Jeremy Corbyn presents new economics (or is it old economics?)
Labour Leader Jeremy Corbyn has called for the nationalisation of the UK energy industry in order to deliver the transition to a low-carbon economy. That may sound radical and ambitious, writes Karel Beckman, editor-in-chief of Energy Post, but it is not a solution at all. According to Beckman, the Labour Leader is shirking the responsibility to come up with realistic and effective climate change policies.
Jeremy Corbyn, leader of the UK Labour Party, laid out his vision for the energy sector in a speech he held on 10 February to the Alternative Models of Ownership Conference.
The speech is worth a closer look. Variations on this debate are taking place in many countries, although few will want to go as far as Corbyn is proposing.
Corbyn has two general points to make. First of all, he argues that the privatisation of the energy sector in the UK has been a failure.
He says: “It cannot be right, economically effective, or socially just that profits extracted from vital public services are used to line the pockets of shareholders when they could and should be reinvested in those services or used to reduce consumer bills. We know that those services will be better run when they are directly accountable to the public in the hands of the workforce responsible for their front line delivery and of the people who use and rely on them. It is those people not share price speculators who are the real experts.”
“Energy independence for some will mean rising bills and unreliable energy for the rest”
According to Corbyn, in many countries privatisations are being reversed, though he mentions no examples from the energy sector. “There are very good reasons for what’s taking place”, he notes. “The neoliberal ideology that drove the privatisation frenzy forgot a key lesson that’s understood even by conventional neoclassical economics; that where there are natural monopolies, markets fail.”
“The architect of Thatcherite privatisation, Professor Stephen Littlechild thought regulators could mimic market competition but he was wrong. The regulators have proved too weak, [too] close to the companies they’re supposed to be regulating and too prone to corporate capture…”
Corbyn says that “Without genuine competition or public accountability private ownership of key utilities has meant customers at the mercy of rip-off price fixing. The case for public ownership is so clear and so popular and we’ve demonstrated how it’s an investment with no net cost for the taxpayer.”
“… We’ve all seen how the big energy companies jack up prices too knowing full well most people don’t switch suppliers.”
“And the energy grids are even worse, overcharging customers by £7.5bn over the last 8 years, according to Citizens Advice.”
Greatest market failure
The second point he makes is that nationalisation is necessary to be able to tackle climate change: “We need to take back control of our energy system because, as [the economist] Nicholas Stern described, ‘the greatest market failure the world has seen’ is climate change.”
According to Corbyn, “the challenge of climate change requires us to radically shift the way we organise our economy.” Why? Because “A green energy system will look radically different to the one we have today. The past is a centralised system with a few large plants. The future is decentralised, flexible and diverse with new sources of energy large and small, from tidal to solar.”
He notes that “Transforming the grid will require investment and planning on a scale that is simply not happening under the current system. Price cap regulation encourages private grid operators to cut costs and pay money out in dividends, not to plan how the grid will need to work in 25 years’ time, or to make the necessary long-term investments we need to get there.”
“Our energy system needs to change but it cannot be workers and local communities who pay the price”
“Grid operators are notorious for overcharging and causing delays in connecting renewables because they have no incentive to make it easy for clean, community generators to connect to the grid, or to encourage community grid initiatives that might end up undermining their profits… With the national grid in public hands we can put tackling climate change at the heart of our energy system, committing to renewable generation from tidal to onshore wind.”
His vision is one of “Investing to connect renewable energy to the grid, giving impetus to the kind of research and innovation that will make our grids smarter, more flexible, and capable of genuine optimisation. And actively devolving power to local communities, by giving community energy practical support and encouragement.”
Does this mean he approves of the “prosumer” model? Apparently not. “There are some who hanker after a Thatcherite so-called ‘prosumer’ model where people produce and consume their own energy and whole communities opt out of the grid”, says Corbyn. “But not everyone has the resources – natural or financial – to go it alone. Energy independence for some will mean rising bills and unreliable energy for the rest. We need a publicly-owned grid to act as the great leveller, distributing energy from where it is plentiful to where it is scarce and guaranteeing that everyone has access to clean, affordable energy all of the time. Anything else is not only unjust, it risks doing immeasurable harm to the climate cause.”
