Ownership and Markets in Energy
by Chris MacMackin on April 12, 2018



One of the most popular elements of Labour’s 2017 manifesto was the pledge to return energy to public ownership. At last year’s party conference, John McDonnell said “Rail, water, energy, Royal Mail–we’re taking them back”. This makes it sound like he’s pledging to renationalise energy, but the policy in Labour’s manifesto represents an unworkable locally-oriented policy which would be insufficient for achieving socially useful outcomes.

Here, I will argue that we should embrace national planning of electricity through centralised ownership. This a response to Labour’s manifesto which suggest that the electricity market1 should be reorganised as a decentralised system with partial public ownership. Unfortunately this fails to respond to the democratic and technical shortcomings which Margaret Thatcher’s specific method of privatising electricity created.

Nationalisation and Privatisation

Nationalised electricity was once the norm across much of the world and how Britain structured the industry was fairly typical. The Central Electricity Generating Board (CEGB) owned all power plants and the national grid. The distribution infrastructure (wires leading into people’s homes) was owned by 14 area electricity boards. The CEGB was responsible for ensuring that there was always sufficient electricity supply for the country, which was bought by the area electricity boards and then sold on to customers. Scotland had a separate electricity company which handled all of generation, transmission, distribution, and sales in that jurisdiction.

It was once thought that electricity was a natural monopoly, but Margaret Thatcher showed much of the sector could be “liberalised” to operate in a competitive environment. She split the CEGB into the national grid and three generating companies. These were sold off over a few years, along with the area electricity boards. A system was introduced by which the electricity boards purchased electricity from the generators on a national wholesale market. This was achieved through a combination of bilateral contracts, real-time bidding, and a futures market. After a transition period, retail companies were allowed into the market to compete against the area electricity boards, the latter being required to separate operation of the distribution grid from the supply of electricity.

Matching electricity production to demand has gone from a technical exercise to something more like the trading floor of the stock exchange. Yet even that is not sufficient to make the grid function properly, because generators and suppliers only trade with each other to cover half-hour intervals. Demand varies on considerably shorter time scales so there must also be a “capacity market” through which National Grid plc pays generators to stay on standby and turn production up and down as needed. Similar markets exist for other “ancillary services” such as maintaining the correct voltage.

If ever you need an example of the role of the state in constructing and maintaining markets, electricity is where you should look. None of this could exist if not for government regulations. Nothing that happens can be considered some sort of “natural” market outcome, as it is a direct consequence of the decisions the government made when it constructed the market. If the design is faulty, then a serious crisis can develop. We saw this when the Canadian province of Ontario liberalised electricity; after a few months, the wholesale price climbed so high that the market had to be suspended, to be replaced by an even stranger quasi-liberalised system. A much more serious case was the Enron scandal in California, where companies manipulated the market to boost profits, causing blackouts.

The Inevitability of Planning

Beyond the need for regulation, electricity markets as a potentially stable generator of profits are really terrible at securing sufficient investment. The old vertically-integrated companies used to simply forecast demand and build accordingly, setting rates to cover cost. In a liberalised electricity market, generators have to hope that they can supply at the wholesale price, without being certain what that price will be in 10, 20, or 50 years’ time. In practice, building new power plants has often required the government to guarantee a price for the generator. Risk has been shifted off of the utility and back onto rate-payers, which is precisely what liberalisation was supposed to avoid!

This is true for conventional energy sources, but the problem becomes even worse with intermittent renewables. A wind farm on its own isn’t of much use to the grid, because its output can’t be set to meet demand. Somehow you need to ensure that there are sufficient other mechanisms to adjust supply and/or demand to be equal, regardless of how quickly the wind is blowing. This has been a serious problem for the government’s attempts to incentivise green energy and can result in some very inefficient decisions. Fortunately, researchers at Imperial College have developed a model which can determine the cheapest combination of energy sources to achieve this “system integration”. In a report commissioned by the Committee on Climate Change, we are told that

A range of market and regulatory mechanisms and commercial arrangements exist to allocate and recover system integration costs. Ideally, such arrangements should ensure that the operational and investment decisions made by private entities achieve outcomes as close as possible to the theoretical ideal prescribed by Imperial’s modelling.

