The new Labour Government defines itself within and against its “inheritance” from the Conservatives. The inherited mess, we are told, extends across almost all spheres — fiscal, social, global — brought about by a mix of Tory moral failing, incompetence and internal discord.  A new set of inheriting ministers now found themselves in the departed one’s attic, separating out the detritus from the treasured heirloom. But a deep set of questions remain: how and what are they sorting, and to what end?  

The inheritance framing is as firm in energy policy, exemplified by “Great British Energy” — a newly established publicly-owned energy company — as anywhere.  The background notes to last month’s King’s Speech promise that “Great British Energy will help us take back control of the country’s energy”.^[1] Talk of control — a deliberate playback of Vote Leave’s winning slogan in 2016 — has powerful resonance following the energy price shock. That uncontrolled surge in prices, driven by the vagaries of geopolitics and international fossil fuel markets, stoked inflation, heaped hurt on households, and with perhaps the faintest of silver linings, doomed Liz Truss’s tax cutting by necessitating a large Treasury spending response.  

How might GB Energy wrestle control from such chaos? A tempting, but ultimately unsatisfactory answer is that it at last opens the possibility of authentically “British” renewable energy. Such a position signals a deep lack of ambition and a warped view of the actual inheritance. It is critical to recognise that the crisis in fact occurred following a decade of relatively high levels of renewable investment in the UK, and that the necessary further growth of renewables will occur within the thicket of private power that is the British electricity market. An opening towards real control is available, however. A large part of the true energy inheritance involves unresolved questions about the role and nature of price signals in a system replete with forms of state intervention that deliberately fix prices to leverage private investment. This juxtaposition has been described by scholars as a “hybrid regime”, made necessary by the forces of privatisation and market liberalisation. These are questions that a refined form of public ownership can help answer, generating a new mode of investment and operational decision-making that has as its target the socially necessary and just, not the privately profitable.  

Margin Notes

An electricity system is a complex infrastructure, coordinated through a mix of price signals and regulatory structures. The basest form of electricity economics tells us that accurate, marginal prices reflect the trade-off between the value of power and the cost of generating it, and thus should ensure efficiency in both the short and long term.^[2] Such an idea is of course not unique to electricity. Marginalism applies almost universally within mainstream economic reasoning, dating back to the late 19^th century. But its application to electricity is perhaps the most disconcerting, due to the rapidity of changes in supply conditions and the titanic gap in marginal costs between fuel based and weather-dependent generation. The price shock of 2022, in which generators’ revenues soared by billions, saw the UK Government seriously explore reforms to marginal pricing via variations of a “split market”. This exploration ultimately led nowhere. The core problem, no doubt worsened by political volatility and ministerial turnover, was an inability to identify an alternative in which the low cost of non-dispatchable renewable electricity, an intensely fungible commodity, would not be arbitraged away when linked to a continuing dispatchable market.^[3] Along the way officials calculated that the existing Contracts for Difference (CfD) policy, described below, would already significantly diminish consumer exposure to any future gas driven high marginal price periods by the 2030s.^[4] Attempts to accelerate this process through moving windfall generating Renewables Obligation projects onto fixed prices, were doomed by an exceptionally weak state bargaining position and a fear of locking in current high wholesale prices onto ongoing subsidy.^[5] Instead, the Sunak administration adopted a temporary windfall tax on revenues above £75/MWh.^[6] The split market exercise reiterated certain cruel economic logics — the primacy of private trading regimes and the profit imperative — and the state’s inability to overcome them with any meaningful force. Attention quickly returned to the perennial question of investment.  

Fixing the Future

Investment by private actors is driven by expected returns. Investors maintain a mental model of potential returns and their probabilities, often (but not always) backed by real quantitative models, and act accordingly. “Low risk” investments will have narrow probability distributions clustered around the expected value, with low or zero probabilities associated with extreme gains or losses, and vice versa. This definition of risk, which goes back to Frank Knight^[7], provides a neat conceptualisation of the derisking phenomena as applied to electricity. The CfD scheme, which guarantees a renewable developer a fixed price for all produced power for 15 years, reduces the number of possible outcomes for returns on investment. As Brett Christophers explains at length, such state intervention is made necessary by the volatile, uncertain nature of electricity prices in liberalised wholesale markets, especially when attended by high renewable penetration.^[8] But such reasoning has a long and perhaps unexpected history. In 1920 Ludwig Von Mises wrote:

…it is quite a different matter when the choice lies between the utilization of a water-course for the manufacture of electricity or the extension of a coal mine or the drawing up of plans for the better employment of the energies latent in raw coal. Here the roundabout processes of production are many and each is very lengthy; here the conditions necessary for the success of the enterprises which are to be initiated are diverse, so that one cannot apply merely vague valuations, but requires rather more exact estimates and some judgment of the economic issues actually involved.^[9]

This text, intended to demonstrate the deficiencies of socialist planning, somewhat bizarrely pre-figures contemporary capitalists’ pleas for the state to provide “more exact estimates” of returns in electricity investment.

