The Greatest Generation: How Public Power Can Deliver Net Zero Faster, Fairer and Cheaper

Summary

Common Wealth would like to thank Advait Arun, Alex Chapman, Brett Christophers, Sahil Dutta, Susanna Elks, Amelia Horgan, Chaitanya Kumar, Chirag Lala and Lorenzo Sani for their comments on this paper. Any errors or omissions are the authors' own.

The transition to a net-zero future hinges on our ability to rapidly expand and concurrently decarbonise the power system. Whether we succeed or not is therefore of fundamental importance to our collective security and prosperity. This report argues the approach currently shaping this necessary sectoral transformation — market coordination, premised on private investment, market-based governance and private profitability — will be slower, more unequal, costlier, and therefore less secure than public coordination of the transition, driven by public enterprise.

Based on socialised ownership, investment and planning, public coordination alone offers the systemic ability to:  

1. Make significant savings (because public enterprise has no mandate to pay dividends in excess of initial equity injection and benefits from structurally lower cost of borrowing);  
2. Invest in clean power based on system-level need rather than isolated project-level returns (because public enterprise can divorce investment decisions from the profit imperative; and is not constrained by the need to clear subjective “hurdle rates”  before undertaking investment; and can finance further investment or consumer cost reduction by the recycling of revenues rather than distributing to shareholders);
3. Integrate and coherently plan investments and economic activity to minimise costly disruption; and employ the state’s risk-bearing capacity to restructure and expand the power sector.  

This institutional architecture — and the strategic flexibility and capacities public coordination is singularly capable of enabling — is the most decisive route to rapid and cost-effective power decarbonisation. As a result, it is the best means to guarantee energy security, itself the wellspring of prosperity in the 21^st century.  

If Britain is to realise its potential as a clean energy superpower, the turn to public coordination of the energy transition is vital. A new institution should anchor this strategic pivot: a publicly-owned green generation company able to deliver the majority of investment in renewable capacity to drive the sprint to clean power by 2035 (2030 if Labour win the next General Election) and deliver an expanded net-zero power system by 2050. This report sets out the case for and design of a transformative new public green energy company. In doing so, we show how ambitious public enterprise — scaling homegrown clean energy, accelerating toward cheaper and cleaner power, growing public wealth, cutting bills and protecting us from volatile and expensive fossil fuel imports — is the best way to harness the shared resources of our island home for common benefit.  

The need for a new national energy champion to drive the transition is urgent. We are at the foothills of an unprecedented energy transformation. The vast majority of investment needed to decarbonise the power sector has not yet been undertaken: the Climate Change Committee’s Sixth Budget report on electricity generation finds in its “balanced net-zero pathway” that the UK will need to have installed 125GW of wind and 85GW of solar in total by 2050. The UK has currently operational 30GW of total wind capacity and 15GW of solar, with a further 18GW of offshore wind capacity, 9.7GW of onshore wind and 33GW of solar in the pipeline by 2050, subject to permitting approvals. Building a clean power system while the Government’s 2021 Net Zero Strategy argued that up to £400 billion of investment in new generating capacity is needed by 2037.

Private capital is ill-suited to delivering investment of this scale on its own. That is because renewables struggle in wholesale markets such as the UK’s as they are highly capital intensive (especially compared to fossil fuel generation) and are structurally vulnerable to both “merchant price risk” where market volatility poses debt servicing issues and the “revenue cannibalisation effect”, whereby periods of high output and low demand produce very low marginal prices for variable renewable electricity, causing extremely low or negative market prices that also pose debt servicing and solvency issues for developers and operators. This combination of volatility and pricing — and the low profit margins they generate — undermine the “bankability” of renewable projects, i.e. the ability of proposed projects to attract financing from banks and investors, which is critical given renewables have zero-marginal cost of operation but high upfront capital costs. Given renewables require significant upfront investment, this threat to bankability is a threat to the transition. To overcome this sensitivity to capital costs and merchant price risk, state capacity through the Contracts for Difference regime — a form of indirect public procurement contracts for private renewable generation capacity — is currently deployed at significant scale to stabilise prices in advance of investment and address revenue uncertainty, hence making projects more bankable and more amenable to private investment.