What is being said is that the government is trying to construct the market so that it will choose what we already know to be the optimal outcome. The absurdity of this should be apparent.

The only solution is to start to move away from markets. To an extent this is acknowledged in an independent report to the government proposing a set of reforms. In simple terms, these would see the national transmission grid operator putting contracts out to tender for new generating capacity, with the requirement that the winner be able to meet certain levels of demand when needed. The generating company would then be responsible for getting the correct mix of generation, storage infrastructure, and demand management to achieve this, likely via subcontracting.

What we would see, then, is the nation’s electricity supply being planned in little pieces. The problem is not the presence of planning, per se, but the fact that it is being done by unaccountable private firms. The piecemeal nature also prevents economies of scale, leading to more expensive electricity. Similarly, it is likely that by planning the grid as a whole we could arrive at a more optimal solution than planning it as many small units (as critics of the report have noted).

Labour’s Unfocused Vision

“What does all of this have to do with Labour?” I hear you cry. “Didn’t they promise to nationalise the Big 6?” While last year’s manifesto was often reported that way (including in a breathless Momentum email after it was leaked), no such promises were made. We are told that Labour will “regain control of energy supply networks through the alteration of operator license conditions, and transition to a publicly owned, decentralised energy system.” The following steps are laid out to achieve this:

  • Regaining control of energy supply networks through the alteration of the National and Regional Network Operator license conditions.
  • Supporting the creation of publicly owned, locally accountable energy companies and co-operatives to rival existing private energy suppliers, with at least one in every region.
  • Legislating to permit publicly owned local companies to purchase the regional grid infrastructure, and to ensure that national and regional grid infrastructure is brought into public ownership over time.

The only nationalisation mentioned here is of the grid, and this is only “over time”. Any energy retailers will have to compete against the Big 6. Given that “Labour understands that many people don’t have time to shop around, they just want reliable and affordable energy”, it is exceptionally odd that their solution is to create a seventh choice in the market.

Strikingly, absolutely nothing is said about electricity generation. No commitments are made to buy out existing infrastructure and only vague statements are given on ownership of new infrastructure. We are told that Labour supports new projects such as carbon capture and storage, renewables, and nuclear, but not who will own them. The accompanying report on industrial strategy commits to “support local renewable energy generation” but doesn’t define what this means.

Could “local” include ownership by small businesses? Would that be any more democratic that ownership by the Big 6? The report also pledges to continue to support private development of schemes such as the Swansea tidal lagoon, Hinckley C, and a potential nuclear power plant at Moorside. Offshore wind development is endorsed, but no clue is given over ownership, especially considering no one is particularly “local” to an offshore wind farm.

The household itself has been put forward as an owner, as part of Labour proposols to encourage the installation of domestic solar panels. However, this idea is technically, socially, and ideologically unsound. As George Monbiot explains, it is technically unsound because solar panels produce the most electricity in the summer and the middle of the day, and little or none at periods of peak demand. It is socially unsound because it means that those people sufficiently well-off to own a house are given generous subsidies for solar panels, paid for by higher energy bills for everyone else. And it is ideologically unsound because it represents a petty-bourgeois, individualised vision of addressing climate change, in which power production becomes a literal cottage industry for which households must take personal responsibility.

There is a tension over these policies. At the alternative models of ownership conference, the local model was discussed alongside explicit critiques of Thatchers “prosumer model”, which recognised the dangers of localisation. Furthermore, significant discussions on production were present, albeit with a focus on how this can avoid “top-down” pronouncements. However, it is crucial here that we begin to take clear sides in these debates when it comes to specific markets and policies, and for energy in paticualar we need to avoid fetishising socialist-sounding solutions which may not allow socialist outcomes to be achieved.

