MPs returned to Westminster last week for a new parliamentary year. But while Brexit may continue to dominate the wider political debate, Labour’s public ownership plans are probably causing more headaches in the utility sector.
What Labour thinks about energy matters. While the next general election could be another four years off, the uncertainty surrounding Brexit means another snap poll cannot be ruled out. And with Labour running neck and neck in the polls with the Conservatives (despite the furious accusations and counter-accusations over anti-Semitism in the party), the opposition has a strong chance of forming the next government.
So far, though, Labour has revealed few details about how its public ownership plans will work. In a bid to shed some light on the party’s thinking on the UK’s rapidly changing energy system, Utility Week went to Southampton to talk to the party’s energy spokesman, shadow energy minister Alan Whitehead.
The former politics professor is having a busy day when we meet in his constituency office in the city, where he has been an MP since 1997, with a visit to the local hospital next on the agenda.
Last year’s general election manifesto contained a pledge to restore public ownership across a wide swathe of the utilities sector. Alongside the water industry, the distribution networks and the National Grid would all be brought back into public ownership.
The mild-mannered Whitehead makes an unlikely advocate for such a radical policy shift, which he insists is “not particularly revolutionary” .
Critical analyses of Labour’s public ownership plans published so far have itemised the cost of buying back the existing operators’ shares. But, clutching a Southampton FC coffee cup, Whitehead insists these sums have been drastically overestimated. He says the industry currently receives government money to smooth the transition to a low-carbon energy system and Labour would simply build up public assets by redeploying these subsidies.
“You could argue that capacity payments are effectively providing subsidised assets for energy companies, and they will retain those assets,” he says. “We are providing private sector companies with basically free assets in order to make a [low-carbon] transition.”
As to why the matter of ownership is such an issue, Whitehead says: There are elements of particular local and regional distribution that are in the public interest. It is based on the assumption that you shouldn’t make a private profit out of something that is essentially a public good.
“It may look like a lot of money but it’s actually money that would need to be spent anyway.”
For an example of how such arrangements work abroad, the 68-year-old points to Denmark. He visited the Scandinavian country recently with former MP Alan Simpson, who is advising shadow chancellor John McDonnell on energy and environmental issues.
Public ownership certainly doesn’t mean a mass buy-back of existing energy generation kit, much of which Whitehead insists is reaching the end of its natural life.
“Public ownership does not mean recreating the CEGB [Central Electricity Generation Board] with five large generators. That would not only be a nonproductive way of going about it, it would be quite counterproductive.
“You would have bought for the public a load of assets that are about to go out of commission anyway. That’s off the agenda.”
Drilling down to a local level, he sees scope for the new breed of council-owned energy companies to widen their remit beyond energy supply to more vertically integrated arrangements, embracing distribution, transmission and potentially even generation.
Changing the time-limited nature of licensing arrangements may also be on the cards. This is the point where Labour’s wider public ownership push and Whitehead’s oft-stated passion about decentralisation of the energy system link up. The latter is a topic clearly close to Whitehead’s heart. Southampton, where he led the local council before becoming one of the city’s MPs, boasts the UK’s biggest combined heat and power district energy system.
He says balancing electricity demand could be carried out at a sub-national basis, building on the infrastructure developed by the regional offices of the former CEGB.
The local step-down of voltages means there is often no “clear dividing line” between the transmission network and distribution networks, which means balancing could be carried out at a city regional level, Whitehead says. Any deficit in supply at the regional level could be balanced out nationally with electricity imported via interconnectors.
However, the electricity system is not keeping up to speed with these kind of changes, he says, pointing to how Ofgem’s review of network charges will “potentially persecute” local suppliers.
“Even if they have effectively private wires or entirely localised generation and transmission supply systems, they will be billed as if every electron is going to Carlisle and back again, which is patently not going to be the case in future years. That’s another area that is becoming dysfunctional.”