The scale of public intervention required to derisk wholesale price volatility is striking. Our analysis shows net CfD payments — state-administered but ultimately financed through consumer bills — to generators since 2016 have totalled £7.3 billion, payments that were essential to the expansion of recent renewable capacity. In other words, as the political economist Brett Christophers argues, the issue is not that renewable power is typically a hugely profitable sector; instead, the problem is its opposite: absent expensive public support, the qualities of renewable power — volatile, competitive, capital intensive — mean the returns on investment are too low for most investors. With investment driven by profit, not price, this leads to under-investment and systemic fragility that even sophisticated derisking regimes cannot overcome. The failure of the most recent Contracts for Difference auction round to attract any offshore wind bids for the first time, with bids also underperforming for other sources of renewable energy, underscores this fragility.

From the Renewables Obligation Scheme to the current Contracts for Difference (CfD) derisking regime, the state has been essential at every turn to facilitating the construction of the UK’s existing renewable generation capacity. The state’s allocative, market-making and price-fixing capabilities have, however, been deployed to backstop private investment in renewable generation, but it has abstained from direct investment and undertaking itself. This division of labour between the state and private capital leaves the coordination of power sector decarbonisation to the market, meaning it is premised on private and asynchronous decision making to undertake fixed capital investment and broader economic activity based fundamentally on expectations of project-level profitability not a comprehensive investment programme to buildout a functioning renewable electricity system; precisely for these reasons the UK is not on track to meet power sector decarbonisation targets.  

Ultimately, the buildout of renewable energy will be paid for by the public, whether through public subsidy, higher consumer energy bills to for-profit companies, or direct investment undertaken by the state itself. Thus, the fundamental question is how do we want to use the state, its singular risk-bearing capacity and public money, and to whose benefit. It is a fundamentally flawed assumption that public derisking of private investment in the electricity system is somehow cheaper for the public than direct public investment and public ownership. Therefore, rather than engage in ever more institutional acrobatics to nudge an existing industry structure — private, fragmented, unbundled, with investment organised by the profit imperative and deploying higher costs of capital — toward delivering a comprehensive transition that it is ill-suited to coordinate, we should do it ourselves as a project of national renewal: directly, consciously, by and for the public interest.    

The CfD regime is ill-equipped to cope with the fundamental uncertainty and turbulence characterising our era of polycrisis. Investment commitments are secured by fixing long-term prices far in advance of the highly volatile development costs that the price serves to recoup. During periods of turbulence, which threaten to become more the rule than the exception, this has the effect of fossilising yesterday’s uncertainties into today’s prices. Only a public energy company is able to invest on the basis of the most enduring certainty — namely, is the system-level necessity for energy investment to occur — and set prices ex post to recover costs after the risks attending them have been resolved.  

Direct public investment through a public energy champion would be able to more rapidly and decisively scale new renewable capacity — not subject to the same hurdle rates or profit expectations as private operators — while delivering lower costs at both project and system-wide levels. Public coordination of the energy transition, premised on large-scale and more cost-effective public investment, socialising the investment function, and common ownership of new renewable capacity, can overcome the costly and inefficient fragmentation of ownership and privatisation (and therefore profit imperative bound nature) of investment decision-making throughout the electricity system. In doing so, a public power system — integrated, planned, with investment based on need not profit, driven forward by the vehicle of public enterprise — would deliver substantive benefits in terms of lower bills, a quicker and more stable transition, and better macroeconomic outcomes.  

These benefits include:

