This week the main political parties published their manifestos ahead of the General Election next month. In this post I will explore what they mean for the energy markets.
The current political landscape has resulted in a very interesting set of manifestos. The Conservatives are widely expected to return to government with an increased majority, not least because for the first time in decades there is a clear difference between them and a Labour Party that has moved strongly to the Left since the last General Election. British politics has historically evolved around the centre ground so a rejection of Labour’s policies is expected, with the main question being the size of the new Conservative majority.
The Conservative manifesto is therefore less detailed than usually would be the case, as there is a view that they have sought to keep their options open given the uncertainty brought by the Brexit negotiations. Part of the reason the election was called is thought to be the constraints imposed by the previous manifesto that became out of date or inappropriate following the vote to leave the EU.
Labour on the other hand has produced a far more detailed manifesto, but important elements have not been costed, leading to uncertainty about their economic impact. It is a strongly left-wing manifesto, that follows a union-inspired agenda, with re-nationalisation of various industries and a significant increase in state spending financed through additional government borrowing.
The Liberal Democrats openly position themselves as the main party of opposition in their manifesto, rather than proposing a programme for government, resulting in a manifesto that is long on vision and short on detail. A LibDem renaissance following their poor showing at the last General Election seems unlikely as the party is presenting itself as the only opponent of Brexit (or as they like to put it “hard Brexit”) and as many of their traditional voters elected to leave the EU, their support base has shrunk. The hoped-for translation of Remain votes to LibDem votes is not currently reflected in the opinion polls, as many “Remainers” appear to consider the referendum a done-deal and now prefer to see the decision implemented without further delay.
These overall perspectives are reflected in the way in which each party deals with energy in its manifesto.
Conservatives propose yet more investigations into the energy market, and of course, a price cap
As has been widely trailed, the Conservatives have proposed a cap on retail energy prices, saying they “will pay immediate attention to the retail energy market”. They correctly identify the problem of those on lower incomes, with lower qualifications, who rent their home and the elderly as paying higher energy prices due to not switching either tariffs or suppliers.
Their solution is firstly to install smart meters in all homes by 2020, and to extend the existing cap on prepayment tariffs to standard variable tariffs. In addition, they will support initiatives to make switching easier and commit to upgrading all fuel poor homes to EPC Band C by 2030, as well as exploring the energy efficiency requirements for new homes.
For businesses, they plan to consult on how to extend our price cap to micro-businesses, as part of broader reforms to the business energy market. An independent commission will be appointed to carry out a review into the cost of energy, which will be asked to make recommendations as to how UK energy costs can be kept as low as possible, while ensuring security of supply and allowing the 2050 carbon reduction targets to be met.
Their overall ambition is for the UK to have the lowest energy costs in Europe, for both households and businesses.
In terms of generation, the Conservatives continue their opposition to more onshore wind, but intend to support the development of offshore wind projects, particularly in Shetland. There is a signal that following Brexit, the Conservatives would throw off the state-aid restrictions by supporting technologies of choice.
“…after we have left the European Union, we will form our energy policy based not on the way energy is generated but on the ends we desire – reliable and affordable energy, seizing the industrial opportunity that new technology presents and meeting our global commitments on climate change.”
The Conservatives have committed to supporting shale gas, subject to the oversight of a new Shale Environmental Regulator. A Shale Wealth Fund would ensure a greater percentage of the tax revenues from shale gas will directly benefit the communities that host the extraction sites. In the North Sea, the industry will continue to be supported, with growing focus on developing a world-leading decommissioning industry.
There is a commitment to spend more on research and development, supporting technologies including EV batteries as part of an overall ambition for the UK backed by a £600 million investment commitment, to lead the world in electric vehicle technology and use, with “almost” every car and van to be zero-emission by 2050.
There’s little in this that’s new or surprising, the news of the price cap having been well publicised. Yet another energy review is unlikely to be welcomed – the problems with the industry do not need to be uncovered by another review, they are already well understood. Further reviews are largely code for kicking the problem down the road, presumably until after Brexit.
Labour seek state control of the energy sector
The Labour Party also wants to re-regulate the energy sector, but to a much greater degree, with an ambition to bring much of the system back into state ownership.
“Privatisation has failed to deliver an energy system that delivers for people, businesses or our environment.”
Returning the sector to public ownership would be phased and locally based, through acquisition of supply networks and creation of new, publicly owned suppliers.
Like the Conservatives, Labour plans to introduce a retail price cap with the aim of ensuring that the average dual-fuel household energy bill remains below £1,000 per year, pending a “transition to a fairer system for bill payers”.
There is also a commitment to providing interest-free loans for homeowners to make their properties more energy efficient, along with legislation requiring landlords to do the same – Labour intends to insulate four million homes as an infrastructure priority.
