[.green]1[.green] Great British Energy

It is critically important that GB Energy is a public developer, not a mere subsidiary of a public financing institution like the National Wealth Fund. A helpful distinction between these is provided by Chirag Lala and Yakov Feygin of the Center for Public Enterprise:

[.quote][.quote-text]… while public lenders only take on debt financing for another entity, public developers use that financing to create capital assets. This means public developers take additional risks compared to public entities solely engaged in providing finance. But, as a result, public developers have far more latitude for capturing the value of the assets they develop, pursuing projects for the public good and for cultivating the market and sectoral dynamics conducive to their strategic goals in the process.[.quote-text][.quotee]Chirag Lala and Yakov Feygin, Center for Public Enterprise[.quotee][.quote]

While written for a US context, the above broadly matches the role a public developer could play in the UK. The ability to actively plan, develop, construct and operate projects, as well as staffing expertise and activity within the real economy functioning of the energy system, is critical. This position is consistent with the text of the Great British Energy Bill.  

The choice of technologies and projects developed by GB Energy should be driven by an assessment of strategic needs of the energy system. The 2030 Clean Power Plan and longer term Strategic Spatial Energy Plan (both commissioned by DESNZ from the new National Energy System Operator [NESO]) form the most logical basis for this assessment. For example, Common Wealth has proposed that GB Energy could develop renewable generation projects within the portion of the supply curve that is excluded from Contracts for Difference auctions by the setting of Administrative Strike Prices (needed to retain competitive tension in the auction) but which may nonetheless be deemed necessary for decarbonisation as judged by NESO advice. These projects may often deliver low returns when viewed in isolation but would have a high marginal value as part of the overall decarbonisation mission.

[.fig]Figure 2: GB Energy Can Operate Outside of the CfD Regime[.fig]

[.notes]Source: Department for Energy Security & Net Zero[.notes]

In all cases, GB Energy can act as a demand pull on innovation, investment and good labour practices in domestic manufacturing supply chains across renewable technologies.

In addition, GB Energy must fulfil its announced partnership role with Crown Estate to accelerate offshore wind deployment and (a yet-to-be-specified) role in delivery of community energy projects through the Local Power Plan. These functions will also require the institution to act as a developer.  

[.green]2[.green] The National Wealth Fund

The NWF should invest directly in domestic energy related supply chains, stimulating and directing supply in a distinct but complementary fashion to the demand-pull functions of GB Energy described above. This can help overcome the “chicken and egg” coordination failure — by which developers erode margins and fail to facilitate investments by supply chain firms. Targeted NWF investments could, for example, actively influence the shape of the supply curve depicted above.  

The NWF is primarily a rebranding of existing institutions (the UK Infrastructure Bank and British Business Bank) coupled with an increase in funding of £7.3 billion over five years, and an implied increase in political ambition. The “wealth fund” terminology does not imply an institution akin to traditional sovereign wealth funds (e.g. of large oil exporters) which seek long-term returns on very large amounts of capital earned from exports surpluses; rather it is a state equity financing vehicle and over time a state asset holding company intended to support policy objectives using a relatively small pool of capital.  

As such, the policy objectives need to be tightly defined and well informed. The Labour manifesto included a proposed capital split across ports, gigafactories, steel, carbon capture and green hydrogen based on the sectors and capital needs assessed by the NWF Task Force. This is a helpful starting point, but the Task Force’s analysis lacks granular detail and has an overwhelming focus on enabling private sector investment in tandem with “derisking” policy mechanisms. Notably, the Task Force was comprised of figures from finance with minimal representation from the real economy industries in question. More detailed work should look to join up with wider government policy on decarbonisation and industrial strategy and a more expansive view of public investment in coordinating economic rejuvenation and the energy transition. Regular advice and scrutiny from the promised in statute revival of the Industrial Strategy Council, analogous to carbon budget and oversight advice from the Climate Change Committee, could be one avenue for this.  

[.green]3[.green] Returns and Capitalisation

These institutions can (and likely need to) make some level of positive returns (i.e. profits) on their overall portfolio but their decisions should not be guided by profit seeking in the same way as the private sector. Rather than targeting a given return on investment for each project ex ante, investment decisions should be made to meet the agreed strategic objectives and functions of each institution, with the question of how to capture returns for continual reinvestment made ex post.

Both institutions need to be adequately capitalised (and recapitalised on an ongoing basis as needed) to perform their intended functions and meet their objectives. HMT decisions on capitalisation and oversight and evaluation of individual investments should not be made narrowly using existing Green Book appraisal methods, as these cannot adequately consider strategic objectives or the transformational potential of the net zero transition. Risk-Opportunity Analysis is one possible alternative. 

Both institutions should function as public corporations, and recruit staff outside of civil service pay bands and recruitment practices — a precedent already set by the UK Infrastructure Bank. As part of wider reforms to fiscal frameworks, assets and liabilities held by these corporations could be excluded from public sector debt calculations.

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Image credit: Lars Plougmann licensed under CC BY-SA 2.0.