Calls to nationalise some or all of the UK energy market have gained traction as a potential remedy to crippling consumer bills, but how viable and effective would these measures be?
With annual energy bills for a typical UK household expected reach over £3,500 in October and exceed £4,200 by Q1 2023 under the impending price cap revision by Ofgem, politicians and pundits are scrambling to find ways to mitigate the worst impacts of the energy crisis.
Nationalisation – to varying degrees – has often been proposed, but effecting such measures may be tricky in practice, unlikely to deliver much reduction to consumer bills, and even more unlikely to be achievable in time to meet the October deadline.
It comes while First Minister Nicola Sturgeon has said nationalisation of energy companies “should be on the table”.
Labour leader Sir Kier Starmer last week unveiled proposals in which he suggested expanding the windfall tax levy and scrapping existing bill rebates to fund a total freeze on energy bills over the coming winter.
Former prime minister Gordon Brown had already gone further, writing in the Guardian to propose not only a “watertight windfall tax” and voluntary demand reduction, but potentially a temporary nationalisation of utilities until the crisis is over.
The latter idea was echoed by others this week, including the Trades Union Congress (TUC) which set out proposals to take the so-called “Big 5” retail companies – responsible for over 70% of household energy customers – into public ownership at cost of around £2.8 billion.
The Green Party followed suit, adding its own calculation estimating a £37bn cost to fix the price cap at the £1,277 rate set in October 2021.
At present, the government’s support extends to a £400 non-repayable household grant as part of the Energy Bills Support Scheme, as well as some payments for roughly 8 million households on a means-tested basis.
However, it’s clear that far more will need to be done to address the scale of the crisis.
Political options still ‘on the table’
Jim Watson, professor of energy policy at UCL, was clear that rising gas prices are the primary cause of spiralling energy costs, and that recent inaction on energy efficiency has also impaired the UK’s ability to reduce demand.
However, he was unsure that nationalisation – either of retailers or of energy producers – would deliver results.
“I tend to be sceptical about calls for nationalisation under normal circumstances just because it will cost a lot of money, it’s disruptive and the question is: What will it enable you to do as a government that you can’t do now?” he told Energy Voice.
“Because we haven’t had nationalised energy companies for so long, people have forgotten that it’s an enormous headache to have one – as well as an enormous opportunity – in the sense that the taxpayer ends up as the owner.”
Alongside managing “difficult relationships” between new, state-owned companies and the government, Mr Watson was unconvinced such moves would alleviate consumer prices – especially when politicians still have “lots of options on the table.”
Looking at proposals such as the TUC’s, he pointed to the difficulty of “disentangling” a retail arm from the rest of an often much larger business. “If you just buy that bit as the government, you are left with basically the least profitable, most problematic segment of the whole sector,” he explained. “It’s not the segment that’s making all the money, so you don’t have access to that money. All you have access to is the businesses with lots of a cost, lots of problems to deal with.”
While some costs could be alleviated without the need to return cash to shareholders, he suggested “it wouldn’t be very much.”
“You nationalise the risks as well as nationalise the opportunities, and I think that’s again sometimes forgotten,” he added, likening it to the debate over the state’s role in the building of new nuclear power stations.
‘Simply not enough time’
In a recent blog post Kathryn Porter, an energy consultant and director at Watt-Logic, pressed the need for “urgent action” from government but was equally sceptical of calls for nationalisation and price cap-freezing.
“While many of these plans may attract popular approval, they risk harming both the retail market and the prospects for new oil and gas production,” she said.
“People are upset that ‘energy companies’ are making ‘record profits’, but the companies making these profits are not for the most part the companies selling to the domestic energy market, and they have already been subjected to a significant windfall tax.”
Using British Gas owner Centrica as an example, Ms Porter pointed to a drop in profits within its retailing arm – including from taking on unhedged customers under the supplier of last resort (SOLR) mechanism – offset by bumper results within its upstream business.
“This illustrates the point that energy suppliers are not seeing record earnings except in the rare cases that they also happen to have upstream oil and gas production businesses,” she said, adding that Shell would also fall into this category, but has far fewer supply customers.
“Even if nationalisation was a good idea in principle, nationalising solvent businesses is expensive and time consuming. In the case of Centrica, the shares are widely held by pension funds so it would be very important to pay a proper market price otherwise you would be asking pensioners to subsidise bill payers, which would be wrong,” she told Energy Voice.
“There is no way any of this could be done in time for the October price cap increase which is the timeframe in which action is needed. It is simply not enough time, and would cost money which would be better spent on direct support packages for consumers.”
As to what measures could be taken to address the crisis, Mr Watson pointed to energy efficiency, expanded windfall tax measures and market reform as potential routes over the medium term.
“Clearly you can restructure the tax – there are a lot of tax breaks for companies but they only apply to oil and gas development, so you could structure that differently to encourage low-carbon investment, which clearly is one of the longer term answers to the predicament we’re in,” he suggested.
“But I do think the big missing piece – as well as increasing the amount of immediate help to lower income households – is a large-scale energy efficiency program of the kind that we had about 10 years ago.”
Decoupling the cost of electricity from the current marginal pricing system – set largely by gas plants – would better reflect the lower cost of renewable electricity supplies, he added, though this again is a matter of years and not months.
Ms Porter concurred that changes to wholesale electricity pricing were needed, but made a series of additional recommendations which she said could help fund near-term consumer savings, including shifting the funding of “green levies” to general taxation, and zero-rating VAT on energy bills.
Other proposals were more radical, including suspension of the UK ETS and other carbon taxes, and expansion of the windfall tax to Renewables Obligation (RO) holders.
She also proposed an acceleration of the Contracts for Difference (CfDs) process, instead applying the payments as soon as the first phases of clean energy projects were commissioned.
Crucially, Ms Porter advocated for abolition of the energy price cap, given its current inability to control prices for consumers nor protect suppliers. This would instead be replaced with a “social tariff” funded by the state through increased borrowing.
“The only real solution is for the state to subsidise energy costs for consumers – the questions are how and by how much,” Ms Porter said.
“Talk of ‘freezing the cap’ needs to stop, as must complaints about energy company profits. Upstream producers, as can be seen from Centrica’s results, have had a difficult few years before this one, and it is vital that they re-invest profits in more upstream production.
“Ultimately the only way that prices will come down is when global gas prices come down, and that will only happen when new sources of supply come on-stream globally to replace Russian gas.”