[.quote][.quote-text]“The opportunity of clean British power… cutting your energy bills for good.”[.quote-text][.quotee]Keir Starmer[.quotee][.quote]

When the new Prime Minister Keir Starmer spoke these words on the steps of Downing Street, he made rapidly decarbonising the power system a core focus of his new Government. Great British Energy, a central plank of Labour’s election winning manifesto, should now be a driver in making this opportunity a reality. GB Energy is incredibly popular, with polling showing that 75 per cent of voters support it. This briefing sets out Common Wealth’s initial assessment of how the new Labour Government can deliver this policy, to the benefit of climate, bills and the economy.

What Can GB Energy Achieve, and Why Is Full Public Ownership Critical?

If well delivered, GB Energy can reduce costs, bring greater coherence, and enhanced certainty both to the investment pipeline and to ongoing operation of the power system (we call these the “three Cs”). To do this it needs ambition, capital and a genuine commitment to public ownership. It must be positioned as a tool in achieving the clean energy mission through bringing greater coherence to the power system and coordinating investment.  

Some descriptions of GB Energy by Labour figures during the campaign suggested a weaker institution focused on derisking private led investment with minimal public ownership or coordination. This would pose a major policy delivery risk, as set out further below, and political risk if Labour’s central election promise on climate and energy is perceived as underwhelming or failing to deliver on expectations.  

Above all, GB Energy must build, coordinate and own a portfolio of renewable generation projects. Absent genuine public ownership and investment coordination, GB Energy’s functions would resolve to some mix of debt financing and minority equity stakes of private sector led investments. State led debt financing is a role that best fits the existing UK Infrastructure Bank (UKIB), which already has a remit to support net zero investments and the institutional expertise to deliver it. The new Government should consider reforming UKIB, and increasing its capitalisation rather than replicating its functions elsewhere. Taking minority equity stakes for renewable projects risks leaving GB Energy with little to no control of projects, a thin and non-strategic portfolio, and potentially replicating functions better undertaken by the new National Wealth Fund (NWF). Wider Government policy on renewables (such as the Contracts for Difference scheme) heavily emphasises lowering projects’ cost of capital through cheaper debt financing and higher leveraging (i.e. debt over equity). It is unclear how GBE taking minority equity stakes would fit into this, or how and why equity stakes would lower cost of capital (absent securing poor value for money for taxpayers through deliberately undervaluing projects), or actually promote additional investment. The Government should soon decide and publicly clarify the role and relationships between GB Energy, UKIB and the NWF with a view to delivering greater public investment and greater public value. These institutions should be set up to coordinate and mutually support each other without replicating roles or responsibilities.  

More generally, private sector-led investment in electricity is uncoordinated, replete with barriers and delays and vulnerable to policy errors (such as the setting of Administrative Strike Prices in CfD auctions), supply chain inflation and market interest rates. The lack of coordination is demonstrated by a failure to strategically plan the buildout of new renewable generation with the necessary network infrastructure, leading to decade long grid connection delays, and high and rising “constraint payments” to wind farms in periods when the network cannot handle their output. Furthermore, the recent Government Review of Electricity Market Arrangements (REMA) has been slow and full of intense inter-industry debates focused on seemingly unresolvable tradeoffs between investor certainty and market efficiency. The thin derisking version of GB Energy would do little to resolve these tensions and could even worsen them, accelerating the existing status quo and increasing policy leverage of particular parts of the industry. In contrast, an ambitious and well capitalised GB Energy can directly invest in, own and operate projects chosen for their strategic value to the system and in the service of wider economic and industrial strategy objectives. As a state-backed entity, GB Energy would be uniquely well placed to manage and coordinate key players across the supply chain, leasing, planning system and grid connections. Its cost of capital would be structurally lower, and its appetite for investment less vulnerable to changes in interest rates and cost inflation shocks.  

What Should GB Energy Focus On?

