The Labor Party has launched its Great British Energy Policy – ​​do we need it? | Business News

The creation of Great British Energy is among the last remnants of the “green prosperity plan” conceived and championed by Ed Miliband, the shadow secretary of state for energy security and net zero emissions, three years ago.

The former Labor leader’s vision was to spend £28 billion a year, in the first five years of a new Labor government, on decarbonising the UK economy.

However, as the current leader, Sir Keir Starmer acknowledged, the issue was quickly weaponized by the Tories because all the money – as Mr Miliband himself made clear – would have been borrowed.

More importantly, the plan did not survive contact with Raquel Reevesthe shadow chancellor, who has made fiscal responsibility her priority.

The spending promise of £28 billion a year was watered down in February this year to £23.7 billion over the life of the next parliament.

A sizeable portion of that amount will go to Great British Energy, described by Miliband as “a new public clean energy company”, which the Labor Party said will initially be capitalized at £8.3 billion.

And rather than the money being borrowed, the Labor Party now says it “will be funded by asking the big oil and gas companies to pay their fair share through an appropriate one-off tax”.

What is an extraordinary tax and what does it have to do with green energy?

Before proceeding, it is worth explaining what the current tax on extraordinary profits is.

O existing “temporary tax on energy profits”‘ was released by Rishi Sunakas Chancellor, in May 2022 and imposed an extra 25% tax on profits made by companies from oil and gas production in the UK and on the UK continental shelf in the North Sea.

Due at the end of 2025, it raised £2.6 billion during its first year.

Jeremy Hunt, as Chancellor, increased the tax to 35% from the start of last year and extended its duration until the end of March 2028. This ‘sunset clause’ was extended by the end of March 2029 in Mr Hunt’s spring budget earlier this year.

It effectively means that the total tax burden on North Sea oil and gas producers is now 75%.

Labor made it clear in February this year that this figure would increase to 78%. It also plans to eliminate some of the investment incentives that Sunak created when he announced the current windfall tax.

This will undoubtedly have consequences.

Offshore Energies UK, the industry body, said that in its first year, the existing levy on energy profits led to more than 90% of North Sea oil producers cutting spending. He warned that Labour’s plans could cost 42,000 jobs in the North Sea and around £26 billion in economic value.

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Thus, the increase in the rate of extraordinary profits will have consequences for global tax revenue.

It is therefore important that the Labor Party makes clear what changes to investment and hiring it is considering from companies operating in the North Sea as a result of higher taxes.

Large operators are already abandoning the region. It was reported this week that Shell and Exxon Mobil are close to selling their jointly controlled North Sea gas fields in the UK – marking the US giant’s final exit from the North Sea after 60 years.

And Harbor Energy, the largest independent operator in the North Sea, has reduced investment in the region, along with hundreds of jobs, since the energy profits tax was introduced. It is also trying to diversify beyond the North Sea – having seen the energy profit tax wipe out all its annual profits during the first year of the levy.

What will Great British Energy own?

The second big question is which assets will be owned by Great British Energy.

Labor said overnight: “Great British Energy’s first investments will include wind and solar projects in communities across the country, as well as making Scotland a world leader in cutting-edge technologies such as floating offshore wind, hydrogen and CCS (capture carbon and store).”

What is not clear, however, is whether this will involve purchasing existing assets from private sector operators, building new assets from scratch or co-investing in new projects.

It’s worth asking the question because only the latter of these two options will actually increase the UK’s energy generation and storage capacity.

And, if it is the second or third option, the question is what return on capital employed will Great British Energy seek to achieve.

A risk that money could be wasted

All business operators seek to achieve a return on capital that exceeds their cost of capital.

Now, as a sovereign debt issuer with a good credit rating, the UK government benefits from a lower cost of capital than most companies. But there will continue to be a nagging concern – given the traditionally weak management of public companies in the UK – that without the discipline imposed by shareholders, some of the money will be wasted.

Investments of this type are risky and volatile.

An example of this emerged last week when SSE, one of the UK’s largest and best-run companies renewable energy generating companies, has admitted that Dogger Bank A, its gigantic wind project off the Yorkshire coast, will only be fully operational next year and not this year.

Is it necessary when billions are being spent on green investments?

A third question is why, precisely, Great Britain Power is needed.

The UK is already decarbonising faster than any other major economy and is also investing heavily.

The Department for Energy and Net Zero recently estimated that there will be around £100 billion of private investment earmarked for the UK’s energy transition by 2030.

National Grid announced last week that it plans to invest £31 billion in the UK in the transition between now and the end of the decade.

SSE is investing £18 billion in renewable capacity over the five years to 2026-27. Scottish Power, another major renewable energy company, recently announced plans to invest £12 billion by 2028.

Therefore, it is not entirely obvious why a comparatively small state-owned enterprise is needed.

Security and energy cost

Labour’s justification is based partly on energy security – Sir Keir has questioned in the past why a Swedish state energy company, Vattenfall, should be the biggest investor in onshore wind power in Wales – and partly on prices. .

He said overnight: “Great British Energy is part of our mission to make Britain a clean energy superpower by 2030 – helping families save £300 a year on their energy bills.”

Again, though, this raises other questions.

Mark McAllister, chairman of energy regulator Ofgem, told the Financial Times this week that energy bills are unlikely to fall substantially over the decade, in part due to the costs of building the electricity network to support the transition to renewables.

He told the FT: He said: “As we build more and more renewables, we also increase the price, amortized over many years, of grids.

“If we look at the forecasts for wholesale prices and then build on that the network costs going forward, I think we see something, in our view, that is relatively stable over the medium term.”

And that raises the biggest question of all, not just for Labor, but for all parties: why is it being left to the regulator, and not politicians, to set the costs of the energy transition for families?