A Social Guarantee for Energy

This blog is a summary of our recent discussion paper which you can read here.


It was great to see the Labour Party announce their proposal for Great British Energy at their conference last month. GB Energy would be a publicly owned, renewable energy company designed to turbo charge the transition to net zero whilst creating jobs up and down the country. A publicly owned renewable energy company is a great first step in redesigning the energy system so it is fit for purpose, but there is much more work to be done.

The Social Guarantee aims to redesign the economy so that meeting people’s basic needs is at the heart of economic and political activity. For energy, this means ensuring that everyone has access to enough energy to heat their homes, cook food and keep the lights on without having to worry. It also means creating an energy system fit for the future.


What’s wrong with the energy system?


Profiteering happens at every stage of the energy supply change from producers and generators to the companies that own the transmission and distribution networks, and finally to energy retailers.


Production


An integrated oil company is one that engages in the exploration, production, refinement and distribution of oil and gas. The two major integrated oil and gas companies headquartered in the UK, Royal Dutch Shell and BP, have reported headline-grabbing rises in profits in the first two quarters of 2022. Before this, in the period from 2010 to 2020, they spent a combined sum of £142.7 billion on shareholder pay-outs - outstripping the amounts paid in taxes significantly.


Many smaller, independent oil and gas companies have failed to make a profit between 2010 and 2020. Despite this, the most of those headquartered in the UK have paid out large sums to shareholders. Capricorn Energy and Enquest paid out a total of £104 million to shareholders in the same period.


Transmission and Distribution


The high-voltage transmission grid is owned by the National Grid Company, one of the single largest ‘investor owned’ utilities companies anywhere in the world, and which paid out £1.4 billion in dividends in 2021 alone.


Electricity distribution network operators (DNOs) and gas distribution networks (GDNs) control the supply of gas and electricity from the transmission grid to end users. These companies pay lower taxes than the average FTSE 100 company and, once again, pay out significantly more to shareholders than they do in taxes. From 2017-2021 GNDs paid £1.25 billion in tax, half the £2.45 billion they paid out in dividends, whilst DNOs paid £2.16 billion in tax, 40% less than the £3.63 billion they paid to shareholders.


Energy Retailers


Energy retail is dominated by ‘The Big Five’ - British Gas, E.ON, EDF, Scottish Power and Ovo Together they cover 70% of the market. These large energy retailers have seen significant increases in earnings during the last six months of crisis. Even before the current crisis, between 2011-2020, they paid shareholders £23 billion, six times the amount they paid in tax.



How should it change?


The Social Guarantee aims to ensure that everyone has access to life’s essentials. For energy, this means guaranteeing access to the energy for households, ensuring essential service providers have enough energy to deliver high quality services, and finally, creating an energy system that protects and supports the environment.


These ends can be supported in the following ways:


1. Tariff Reform


All households should have access to enough energy to meet their everyday needs for free, or at rates that are genuinely affordable. Households who spend more than their allocated energy allowance would be charged at higher rates, on a rising scale. This would encourage people to stay within their allowance – reducing energy consumption across the board.


Public services that supply life’s essentials must also be protected. A public service tariff could be designed in a similar way – guaranteeing affordable access to a basic level of energy and implementing tariffs on an increasing scale for energy use above that level.


2. Bring the Big Five into public ownership


A publicly owned energy retailer with over 70% of the market share would supply energy to millions of households. It would be able to compete with private suppliers, absorb smaller energy companies that fail, and protect consumers from price hikes. The TUC has estimated the cost of taking the Big 5 energy retail companies into public ownership at between £2.75 and £2.85bn. This is affordable and would have huge benefits for consumers.


3. Bring The National Grid, DNOs and GDNs into public ownership


This would ensure a fairer price for households, businesses and service providers and would also enable any gains to be reinvested in the grid, developing the necessary infrastructure to support the rapid transition to renewables needed to meet net zero targets. It could facilitate local energy generation, creating jobs across the country, and would pay for itself in 7.5 years.

4. Set up a publicly owned renewable company and support community energy generation


This is where the proposed GB Energy comes in. A publicly owned energy supplier can increase the supply of renewable energy and enable the reinvestment of any profits. The majority of renewable energy sources are now cheaper than fossil fuels, and prices continue to fall year on year. Our outdated electricity market sets prices by the cost of gas (the most expensive generator) to guarantee supply. We need to uncouple prices from gas to enable us to move away from fossil fuels and towards low-cost, reliable and domestic production of renewable energy.


5. Tax the oil and gas giants properly and to end subsidies and tax breaks


Aside from the temporary Windfall Tax, the UK government currently taxes only 40% of all profits on oil and gas extracted from the North Sea. This is well below the international average of 70% and increasing it could raise approximately £13.4 billion this year alone. The recent ‘investment allowance’ gives companies £0.91 of tax relief for every £1 they spend on investment in energy infrastructure, including oil and gas extraction. Getting rid of this regressive tax break would generate even more revenue and help prevent unsustainable investment in fossil fuels.


A Social Guarantee for Energy


The Social Guarantee puts meeting people’s needs at the centre of all economic activity. For energy this means:

  • Creating a universal basic energy allowance

  • Create a special tariff for public services

  • This is best supported by

  • raising taxes on North Sea oil and gas

  • Setting up a publicly owned renewable company

  • Bringing the transmission and distribution networks back into public ownership

The benefits of this model would mean:

  • Energy security for all

  • Increased incentives to develop cheap renewable energy

  • Strong incentives for households to reduce energy use

  • Green job creation

This blog is a summary of our recent discussion paper which you can read here.