• Significantly lower cost of capital that can generate major savings. Harnessing public procurement and ownership minimises costs and build value, as the company will face no need to pay dividends, benefit from structurally lower cost of capital than private projects and will not stipulate subjective hurdle rates in excess even of these costs as a condition for going forward with socially needed investments. Given this, public enterprise can deliver large-scale capital expenditure at significantly lower cost. We calculate that renewable investment financed out of Labour’s announced £8.3 billion initial capitalisation of GB Energy would save between £125-208 million per year on interest alone, for every year that the debt was being serviced, relative to if that investment was financed by corporate borrowing (based on average rating of corporate bond for offshore projects). A £28 billion stock of debt would save an estimated £420-700 million per year on interest alone, based on current borrowing costs.  
• Lower costs which translate into lower bills. The International Energy Association estimates that a 2 percentage point increase in the cost of capital alone — which is a reasonable estimate of the spread between corporate and government borrowing costs — can lead to a 20 per cent increase in a solar or wind project’s levelised cost of electricity (LCOE). Conversely a 2ppt reduction would lower LCOE by 17 per cent, translating into lower electricity bills. A generation asset financed by GBE’s 1.0-2.5ppt cheaper cost of borrowing would therefore have a LCOE 8.7-20.4 per cent lower than a privately financed identical asset.
• Income for a public company can be reinvested to accelerate the shift toward energy independence, not distributed to investors. Common Wealth analysis finds that UK's four largest owners of clean energy, together account for more than half of clean capacity, each paid more than 30p in dividends for every £1 in net capex over the last 5 years, money that could be reinvested. For all of these except Ørsted, this ratio exceeded the share of equity in total assets. The TUC, meanwhile, found that a publicly-owned energy champion could return £3 for the public purse by 2040 for every £1 invested.
• More direct and less vulnerable than private developers to delay as investment not guided by project level profitability. Public enterprise is not subject to the same constraints imposed by subjective hurdles rates and the profit imperative; it can plan and undertake the comprehensive investment programme needed to build out a functioning renewable electricity system based on what is required, not whether it clears subjective hurdle rates. Freed from the need to pay dividends, public enterprise is a vehicle through which to cross-subsidise projects and recycle revenues into further capital investment or further consumer electricity cost reductions as opposed to the deadweight loss of dividend extraction.  
• Energy independence through expanding homegrown public renewables will increase public wealth, lower inflation, and strengthen the UK’s balance of payments. Bringing assets onto the public balance sheet in exchange for public expenditure will boost public sector net worth compared with the prevailing subsidy/derisking approach where public money fails to generate valuable assets for the public balance sheet. It is also investment in revenue-generating assets whose costs are recovered directly. Given the prevalence of foreign ownership in the renewables sector — 82.2 per cent of all current and pending UK offshore wind capacity is foreign-owned as of September 2021 — significant public ownership will have a positive balance of payments effect.  Moreover, public ownership is already widespread, it is just other countries who directly benefit; 44.2 per cent of current offshore wind generation held by foreign state-owned companies, with the Malaysian government (0.1 per cent) or the city of Munich (0.85 per cent) owning less than the combined total of UK public entities (at just 0.03 per cent).
• Supporting an active green industrial strategy. The current clean generation investment regime poses tension between maintaining profitability of both private generation and private production of inputs while pushing for lowest possible consumer costs of said generation, which has led to an erosion of the stability of green production networks or supply chains. Public renewable generation would ameliorate this issue, as a public company freed from the burden of furnishing a maximal shareholder dividend could purchase inputs at higher prices while still maintaining lower consumer electricity costs than a profit-maximising private generation system. In this sense, public ownership derisks private investment in green production networks without falling into the model of socialising risks and privatising profits. A further function of largescale clean electricity generation is to subsidise private industry in other sectors as part of a green industrial strategy.
• Retain pricing power to translate zero-marginal cost benefits of renewables into cheaper bills. Public ownership not only will deliver a cheaper transition, but it also offers the potential to socially set electricity prices — especially once capital investment costs are recouped over time, which would be profoundly and structurally deflationary due to a renewable-centric energy system’s low marginal costs and also more resilient to physical and economic shocks. Toward that end, as part of wider electricity pricing reform, the public company should backstop a new National Energy Guarantee retail offer — whereby 80 per cent of families would receive considerable net support despite being cost neutral overall.  

Taken together an ambitious new public generator can cut bills, accelerate decarbonised power supply, support domestic industrial supply chains and help stabilise prices.

Recommendations

To secure these outcomes we recommend a new public green generation company should be created within the first hundred days of a new government, mandated to act as the decisive engine to transform Britain into a genuine “clean energy superpower”, along with the mutual goals of maintaining price and macroeconomic stability and building common green prosperity. To achieve that, the new public enterprise should be required to pursue three targets: 

• Contribute to an initial and rapid buildout to hit the Government’s 2035 net-zero power target (or Labour’s 2030 clean power goal) while recognising there will be a ramping up effect as public sector capacity develops; 
• Play the leading role in delivering a net-zero power system by 2050 at the latest, investing in, owning and operating the majority of new renewable power brought online in the coming decades;
• Invest in scaling up nascent technologies, de-risking new projects and accelerating deployment of flexible technologies to support the transition and secure ancillary domestic industrial and service sector supply chains — while co-financing community energy projects.