The Labour Leader stresses that “our energy system needs to change but it cannot be workers and local communities who pay the price. The devastation wreaked when our coal mines were closed, leaving a legacy of decline that former mining communities are still living with, is a brutal reminder of what can happen when those communities are silenced and disregarded in the process of change. Never again. In public hands, under democratic control, workforces and their unions will be the managers of this change, not its casualties.”
He concludes his speech by calling for the creation of “an energy system that doesn’t jeopardise the future of our planet, a joined up transport system that helps us, rather than hinders us, from moving away from reliance on fossil fuels … A society which puts an end to wasteful leakage and environmental degradation, which puts its most valuable resources, the creations of our collective endeavour, in the hands of everyone who is part of that society. Extending the principle of universalism, right across our basic services. Free at the point of use to all who use them. That’s real, everyday, practical socialism. And we’re going to build it together.”
Mimic competition
I believe both points Corbyn makes are questionable. Even more importantly perhaps, it is not clear at all what he means exactly when he speaks of “taking our public services back into public hands”.
With regard to the “failure of privatisation”, according to Corbyn, public ownership of utilities is both more efficient and fairer. But there are of course countless examples of utilities ineptly managed by bureaucrats and politicians, and as often as not to their own advantage rather than “in the public interest”.
Far from being “directly accountable” to the public, as Corbyn claims, publicly owned entities are monopolies that offer the public no alternatives. Do we want the energy sector to be run like the National Health Service?
Market players on the other hand surely are, contrary to what Corbyn claims, “directly accountable” to the public. That is to say, if markets are genuinely competitive. Ask Kodak.
Customers in the Netherlands do switch suppliers. Just a few weeks ago I got a €200 bonus when I switched my supplier
The problem with many privatisations is not the private ownership that goes with them, but the fact that the privatised entities retain monopolies and no real competition takes place. Corbyn may well be right to argue that regulators cannot “mimic market competition”, but that’s not an argument against genuine markets or in favour of nationalisation.
In this context, it should be noted that in most EU countries the electricity grids are regarded as natural monopolies and are publicly owned. In my own country, The Netherlands, the grids are owned by state-owned entities. The rest of the energy market is liberalised.
Contrary to what Corbyn claims, this has led to a much more efficient market than the state-controlled set-up of the past. Customers in the Netherlands do switch suppliers. Just a few weeks ago I got a €200 bonus when I switched my supplier. Electricity prices in the Netherlands have gone down by 13% over the last ten years.
Overall, electricity prices in European countries have risen considerably in recent years, but these increases are mostly caused by higher taxes and levies – i.e. by the State, not the market. If energy poverty is on the rise, as it is said to be, is it because so much of the energy market is still controlled by state institutions?
No net cost
Corbyn’s second point, that we need public ownership of the energy sector to combat climate change, is at least as questionable.
The problem is that it is not at all clear what Corbyn means by public ownership. What assets and activities are supposed to be publicly owned or controlled? The grid, yes. There is not much gained by private ownership of the grid as long as the system is controlled by the regulator. The fact that, apparently, in the UK investments in the grid are lacking is the result, as Corbyn acknowledges, of “price cap regulation”. This is not a real market.
But what about the rest of the energy sector? Offshore wind farms? Solar farms? Production of electric vehicles? EV charging networks? Grid-scale batteries? Are they all supposed to be nationalised? Corbyn manages to avoid this crucial question.
When Corbyn says, “We need a publicly-owned grid to act as the great leveller, distributing energy from where it is plentiful to where it is scarce”, whose energy is he talking about?
Will Tesla not be welcome anymore in the UK?
Will there be no room anymore for commercial companies supplying solar PV panels? Will Shell not be allowed to build EV chargers? Will Statoil be banned from building offshore wind farms? Will Tesla not be welcome anymore in the UK?
If all energy production is to be controlled by “energy communities”, as Corbyn seems to imply, then who will control the energy communities?
If you doubt that Corbyn wants to go that far, note that he says that “basic services” should be “free at the point of use to all who use them”. Tesla and Shell will not deliver free energy. Only the State can do that – although I doubt that it can be done at “no net cost for the taxpayer”.
