Labour has launched its Great British Energy policy – do we need it?
The establishment of Great British Energy is among the last remnants of the ‘green prosperity plan’ devised and championed by Ed Miliband, the shadow secretary of state for energy security and net zero, three years ago.
The former Labour leader’s vision was to spend £28bn per year in the first five years of an incoming Labour government on decarbonising the UK economy.
However, as the current leader Sir Keir Starmer recognised, the issue was swiftly weaponised by the Conservatives because all the money – as Mr Miliband himself had made clear – would have been borrowed.
More importantly, the plan did not survive contact with Rachel Reeves, the shadow chancellor, who has made fiscal responsibility her priority.
The £28bn-a-year spending pledge was watered down in February this year to one of £23.7bn over the life of the next parliament.
A sizeable chunk of that will be on Great British Energy, described by Mr Miliband as “a new publicly owned clean power company”, which Labour has said will be initially capitalised at £8.3bn.
And, instead of the money being borrowed, Labour is now saying “it will be funded by asking the big oil and gas companies to pay their fair share through a proper windfall tax”.
What’s a windfall tax and what’s it got to do with green energy?
Before going further, it’s worth explaining what the current windfall tax is.
The existing ‘temporary energy profits levy‘ was launched by Rishi Sunak, as chancellor, in May 2022 and imposed an extra 25% tax on the profits earned by companies from the production of oil and gas in the UK and on the UK Continental Shelf in the North Sea.
Due to expire at the end of 2025, it raised £2.6bn during its first year.
Jeremy Hunt, as chancellor, raised the levy to 35% from the beginning of last year and extended its life to the end of March 2028. That ‘sunset clause’ was extended to 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%.
Labour made clear in February this year that this would rise to 78%. It also plans to remove some of the investment incentives Mr Sunak put in place when it announced the current windfall tax.
That will undoubtedly have consequences.
Offshore Energies UK, the industry body, has said that, in its first year, the existing energy profits levy led to more than 90% of North Sea oil producers cutting spending. It has warned that Labour’s plans could cost 42,000 jobs in the North Sea and some £26bn in economic value.
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So the increase in the windfall levy will have consequences for the overall tax take.
It is therefore important for Labour to make clear what changes in investment and hiring it is factoring in from companies operating in the North Sea as a result of higher taxation.
The big operators are already deserting the region. It was reported this week that Shell and Exxon Mobil are close to selling their jointly-controlled UK North Sea gas fields – marking the US giant’s final exit from the North Sea after 60 years.
And Harbour Energy, the biggest independent operator in the North Sea, has slashed investment in the region, along with hundreds of jobs, since the energy profits levy was introduced. It too is seeking to diversify away from the North Sea – having seen the energy profits levy wipe out its entire annual profits during the first year of the impost.
What will Great British Energy even own?
The second big question is what assets will be owned by Great British Energy.
Labour said overnight: “Great British Energy’s early investments will include wind and solar projects in communities up and down the country as well as making Scotland a world-leader in cutting edge technologies such as floating offshore wind, hydrogen, and CCS (carbon capture and storage).”
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What is unclear, though, is whether this will involve buying existing assets from private sector operators, building new assets from scratch or co-investing in new projects.
It is worth asking the question because only the latter of these two options will actually add to the UK’s energy generation and storage capacity.
And, if it is to be the second or third options, the question is what return on capital employed Great British Energy will be seeking to achieve.
A risk that money could be wasted
All commercial operators seek to achieve a return on capital which exceeds their cost of capital.
Now, as a sovereign debt issuer with a good credit rating, the UK government enjoys a lower cost of capital than most corporates. But there will still be a nagging concern – given the traditionally poor stewardship of state-owned enterprises in the UK – that, without the discipline imposed by having shareholders, some of the money will be wasted.
Investments of this kind are risky and volatile.
An example of this came last week when SSE, one of the UK’s biggest and best-run renewable energy generating companies, admitted that Dogger Bank A, its giant wind project off the Yorkshire coast, will not be fully operational until next year rather than this year.