For example, cooperatives may be a way to achieve ecological aims in some sectors, and have thus been put forward as useful organising forms in the electricity market by the We Own It campaign and by David Hall of the University of Greenwich. Both point to the success of existing supply companies like Robin Hood Energy (owned by Nottingham City Council) and to Germany where “council owned energy companies supply around half of the market”. Though they are enthusiastic about the “democratic” system of numerous small, locally-controlled energy companies which will bring the “clean, green, decentralised energy future we need”, this is insufficient for the specific market in question.

In most sectors, a co-operative is owned by its employees or its customers. In rural parts of North America, there do exist electricity supply consumer co-operatives, but this is not what people are talking about here. Instead, locals would become members of the co-operative by paying to finance new energy projects. Given how energy is regulated, it is impossible for them to then buy their power from the co-op, so instead it sells its power into the market and returns the profits to its investors as dividends. These are fairly generous dividends at that: the Brighton Energy Co-operative aims to make a 5% return on investment each year, which is substantially higher than the cost of servicing public-sector borrowing. Whatever their talk of “community ownership”, energy co-ops would appear to have far more in common with Margaret Thatcher’s “share-owning democracy” than with socialism. We should be seeking to sell energy at cost, rather than use energy bills as a way to pay a low-risk, comfortable rate of return to middle class people looking for a feel-good investment. We certainly should not make participation in decision-making around energy contingent on being able to pay £300 to buy shares (the minimum purchase for the Brighton Energy Co-operative).

The Localist Fantasy

Even leaving co-ops of this sort aside and assuming that local authorities will own the generators, there are evident problems with a locally led solution to problems in the electricity market. The focus on locally-owned firms in the manifesto means the market is never mentioned here and no proposals are made for reforms. We are not told how these new democratic energy companies will interact with each other and with the existing private components of the market. It is implied that energy will increasingly be generated locally, allowing for easy democratic control and bypassing the market. To the extent that energy needs to be imported from elsewhere, we are forced to conclude it will be sourced from the energy market more-or-less as it exists now.

This is a problem. Few places in the UK will ever be self-sufficient in energy. To generate, on average, 50GW of electricity from wind (this being roughly equal to current peak demand, which will only grow as we phase out gas and petrol) would require covering about 10% of the country in wind farms. That might not sound like a huge amount, but considering that only 6% of the UK is “built upon”, the scale of the task quickly becomes apparent. Most people live in cities, where there is simply not enough room for much energy generation to be “local” to them.

It gets worse. Those who are against tackling climate change often ask “what happens when the wind isn’t blowing?” Though arguing in bad faith, they make a valid point. There is an issue of “intermittency” in wind, solar, wave, and (to a lesser extent) tidal power. When these sources are part of a broader mix, other power plants can easily adjust their output to take the load. However, what happens if half of your power comes from intermittent sources? What if it’s 100%? What’s left to take the load? In countries without massive hydroelectric resources, it’s not clear that 100% renewable energy is even possible.

One of the answers put forward to address this is the “European super-grid”, connecting renewable resources in different countries so, e.g., Danish wind could provide power to the UK when it is calm over Britain, and vice versa. This could certainly help with the worst lulls, although considerable variability remains. Regardless, the requirement for not only a national grid but a continental one clearly cuts against the argument that we can have local energy.

We also hear about the potential of different storage technologies. If we’re being honest, the only one of these which might be able to work on a sufficient scale is pumped-hydro, which can only operate in certain area and therefore is inherently non-local for most people. There are suggestions about a “smart-grid” which can adjust demand to meet supply, but this could only be a part of the solution and would therefore have to work on the (supra-)national scale. Maybe we could make everything work if different renewable energy and storage infrastructure is carefully selected and sited to complement each other, but who is going to coordinate this in a decentralised system? We’d be back to the current problem of trying to plan the market.

Even leaving the issue of coordination aside, in practice the local model leaves much to be desired. In principle, all of the wind-farms, dams, solar panels, etc. could be publicly owned by different local authorities. They could then trade electricity on the national market, much as happens between the Big 6 now. However, we’re quickly losing any semblance of local control and accountability, with electricity coming from the National Grid, purchased on a contract with who-knows-which generating company, who may well have subcontracted to another company. Gaps would be filled by hedging and buying on the spot market. The local supply companies would only be able to choose from what is available on the market and generating companies would only be able to build what they think they could sell. This market mediation would seriously encumber democratic decision making.