Yet in the end nowhere in his speech does Corbyn specify the extent of the “democratic control” he is envisioning. It is left purposefully vague.
Policy failure
Let’s assume the entire energy sector is brought under “public control”, would that necessarily result in more renewable energy and lower greenhouse gas emissions, at lower cost?
There is no reason to think so. “Public control”, i.e. direction by the State, can work in different directions after all, depending on who is in charge of the State. Ironically, when Corbyn says that, “The past is a centralised system with a few large plants”, he forgets to mention that this centralised system was a creature of the State. As was the coal mining industry. He also forgets that the renewable energy sector is a hotbed of private entrepreneurship.
Nor is there any reason to believe that, even if the direction of his state-controlled system is towards lower greenhouse gas emissions, the means chosen will be efficient, or the solutions innovative. Corbyn is in effect arguing that to supply everyone with decent food, the best way is to nationalise the supermarkets. Would that be a good idea?
It is clear why policymakers are afraid to take effective measures: because they are afraid these will be unpopular with voters
True, the private sector will not “automatically” deliver lower greenhouse gas emissions. But to call this a “market failure” does not make sense.
The release of greenhouse gas emissions is an unfortunate by-product of the use of fossil fuels. It is a form of pollution in the sense that it affects the environment we all live in. This cannot be controlled by any individual producer or user of fossil fuels. It requires society, governments, to step in and take measures to limit or stop. It does not require nationalisation of economic activities, but effective rules and regulations. For example, a carbon tax. Or strict emission limits.
These are exactly the measures policymakers are failing to take, if we consider that the Paris Climate Agreement is merely a non-binding and still inadequate commitment.
This is policy failure, not market failure.
And, if we look at the UK and other western countries for a moment, it is clear why policymakers are afraid to take effective measures: because they are afraid these will be unpopular with voters. (I am ignoring the politicians who deny that there is a problem in the first place.)
Corbyn is no exception. His call for nationalisation of the energy sector may sound oh so radical and ambitious, but it is, in fact, a clever way to avoid real responsibility, to avoid having to step up and advocate measures that would be much less popular than a promise of “free energy” at “no net cost to the taxpayer”.
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Publicly owned grid and competing electricity vendors may be a good middle of the road solution.
For competition to work well though, customers must have the possibility to make informed choices. This is not the case in my view because of the infinite variety of payment conditions offered – the 200 € for switching is a good example: OK, you get a bonus at first, how is that compensated in kWh rates afterwards, there are night rates, day rates, how do you compare your cost of energy with that of the other vendor? To know which vendor has the best offer takes a long and tedious examination of different options.
Most people have better things to do than doing such homework – and indeed, a system that requires people to do such homework to make the best decision is wasting society’s time. So in effect, competition is not working well. Customers make poorly informed decisions, and society is wasting time.
IF regulations were such that customers could easily make well informed decisions, competition between vendors would be good. This would only require a simplified and unified pricing system.
But this has not occurred at the moment and it simply doesn’t seem to occur for markets like energy or banking. Perhaps there are politically connected special interests that prevent it.
So in societies as they are now, I am not sure how well the system of competing private vendors works for electricity.
I agree with the conclusion of the article: UK appear to have been slightly too enchanted with liberalisation and privatisation, while at the same time not providing the needed regulatory means and policy to support an energy system conducive to societal needs.
For district heating in the UK, with which I have conducted research, the deployment is very limited, and among the reasons appear to be
1 weak policy support (could be mitigated by stronger policy and subsequent supportive regulation)
2 profit maximising private entities only building DH in areas with high rate-of-return (could be mitigated by regulation that facilitates/requires build-out in areas with longer payback periods)
3 limited municipal capacity to address heating planning and regulation (pt. 1 would address this)
While at the same time, UK is (in)famous for energy poverty. District heating is no panacea, but one of many solutions to this issue, which Corbyn is certainly right in addressing.
That’s just the point He isn’t addressing it
DH requires very large investments which on the continent was largely undertaken by municipal undertakings with an energy supply monopoly to ensure customers had no other choices.
The UK has a shorter heating season than many northern European cities so DH infrastructure is not so economic in comparison.
