The establishment of Great British Energy is among the last remnants of the ‘green prosperity plan’ devised and championed by Ed Miliband, the shadow secretary of state for energy security and net zero, three years ago.
The former Labour leader’s vision was to spend £28bn per year in the first five years of an incoming Labour government on decarbonising the UK economy.
However, as the current leader Sir Keir Starmer recognised, the issue was swiftly weaponised by the Conservatives because all the money – as Mr Miliband himself had made clear – would have been borrowed.
More importantly, the plan did not survive contact with Rachel Reeves, the shadow chancellor, who has made fiscal responsibility her priority.
The £28bn-a-year spending pledge was watered down in February this year to one of £23.7bn over the life of the next parliament.
A sizeable chunk of that will be on Great British Energy, described by Mr Miliband as “a new publicly owned clean power company”, which Labour has said will be initially capitalised at £8.3bn.
And, instead of the money being borrowed, Labour is now saying “it will be funded by asking the big oil and gas companies to pay their fair share through a proper windfall tax”.
What’s a windfall tax and what’s it got to do with green energy?
Before going further, it’s worth explaining what the current windfall tax is.
The existing ‘temporary energy profits levy‘ was launched by Rishi Sunak, as chancellor, in May 2022 and imposed an extra 25% tax on the profits earned by companies from the production of oil and gas in the UK and on the UK Continental Shelf in the North Sea.
Due to expire at the end of 2025, it raised £2.6bn during its first year.
Jeremy Hunt, as chancellor, raised the levy to 35% from the beginning of last year and extended its life to the end of March 2028. That ‘sunset clause’ was extended to the end of March 2029 in Mr Hunt’s spring budget earlier this year.
It effectively means that the total tax burden on North Sea oil and gas producers is now 75%.
Labour made clear in February this year that this would rise to 78%. It also plans to remove some of the investment incentives Mr Sunak put in place when it announced the current windfall tax.
That will undoubtedly have consequences.
Offshore Energies UK, the industry body, has said that, in its first year, the existing energy profits levy led to more than 90% of North Sea oil producers cutting spending. It has warned that Labour’s plans could cost 42,000 jobs in the North Sea and some £26bn in economic value.
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So the increase in the windfall levy will have consequences for the overall tax take.
It is therefore important for Labour to make clear what changes in investment and hiring it is factoring in from companies operating in the North Sea as a result of higher taxation.
The big operators are already deserting the region. It was reported this week that Shell and Exxon Mobil are close to selling their jointly-controlled UK North Sea gas fields – marking the US giant’s final exit from the North Sea after 60 years.
And Harbour Energy, the biggest independent operator in the North Sea, has slashed investment in the region, along with hundreds of jobs, since the energy profits levy was introduced. It too is seeking to diversify away from the North Sea – having seen the energy profits levy wipe out its entire annual profits during the first year of the impost.
What will Great British Energy even own?
The second big question is what assets will be owned by Great British Energy.
Labour said overnight: “Great British Energy’s early investments will include wind and solar projects in communities up and down the country as well as making Scotland a world-leader in cutting edge technologies such as floating offshore wind, hydrogen, and CCS (carbon capture and storage).”
What is unclear, though, is whether this will involve buying existing assets from private sector operators, building new assets from scratch or co-investing in new projects.
It is worth asking the question because only the latter of these two options will actually add to the UK’s energy generation and storage capacity.
And, if it is to be the second or third options, the question is what return on capital employed Great British Energy will be seeking to achieve.
A risk that money could be wasted
All commercial operators seek to achieve a return on capital which exceeds their cost of capital.
Now, as a sovereign debt issuer with a good credit rating, the UK government enjoys a lower cost of capital than most corporates. But there will still be a nagging concern – given the traditionally poor stewardship of state-owned enterprises in the UK – that, without the discipline imposed by having shareholders, some of the money will be wasted.
Investments of this kind are risky and volatile.
An example of this came last week when SSE, one of the UK’s biggest and best-run renewable energy generating companies, admitted that Dogger Bank A, its giant wind project off the Yorkshire coast, will not be fully operational until next year rather than this year.
Is it needed when billions are being spent on green investments?
A third question is why, precisely, Great British Energy is needed at all.
The UK is already decarbonising more rapidly than any other major economy and is also investing heavily.
The Department for Energy and Net Zero recently estimated that there will be some £100bn worth of private investment put towards the UK’s energy transition by 2030.
National Grid announced only last week that it plans to invest £31bn in the UK on the transition between now and the end of the decade.
SSE is investing £18bn in renewable capacity in the five years to 2026-27. Scottish Power, another of the big renewable energy companies, recently announced plans to invest £12bn between now and 2028.
So it is not entirely obvious why a comparatively small state-owned company is even necessary.
Energy security and cost
Labour’s justification is partly based on energy security – Sir Keir has in the past queried why a Swedish state-owned power company, Vattenfall, should be the biggest investor in onshore wind in Wales – and partly on prices.
It said overnight: “Great British Energy is part of our mission to make Britain a clean energy superpower by 2030 – helping families save £300 per year off their energy bills.”
Again, though, this raises further questions.
Mark McAllister, the chairman of energy regulator Ofgem, told the Financial Times this week that energy bills were unlikely to fall substantially over the decade partly due to the costs of building out the electricity network to support the transition to renewables.
He told the FT: said: “As we build in more and more renewables, we’re also building in the price, amortised over many years, of the networks as well.
“If we look at the forecasts for wholesale prices and then build on top of that the costs of the network going forward, I think we see something in our view that is relatively flat in the medium term.”
And that begs the biggest question of all, not just for Labour, but for all the parties: why is it being left to a regulator, rather than the politicians, to spell out the costs to households of the energy transition?