactions from those involved in the energy networks.

Their widely shared beliefs are that nationalisation would, in fact, be extremely costly for consumers. It would add risk and uncertainty at a time where the focus should be on additional investment if the UK is to meet its carbon targets.

The Energy Networks Association highlight various facts to this extent. Since privatisation in 1990:

Network costs to the consumer have reduced by 17%
There have been 60% fewer power cuts
The average length of a power cut has reduced by 84%

With high levels of investment currently being delivered, they question where that money would come from. Public spending is increasingly constrained and therefore there should be reservation about whether the declared spending will come to fruition. Just this week the National Audit Office announced that a government plan from 2014 to create 200,000 ‘starter homes,’ has resulted in 0 homes being built. What would prevent a similar situation with the energy networks?

Is there a compromise?

One of the reasons for the strong reaction from the energy networks is because of this. There is a middle ground. Ofgem.

Ofgem regulates the gas and electricity markets in Great Britain and is already putting a squeeze on the industry. Plans are in place to cut the returns that investors can make to 4%-5.6% by 2021. This a reduction from the current levels of 7%-8%. If implemented, the new returns would be the lowest ever capital rate for energy networks.

Therefore, the timing of Labour’s proposal has come somewhat as a surprise to the market. At a crucial time for Britain’s energy infrastructure. A dual crackdown is likely to significantly deter investment when innovation is required to provide the foundations for the government to meet its net-zero carbon emissions by 2050.

In 2017 Oxford University Professor Dieter Helm conducted an independent review of how to reduce costs in the power system whilst ensuring carbon targets are met. His two main findings are that:

The cost of energy is much higher than required to meet the government’s objectives; and
Regulation, policies and market design are not fit for purpose with the emergence of low-carbon energy sources.

Instead of nationalisation, he proposes reform to how the market is governed. Implementing national and regional system operators to reduce Ofgem’s role in regulation. The underlying theme of his report is that previous underperformances can be rectified through a more efficient system of oversight. Government involvement should be in setting objectives for the separate bodies to meet.

Summary

Labour’s nationalisation plans not only include the energy market, but also rail, royal mail, water and the national grid. Nationalisation of this scale would be extremely expensive to undertake and has led to some fears that a spending spree could plunge Britain deeper into debt. It doesn’t seem feasible that all these proposals could be undertaken within a short timeframe without negative connotations in other areas.

Whilst the reasoning for nationalisation appears to be justified, the process itself seems questionable. As Dieter Helm highlighted, the energy network could be run much more efficiently with a change in regulation and the government acting as a steering committee instead of having overall control.

It’s often a common thought process that industries could be better run through more efficient regulation rather than major government intervention. This seems to be the case with the energy market, especially with Ofgem’s existing proposals to reduce returns on investment throughout the sector.

All of this is, of course, hypothetical until we know the results of 12^th December. What we can conclude though is that the energy market will no longer escape the political radar.

Note: Any opinions stated in this article are those of the author, and do not represent the views of B.B. Price Limited.