I have worked on DH projects and those that succeeded tended to have large commercial consumers like hotels and paper mills requiring heat year round to anchor developments.
If by regulation you mean more long term price support mechanisms to underpin long term investments in DH pipe work, then the answer to that is no thanks.
BTW Germany is far more infamous now than the UK for energy poverty with sky high electricity prices compared to much of Europe.
Also, if Corbyn and his motley far left crew ever came to power it would end in economic disaster for the UK just as every Labour Government has for the last 50 years.
The only sucessful policy to develop a large amount renewables at a lower cost has been proven to be feed in tarif everywhere it has been applied. Yet this policy has been attacked because it was “messing with the market” and replaced by schemes that are not only a failure but also reduced the number of actors !
If the existence of the market forbid to carry the most succesful policy then the policy problem becomes a market problem.
I always get worrried when politicos talk about power systems – inevitably their speech writers know very little & what comes out is almost always amateurish and confused. & so it was this time around.
Proff Grubb – Ofgem’s economic adviser Oxford proff etc. “the big six generators sweated their assets and failed to invest 1990s to 2013”. I was there when he said that & I double checked that he meant it. Public ownership of off-shore wind? – already happens in the UK, Orsted is 51% owned by ……the Danish state. EdF & nukes? French state. Vattenfall & on-shore wind and storage… Swedish state. Gee is there a pattern developing?. Yes – state control, just not the UK state.
Corbyn’s comments suggest he would like to see more energy collectives – my conversations with Ofgem suggest that options such as “unlicensed supply” could work. Problem is, it is still not easy to get such systems going and UK sheeple tend to be somewhat passive – & energy collectives need the involvement of people/citizens to make them a reality. Thus it is a social problem – not a regulatory one.
Whoever wrote the speech lacks an understanding of things electrical – demonstrated with lines such as: whole communities opt out of the grid – complete nonsense no community in their right mind would do that because of cost.
National Grid – does an OK job – just needs the state to take a controlling interest (it can still be quoted and operate like a private company). & now we come to the UK DNOs.
What a total shower of foreign owned (SSE the exception) gangsters they are. For Lent, my 40 days in the wilderness will be spent in Brexitland. Discussions last week have provided good examples of how UK DNOs attempt to extort money from companies (“our RMU blew up – it feeds your site – we want you to pay us to fix it” – style of). Remunerated on their asset base, UK DNOs have an interest in getting others to pay for their capital assets and then collecting remuneration on these. It is a protection racket nothing more or less. Several of the (more rapacious) UK DNOs are owned by US investment organisations. Funny that.
The DNOs run rings around Ofgem. The answer is nationalisation, fire the whole of the top management and re-build the public service ethos. You may think this is unreasonable? Not so long ago everybody in Nat Grid had to re-apply for their job.
A good start would be to bring back the area electricity boards – (electrically they are still there) and install citizens on the board (a la Van Ruisbroek’s book “Against Elections”). This would bring back citizen control.
On area that Corbyn needs to look at is the cost to build any sort of power generation system in the UK – typically 30% more that its equivalent in mainland Europe.
Not long after privatisation when the original RECs received take over bids, the cash rich RECs defended by offering cost savings and existing shareholders much enhanced dividends so revealing the true hidden value of the RECs. The regulator then realised a much tougher price control was needed and responded with a special review to reset their price controls at lower rates.
This should be happening now to address excessive 30% DNO profit margins. Far tighter controls could prompt overseas owners to sell up at lower business values providing an opportunity for the State to take back control at reasonable cost to the tax payer.
Traditionally, the debate was about the best management of natural monopoly.With the liberalization, we came with a revised vision where (1) the natural monopoly is limited to the grid (managed as a regulated private or public monopoly) and where (2) the production and sale of electricity are managed by the market.
The new problems we face now is different.
First problem is: what do you do when a growing proportion of electricity (from wind and solar) has a zero marginal cost?
The cornerstone of market gouvernance is that prices are driven by marginal costs. What do we do when marginal costs is zero?
It seems logical to consider pricing on the basis of average cost; but the market does not lead to average cost pricing.
The second question is whether the scale of the change we need in the energy system and the required speed of that change can be achieved without some planing.