Decarbonisation of the heat network poses an even more profound challenge, says Whitehead, who warns that the UK is in “danger of exhausting” what the electricity system can achieve in terms of further decarbonisation. “We damn well need to do something about heat rapidly, because it’s lagging so far behind in the decarbonisation process,” he says.
Whitehead doesn’t believe that electrification and hydrogen should be treated as either/or solutions, but that both should be run in tandem with other measures, including greater efforts to manage demand.
The UK can buy some time by injecting bio-methane and other natural gas alternatives into the grid, he says, adding that hydrogen is “one of the key arrows in the quiver” in terms of a longer-term decarbonisation of heating, contributing up to 30 per cent of the energy mix.
However, relying on steam methane reformation, which is currently the cheapest way of manufacturing hydrogen, doesn’t deliver the goods in terms of decarbonisation because of the amount of carbon the process releases, he says: “Unless you have a really good industrial carbon capture programme alongside it you haven’t got very far.”
Using the more advanced electrolysis method of producing hydrogen may be a better bet. The surplus electricity produced at times by intermittent renewable sources is currently a headache for those managing the energy system. “We are spending millions of pounds constraining wind, in particular, because it produces when we don’t want it,” Whitehead says.
Electrolysis could harness this excess capacity and turn it into an asset. “You can produce as much as you want and balance the system by producing hydrogen,” he says. “That would help to balance the system long term because it’s seasonal shifting and you have quite a lot of hydrogen.”
All this uncertainty points to a fresh look at the energy system. Whitehead agrees, with a suggestion by Energy UK chair and former Labour trade and industry secretary Lord Hutton that a fresh energy white paper is overdue.
He says the previous white paper, which led to the coalition government’s Electricity Market Reform, was “fighting the battles of the last war”.
“People gave a mighty sigh of relief that the market was sorted out, but even then it was changing before our eyes,” he says. “Increasingly, the market is going to be one where you put up a lot of capital upfront and then your fuel is effectively free, which itself is going to make a difference to how you price energy.”
Energy will require a “different form of return on investment than previously was the case”, says Whitehead, who is alive to the suggestion that energy retailing may become more about providing services rather than quantities of energy.
Policymakers shouldn’t be nervous about facing these challenges, he adds. “It may cause some short-term disruption but things are disrupting before our eyes. It would be much better to go with that and work out where we are going to be at the other end rather than spend time trying to shore up previous positions against that disruption.”
However, the government is not grappling with these issues, says Whitehead. He says he was “encouraged” by the “change of tone” that followed Claire Perry’s appointment as energy minister last summer, pointing as it did to a more open-minded approach in areas like carbon capture and storage, which had been “written off” after the 2015 general election. But recent decisions, notably the go-ahead for test fracking in Lancashire and the rejection of plans for the Swansea Bay tidal lagoon project, have seen the government revert to an earlier type.
“The roadblocks are the same as they always were and there appears to be no progress in overcoming them. A lot of people are prepared to give the minister a lot of leeway because she clearly appears to be facing in the right direction. It’s disappointing that that appears to be running into the sand.”
One of the biggest roadblocks is Treasury resistance to moves to cushion the transition to a lower carbon economy, Whitehead argues. “It seems we are back to the old problem we had for a long time, which is that inflexibility under the Treasury energy model doesn’t allow these things to happen.”
What he describes as a “pretty dogmatic and inflexible approach” was most recently displayed by the decision to axe the feed-in tariffs alongside the mechanism that paid small-scale generators for surplus electricity they exported to the grid.
Moves like this will get in the way of the government’s efforts to meet the decarbonisation targets outlined in its own carbon budgets because emissions savings will have to be found elsewhere, Whitehead argues.
“The Clean Growth Strategy is already in trouble because it’s not going to hit its targets and presumes other things would have to happen in order to do so,” he says, pointing to what he describes as a “coruscating critique” by the Committee on Climate Change of how the government’s plans fall short.
His verdict on that? “To start knocking away what would be a number of pillars of the Clean Growth Strategy at such an early stage looks to be careless at the very least and wanton at worst.”