Jul 11 2024

Great British Energy – The UK’s new state-owned energy company

Last week’s UK election saw the Labour Party return to government after 14 years in opposition. Their emphatic win – the largest majority in a quarter of a century - delivered a mandate to implement their party manifesto, including a promise to set up Great British Energy (GB Energy), a publicly-owned and independently-run energy company which aims to deliver cheaper energy bills and cleaner power.[i]

What is GB Energy

Great British Energy is one of Labour’s key election promises. It is intended to capitalise on the potential of clean British energy, achieve UK energy independence, reduce dependency on foreign sources like Russia, and permanently lower household energy bills. Unlike France’s EDF, which manages all the country's power plants, GB Energy is not intended to re-nationalise the energy sector. Initially, it will enter the market as a smaller player with an initial capitalization of £8.3 billion. This funding will be used to establish the company and invest in clean energy projects. However, Labour does have broader aims to expand GB Energy into a significant entity comparable to government-owned energy giants such as Norway’s Equinor, Denmark’s Ørsted, or Sweden’s Vattenfall, which are owned by their respective governments, but which operate independently in the global market.

GB Energy will serve two primary purposes: first, to drive investment in new technologies, particularly floating offshore wind, through partnerships with the private sector; and second, to promote renewable energy and provide benefits to local communities through a "local power plan." This plan aims to empower communities by giving them ownership stakes in renewable energy projects through collaborations with local authorities and private sector partners.

The establishment of GB Energy will follow a dual-track approach, dividing its £8.3 billion capitalization into two parts, funded by changes to oil and gas windfall taxes.

The Local Power Plan

Labour’s manifesto emphasises working with local leaders and governments to encourage ‘local power generation’, aiming to reduce the strain on the grid and ensure local people benefit directly from the energy their area produces. The Local Power Plan will see GB Energy partner with local communities to develop renewable energy projects, with a target capacity of up to 8GW. Funding of £3.3 billion is planned over the course of the next parliament (five years). Local authorities, metro majors and community groups will be able to dip into the funding pool for small grants and loans to put towards small-scale clean energy projects such as solar panels on council housing, schools or hospitals. Like in Australia, projects for wind turbines and solar farms have faced backlash from local residents who have little interest in them and see little benefit, but Labour has said some of the profits from these local energy projects will go back into the local communities, for example through discounts on local energy bills or council tax bills, which they hope will change community sentiment towards renewable projects.

Funding for these projects is expected to start by early 2025, following the establishment of GB Energy and the appointment of its board and interim Chief Executive, subsequent to passing the Energy Independence Act.

The Long Game

The remaining £5 billion of GB Energy’s funding will become investment capital, helping the new company establish itself in the market. Ed Milliband, the Secretary of State for Energy Security and Net Zero, has said this will be a slower, more gradual process with the goal of GB Energy becoming a lead developer on UK energy projects. However, success in getting there will depend on whether the company’s tentative first steps into the market see it turn a profit after a few years, or if it falls flat. Success will also be measured by whether its projects contribute to Labour’s wider ambitions of decarbonizing the UK’s electricity supply by 2030.

Labour has said GB Energy will work with private sector to double onshore wind (Labour has already lifted an effective block on onshore wind projects), triple solar power and quadruple offshore wind by 2030, as well as investing in carbon capture and storage and hydrogen energy. Its partnership with private investors is intended to take on some of the risk which may have previously stopped independent firms going it alone. However, with such a small amount of capital to invest in the first parliament, these partnerships may just include slapping the GB Energy logo on to the projects to increase visibility with voters.

Labour has said the goal for GB Energy is to unlock rather than crowd out private capital investment in decarbonization technologies and clean energy projects like offshore wind and hydrogen by offering a more direct approach of co-investment, creating both more risk and potential upside for taxpayers.

GB Energy will focus on providing equity capital in partnership with the private sector. As such it is not expected to be an operator like the British Gas or British Steel of old. This could be especially beneficial for start-ups focused on decarbonisation, by allowing them to access lower cost capital compared to the higher rates typically demanded by early-stage venture capitalists. It’s argued GB Energy will support energy infrastructure developers by providing a cost-effective capital solution, where they only need to recover their initial investment without any dividend payments back to the government.[ii]

Labour has also signaled their intent to use GB Energy as an investment vehicle in sources of energy which are not yet fully commericalised such as tidal energy – generating electricity from tidal waves. The UK has 50 per cent of Europe’s tidal energy resources, which it claims has the potential to meet 20 per cent of the country’s current electricity demand.

