With days until the election, proposals to “bring rail, mail, water and energy” together with “the broadband-relevant parts of BT” under public ownership continue to attract much coverage.
Together with my colleague Phil Burns, I recently published a report on the merits of the Labour Party’s Bringing Energy Home (BEH) proposals, which focused on the energy networks. This report was commissioned by the Energy Networks Association, but written independently of it, and it aimed to answer the central question: will the proposals to restructure and nationalise the sector help to deliver energy and environmental policy objectives in a more timely and cost efficient manner than the existing ownership and governance arrangements?
In a nutshell, we found that the balance of evidence suggests the answer to that question is no. Whilst the objectives themselves are not controversial and would be widely supported, there is nothing in the BEH proposals that suggests we should have confidence that they will meet the enormous challenge of achieving net zero on time and at reasonable cost.
Although the timeliness and efficiency of delivering net zero is, in my view, by far the most important issue, there is also strong interest in the question of fiscal neutrality. Supporters of nationalisation believe that it can be achieved at little to no cost. They argue that while there is an upfront cost of purchasing the equity in these businesses from their current owners, the state is acquiring assets to set against this liability (and others the state may take on). These assets will provide ongoing earnings to finance the upfront cost. Under this assumption, the nationalised industries fund themselves, with no significant impact on wider state borrowing and no need for ongoing funding by the taxpayer. (I am consciously avoiding here the topic of how an accountant would approach the question of fiscal neutrality within accounting statements – as an economist this is, as they say, not my department.)
So, does this argument stack up?
Whilst fiscal neutrality may be the desired outcome, its achievement is not axiomatic and cannot be delivered by edict. Ensuring that nationalised energy networks do not require significant ongoing support from the state requires it to run them efficiently, with a strong commercial focus on balancing the books and making a return, whilst at the same time adhering to the user pays principle (rather than the taxpayer). In practice, achieving this will be problematic.
First, the productivity performance record of the networks since they were privatised has been very strong, outperforming the economy as a whole by some considerable margin. In contrast, their performance under state ownership was poor, driven by blurred and contradictory objectives, weak incentives and a lack of commercial focus. Why would it be different this time around? There is therefore a material risk of inefficiency driving up costs.
Secondly, we also need to consider the risks posed by the sheer scale of the envisaged reorganisation of the sector. The programme would take years to execute and bed in, the proposed geographic fragmentation of the networks would undermine network scale economies and disrupt innovation, and would create confusion in the roles of the new entities fuelled by weak checks and balances. As noted in our report, not only does the reorganisation risk not achieving the objective of net zero, it is also likely to undermine the performance of the networks and create upward pressure on costs.
Thirdly, it is well known that under any system of ownership and control, the energy networks will need to invest much more than at present to facilitate the delivery of net zero. Under BEH the networks will be expected to roll out EV charging infrastructure, decarbonise heat, install at scale energy storage and flexibility solutions and support the delivery of energy efficiency insulation, in addition to their current roles. This will create further upward pressure on costs. In addition, under the BEH proposals, the networks will also be empowered to “take an active role in industrial strategy … to create jobs and economic activity”. It is unclear what this will entail but will surely only push costs further up.
Each of these pressures is likely to increase costs, but at the same time networks will also be required to tackle fuel poverty, address general concerns over affordability as well as ensuring that all households have access to low carbon technologies. In the light of these additional policy commitments, the desire is clearly for bills to go down rather than up. And if bills are held down in the face of rising costs then the resulting deficit will have to be met by the state.
Based on this high-level analysis, even if we presume that there may be some short-run saving arising from saved dividends to equity holders, any benefits will likely be swallowed up by the costs of inefficiency and taking on new commitments. Fiscal neutrality will be hard to sustain.
The debate on nationalisation needs to lean into these cold hard facts. Costs will rise to meet the net zero challenge; the BEH proposals will be likely to raise those costs further. Higher costs will need to be funded from one of only three sources – either through higher bills, by the taxpayer or through higher state borrowing. If fiscal neutrality is the objective, it will need to be actively pursued – likely at some cost to other objectives. It cannot simply be assumed.