Back in this century, the state derisks investment for private capital in the electricity sector by simplifying their investment decision down to a crude form of cost competition — a “how low can you go” limbo game on levelised cost.^[10] The objective is large-scale private investment at low cost of capital, and to an extent, Britain in the 2010s provides a vindication of this approach. This success of the CfD scheme, and similar programmes abroad, has spawned much theorising. The UK Energy Research Council (UKERC) concludes that renewable investors in Great Britain face significant “transition risk” around the future state of the power system.^[11] This analysis focuses on risks that investors in new power generation are thought to be “unable to manage”, such as the extent of demand side electrification and flexibility, and the capacity mix. These outcomes will of course emerge endogenously from the actions and interactions of different agents.^[12] The derisking state has an elaborate solve for this reflexivity (as Soros would call it^[13]): fixing the price to fix the future.    

The Reluctant (Market) Fundamentalist

The problem is that to fix the modelled future is to remove the incentive and ability to respond to the actual future when it comes. It is logically impossible to both financially expose agents’ actions to their expectations of future revenues, and derisk exposure to uncertainty in future revenues. A balancing act thus emerges between managing system risk and maintaining a degree of system responsiveness. This argument has come out in force in the UK’s ongoing Review of Electricity Markets (REMA), which looks at major changes to the way wholesale pricing operates, as well as more technical reforms to policy schemes.^[14]

The most revered price signal is that given by locational marginal prices (LMPs) calculated algorithmically at every conceivable “node” of the network,^[15] followed in esteem by “zonal prices” developed in sub-national regions. Great Britain, to the chagrin of some, instead has a single price. This provides a skewed investment signal to locate new assets in areas far from demand. The CfD scheme further blunts what is left of pricing signals, providing a constant operational incentive to produce power whenever possible, even when the network cannot handle it. The core challenge is that a national wholesale market cannot itself resolve network constraints within the nation, a role thus left to the system operator’s post market Balancing Mechanism (BM). The result is high and rising “constraint payments” to wind farms within the BM and blatantly false signals to interconnectors and other forms of flexibility. Modelling from Ofgem, communicated with force by Octopus Energy,^[16] suggest vast savings through zonal pricing, a policy which Ed Miliband’s department is formally still considering.^[17] The claim of net efficiency gains from zonal pricing is complicated by the larger implied distributional transfers from (primarily wind) producers to consumers, driven by the elimination of constraint costs in the BM, and the assumed transfer of congestion rents (profits from price differentials between zones) to consumers. DESNZ’s own modelling estimates the distributional transfer as between £24 billion and £59 billion between 2030 and 2050, compared to a system wide net saving of £5 billion to £15 billion over the same period.^[18]  Technocratic modelling of this kind can only hint at whether producers would allow such a transfer to occur, or would instead entrench their existing position, for example by demanding higher CfD strike prices or a regulated capture of congestion rents. These questions can be quantified through a tweak in model parameters, but this cannot tackle the deeper political economy issues at play, which instead require a mode of analysis civil servants and industry consultancy bureaus lack comfort in.      

It should be noted that many publicly doubt the entire veracity of the modelling results, a debate which comes down to the minutiae of counterfactuals and network build assumptions. The wind developers, protective of their current position, publicly detest the idea, claiming that more granular prices will not change their decisions and yet are harder to forecast. The increased risk, they argue, will increase their cost of capital and thus consumers prices.^[19] Their position, whilst no doubt financially motivated, is not without some intellectual backing. Rob Gross of the UKERC, and formerly Imperial College, critiques locational pricing as “market fundamentalist”, a repeat of the transition risk mantra.^[20] And not much solace can come from experiences abroad. Econometric analysis suggests that locational prices within the Texas market (ERCOT) have no statistically significant impact on the siting of new utility scale wind.^[21] Zonal pricing exists in several mainland European jurisdictions, but implementation and impacts vary significantly. Perhaps most worryingly, its proposed introduction to Germany is the cause of major inter-state North-South tension (Bavaria and its southern allies call it a threat to the “central expression of the unified German economic area”) and consternation in Brussels.^[22]  