GB Energy should take the lead in investing in new offshore wind (OFW), both fixed and floating. This would be preferable to the current approach of relying exclusively on profit driven private investment decisions “derisked”  — via ex ante price-fixing — through the Contracts for Difference (CfD) scheme. Labour’s manifesto promised to quadruple OFW capacity by 2030, and the technology will be key to the clean energy mission of decarbonising the power system by 2030. This clearly requires major acceleration of the project pipeline beyond what has been secured by existing policy. The failure to secure any bids for OFW in the Auction Round (AR) 5 CfD auction and the well-known problems with AR4 projects, show the risks associated with the status quo, especially in a period of supply chain inflation and high interest rates. The Government must ensure it retains incentives for innovation and sustainable cost reduction for emerging technologies like floating offshore wind, balancing this against the need for sustainable supply chains and investment pipelines in more established technologies like fixed offshore. The scheme evidently has failed to do this in recent years, in part because of an information asymmetry on project costs between Government and developers leading to errors in parameter setting by DESNZ and chronic issues with underfunded auctions. The underfunding of auctions is arguably a feature not a bug, intended to ensure a degree of competitive tension between developers. If relying exclusively on the CfD, this deliberate lack of funding comes at the cost of delivering the scale of investment needed. As a publicly-owned developer, GB Energy would be well placed to ease this tension and accelerate investment in OFW without the need to compete in deliberately constrained CfD auctions. Instead, it can manage price risk ex post through signing bespoke Power Purchase Agreements (PPAs) with suppliers, including with a public supply option discussed below. It simply cannot play this role, as a conscious tool of system reform, if it takes only minority stakes in private led projects. Whilst GB Energy can bypass the CfD process, the CfD system itself should remain intact for the use of private sector developers.

As well as offshore wind, GB Energy should identify other technologies including onshore wind, solar PV and storage technologies that can bring the most benefit to the system and invest at pace in them as needed. These investments should be based on the results of the upcoming Strategic Spatial Energy Plan, which the Government and new National Energy System Operator should accelerate. As well as new projects, GB Energy should consider where it could take ownership of existing assets that are already operational; this could include projects nearing the end of their Renewables Obligation (RO) contracts. The Government could make partial or full public ownership of these assets a condition of any further public subsidy as RO contracts expire. Getting hold of operational assets would enable GBE to get experience in operating projects and prevent capacity dropping off the system.

GB Energy must also actively engage with trade unions and local communities to ensure a genuine, democratic voice for the people who will actually deliver these valuable new projects and those whose lives will be most affected by them. GB Energy should also prioritise its procurement from UK based manufacturers to ensure the benefits of the transition are felt in the UK and help the Government’s wider industrial strategy objectives.  

Delivering local community-owned projects through the Local Power Plan must also be a key focus. Common Wealth has previously published work on how this can underpin a new generation of community energy projects and will be continuing this work later this year.  

Over the medium to longer term, the Government should strongly consider setting up a public option retail arm of GB Energy, with a view to it being operational before the next general election. This would help bring greater coherence to the fragmented energy system and ensure consumers (who are also voters) directly see the benefits of clean power in their bills, not just from future capacity as it comes online, but of existing capacity too. Common Wealth plans to publish a more detailed proposal for a retail arm in the coming weeks.  

What Should GB Energy Not Do?

As above, GB Energy must not simply “derisk” private sector led projects. There is also no need for GB Energy renewable projects to participate in the CfD scheme. Having GBE projects in CfD auctions would complicate and constrain the auctions for no obvious benefit. That said, CfD auctions for private sector projects should continue as planned.