Is it needed when billions are being spent on green investments?
A third question is why, precisely, Great British Energy is needed at all.
The UK is already decarbonising more rapidly than any other major economy and is also investing heavily.
The Department for Energy and Net Zero recently estimated that there will be some £100bn worth of private investment put towards the UK’s energy transition by 2030.
National Grid announced only last week that it plans to invest £31bn in the UK on the transition between now and the end of the decade.
SSE is investing £18bn in renewable capacity in the five years to 2026-27. Scottish Power, another of the big renewable energy companies, recently announced plans to invest £12bn between now and 2028.
So it is not entirely obvious why a comparatively small state-owned company is even necessary.
Energy security and cost
Labour’s justification is partly based on energy security – Sir Keir has in the past queried why a Swedish state-owned power company, Vattenfall, should be the biggest investor in onshore wind in Wales – and partly on prices.
It said overnight: “Great British Energy is part of our mission to make Britain a clean energy superpower by 2030 – helping families save £300 per year off their energy bills.”
Again, though, this raises further questions.
Mark McAllister, the chairman of energy regulator Ofgem, told the Financial Times this week that energy bills were unlikely to fall substantially over the decade partly due to the costs of building out the electricity network to support the transition to renewables.
He told the FT: said: “As we build in more and more renewables, we’re also building in the price, amortised over many years, of the networks as well.
“If we look at the forecasts for wholesale prices and then build on top of that the costs of the network going forward, I think we see something in our view that is relatively flat in the medium term.”
And that begs the biggest question of all, not just for Labour, but for all the parties: why is it being left to a regulator, rather than the politicians, to spell out the costs to households of the energy transition?
Six months ago the International Monetary Fund (IMF) warned that the world economy was heading for a serious slowdown, in the face of Donald Trump’s tariffs.
It slashed its forecasts for economic growth both in the US and predicted that global economic growth would slow to 2.8% this year.
Today the Fund has resurfaced with a markedly different message. It upgraded growth in both the US and elsewhere. Global economic growth this year will actually be 3.2%, it added. So, has the Fund conceded victory to Donald Trump? Is it no longer fretting about the economic impact of tariffs?
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Either way, the World Economic Outlook (WEO), the IMF’s six-monthly analysis of economic trends, is well worth a look. This document is perhaps the ultimate synthesis of what economists are feeling about the state of the world, so there’s plenty of insights in there, both about the US, about far-reaching trends like artificial intelligence, about smaller economies like the UK and plenty else besides. Here, then, are four things you need to know from today’s WEO.
The tariff impact is much smaller than expected… so far
The key bit there is the final two words. The Fund upgraded US and global growth, saying: “The global economy has shown resilience to the trade policy shocks”, but added: “The unexpected resilience in activity and muted inflation response reflect – in addition to the fact that the tariff shock has turned out to be smaller than originally announced – a range of factors that provide temporary relief, rather than underlying strength in economic fundamentals.”
In short, the Fund still thinks those things it was worried about six months ago – higher inflation, lower trade flows and weaker income growth – will still kick in. It just now thinks it might take longer than expected.
The UK faces the highest inflation in the industrialised world
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August: Tax rises playing ’50:50′ role in rising inflation
One of the standard exercises each time one of these reports come out is for the Treasury to pick out a flattering statistic they can then go back home and talk about for the following months. This time around the thing they will most likely focus on is that Britain is forecast to have one of the strongest economic growth rates in the G7 (second only to the US) this year, and the third strongest next year.
But there are a couple of less flattering prisms through which one can look at the UK economy. First, if you look not at gross domestic product but (as you really ought to) at GDP per head (which adjusts for the growing population), in fact UK growth next year is poised to be the weakest in the G7 (at just 0.5 per cent).
