Labour’s Misplaced Faith in a Capital-Led Green Transition
The Labour Party has retreated on its ambitious climate spending pledges, scrapping a plan to invest £28 billion a year in green energy. But the continued reliance on private capital to drive a rapid green transition is a demonstrably bad bet.
Labour Party leader Keir Starmer and Shadow Climate Change and Net Zero Secretary Ed Miliband visit the British Steel manufacturing site in North Lincolnshire on June 8, 2023 in Scunthorpe, England. (Ian Forsyth / Getty Images)
With the Labour Party officially abandoning its pledge to invest £28 billion a year in its Green Prosperity Plan, two elements of the party’s green platform remain. One is its proposed publicly owned clean energy company, Great British (GB) Energy, with initial funding of £8.3 billion, paid for through government bonds. The other is its ambitious target to fully decarbonize by 2030, for which the vast majority of necessary investment has not yet been undertaken. Despite the death knell of the £28 billion, the political contest over the green transition has only just begun.
Where the UK has had success in green energy policy in recent years has reflected a growing repudiation of market orthodoxies and a recognition of the state’s integral role in coordinating any effective transition. However, few are willing to shatter the halo around the private sector’s role as the agent of investment; the state, on this account, must merely “derisk” investment for the private sector (where the state encourages private investment by taking responsibility for potential losses — a concept critically popularized by economist Daniela Gabor and now uncritically embraced by Rachel Reeves). In other words, the conviction that the state must bring the private sector horse to the renewable water, that it will drink, and that this is the right division of labor between public and private, continues largely unexamined.
But given that all paths to delivering renewable investment must run in some form through the state, the political question then becomes how best to deploy the state’s capacities toward delivering the transition. Some proposals for an unambitious iteration of GB Energy see it as an extension of the status quo, operating more like a high-risk venture capital fund to subsidize private investment in newer renewable technologies. Against this, recent research by Common Wealth argues that such a limited version of GB Energy would be rendered untenable by the fragmentation and volatility of the for-profit private renewables industry. Instead, a green investment sprint could be undertaken by GB Energy at the scale of the whole energy system — displacing private capital, overcoming the sector’s fragmentation, and socializing investment decisions. This would deliver the necessary transition faster, fairer, and more cheaply.
The Market Won’t Save Us
As Brett Christophers rigorously demonstrates, structural features of how renewables behave pose risks to profitability in Britain’s energy market. This deters investment by private, profit-driven investors, such that even proven technologies such as solar and offshore wind require ongoing state support to overcome market risks — typically by fixing the wholesale price of electricity or otherwise using public funds to ensure stable profitability for the private sector.
Toward this, the UK relies on its Contracts for Difference (CfD) Scheme, which aims to derisk private investment by guaranteeing stable revenue by fixing the price for each unit of electricity ahead of investment. This price is backstopped by state guarantee, ultimately passed on to customer’s bills. In a further stripping back of market orthodoxy, the UK has also recently renationalized and rebranded the National Grid’s Electricity Systems Operator as the “New Energy System Operator.” Prioritizing a “coordinated top-down” approach over leaving the system to the market, the operator is charged with sketching the blueprint of necessary investments to deliver a green power system without undermining grid functioning. But as it lacks control over investment, it must simply hope the private sector will deliver.
The CfD Scheme has brought renewables online, but even when working as designed, it has been insufficient to deliver the coordinated investment needed for decarbonization. The scheme, which awards contracts via auction, only sets an indirect target for energy generation without a mechanism for ensuring a minimum level of energy generation capacity is actually built. Nor can this process properly coordinate investment in new renewable projects needed across the system. The UK is not on course to deliver its clean energy targets through this arrangement.
As we have seen with the recent failure of CfD Allocation Round Five to deliver new investment in offshore wind, and with for-profit developers likewise abandoning planned offshore wind projects, this regime for delivering renewables is structurally fragile. Although more generous government-backed fixed prices could induce investment, it would do so at the cost of entrenching higher energy prices well into the future. More broadly, increasing state intervention without changing the kind of intervention would leave fundamental problems of cost, certainty, and coherence unaddressed. The privatized and fragmented nature of our electricity system leaves system-wide decarbonization vulnerable to private and uncoordinated investment decision-making based on the profitability of individual renewable projects.
When it comes to cost, direct public investment will simply always be cheaper: over the past decade, the difference in cost of UK “BBB-rated” corporate bond yields (the credit rating invariably used for new offshore wind projects) over government gilts has been in the region of 1.5 to 2.5 percentage points. Renewables are acutely sensitive to the cost of capital. According to the International Energy Agency, even a modest 2 percent rise in capital costs can escalate the “levelized cost of electricity” — the price at which electricity needs to be sold for the project to break even over its lifetime — of solar or wind projects by an eye-watering 20 percent. Moreover, GB Energy would face no need to pay out dividends indefinitely. The state’s refusal to directly invest effectively redistributes money upward from consumers to the financial sector but should also be understood as a refusal to democratize energy, where prices could be set according to social priorities and electricity provided as a social good. And such refusal threatens economic stability: given that electricity is, in economist Isabella Weber’s words, a “systemically significant price,” it is essential to keep such a key price low and stable.
The profitability on which private capital depends is determined by a wider set of volatile factors than the CfD process is able to derisk, let alone while ensuring low prices. Yet, we know with existential certainty that we need to invest in decarbonizing energy and, more broadly, to address the climate crisis.
As the creation of the New Energy Systems Operator demonstrates, the fragmentation characterizing our privatized system increasingly places investment needs at the level of the whole energy system in tension with the pursuit of private profit. Tinkering with market incentives to invest in and operate the electricity system invariably enlists the consumer through higher bills, whereas GB Energy would undertake these activities simply by dint of their necessity.
The current mix of half measures and too-clever-by-half measures is unlikely to deliver energy decarbonization. Instead of attempting increasingly acrobatic forms of state intervention to nudge private capital toward delivering the investment needed to get to net zero, a large-scale and coordinated program of direct investment by GB Energy would be cheaper and far more effective. The climate crisis is too urgent to be left to market forces; the public must take power back.