This week, despite Chancellor Jeremy Hunt’s three-month extension of the energy price freeze, the UK’s state-funded discount on energy bills has been withdrawn. Overnight, households have seen their energy bills rise by the equivalent of £400 ($496) a year – further intensifying the cost-of-living crisis. The government’s raft of climate and energy announcements last week, initially dubbed ‘Green Day’ but renamed ‘Energy Security Day’, will do little to support lower or more stable bills, or deliver the effective transition and energy security the UK so desperately needs.
As the US and EU take steps to promote investments in decarbonisation, the UK’s latest energy announcements instead maintain support for oil and gas exploration. They retain hefty tax relief for the fossil fuel giants’ profits and envisage a major role for carbon capture, use and storage. None of these measures will meaningfully support lower household bills, either in the short or long term. They are being touted as options to build up the UK’s energy security. But further tying the UK to fossil fuels leaves the country dependent on volatile international oil and gas markets – as well as undermining its climate action.
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Doubling down on the status quo is no way forward, for either net zero or the public’s energy needs. Instead, what is needed is a bold and far-reaching shift in both our energy mix and the energy system’s design. Right now, our energy system is seeing vast windfall profits, particularly ‘upstream’ among the companies involved in electricity generation and in transmission and distribution.
Changing the UK energy system
The UK has a labyrinthine and multi-layered energy system – shaped by Margaret Thatcher and John Major’s privatisation programmes in the 1980s and 1990s – that is not fit for meeting the social, economic and ecological challenges of the 2020s. With the UK lagging on its climate targets, it is clear that the current system has done too little for clean energy. Households have faced record increases to bills, while at the same time the National Grid, distribution networks and many electricity generators have made vast windfalls. Nor has the current energy system delivered the energy security we need, with the UK particularly hard-hit by the global shocks of the war in Ukraine and the post-pandemic surge in energy prices.
This is a direct consequence of the ownership structures and purpose of energy companies: to maximise profits and secure returns for their investors. The needs of energy customers, the wider public good and climate goals come second to returns for shareholders. Companies are not in business to meet public needs, or to achieve net zero – their duty is first and foremost to the needs of their shareholders.
As the war in Ukraine has inflated global oil and gas prices, the design of the UK energy system has left us particularly exposed to global volatility and extraction for the benefit of shareholders. Energy privatisation, instead of delivering stable and affordable bills, has led to instability, high bills and a lack of public control over a fundamental economic resource.
A UK Public Energy Generator
One solution which has recently been put forward by Common Wealth is for a Public Energy Generation Company (not unlike the Labour Party’s call for ‘Great British Energy’). At the right scale and with the right ambition, a UK Public Energy Generator like Vattenfall in Sweden, EDF in France or Ørsted in Denmark could eliminate the windfall profits in low-carbon electricity generation overnight. This would offer a route to cut energy bills here and now. This could be achieved by a Public Energy Generator purchasing many of the older assets in clean energy generation, which are currently seeing huge windfalls (with the ten biggest clean energy generators paying 40% to shareholders for every £1 of capital expenditure), and passing the savings onto both households and businesses. Critically, a UK Public Energy Generator could also play an indispensable role in accelerating our path to net zero by allowing for much greater public coordination of the energy transition.
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By GlobalDataWhile this approach would involve large upfront costs, these assets would be brought onto the public balance sheet – increasing the wealth owned by the tax payer. The tax revenues on the increased economic growth that would likely result from lower energy costs to businesses and households would be one channel through which the public sector balance sheet would achieve returns on its investment.
Enormous profits during the energy crisis
While energy generation has headlined windfall profits stories, research from Common Wealth has also shown that the profit margins in UK energy transmission and distribution are vast. The National Grid, the monopoly responsible for the UK's high-voltage transmission networks, has been making enormous profit margins with the bulk of post-tax profits being channelled to shareholders, rather than reinvested. Since 2010, its operating margin has rarely dipped below 20% – almost double the equivalent for BP in 2022.
The UK's electricity and gas distribution network operators, in charge of the infrastructure which distributes energy "the last mile" to homes and businesses, have seen even more striking margins. These companies have topped IBIS World's 2023 rankings of the UK industries with the highest margins, confirming profitability at comparable levels to those found in Common Wealth's 2022 report. That monopolies entrusted to maintain key national infrastructure are making such vast sums confirms their inability to deliver on the public good. These industries should be taken back into public ownership.
The retail energy market has seen a different story. As of summer 2022, at least 30 UK energy retail suppliers had gone bust, unable to withstand the high wholesale prices. The consumer choice promised by privatisation has rapidly disappeared, leaving behind a small number of large energy companies. As the Trades Union Congress (TUC) has pointed out, the impact of the energy crisis on the profitability of energy retailers has diminished the potential financial costs of taking suppliers into public ownership (with the TUC estimating the cost of taking the Big Five suppliers into public ownership at as little as £2.85bn).
The case for reorganising the UK's energy system has become ever clearer. However, the government’s ‘Green Day’ announcements fail to take even baby steps in this direction. This project of wholesale reconstruction should involve developing models of ownership and governance organised around democratic control and meeting public and environmental needs – building on and going beyond the successful records of public sector energy companies in countries like Norway, Sweden and Denmark. If the goal is energy security, this is the most effective and reliable way.
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