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Should we nationalise energy to tackle the cost of living crisis?

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Britain needs a plan to tackle the soaring cost of energy that has resulted from the war in Ukraine. Having initially set the agenda with the Windfall Tax, Labour is bringing forward a package of cost of living measures next week.

It will contain proposals to end the disparity between the costs of prepayment meters and direct debits, which hit the poorest consumers hardest. One thing we know it won’t contain, thanks to Shadow Business Secretary Johnny Reynolds’ appearance on Sky yesterday is a plan to nationalise the energy companies.

This prospect had been raised by former PM Gordon Brown, who included it in a series of measures he thought government could and should take to tackle the crisis.

The actions on the Brown list are both practical and radical, with measures to tackle the domestic symptoms of the crisis and an acknowledgement that a concerted global (or at least western) effort is needed to address its root causes.

So it is unfortunate that the headlines and reaction this week have focused on the one bit that is not particularly fleshed out, and probably the least likely to work. As Brown described it, the temporary renationalisation of the “energy suppliers”, or as it seems to have been read by some, the total renationalisation of UK energy production, distribution and supply.

And it would be doubly unfortunate if, following the pattern of recent debates about rail, next weeks cost of living announcements are likely to overshadowed by another internally focused debate about nationalisation.

Answering the wrong question

So why isn’t Labour pursuing it as a strategy? Because, for this crisis, it wouldn’t work and there is  a genuine danger that comes from conflating the problems nationalisation probably could address, with the ones it probably couldn’t.

The road to hell is paved with good intentions and there are variety of ways for politicians to get distracted from tackling people’s real, on-the-ground, needs.  A well-meaning, but long winded and expensive effort to nationalise energy would do almost nothing for prices now, this winter, or likely even next.

To understand why, we have to understand the causes of the current crisis, and how energy in the UK is structured.

Why are energy prices going up?

The war in Ukraine and the resulting sanctions have made gas harder to get. Because it is scarcer, competition for it has increased and the price is skyrocketing. This is a function of global markets, and the UK is very badly exposed – consuming 38% of its energy in the form of gas. France, for example, only consumes 16% of its energy as gas.

Britain, regardless of who owns the utilities, could not quickly become self-sufficient in gas if at all. According to the ONS, in 2021 our natural gas demand was equivalent to 861 TwH of energy. But we only produced 364 TwH worth the same year.

This suggests even a nationalised energy company would have to contend with the rising wholesale price of gas. These are the components of everyone’s bills which are quadrupling or more. It would not be able to bring these costs down entirely, though presumably it could reduce to price of domestic gas to what it cost to produce.

Profits and prices

We all know energy companies are making big profits at the moment. But what is an energy company?

There are roughly three types. Some companies do generation, running powerplants or drilling for gas, an example would be BP. Some transmits the electricity or gas and the most well-known example in the UK is the National Grid. And then there are retailers, who we all deal with and pay our energy bills to. In the UK there are six big retailers who dominate the market.

It’s a bit more complicated that outlined here of course, notably some companies do both generation and retail. Regardless, he argument is that nationalising some or all of this chain would take the profit and shareholder dividends out of the industry and result in lower bills.

That is make sense, and at face value there are some gigantic numbers involved.

This year National Grid saw it’s pre-tax profits rise 107%, to £3.4bn and it increased dividend payments to shareholders. This feels morally outrageous. But national grid claims it’s costs only represent 1.6% of the value of a gas bill.  Buying National Grid would cost about £41bn and even then the transmission costs wouldn’t be reduced to zero.

So spending all that money, and probably more importantly, time – might reduce the cost of transmission by half. That would be 0.8% of a typical gas bill. Meanwhile, retailers’ profits are capped by Ofgem at 2%. Stripping that out, either through nationalising the big six or setting up a national provider will again not make a material dent on people’s bills, for all the energy, money and time it takes.

Wholesale is the problem, and even if we spent the around £80bn it would take to nationalise BP we will not have enough domestic gas and will still be buying on the inflated global market.

Solutions for the crisis now, solutions for the next crisis

The way through this crisis is to reduce energy use and help pay people’s bills through taxation. Profits can be taxed and caps should be reduced. All this will be expensive enough to do and complex enough to deliver without trying to buy various multinational businesses at the same time.

But that doesn’t mean there are no good arguments for nationalisation. It is also true, that if we had a nationalised energy company as France does, and had spent 20 years building nuclear power plants, we would likely be better off now.

As the geopolitical situation gets more and more volatile, energy security is more and more important. It clearly cannot be left to the market. So, advocates of nationalisation should stop proposing it as a kneejerk solution to the current crisis, depriving the real solutions of oxygen. And they should not be disappointed if it doesn’t feature the the cost of living package next week. Instead they must recognise it is a long term, structural, solution to long term, structural problems.

For more on the energy crisis, and how our bills are structured, see How to tackle the energy poverty crisis? from earlier this year.