Much more than the question of public ownership vs. private ownership, we should reconsider the question planing vs. market. The answer is certainly not black or white but rather the difficult search for the good mix.
erm…. traditionally (The Road to Smurfdom etc) was that planning = state control, markets = private/profit/??? I’d suggest it is most certainly black & white – in the case of “energy markets” – regulators are at best glove puppets – captured by industry “players” – with the only open question – which industry “player” controls them the most – r is it a group effort?
Black and white answer are easy but nearly always wrong.
There is not a single country in the world that relies only on market organisation and not a single country that relies exclusively on a planned economy (not even the Soviet Union).
There is always a mix of both, and the difficult question is : what is the best mix.
Nobody would discuss that most infrastructure (road, bridges, train lines, etc) are subject to some state planing or if one prefers ” government coordination”.
In the energy sector, m our electricity and gas grid have been built with some government coordination.
The success of the French nuclear industry in the 1960-1990 relied on some government coordination with national industries.
Asian countries successful industrial policies all rely on some strong coordination between government and industry.
Transforming completely our energy system, building a new infrastructure for alternative fuels (electricity, hydrogen and gas), relying only on market signal seems extremely naive.
This is evenmore true in a context where the main new energy sources (renewables) have a zero marginal costs, situation for which the market is not able to tackle properly.
Nicolas
One model discussed in germany is to have a tiny holding with owns the grid, but does nothing else than to get others write tenders for them – tenders to operate the grids, tenders to expand the grid and so on. The energy itself (or other things distributed by the grid) could then be generated and marketed by private companies under competition, as well as operation and expansions would be done by private companies under competition.
The benefit of private ownership is the use of competition to keep prices low and service quality high. The benefit of state ownership is to avoid the use of natural monopoles to keep prices high and service quality low. Combining the benefit of both models in the way I described above looks like a good choice to me.
More years ago than I care to remember, the state owned DNO I worked for asked itself a question: why are we paying UKpounds120 for an LV 3 phase straight joint. The small R&D team of the time was given the problem and came up with an answer that was 1/10th of the price, almost indestructible and better with respect to water ingress. Bad news for BICC (as was) – good news for citizens. When the UK DNOs were nationalized R&D spend fell to exactly………..zero on the day following privatization.
The same state owned company would answer a customer account query within 15 seconds of the phone ringing – always (even in the 1970s). Your statement: “The benefit of private ownership is the use of competition to keep prices low and service quality high”
is proven to be wrong every single day in the UK – high elec prices & absolutely abysmal service – heroically, pathetically bad. UK energy companies are, basically, tax farmers – the UK state collects little or no tax on energy – leaving the space to the (mostly foreign) energy companies to gouge customers & move profits back to their national base. That the Tories allow this to happen is another scandal.
There is nothing that private can do, that public could not do so so much better. I’ve seen it, I’ve lived it.
You seem to live in a privae owned monopoly at this point? no competition to make services any better?
I get answers here fast from my electricity supplyer and from the grid operator.
good I’m very glad. However, that is not the case in the Uk & has not been for 28 years & there are lots of reasons for that – but most come down to “let’s shaft the customer as often as possible” an attitude induced by nearly 40 years of Tory & Tory-lite gov & with a population best described as “sheeple”.
In Germany too there are issues looming for consumers with ever increasing grid charges due to renewables, and overcharging:
“….the current system allows grid operators to charge large profits, according to critics. Complex regulation is required to balance the interests of grid operators and power consumers because electricity grids are a monopoly business without competition to drive costs down. The Grid Agency approves the fees charged by network operators, but critics complain the system is not transparent, and offers operators far too much leeway to overcharge consumers.”
https://www.cleanenergywire.org/factsheets/power-grid-fees-unfair-and-opaque
Which is the cause why the above proposal is in discussion. It would move the monoply in public hands, and open the real operation of the grids to competition. It also would make it much more easy to push grid extensions where neccesary for the society as a whole.
What alternate reality do you live in, Mike? Wasn’t it Brussels, capital of the famously competent and efficient Belgian [!?] government.
Just remembered this gem :
Clarke and Dawe – The Energy Market Explained
https://www.youtube.com/watch?time_continue=16&v=ELaBzj7cn14