GB Energy must also not focus exclusively on first of a kind or emerging technologies. This would lead to an undiversified portfolio which is highly exposed to technology failure risk. The extremely high levels of rapid and better coordinated new deployment needed from established technologies belies claims GBE would crowd out the private sector if developing fixed offshore wind and solar. In fact, the certainty offered by a pipeline of GBE projects would strengthen the supply chain — by assuring those companies that their investments in capacity will be made good by a robust order flow^[1] — to the benefit of the entire industry, including private developers. In general, Common Wealth is agnostic on the capacity mix needed across the system. As noted above, deployment decisions for GB Energy should be driven by the National Energy System Operator’s Strategic Spatial Energy Plan.  

GB Energy must also not take ownership of legacy fossil fuel infrastructure such as gas transmission or unabated gas power plants. This could be politically ruinous for the Government and would lead to major stranded asset risk for GB Energy. Where needed, public ownership of legacy fossil fuel assets should be done outside of GB Energy branding and finances, in line with wider policy on a just and managed transition.

How to Deal with a Limited Capitalisation?

Per the Labour manifesto, the proposed capitalisation for GB Energy is £8.3 billion over the Parliament, (of which £3.3 billion will be allocated to community energy), averaging at £1.66 billion a year, funded by a “time limited” windfall tax on oil and gas companies. Whilst this initial level of funding is valuable and welcome, it is small in the context of the overall investment needed to decarbonise the power system. Analysis implies upwards of £30 billion a year of capital expenditure in generation is needed by the end of the decade, meaning GBE would be contributing less than six per cent of total investment. Given this limited capital, the Government must be relentless in ensuring it is spent on projects that deliver true meaningful public ownership and support genuinely additional investment, not simply increasing private sector profit margins by derisking projects that would be delivered anyway. A focus could be on targeting the part of the (modelled) supply curve deliberately excluded from CfD auctions through the setting of the Administrative Strike Price (ASP). By definition, these are the more expensive projects, and thus the least profitable, but nonetheless must be delivered, making them perfectly suited for GB Energy whose decisions need not be constrained by the profit motive. When setting the ASP, DESNZ assumes a linear increase in construction costs along the supply curve. DESNZ officials should work with the industry to understand how valid this assumption is, and then consider whether any improvements are needed in the modelling techniques used in calculating ASPs. Having Great British Energy take responsibility for the more expensive end of the supply curve would also help avoid the need to increase ASPs further to accommodate these projects.

As and when the politics of public finances allow, Common Wealth would advocate a significant uplift in capitalisation for GBE, funded through taxation and borrowing to invest as needed. HM Treasury should view borrowing for public investments through GBE as investments, taking into account the long run returns as well as the costs. Failure to adequately capitalise Great British Energy could lead to the policy failing to deliver on the promises Labour made in its election campaign. This could further alienate an electorate already sceptical of the ability of politicians to deliver what they promise.  

What Should the Government Do Now?

As soon as possible the new Government should legislate for GB Energy as a fully publicly-owned energy company that owns and operates assets. Its mandate should be explicitly defined by Parliament as being to accelerate the sprint to clean power by 2030 and the economy wide net zero 2050 target, with the goal of becoming a genuine, scaled national champion for the UK. Alongside this, HM Treasury should also carefully consider and then publicly clarify the balance sheet accounting position of GB Energy owned assets, and their impact on fiscal rules.  A prudent but ambitious approach is needed here, allowing room to borrow to invest whilst respecting the wider fiscal position.  

DESNZ should work with NESO and others to deliver the Strategic Spatial Energy Plan, and GB Energy should in turn use the results of the plan to guide the spatial distribution of its deployment. In addition, DESNZ should consider a reset of REMA to take into account the new Government’s 2030 target and the role of GB Energy. There is also a clear need for the Government to clarify the respective roles and relationships between GB Energy, UKIB and the NWF.

Finally, the Government should announce and consult on plans for a public option retail arm of GBE, with a view for it to be operational by the end of the Parliament. We plan to say more on this final suggestion soon.

Common Wealth looks forward to further critical engagement with the new Government and others on GB Energy and wider energy policies. The election result means the opportunity for clean, publicly-owned, British power is finally here. Now is the time to make it real.