Second, and perhaps more worryingly, UK inflation remains stubbornly high in comparison to most other economies, the highest in the G7 both this year and next. Why is Britain such an outlier? This is a question both Chancellor Rachel Reeves and Bank of England governor Andrew Bailey will have to explain while in Washington this week for the Fund’s annual meeting.
What happens if the Artificial Intelligence bubble bursts?
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Few, even inside the world of AI, doubt that the extraordinary ramp up in tech share prices in recent months has some of the traits of a financial bubble. But what happens if that bubble goes pop? The Fund has the following, somewhat scary, passage:
“Excessively optimistic growth expectations about AI could be revised in light of incoming data from early adopters and could trigger a market correction. Elevated valuations in tech and AI-linked sectors have been fuelled by expectations of transformative productivity gains. If these gains fail to materialize, the resulting earnings disappointment could lead to a reassessment of the sustainability of AI-driven valuations and a drop in tech stock prices, with systemic implications.
“A potential bust of the AI boom could rival the dot-com crash of 2000 in severity, especially considering the dominance of a few tech firms in market indices and involvement of less-regulated private credit loans funding much of the industry’s expansion. Such a correction could erode household wealth and dampen consumption.”
Pay attention to what’s happening in less developed countries
For many years, one of the main focuses at each IMF meeting was about the state of finances in many of the world’s poorest nations.
Rich countries lined up in Washington with generous policies to provide donations and trim developing world debt. But since the financial crisis, rich world attention has turned inwards – for understandable reasons. One of the upshots of this is that the amount of aid going to poor countries has fallen, year by year. At the same time, the amount these countries are having to pay in their annual debt interest has been creeping up (as have global interest rates). The upshot is something rather disturbing. For the first time in a generation, poor countries’ debt interest payments are now higher than their aid receipts.
I’m not sure what this spells. But what we do know is that when poor countries in the Middle East and Sub-Saharan Africa face financial problems, they often face instability. And when they face instability, that often has knock on consequences for everyone else. All of which is to say, this is something to watch, with concern.
The IMF’s report is strictly speaking the starting gun for a week of meetings in Washington. So there’ll be more to come in the next few days, as finance ministers from around the world meet to discuss the state of the global economy.
The jobs market continued to slow, with 9,000 fewer vacancies in the three months to September, official figures show.
It is the 39th consecutive period where vacancy numbers have dropped.
Having fewer job openings can mean it is harder to find work.
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There was also a surprise increase in the unemployment rate, up to 4.8% from 4.7% a month earlier, primarily driven by younger people, as a record number of people over 65 are in work, the Office for National Statistics (ONS) said.
Economists polled by Reuters anticipated no change in the jobless rate, but instead the figure is now the highest since the three months to May 2021, when the country was in lockdown due to the COVID-19 pandemic.
The ONS, however, has advised caution when interpreting changes in the monthly unemployment rate and job vacancy numbers due to concerns over the reliability of the figures.
The labour market has struggled in recent months as the cost of employing staff became more expensive due to higher employers’ national insurance contributions and an increased minimum wage.
Wage rises slowing
Further signs of a slowing labour market were seen in the fall of annual private sector wage growth to the lowest rate in nearly four years – 4.4%.
Public sector pay growth increased more quickly, at 6%, as some public sector pay rises were awarded earlier than they were last year.
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Inflation up: the bad and ‘good’ news
Average weekly earnings rose more than expected by economists at 5% and also more than previously thought after a revision to last month’s figures (4.8%).
Also published by the ONS was data on industrial action, which showed August had the fewest working days lost to strike action in a single month for nearly six years.
What does it mean for interest rates?
While a tough job market is difficult for people looking for work, the slowing wage rises can mean interest rates are brought down.
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The rate-setters at the Bank of England had been concerned about the effect higher wages could have on inflation, which it is mandated to bring to 2% though latest figures showed it was at 3.8%.
Following today’s figures, traders expect a cut in the interest rate to 4.75% in December.
No change is anticipated at the next interest rate setter meeting in November.
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