Several months of rumours, internal briefings and mixed messaging culminated in the Labour Party officially abandoning its pledge to invest £28bn a year in its green prosperity plan, down-scaling its spending plans to less than £15bn over the course of a full parliament. Great British Energy, a central part of this plan, will remain with an initial capitalisation of £8.3bn, presumably financed by gilt issuance. While the larger climb-down is motivated by the party’s stated commitment to fiscal credibility, it has retained its target to reach clean energy by 2030. The two stances are incompatible; the situation demands more public investment, not less, and GB Energy must lead the way.
In an effort to appear hospitable to business, Rachel Reeves has repeatedly stressed her wish to “de-risk” private investment not just in British business but also for our infrastructure, “unlocking” private capital to fill the void left by previous governments. The cruel irony is that our new era of high interest rates, which has given the shadow Treasury team fiscal cold feet, is itself a symptom of precisely the conditions that make private capital less, rather than more, likely to take up the mantle – at least where renewable energy investment is concerned. The reasons for this can broadly be put into three categories: cost, certainty and coherence.
Cost is the simplest. The interest-hiking cycle frightening fiscal policymakers has applied to everyone, not just to governments. Governments, at least in the rich world, can still borrow more cheaply than private companies. If anything, the spread in yields between corporate and sovereign bonds rises during periods of financial instability. Over the past decade, the spread of UK BBB-rated corporate bonds (the credit rating invariably assigned to new offshore wind projects) over gilts has been in the region of 1.5-2.5 percentage points.
This is not a marginal concern. Renewable energy – with its profile of high upfront investment costs followed by extremely low operating costs – is acutely sensitive to the cost of capital, with debt usually comprising up to 80 per cent of the financing mix. The International Energy Agency estimates that a 2 percentage point increase in the cost of capital inflated a solar or wind project’s “levelised cost of electricity” (the average unit electricity cost over the lifetime of an asset) by a staggering 20 per cent. In so far as it is avoidable, this is upward redistribution from billpayers to the financial sector. Combine this with the freedom from the need to pay dividends beyond making equity holders whole and you have a radically cheaper energy proposition to the public. Given that electricity is, in economist Isabella Weber’s words, a systemically significant price, the need to keep it low and stable is a matter of macroeconomic urgency. Indeed, failure to do so over the last two years is the main reason interest rates are currently as prohibitively high as they are.
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Certainty is what investors crave as a precondition for overcoming what Keynes called the “liquidity preference” and sinking their capital into long-term projects. Hence the UK’s often celebrated “contracts for difference” scheme, which addresses the volatility pervasive to spot markets in wholesale electricity – especially where renewables are concerned – and fixes generators’ prices, providing some certainty to the price side of the profitability equation. Until recently, this regime had considerable success mobilising investment in a nascent offshore wind industry; only Denmark has more offshore wind capacity per capita. But as geopolitical, ecological and macro-financial turbulence has become the order of the day, the relative stability once taken more or less for granted on the cost side has been replaced by supply-chain snarls, raw input inflation and, of course, the much tighter financing conditions that prompted Labour to seek salvation from the private sector.
By the time these large capital-intensive projects are operational, the risks attending these costs have been resolved, yet the investment decision itself is made based on price-fixing agreements secured long beforehand. Either investors abandon their plans – as with the calamitous failure of the last such auction round – or demand a risk premium. In other words, private renewable investment is secured by fossilising yesterday’s uncertainties into today’s prices (for 15 years) – uncertainties that are immaterial to the one cast-iron certainty from society’s perspective, namely that such investment must take place one way or another if we are to confront the climate crisis.
Finally, as the architects of the future systems explicitly acknowledge, the components of our energy system must be understood in terms of their contribution to the larger coherent system. And yet the vertical disintegration and horizontal fragmentation characterising our current privatised model increasingly places system-level need in tension with project-level expected profitability. Despite the obvious surplus created by the larger system, which is not in any question, investment is determined by the ability of its isolated components to capture a sufficient share of that surplus under prevailing market and regulatory conditions. In other words, the investment pipeline is gummed up by intra-system distributional squabbles (among and between generators, retailers, the grid, etc) that ought to be subsumed on to a larger balance sheet. Instead they are invariably overcome by enlisting the unwitting consumer via higher bills.
An alternative is possible. As a new report by Common Wealth argues at length, energy decarbonisation can be achieved cheaply, effectively and robustly if politicians have the courage to undertake the scale of public borrowing necessary and turn GB Energy into the leading developer of revenue-generating energy assets, rather than a minor bit-player. It is an illusion to expect the private sector to do the government’s work without extracting a higher price. The best way to de-risk investment is simply for states to invest themselves.
Read the full report on public power generation from the Common Wealth think tank.
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