Does the UK need GB Energy?

GB Energy is a key pillar to Labour’s Green Prosperity Plan, which aims to make Britain a clean energy superpower, create hundreds of thousands of jobs, help the UK achieve energy independence and lower energy bills. Since Labour was last in power, the cost of energy has risen dramatically. Last year, the average electricity bill for households who use 3600kw/h a year was £922, an increase of 104 per cent when compared to the average bill in 2010.[iii] Likewise, the average gas bill has risen 82 per cent when compared to the 2010 average, with UK households paying around £960 per year.[iv] A key factor for this increase has been the ongoing conflict between Russia and Ukraine which subsequently saw gas supplies in Europe squeezed, leading to higher wholesale gas prices. Around 85 per cent of households in the UK use gas boilers to heat their homes, 40 per cent of its electricity is generated in gas-fired plants and UK homes are considered the least energy efficient in Western Europe. This trifecta meant UK households were the worst hit by the 2022 energy crisis, leading to calls for urgent action by the UK government to ensure energy independence and to prevent another similar crisis in the future.

The private sector could struggle to manage the energy transition alone, given returns on investment in renewable energy is low. The idea behind having a state-owned and state-funded energy company like GB Energy is that it can invest and take risks in future technologies which private investors may be more reluctant to support.  Will it work?

Twelve years ago, the Conservative-Liberal Democrat coalition government established the Green Investment Bank, headquartered in Edinburgh, Scotland, with the goal of accelerating the UK’s transition to a greener, stronger economy through investments in green projects. It committed over £8 billion in co-investment funds across 100 projects, deploying £1.5 billion by 2017 and attracting £2.5 of private funds for every £1 invested.

However, after just three and a half years, the Treasury initiated the sale of the Green Investment Bank to reduce government debt, a process that took nearly 18 months and yielded a modest profit of £186 million. By 2022, the bank was fully acquired by the Macquarie Group.

Labour has emphasized energy transition as a key policy area, but the Green Investment Bank's history raises questions about whether GB Energy can effectively and profitably operate as a government-owned entity. The success of GB Energy hinges on its initial steps over the next five years. Labour has not committed to a timeline for achieving profitability, raising concerns about potential future strategies to reduce government debt, such as seeking private buyers.

Moreover, there are uncertainties about how effectively GB Energy can deliver on its promises given its relatively modest budget for the next five years. The strategy heavily relies on private sector involvement, aiming to attract three times as much private investment as government funding. Even if successful, this level of funding over the next parliamentary term may still not be equal to the amount of investment considered necessary every year to meet government targets.

Labour’s plan to use £3.3 billion of GB Energy’s allocated funding to assist local authorities and communities in developing small-scale renewable projects, is also aimed at trying to lower local energy bills. An example of this type of community benefit is the Fintry Development Trust in Scotland. A portion of the Fintry wind farm is owned by the community, so some of its profits go to the local residents. In 2023, this took the form of £1,000 grants for households for energy efficiency upgrades. Similarly, significant investment by Denmark's Ørsted has led to 50 per cent of their of electricity being supplied by wind and solar, lowering energy costs for locals. This however has been achieved through large-scale projects. 

Only time will reveal GB Energy's potential for success. Labour and future governments will need to commit to supporting investments over the years if it is to be successful. This will likely demand considerable patience from government, as tangible results may not emerge within a single parliamentary term.

 

[i] https://labour.org.uk/change/make-britain-a-clean-energy-superpower/

[ii] https://www.common-wealth.org/publications/the-greatest-generation-how-public-power-can-deliver-net-zero-faster-fairer-and-cheaper

[iii] https://www.statista.com/statistics/496661/average-annual-electricity-bill-uk

[iv] https://www.statista.com/statistics/1403993/average-gas-bill-by-payment-method-united-kingdom/

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