The mandate will will be best achieved if the public company has the following design and powers:

• Robust institutional framework. As is best practice internationally, it should be a limited liability company with the state the sole shareholder (with the company owned on behalf of the public). The energy company should ultimately sit off the state’s balance sheet and have operational independence to pursue its mandate and objectives. Operationally, it should develop and deploy a balanced portfolio of mature and frontier technologies.
• Ambitious investment. Recent modelling by the TUC found that a public generation company would need to invest £61.4-82.3 billion between 2025-2035 to put itself on the pathway to becoming EDF-style national energy champion.² Given the benefits of frontloading investment, the public company should undertake £40 billion of total public investment in the next Parliament, scaling up over the next five years. To put this in context, the annual cost of tax relief on domestic fuel and power is £4.9 billion, while the 2021 Spending Review committed £30 billion of domestic investment to green industry.
• Appropriate capitalisation. Following an initial capitalisation of £8.3 billion provided by Labour’s Green Prosperity Plan, further capitalisation for investment for a public enterprise vehicle should come from a combination of two main sources in the future: direct government injection, either by Treasury borrowing, or tax-funded; and off-balance sheet financial institutions such as the UK Infrastructure Bank, which has £22 billion to deploy to support clean energy infrastructure, or Labour’s proposed National Wealth Fund.
• Appropriate borrowing powers.  The company must be able to borrow to invest. Not being able to do so would inhibit its ability to scale and leave it reliant on government investment to operate. Conversely, it would be able to borrow at lower cost than private sector firms, with access to cheaper capital a key aid in the development of renewable capacity (as well as enjoying large-scale capitalisation in its first decade at significantly lower costs of capital than private sector alternatives).  Public sector net borrowing should exclude the energy company, as is best practice in the EU, and as public banks and bodies such as Network Rail and TfL are currently.  
• Introduce a National Energy Guarantee to cut bills. Under this system, first modelled by NEF, each household would receive, free of charge, enough energy to ensure it can cover its needs (weighted by the number of people in a family and to account for any disability needs). Above this guaranteed block of free energy, a higher and progressively rising price is then charged for higher levels of usage; the system would be cost neutral in design.
• Strategic planning reform. Though reliance on the profit motive — in a volatile and low-profit sector — to structure investment decisions is the critical barrier, reform of the planning system to expedite the development and construction of renewable infrastructure, including: greater investment in planning capacity gutted by austerity; targets to speed up consenting decisions; reversing onshore wind ban; requiring local authorities to proactively work with developers to identify and allocate areas suitable for development; and a national spatial and strategic planning framework that prioritises rapid buildout.

Looking Forward

To hit the ground running, in the next Parliament the company should run annual competitive direct public procurement auctions for bids to build public generation assets as the best route to clean energy security. This approach would immediately deploy private building capacity backed by the certainty of socialised investment decision-making. To hasten the process, it could for example, intervene to resume development of any newly cancelled projects (as threatened last year to be the case with Hornsea 3 and Norfolk Boreas). By drawing on established private sector development capability, this approach would also help answer concerns around public sector capacity, enabling a smoother ramping up while still commissioning and investing in new generation.   

More longer-term, precisely in socialising the investment decision function, our proposal constitutes a reorganisation of the division of labour between state and private capital that not only does not foreclose private activity in renewable generation but should rather be viewed as a more effective regime for derisking and stabilising private investment and activity in industrial decarbonisation and ancillary sectors.  In simplified, functional terms, our recommendations would see the state take on the functions of a project developer but in so doing may well draw on the capacities of existing for-profit developers through a reorganised relationship. Where CfDs are an indirect public procurement mechanism, we detail how a public company could run direct competitive procurement auctions for bids to build public generation assets. This alternative approach would immediately deploy private building capacity backed by the certainty of socialised investment decision-making.

Conclusion

We confront an immense task: the transformation of our power system as the precondition for a post-carbon society of shared and sustainable abundance. Public enterprise developing homegrown clean power is the institutional form best suited to delivering that transition, and with it a future of energy security and green prosperity.

[.img-caption]Our Vision for the First 100 Days of GBE[.img-caption]