Green Capital Strike!

On the failed CfD auction and the case for public power.
Melanie Brusseler & Chris Hayes

Today’s failed offshore wind auction round amounts to a private capital strike which can and must be broken by direct public investment undertaken by a public energy company.  

The state has been essential to delivering the UK’s existing renewable generation capacity. Yet, the role of the state in delivering clean electricity is structurally circumscribed to subsidising private investment. This systemic division of labour between the state and private capital leaves decarbonisation of energy subject to market coordination — premised on private and non-synchronised decisions to undertake investment based on expected profitability. Reliance on market coordination leaves the transition vulnerable to the demands of private capital, which as we see today are for higher consumer prices and more fiscal subsidy to protect their margins threatened by rising input costs. The annual auction for Contracts for Difference (CfD) Scheme contracts — subsidised public procurement contracts for fixed-price private generation capacity — which concluded today failed to secure any bids to build offshore wind capacity, as the price cap set by the government for this round failed to meet private hurdle rates in the context of rising interest rates and input cost inflation — which is not expected to dissipate in the medium-term. Rapid growth of offshore wind is central for the UK to meet power sector decarbonisation targets, which in the context of a structural crisis of fossil fuel-dependent wholesale electricity markets — subjecting households to higher prices and volatility — is an acute imperative beyond climate stabilisation alone.  

The CfD scheme is “the government’s main mechanism for supporting low-carbon electricity generation” and is emblematic of the issues posed by this division of labour between the state and private capital. The scheme seeks to use public resources to ensure revenue streams sufficient to incentivise private investment while also setting a price cap. Ahead of today’s failed auction round, for-profit developers — whose motivation is the maximisation of shareholder wealth not the quickest, most effective delivery of a clean power future — publicly clamoured for more subsidy and as we now know, have refused to invest without it. Before this failed auction, for-profit energy companies have cancelled planned investments and threatened to pull out of further planned investments in offshore wind without more public subsidy. We can expect further and increased demands by for-profit energy companies for fiscal support and/or increased consumer prices to induce their investment.

The threat of green capital strike is a problem everywhere that systemic reliance upon private investment to meet renewable generation goals prevails. Despite the Inflation Reduction Act’s generous tax credits for renewable generation, for-profit offshore wind companies have sought to renegotiate contracts along the US East Coast to garner higher subsidies and offshore wind auctions in the US Gulf Coast likewise flopped. Faced with such demands our options are to concede to the primacy of private control over investment decisions — and the transition itself — and remain vulnerable to further threats to capital strike. Here, concession would mean the state furnishes higher subsidies to restore acceptable profit margins or higher electricity bills for households and businesses are allowed in order to achieve the same function. Or, our other option is to repurpose the power of the state to democratise investment and deliver deep decarbonisation through public enterprise.  

Public enterprises face no mandate to pay dividends and benefit from structurally lower cost of capital — a cost to which renewables projects in particular are acutely sensitive — and do not stipulate subjective hurdle rates in excess even of these costs as a condition for going ahead with socially needed investments. As a result, direct public investment through public ownership is cheaper and allows for the recycling of revenues to finance further investments or consumer cost reductions.  

One way to understand the failure of CfD AR5 is that it reflects a tension between price stability (necessary to prevent self-defeating price cannibalisation in competitive spot markets that are driven by zero marginal costs) and flexibility when relying on private profit-seeking investors whose investment decision is dependent on assurances given far in advance of ex-post changes in circumstance. A public generator could reconcile these virtues. It could sign power purchase agreements with retail suppliers and direct customers at a price equal to actually realised average cost, but price stability would be secured by its autonomy from the profit imperative, rather than by restrictive power of contract. Since it would decisively undertake investment on the basis of our economic and ecological need rather than expected returns, subsequent PPA price-setting would have the flexibility to respond to exogenous shocks to outturn costs such that we have seen both in physical supply chains and in the cost of capital. (Put another way, the PPA price would function as an ex-post mechanism to cover its costs, in contrast to the CfD strike price, which functions as an ex-ante commitment device to encourage investment.)

As Common Wealth has previously argued, public generation can even resolve precisely this issue of input cost inflation in offshore wind, as a public enterprise could purchase inputs at higher prices while still maintaining lower consumer electricity costs than a profit-maximising private generation system.

Reliance on market coordination is failing to deliver fixed investment in generation capacity at pace, scale, and with the coherence and sequencing necessary to meet the UK’s existing 2035 target for 100% clean electricity, let alone Labour’s more ambitious 2030 goal. Britain has set a target of 50 GW offshore wind by 2030. With seven years to go, it is more than 36GW short, barely a quarter of the way there. Today’s failed auction shows that private investment cannot be relied upon to deliver the transition. And it shows that as we face the decarbonisation imperative, capital will make claims upon the state to suit its interests; we must respond in kind. It is a fundamental conceit that taxpayer subsidy of private investment in the electricity system is somehow cheaper for the public than direct public investment and public ownership. Building renewable generation will be paid for by the public whether it is through public subsidies, higher consumer energy bills to for-profit companies, or direct investment undertaken by the state itself. The question is how we want to use the state and public money. A publicly owned energy company would be able to more rapidly and decisively invest in renewable generation while delivering price and macroeconomic stability and building common green prosperity — private investment cannot be relied upon to deliver any of these constitutive elements of an effective, let alone just, transition.  

In a forthcoming report, Common Wealth charts the systemic role of a public clean generation company in delivering power sector decarbonisation, demonstrating economic functions that must be socialised to coordinate the sector’s transformation and the structural fiscal efficiency of direct public investment in the electricity system. Another forthcoming report does the same for demonstrating the necessity of bringing the transmission system back into public ownership.

The profitability on which private capital depends is a function of a greater set of volatile variables than the CfD process is able to de-risk. As circumstances have changed, the Allocation Round has fallen short of conditions set by private capital. But the needs of our energy transition are unconditional. We must invest on that basis too.