Why the Labor government’s pioneering new clean energy company could be a hallmark of the energy transition – Columbia University’s Center for Global Energy Policy SIPA

With a landslide victory, the Labour Party under Sir Keir Starmer has returned to power in the UK after fourteen years. While much of their election platform reflects the principles of ‘New Labour’,(1) there is one initiative that at first glance resembles Labour’s earlier policies from the post-war nationalisation era that gave rise to British Steel, the National Coal Board and British Gas. Starmer’s foray into state-owned enterprises includes the proposed creation of Great British Energy (GB Energy), which, while more limited in scope than earlier government interventions, is still a remarkable return to a direct ownership role in the UK energy sector.

GB Energy’s model seeks to unlock, rather than crowd out, private capital investment in decarbonisation technologies and clean energy projects such as offshore wind and hydrogen. The creation of a state investment vehicle such as GB Energy is likely to be the next evolution of the OECD’s current ‘green industrial policy’ boom. To date, green industrial policy has relied on regulation, subsidies, R&D and trade protectionism, creating a complex and often inefficient toolbox for companies to navigate.(2) GB Energy offers a more direct approach to co-investment, which creates both greater risk and potential rewards for taxpayers.

Back to the Future: State-Owned Enterprises, Energy Security and Industrial Policy

GB Energy will be a state-owned clean energy company, under the Labour Party platform, capitalised with an initial investment of £8.3 billion – with £3.3 billion in grants for local energy projects and $5 billion in equity to take stakes in energy companies and projects.(3) Unlike the state-owned companies of the past, GB Energy will not seek nationalisation and will be far from a monopoly, but will be aimed at both the UK’s green industrial powerhouse and its decarbonisation agenda.(4) Its supporters see the company as more of an EDF or Ørsted than a nationalised British Steel monopoly, complementing private sector investment rather than displacing it.(5)

This mission parallels the crisis-based national industrial policy missions that the UK has faced in the past, from the post-World War II recovery to the energy and inflation shocks of the 1970s. These parallels are particularly true if you believe, like many Labour voters and newly elected MPs, that “climate change is the greatest challenge we face” and that a whole-of-government effort in wartime is the only way forward on climate action.(6)

While green industrial policy may be relatively new in the UK and other OECD countries, industrial policy itself is not. The aforementioned cases of nationalisation of industry by the UK Labour government represent the peak or trough, depending on your perspective, of industrial policy – ​​monopolistic government ownership of key industries. National oil companies such as Norway’s Statoil/Equinor were created to support a national oil/gas champion, but left room for other companies to develop resources within Norway. OECD governments have also created state-owned enterprises to spearhead development in sectors such as nuclear reactors and fuel (Areva in France and Cameco in Canada) or public power (TVA and Bonneville Power Authority in the United States).

The OECD’s industrial policy toolbox over the past few decades has seen a cycle of privatization of state-owned enterprises(7) and the development of a toolbox of other industrial policy tools.(8) These include a wide range of subsidies, from tax breaks to R&D grants, export finance, and the use of public procurement to boost demand for new products. Trade policy has also played a key role, as governments are often tempted to ensure that subsidies benefit domestic industry and workers, creating a swathe of “Buy American” regulations, and not only in the US.(9) Governments have also used the public sector balance sheet to lend to strategic industries, sometimes at market rates but often on concessional terms.

What will make GB Energy stand out?

The latest cycle of mega-industry policy in the US, focused on green industries (via the Inflation Reduction Act) and the semiconductor industry (CHIPs Act), includes all of the above and more. The UK, Canada, the EU and other jurisdictions have responded with their own green industrial policy programs.

But there is a lack of direct government equity investment in businesses and projects that are geared towards decarbonisation. This is a void that GB Energy will fill in the UK’s climate and environmental policy. Government equity investment is seen by some as a slippery slope to nationalisation. Other critics argue that government ownership means the company will drift from its focus on profitability to other, more political goals – indeed, GB Energy’s focus on regional economic development has drawn such accusations. And many politicians will fear that the inevitable ‘losers’ in an equity-led strategy will become an electoral liability.