“Local” is not a Synonym for “Democracy”

I do not see any way to have significant local ownership of energy production without a national electricity market and all of the contradictions that entails. The answer to these problems and the creation of clear wider solutions to questions of energy costs and ecological soundness would be much more transparent and easier to understand if we were to develop a national plan for energy (with local consultation, of course).

Generation and transmission would be owned by a single national Power Generation Board. Distribution and retail could, if desired, operate on a regional or local level, leaving some room for local input into exact tariff structures. The downside to this is that people in low density areas (with greater infrastructure requirements) will likely end up paying more than those in big cities. In any case, the big decisions about what sort of energy we want and where to build the infrastructure are inherently national in scale. The Left needs to face the fact that only a centralised model for generation is likely to achieve the economies of scale and capacity for planning which we will need to get ourselves off of fossil fuels. Despite the obvious risk that such a centralised institution would be aloof from local concerns, the improved transparency of decision-making would still make this the more democratic approach.

Indeed, conflation of “democratic” with “local” is something we should be suspicious of. Certainly local control has its place, but that does not mean it is the best choice in all cases. Indeed, we need to examine what we mean when we say something is “democratic”, as was argued in an article surveying Germany’s famous Energiewende (the name for their attempted move towards renewable energy):

It is interesting the way in which the language of German environmentalism has become incorporated into an Australian environmentalist narrative… [It] was the German [solar energy feed-in-tariff] model that became the template for small-scale support mechanisms from the 1990s. This became aligned with the concept of democratised energy, which was imported into Australia via green groups and solar advocates.

What makes the democracy idea interesting in an Australian context is that there is little precedent for the concept in relation to utilities and public services–indeed, Australians generally express a preference for socialised public services (such as Medicare)… It is easier for a household to go “off-grid” for their water supply, for example, yet nobody discusses “the suburban democratisation of water”....

In contrast, the democratisation of personal transport–motor cars–is strongly critiqued by green groups in favour of the socialised model of urban transport–trains and public transport. So we can see that the “democratised” model is really an opportunistic use of language–democracy is adopted as a universal virtue and associated with a value-laden cause, rather than representing a coherent argument.

One can see parallels and similar inconsistencies in this country. For example, the Left favours national management of the NHS, feeling this to be more accountable and thus “democratic”. Yet, for some reason, a fragmented and competitive system is viewed as “democratic” in energy despite it bearing more resemblance to the present Health and Social Care Act than the vision of the NHS Reinstatement Bill. So, what do we actually mean by democracy? To me, it means that everyone who is affected by a decision should be involved in the decision. Some issues will inherently involve vast numbers of people and therefore must be dealt with on that scale. Energy is one example of this.

Desire to cut oneself off from other people and be totally self-sufficient is a hallmark of the wilder fringe of the Right. Human beings are social creatures who depend upon each other for survival. As socialists, we acknowledge and embrace this, fighting for the system managing these inter-dependencies to be fair, transparent, and democratic. If we want a democratic energy system, then we must abolish the electricity market and embrace the accountable, centralised control that entails, rather than retreat into conservative fantasies of local self-reliance. As a wider point, maintaining a keen sense of how specific markets and forms of production are structured is crucial to developing an intelligent nationalisation policy which can achieve socialist outcomes, even if the paraphernalia of localised ‘democratic’ forms of ownership are not always used.


  1. While electricity only makes up 20% of the UK’s energy use, electrifying the remaining 80% will form a key part of addressing climate change, so I will use the terms interchangeably throughout this article and have chosen not to look at gas and petrol markets. 


author

Chris MacMackin

I am a Canadian physics student pursuing graduate studies at the University of Oxford. My research focuses on the interaction between the ocean and ice-shelves and the response of the latter to seasonal variations.

You can read more of my work on my blog .

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