Ofgem’s new price cap came into effect on Saturday, with the headline level falling by £1,000 per household to £3,280. This price cap limits the amount that retail energy suppliers can bill households, which ultimately limits suppliers’ ability to pass on the cost of the soaring wholesale prices they’re facing. These prices are far beyond what households and businesses can afford. The government has responded by limiting the consumer burden to £2,500 for three more months, and itself footing the difference in the bill.
It’s remarkable that such an expensive policy is still just a sticking plaster. While overdue help for households is nothing to be sniffed at, the temporary price cap does nothing to address the defective structure of our energy market at the root of the crisis.
The price spike currently afflicting customers, retail suppliers and government alike originates in the domestic wholesale energy market. Despite 43% of our electricity being generated from clean energy sources, prices are determined by the most expensive source needed to satisfy 100% of the demand in a given period. The result is that energy derived from mainly clean sources is being slapped with a gas price tag. What then fills the yawning chasm between these generators’ lower production costs and the higher price they’re getting? Profit. Just look at British Gas-owner Centrica’s 60% profit margins in its generation business.
And yet, businesses lack the agency to make positive changes. Centrica could, in theory, lower prices for its household customers by drawing down on some of those windfall generation profits. In practice, competition regulations forbid firms from subsidising parts of their business with the profits from separate divisions of the company.
The current structure of our energy market entrenches the dynamics of crisis. But this is not inevitable. It’s the symptom of a narrow-minded political consensus that rules out a simple and rational solution: public ownership.
Public ownership of the UK’s clean energy generation, selling at cost without markup, is the only option that short-circuits the trade-offs that we otherwise take as given, such as the urgent need to decouple the price of clean energy from gas; and to supercharge investment in clean energy.
Recent research by Common Wealth estimates a publicly owned generating company could reduce electricity costs by £20.8bn or £252 per household a year, far more than any of the other cost reduction proposals on the table.
Public investment is cheaper than private, enjoying considerably lower bond yields and shareholder payouts. Common Wealth calculates that the UK’s 10 largest clean energy operators pay out 40p to shareholders in dividends and buybacks for every £1 in capital expenditure. Under public ownership, this cost could be spared or recouped.
If we care about net worth – not just on the public sector’s debts, but the taxpayer’s corresponding assets, too – it is far more fiscally sound to invest directly but bring 100% of the resulting assets on to the public balance sheet. This is better than the 0% the public would get in return for subsidising private schemes. One such scheme, Contracts for Difference, has paid out a gross £7.9bn to private generators since its launch in 2016. Those concerned that such large-scale government intervention might frighten investors should consider the investment opportunities opened up in those industries whose profitability will be boosted by their cheaper energy bills.
Critics may respond by citing the benefits of market competition. But this wouldn’t have to be sacrificed under public ownership. Just as Denmark’s Ørsted, the world’s largest developer of offshore wind energy, commissions General Electric to construct its wind turbines, the supply chains for a public energy generator would remain private. This would create an opportunity to build a domestic supply chain industry for renewables, helping to support energy workers in the climate transition rather than sacrifice them.
Public ownership is not a nostalgic or sentimental slogan, but a rational solution to a problem consecutive governments have been unable to solve. As historian Adam Tooze has argued, we are living in an era of polycrisis, where disparate shocks interact with and compound each other. Rather than cannon blindly through it, we must rebuild state capacity to avoid those shocks spilling over in escalating chain reactions. We cannot afford – fiscally, economically, ecologically, and politically – to do otherwise.
Christopher Hayes is a senior analyst at Common Wealth thinktank
