One step forward, two steps back

The recent launch of UK Labour’s election manifesto commits to implement its radical Bringing Energy Home proposal. This plan is to bring into public ownership the energy transmission assets of National Grid, fourteen regional electricity networks and eight gas distribution networks, through a forced nationalisation of network assets.

This move would precede a once in a generation revision of organisational and market arrangements. The existing system of independent regulation by the Office of Gas and Electricity Markets of privately-owned networks would be replaced by a complex four-tiered structure featuring the following bodies:

• National Energy Agency – this broad entity would combine owning and running electricity transmission networks, ‘regulating’ the energy system, some current government policy functions, setting decarbonisation targets and undertaking planning on skills and workforce;
• Regional Energy Agencies – which would be focused on owning and operating regional energy grids, implementing decarbonisation and fuel poverty policies and driving “regional industrial strategies”. They would be responsible to councils, workers and residents, though the precise mechanisms of accountability are unclear;
• Municipal Energy Agencies – owning and operating local energy grids devolved from regional agencies; and
• Local Energy Communities – community owned micro-grids at the level of housing estates, suburbs and villages.

Each of these new public energy bodies would be governed by a board with combinations of representatives from local government, members from other energy agencies, elected worker representatives and members of civil society representing social and environmental interests.

The basis for the proposed changes is wide-ranging critique of the ability of current policy and regulatory arrangements to deliver on community and environmental goals.

Labour proposes public ownership as a solution for what it argues is a failure of independent regulation of networks and energy markets as whole. Public ownership will also, Labour argues, better allow the strategic direction and coordination of investments to deploy renewables.

Seeking truth from facts – or delays and gridlock to come?

Nationalisation of energy networks would represent a return to old ownership models to seek to address the needs of the future.

The debate around whether that is the right approach is heating up, with Energy Networks Australia’s British cousins, the peak sector body Energy Networks Association, even undertaking a Facebook ad campaign highlighting the case against the proposal.

Economic analysis prepared by both business groups and British networks points to the potential for this revolution to unwind substantial efficiency gains made and deny customers further gains in the future.

An increasing range of voices have also raised question about whether and how the entirely revised industry structure would work. For example, it is not clear how some of the past challenges experienced by British customers and governments with public ownership – such as moral hazard around investments, poorer service outcomes and difficulty accessing sufficient capital – would be addressed.

Respected energy policy academics have questioned whether the entire program of restructure is more likely to serve as a costly distraction from progress on decarbonisation goals, at a high bill cost to customers.

Paying the bill – running out of other people’s money?

Such a revolutionary program will face a myriad of challenges. Not least will be finding the funding to compensate existing private shareholders for the nationalisation of network assets.

Private investors have contributed the equivalent of more than AUD$150 billion since privatisation in new and refurbished network assets. S&P Global ratings has estimated the cost of purchasing the networks to be more than AUD$135 billion. Market-based valuations of the firms could easily see compensation bills much higher, in the vicinity of AUD$200 billion. Recent analysis by one UK business group put the full cost of the planned nationalisation of energy and water networks at more than AUD$370 bill.

The UK Shadow Chancellor has indicated that overall the nationalisation program would effectively be ‘self-financing’ due to the lower cost of funds available to government borrowings.

Not everyone is convinced the numbers work, particularly due to the large increases implied for Britain’s existing national debt and budget impacts. It takes about the equivalent of AUD$13 billion to fund network operations annually and taking this function within government would represent about 150 per cent of the budget of Britain’s highways authority.

A further concern is the cost impacts on customers from some decentralisation components of the Labour program. Distributed grids can and do make valuable contributions to customer outcomes. Stubbornly persistent economies of scale that underpin current network pricing, however, means that on some estimates, Yorkshire customers for example could face cost increases of 7 to 18 per cent from a full movement to multiple fragmented municipal energy authorities.

This raises the real prospect of network customers in Britain paying a tangible ‘nationalisation premium’ (i.e. higher costs to finance due to uncertainties around nationalisation) today, and customers of both large and smaller decentralised grids also paying more in the future.

An energy revolution in white gloves?

The suggestion that nationalisation of energy networks represents an effective response to the challenges of the future is not evident at first glance. In particular, one has to question how four interlinking levels of governance could possibly be efficient and effective?

In a weeks’ time, however, it is possible observers across the world will start witnessing a living experiment of what happens if an energy revolution is pursued alongside a complete overhaul of virtually every commercial, regulatory and legal relationship affecting energy supply in a major developed economy.

On expert assessments so far, both tragedy and farce seem distinct possibilities for investors, governments and customers alike.