By Gareth Jones
The Labour Party has today officially launched its plans to nationalise the UK’s energy networks, in a major speech delivered by Jeremy Corbyn and Shadow Business Secretary, Rebecca Long-Bailey. This accompanies the publication of an official policy document, entitled Bringing Energy Home – a detailed proposal and rationale for bringing the UK’s gas and electricity transmission and distribution networks back into public ownership.
Since the Party’s transformation under the leadership of Jeremy Corbyn, Labour’s commitment to nationalisation has hardly been a secret. It forms the basis of Labour’s economic policy and the Party has previously set out its intentions to nationalise the energy sector in its 2017 general election manifesto and through various statements from Shadow Chancellor, John McDonnell. However, today’s policy launch is arguably the most radical manifestation of this policy platform given the level of detail provided (on both what they want to achieve and how they intend to achieve it). If realised, the consequences will be felt far beyond the companies directly affected and go beyond the energy sector – potentially creating a fundamental change in how UK infrastructure is run, funded and perceived by investors.
What are Labour proposing?
Labour have pledged, once in power, to ‘immediately’ nationalise the gas and electricity transmission and distribution networks. This includes National Grid, the 19 regional distribution networks and the network businesses of large energy companies. These national and regional networks will then be overseen by a newly established ‘National Energy Agency’ – a government quango that will be part-operator and part-regulator and will also be responsible for establishing ‘equitable decentralisation’ of energy through the creation of publicly owned ‘municipal energy agencies’ and ‘local energy communities’.
Perhaps the most striking (and controversial) aspect of this process is how existing shareholders of the companies would be compensated through nationalisation. The implication from Labour’s proposals is that they would not necessarily be compensating shareholders at full market value as they would be paid in bonds at a price decided by Parliament and this would take into account various factors, including asset stripping, subsidies, pension fund deficits and assets in need of repair and replacement.
Why are Labour doing this?
Labour consider that these networks represent ‘infrastructure of national strategic importance’ and believe that various challenges that the energy sector faces – from delivering decarbonisation, tackling climate change, addressing fuel poverty and security of supply – cannot be left to the market. Labour’s rationale contains extensive criticisms of the role of the private sector and the effect that private ownership has had on networks over the past 30 years. The key criticism is that privatisation has led to excess profiteering at the expense of much needed investment in infrastructure, which has been further compounded by natural monopolies and weak regulation. Labour believe that public ownership would allow the government to reinvest the billions of pounds currently paid out in share dividends into the energy system or pass on savings to consumers.
This notion has, of course, been vigorously contested by those in the energy sector (and among investors and opponents of nationalisation). Many industry and market commentators have already commented that nationalisation would be extremely disruptive and many of these stated objectives (from decarbonisation, investment and cheaper bills) would be better achieved through other means, such as regulatory reform.
These arguments, however, are very unlikely to be acknowledged by the Labour leadership. For those wishing to understand Labour’s motivations, it’s important to recognise Labour’s fundamental ideological belief that public ownership and management of economic institutions is a vital way of addressing inequality and embedding ‘Democratic Socialism’ in the UK (a thread that runs through Labour’s policy agenda). What is particularly notable from these proposals is Corbyn’s and Long-Bailey’s determination to reverse the economic reforms of Margaret Thatcher (who privatised the UK’s gas and electricity distribution networks in the 1980s). Indeed, Thatcher’s name is mentioned several times throughout the policy paper and Corbyn and his allies see that reforms to the energy sector (along with water, rail and other utilities) as a key way of erasing her legacy.
Could this actually happen?
There may have been a time when such radical measures would have been casually dismissed by the energy sector and the markets. The ferocity of the response to these proposals from various energy companies and bodies, however, reflects a growing recognition that the prospect of a future Labour Government is getting closer – and the current level political instability and the dire situation of the Conservative Party brings this into sharper focus.
Perhaps a more pertinent question is whether a future Labour Government would be able overcome the numerous hurdles in implementing this policy. These would include parliamentary challenges (eg ensuring Labour’s own backbenchers and potentially coalition partners would pass the necessary legislation in the House of Commons), financial challenges (ensuring that the price for UK Bonds is stable and markets have sufficient confidence in the UK) and legal (this process would undoubtedly invite legal challenge). While these are all serious challenges, they are probably not insurmountable ones, particularly if Corbyn manages to achieve a parliamentary majority and prioritises this as an area of reform.
What should business do?
For companies and investors that are likely to be affected by this, there is unlikely to be an easy and obvious way of managing the clear risks involved. For instance, there will be limits to what traditional political engagement with Labour spokespeople may achieve (it is particularly noteworthy that Labour’s policy document has not been written as a consultation document). This potentially requires a re-think of public affairs and political engagement.
For the wider sector and investors, it will be important to incorporate political risks into business plans and consider de-risking portfolios. Moreover, many companies should consider a proactive programme of communications and alliance-building to position themselves most effectively ahead of any increasingly likely eventuality.