The mess of this debate,^[23] running for two years and counting in the UK, reveals the hard edges of the “hybrid regime” of modern electricity systems, a bizzarro mix of market and state coordination.^[24] The two modes of coordination are imbricated, revealing a deep set of tensions, and an antagonistic political economy as demonstrated by the zonal pricing debate. Ultimately, a UK Government seeking billions more capital from the wind industry, and with a constrained civil service resource, will likely not proceed with zonal pricing. The hybrid beast will live another day. But in making this decision, and the myriad others in REMA, the Government might seek to think more imaginatively about an alternative means of control beyond the pin dancing of market design models.  

A Deep Embedding

We have seen that REMA is entangled within the rigidities of marginal pricing, national pricing and the hybrid regime, driven by and worsening the forces of fragmentation and privatisation. So how might the British state break through the stalemate to “take back control”?  

The most critical step is a conscious new attitude to the market reform debate itself. As noted by Peter Crampton “electricity markets are designed markets”.^[25] A designed market should be a social tool to a social end, not an abstract economic archetype to be theologised. Moreover, the state can act within and beyond market logics to commence and coordinate activity. This is not a call for further entrenching of derisking mechanisms within the current hybrid system. Instead, Common Wealth’s demand is for a gradual but deep embedding of public ownership at every level: generation,^[26] transmission and distribution,^[27] and retail.^[28] Overarching our position is the claim that public ownership can engender a new mode of investment decision-making and operation, determined not by expected project-level profitability but by a systematic assessment of what is needed and socially just. In the case of generation, some control of revenues will be required, but this can be developed ex post after the investment decision, requiring a less intensive interference with pricing signals. Public operation of assets allows for real time responsiveness driven by price signals where they exist but also a more directed set of behaviours, for example constrained bidding strategies in the balancing mechanism and at-cost provision of “ancillary services” like frequency response. The targeting of a publicly-owned “strategic reserve” as a fix for the capacity adequacy problem could serve a similar function, resolving the challenging economics of infrequently operated assets.^[29] In general terms, a pivot toward public control of investment and operation weakens the grip of the risk/responsiveness dilemma.  The claim here is that the current system has no convincing solution to the market reform dilemma within a decarbonising system, precisely because there is no mode of direct control over investment and operation, a legacy of privatisation and market liberalisation.  

The functional case is for the British state to take direct responsibility for ensuring what scholars have called “system efficiency” of an infrastructure network, achieved where nodes of the network are coordinated effectively.^[30] System efficiency is to be distinguished with the neoclassical economic concept of “allocative efficiency”. Traditional economics tends to view an infrastructure as stages of a value chain bound together by contractual arrangements, implying allocative efficiency will occur so long as these arrangements are competitive, or regulated into a form of quasi-competition.^[31] Such a view, embedded in economistic contributions to market reform debates, fails to recognise complementary features of infrastructural networks, meaning nodes must be operated in a specific order and thus coordinated in a manner that neither market competition — subject of the profit imperative —  nor regulation — subject of industry capture and information asymmetry — may ensure. True, the economic concept of dynamic efficiency considers incentives for firm level innovation over time, but it does not fully capture the need for efficient system wide coordination between complementary nodes of the infrastructure network.^[32] This need for effective coordination is likely to be particularly pronounced during the capital-intensive decarbonisation process. Melanie Brusseler has convincingly argued that a renewables-based system is “incongruous” with the previous fossil fuel-based system.^[33] This incongruity forms the technological background to the pivot towards public ownership, breaking free of the hybrid regime and its tensions.

Against the Wheel

The electricity system is at once awe-inspiring — the constant provision of the means of modern life at literal light speed — and deeply disorienting, subject to endless technicalities, uncertainties and debate. To be genuinely transformative, GB Energy would need to act as an opening towards public control of the investment that (re)creates this system, and the continuous fine tuning that operates it. Activating the institution towards this end will require sustained political pressure, as it runs firmly against default modes of thinking. The default position, embedded in officials’ “stakeholder engagement” techniques, would be to take the existing industrial structure and the attitudes it inbreeds as rigid and predetermined, rather than a policy variable. That approach develops delay and dysfunction — government by PDF and performativity. To break against this attitude in an area as contested as energy policy is a non-trivial ask of a government in its infancy. Then again, “control” comes to English from the Latin contrarotulus, comprising “against” (contra) and “wheel” (rota). To take back control, then, we ride against a wheel, but we ride it towards a future.