There is a range of further commitments, including a promise to ensure that 60% of the UK’s energy comes from zero-carbon or renewable sources by 2030, with carbon capture and storage expected to be part of the future energy mix, along with other new renewable technologies including tidal lagoons.
Fracking will be banned, although North Sea assets and jobs will be protected. Somewhat surprisingly, there is a commitment to nuclear energy, with the promise of support further nuclear projects.
In relation to Brexit, Labour promises to prioritise maintaining access to the internal energy market and retain access to Euratom.
These proposals are certainly radical, but their practicality is questionable. Localism in energy is a fashionable topic, particularly in academic circles, as it is assumed to be a good solution to the growth in distributed energy. However, with the commitment to continue to support nuclear, and presumably other large-scale generation projects such as offshore wind, the energy system needs to accommodate both.
There are also good arguments for bringing the transmission system into public ownership – indeed, this forms part of the new system design proposed by the iGov group at the University of Exeter. Creation of an independent system operator would have many benefits, but an ISO does not need to be publicly owned to be effective, and there is no detail in the manifesto as to how exactly the renationalisation would occur, as the grid infrastructure would need to be purchased from National Grid, and staff with appropriate expertise brought over to run it.
The creation of publicly owned suppliers does not have any practical purpose beyond furthering Labour’s ambitions of increased public ownership of the sector. Greater competition would be helpful, but competition is not consistent with the overall direction of travel being proposed: Labour wants the sector under public control in which case there would be no competition and no consumer choice. The entry of publicly owned suppliers is likely to deter other new entrants and is likely to inhibit innovation at a time where new suppliers with new ideas and new business models are essential to driving the energy transition.
The price cap commitment is similarly unhelpful, with an arbitrary annual cost limit being set which may or may not reflect the actual cost of delivering energy to consumers, particularly if Labour continues with the existing process of recovering the costs of energy policy through bills.
The Liberal Democrats focus on the environment
Unlike the two main parties, the Liberal Democrats are not proposing price caps, and are focusing on reducing bills through improved efficiency measures and encouraging small-scale, community and local-authority renewable schemes, including city-scale demonstration projects in electric vehicles and clean energy.
They plan five “green laws”:
a Green Transport Act,
a Zero-Carbon Britain Act,
a Nature Act,
a Green Buildings Act, and
a Zero-Waste Act.
“We will make saving energy a top infrastructure priority, slashing energy bills and carbon emissions, creating thousands of jobs and helping end the fuel poverty crisis once and for all.”
They plan to achieve this by passing a new Green Buildings Act to set new energy-efficiency targets, including a long-term ambition for every home in England to reach at least an energy rating of Band C by 2035, and to ensure at least four million homes are made highly energy efficient (Band C) by 2022, with priority given to fuel-poor households. They would restore the zero-carbon standard for new homes, increasing the standard steadily and extending it to non-domestic buildings by 2022.
There is a commitment to back new entrants to the energy market, aiming for the market share of the Big 6 to drop to 70% of the domestic market or less by 2022.
On the generation side, they would pass a Zero-Carbon Britain Act to set new legally binding targets to reduce net greenhouse gas emissions by 80% by 2040 and to zero by 2050. A British Housing and Infrastructure Development Bank would be established to mobilise investment into the low-carbon and sustainable infrastructure.
Renewable energy would be expanded, with a target of generating 60% of electricity from renewables by 2030, restoring government support for solar PV and onshore wind in appropriate locations and building more electricity interconnectors. New technologies such as energy storage, smart grid technology, hydrogen technologies, offshore wind, and tidal power (including the Swansea Bay tidal lagoon project) would all be supported, in addition to “an ambitious carbon capture and storage programme”.
Nuclear power would continue to be part of the energy mix, but there would be no subsidies for new projects. Like Labour, the Liberal Democrats are committed to maintaining membership of Euratom.
Finally, and unsurprisingly, fracking would be “opposed” (this choice of language reflects the positioning the LibDems as the main party of opposition, rather than a potential party of government).
If the polls are to be believed, it is the Conservative manifesto to which most attention should be paid. We can expect further investigations into the market and the cost of delivering energy, with caps on retail prices being an early priority. Other commitments are broadly in line with expectations, and are high level giving significant breadth in terms of delivery.
The sector has faced review after review so there is definitely a sense of review fatigue, however none of the reviews have put forward sufficiently radical proposals to address the current dis-function of the market. Perhaps if the commission’s terms of reference are appropriately defined, this review may provide an opportunity for a new and more constructive direction, however with the wider pressures of the Brexit negotiations, it may be some time before any positive developments are seen.