Labour’s energy policy will not solve the real problems of the grid

Energy investment is a key issue in the UK national elections, with Labor pledging to deliver zero-emission electricity by 2030. Their flagship policy – Great British Energy – will commit £8.3 billion ($10.5 billion; $9.8 billion euros) within five years for renewable energy Generation.

Understandably, their proposal is popular and impresses voters. However, it will duplicate the efforts of the UK Infrastructure Bank and is likely to displace existing private investment in renewables, without significantly reducing energy bills. The proposed scale of renewable energy deployment is also unrealistic, given the paucity of details on the main obstacles to renewable energy development: grid infrastructure and planning.

High prices driven by fossil fuels

Energy policy is important to voters because electricity costs have increased dramatically: by 81 percent between 2020 and 2023. British energy is also expensive compared to the rest of Europe. According to the Department of Energy Security and Net Zero (DESNZ), retail and industrial energy prices were 45% and 14% respectively above the European median in 2022.

Labor has proposed public investment in manufacturing to reduce costs. According to GRESB, the UK’s energy system has been privately owned since the 1990s, while 88 percent of Europe’s top 20 electricity generating companies are government-owned.

However, all of the Labor aspirant countries – Norway, Denmark, France and Sweden – had cheaper electricity than the UK long before privatization in the 1990s, with the exception of Norway in the early 2000s.

Labor is rightly focused on renewable energy. In Europe, countries with a higher share of production from fossil fuels tend to have higher prices. More renewables may not be enough to protect the UK from gas price shocks, however – many European countries also experienced price increases in 2022 following the European gas crisis.

Little impact on costs

It seems unlikely that public ownership of generation will significantly reduce energy bills. According to Ofgem, production accounts for just 30-35 percent of the total, leaving most of the costs to private transmission, distribution and supply companies.

In the generation space, private investors have historically provided very low returns from renewable energy. The International Renewable Energy Agency estimated that in 2021 the UK after-tax WACC for solar, onshore and offshore wind was 2%, 2.6% and 2% respectively. This year, government bond yields averaged 0.7% for 10-year tenors and 1.1% for 30-year tenors. Interest rates have since risen dramatically to 4.6 percent on 30-year debt in 2024. However, Cornwall Insight estimates that during this period projects were still financed with cheap debt, ranging from 100 basis points to 200 basis points above the rate risk free.

Additional publicly funded investments in power generation are unlikely to accelerate the deployment of renewable energy. Restrictions on planning and grid connections will mean that existing investors are likely to be squeezed out if public capital competes for projects.

Since 1990, 10,000 renewable energy projects have applied for plan approval, representing approximately 243 GW of electricity. Of these, approximately 65 percent of applications were for projects with a capacity of less than 10 MW – just 8 percent of the proposed capacity. Larger projects, representing the lion’s share of the possible capacity additions, were approved an average of 10 months later (around 16 months for projects above 10 MW compared to 6 months for smaller projects). Larger projects were also approved at lower rates (55% compared to 68% for smaller projects). Once approved, larger projects were 20 percentage points less likely to be implemented, with a construction rate of 35% compared with 65% for smaller projects over the period 1990–2024.

The startup time seems to be getting shorter. Renewable energy projects have been developing for years, and the number of approved projects since 2014 has been surprisingly low. Nearly half of approved capacity below 10 MW has come online, compared to 9 percent of projects above 10 MW. Since 2019, around 59 GW of projects have applied for planning permission but, according to the database, have not yet received decisions from local authorities.

When a project applies for connection to the grid, its implementation is delayed on average by five years compared to the proposed connection date. Not only does this limit efficiency gains, but it increases costs as projects wait.

Grid connection and planning delays make it unlikely to achieve net zero electricity emissions by 2030. Labor has pledged to increase renewable capacity by 88 GW, representing 85 per cent of the fossil fuel supply to be replaced, at a reduced price. This means the construction of 12.6 GW of solar, onshore and offshore wind combined annually between now and 2030. In 2022, just 3.8 GW of capacity was installed across these three technologies, with the highest capacity in a single year recorded in 2015, which amounted to 5.3 GW. Public funding for more projects seems unlikely to speed up installation if planning and grid connections are slow.

Why a generation?

One reason Labor may be focusing on manufacturing is the impracticality of nationalizing the grid. Buying out investors at a premium to regulated asset values ​​would require over £100 billion in compensation (around £82 billion for FY2024, according to Ofgem). The government would then be burdened with capital requirements for electricity modernization, which increase as more of our energy use becomes electrified. Renewables funding of £1.7 billion a year looks much more attractive and represents around 18 per cent of the UK’s average annual investment of around £9 billion.

Another reason for focusing on manufacturing is control. Implementing network connectivity and planning consent reform at national level is difficult when local governments are responsible for it. Labor in particular is emphasizing its desire to support small-scale local energy generation, which is more likely to be approved and built, but these projects will contribute much less to decarbonization efforts.

The third motive is to support British jobs. By controlling more electricity projects, Labor also hopes to boost employment in the UK. However, if energy developers do not currently use British companies, it seems likely that in the short term this will increase costs by limiting supplier choice.

Labor may also want to take credit for setting up a clean energy investment agency, even though a similar agency already exists. The Leeds-based British Infrastructure Bank, like the Green Investment Bank before it, is a government-based bank dedicated to investing in low-carbon infrastructure. It dwarfs the financial exposure of capitalized GB Energy

What does this mean for investors?

Labour’s clean energy policies are bold but appear unlikely to achieve their goals. Without a plan to repair network connections and construction permits, private investors will compete with the government for projects. Given that private investors priced projects so competitively, the returns on some projects may be too low to be justified.

Conversely, if the government comes up with network connectivity planning and reform, there will be more than enough projects to support for investors and the government. This will also be an opportunity to invest in network infrastructure, as this will be key to achieving the net zero commitment. The capital commitment will be significant, and the remuneration will be predictable and adjusted to inflation.

Currently, planning reform is a big “if”. After the election, the government will have to do a lot of work to figure out how it can pursue policies that are less exciting to voters but much more important for clean energy use.

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Lucy Shaw is a writer and energy investor based in London. Previously, she worked at Blackstone, International Finance Corporation and Actis, and as a consultant at Boston Consulting Group and the United Nations. He holds an MBA from Harvard Business School and an MPA in International Development from Harvard Kennedy School.