Corbynomics in the Energy Sector



Introduction

Jeremy Corbyn, whose defiance of Labour’s party line over 500 times since 1997 makes him their most rebellious MP, barely made it onto the ballot paper for Labour’s leadership election, securing the nominations needed just minutes before the deadline. During the election he chose to defy his status as a ‘token left-wing outsider’ rather than a party leader overcoming initial odds of over 100/1 to sweep to a landslide victory with a better majority than former Prime Minister Tony Blair could muster.

His views, though roundly backed by the Labour Party membership, have divided opinion within the Labour party as well as outside it, with the energy sector just one of many areas to get the 'Corbynomics' treatment. This article will examine what the effect on the energy sector would be were Corbyn to defy conventional political wisdom and assume office in 2020. Analysis will be based on a selection of his statements as well as extracts from his energy and climate change manifesto "Protect Our Planet".

Nationalisation

A plan to nationalise (or even re-nationalise) the big six certainly makes Ed Milliband’s controversial policy to freeze energy look bland. However, as detailed below, these comments have since been rescinded, or at least qualified. The rescission is somewhat ironic given the support the electorate has, across all-parties, for returning utilities to national ownership, with YouGov finding in a poll conducted in March 2015 that 47% of people think that utilities should be run in the public sector as opposed to either being in the private sector, or being indifferent as long as there is a good standard of service. Despite some public support, such a policy is undoubtedly radical especially given the estimated £185 billion market capitalisation of the big six and National Grid. In spite of the rescission, the fact that Corbyn would contemplate such a move clearly such his fervour to shake up the energy industry.

Democratisation not nationalisation

At the Labour Conference Lisa Nandy dispelled any doubts that Corbyn would nationalise energy. The aim is to "put people back in charge." This policy is certainly very disparate from a nationalisation of the energy companies. Instead of harking back to a pre-Thatcher UK it in fact draws mostly from present-day Germany, as well as Scandinavia, with the paper comparing the UK where 95% of the electricity market is controlled by the Big 6 with Germany where their Big 4 control just 5% of their clean energy market (note in 2013 the Big 4 had a 74% share of power generation). It embodies so-called 'social democracy'. Corbyn would plan to introduce genuine competition, encouraging consumers to purchase their energy from local utilities or co-operatives. Local communities would also be able to buy self-generated 'clean' energy at discounted prices.

As the paper highlights, this is not a particularly new idea, citing the example of over 180 German towns and cities taking over the local electricity grids, selling themselves cleaner (and cheaper) electricity they increasingly produce themselves. We already see a slightly different version of this on a micro-level with homeowners installing solar panels on their properties paid for by the electricity they generate, with extra payments for any surplus electricity that can be sold to the grid. In fact, pre-Corbomania, Phillip Lee, Tory MP, was reported as saying that efforts to achieve workable competition amongst energy companies had failed and pointed to examples of co-operatives in places like Scandanavia [1]. Therefore, whilst 'democratisation' may seem radical, mainly due to most parties' tendency to want to reform Ofgem, which is also one of Corbyn's aims, it is neither an idea confined to the left wing, even if the method of achieving it would be, nor one that is untried.

Capacity Market

Although this article could look at many of Corbyn’s environmental and green credentials, there is little to say about them. He is anti-nuclear and fracking, pro-Carbon Capture Storage, and ambitious in his goals of bringing an end to fossil-fuels and leading the way with clean electricity. Community-led generation and a Green Investment Bank (loaning at 1% interest) would appear to be at the heart of these plans. What other methods would be used are not clear.

More interesting is the plan to scrap to the Capacity Market which forms a key part of the UK Government’s Electricity Market Reform (EMR) programme. The UK Energy sector has previously suffered from under-investment in assets and the Capacity Market is a carrot and stick method of ensuring future supply, with generators paid to ensure they have capacity online in the future, with financial penalties if that capacity is not online. This is also seen as a method of incentivising investment. This reform was a tacit admission that the energy market could not run itself successfully. The system has received some criticism as in the recent auction only 2.8GW of new capacity out of the 49GW auction obtained capacity agreements, whilst 9 GW of coal plants will stay on, and payments will also go to 8 GW of nuclear plants which already have significant financial incentives not to run at reduced loads.

With UK energy policy somewhat opaque in recent years given the different governments in power there has been little investment and a fear of plants closing down. This has also been exacerbated by the increase of renewables which have priority access into the electricity grid. This risk averse policy ensures there is less worry about security of supply, but at a cost. The recent auction had a clearing price of £19.4/kWh, about £1 billion in total, and around an extra £11 on bills. However, it should be noted that the Government has argued that security of supply will lead to lower wholesale prices meaning a smaller additional cost.

Corbyn’s policy to scrap the capacity market would potentially increase the risk of 'the lights going out' as well as potentially accelerating the demise of the large generators. Whilst there are undoubtedly arguments for and against the capacity market as a mechanism, security of supply will remain a key issue and particularly in the short to medium term scrapping the capacity market might not help the situation, particularly if Corbyn were to employ harsh rules on the use of coal and nuclear power.

Conclusion

Corbyn's initial statement about the energy sector where he pondered the nationalisation of the Big 6 and National Grid was certainly a compelling, if slightly misjudged, suggestion, in spite of the public's support for such a move. Team Corbyn have since revised their ideas and come up with some initial plans that are far less radical and actually harder to criticise, particularly as they would seek to mimic plans already in place. This would enable Corbyn to change the direction fairly quickly and easily. However, there still remains some concern over how the plans might deal with the security of supply issue were the capacity market to be scrapped.

October 2015


Footnotes

  1. www.globaljustice.org.uk/blog/2015/aug/20/corbyn-out-step-energy-politics

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