Confined to the UK energy sector, there are also portfolio concentration risks, although Labour leaders have said GB Energy could “eventually” become a global company.(10) Compared to equity investment, government loan guarantees and debt-backed investment with strong collateral for clean energy projects are seen as mitigating some, but not all, of these risks.

GB Energy will focus on providing equity capital, but apparently in partnership with the private sector. As such, it is unlikely to be a British Gas or British Steel operator. This will help companies focused on decarbonisation before revenue, particularly if the cost of capital falls below the risk capital rates demanded by most early stage investors. GB Energy is also expected to help energy infrastructure developers have an attractive cost of capital, as there will be no dividend payout back to the government, just a recoupment of the initial investment.(11) Taxpayers could also benefit from a portfolio of government capital investments. Government bailouts of airlines and the car industry in the US and Canada after the 2008 financial crisis generated good returns for taxpayers – another case of ‘maximum’ government industrial policy applied in a crisis.(12)

Is equity-led public sector investment the new frontier for green industrial policy?

Other OECD countries are experimenting with this equity-based approach to green industrial policy. In Canada, the Canada Growth Fund (CGF) was established in 2022 with a $15 billion mandate to invest in clean energy projects, not just through direct equity investments(13) but by investing in private clean energy funds. Unlike GB Energy, the CGF also has the ability to take equity risks with taxpayer money, but relies on an independent Public Service pension fund manager to deploy the capital.(14)

The type of capital investment in government facilities like GB Energy and CGF is dwarfed by the trillions of dollars of private capital in the hands of asset managers. Yet these trillions of dollars have not led to the deployment of low- and zero-emission technologies in many key sectors, from clean fuels for heavy transportation to direct air carbon capture and small modular nuclear reactors.(15)

Government loan guarantees and tax breaks boost private investment, but co-investing government capital in equity can open up another important channel—one in which taxpayers, industry, and investors share the same benefits and losses. This can reduce or mitigate corporate welfare arguments and even strengthen voter support for climate action if the benchmark is direct gains—as opposed to the hard-to-measure, indirect gains from job creation, technology adoption, and greenhouse gas reductions. Of course, equity funds will sometimes lose money, but under current models, taxpayers rarely get back investments like grants or subsidized loans when something goes wrong.

In the context of the trillions of dollars needed to address climate change, it seems reasonable to expand the range of financial or policy tools available. GB Energy may prove to be an excellent case study to observe to determine whether government equity can be part of the climate solution.

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(1) https://foreignpolicy.com/2024/07/03/starmer-labour-blair-election-britain-tories-optimism/

(2) https://www.ft.com/content/a1a99a43-eca1-42ac-942b-30351daba248

(3) https://www.politico.eu/article/labour-party-energy-company-uk-election-keir-starmer/

(4) https://www.theguardian.com/politics/article/2024/jun/06/could-labour-gb-energy-plan-future-proof-power-generation-uk

(5) Ørsted is 50.1% owned by the Danish government, while EDF was fully reacquired by the French government in 2023.

(6) https://labour.org.uk/change/make-britain-a-clean-energy-superpower/

(7) OECD (2019), A Policymaker’s Guide to PrivatizationCorporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/ea4eff68-en.

(8) https://itif.org/publications/2021/10/04/emerging-industrial-policy-approaches-united-states/

(9) https://www.wilsoncenter.org/article/protectionism-back-not-you-know-it-how-us-inflation-reduction-act-reshaping-path-green

(10) https://www.politico.eu/article/labour-party-energy-company-uk-election-keir-starmer/

(11) https://www.common-wealth.org/publications/the-greatest-generation-how-public-power-can-deliver-net-zero-faster-fairer-and-cheaper

(12) https://www.nytimes.com/2014/12/20/business/us-signals-end-of-bailouts-of-automakers-and-wall-street.html#:~:text=Although%20general%20bailouts%20have%20been%20invested.

(13) https://www.cgf-fcc.ca/content/documents/CGF_News_Release.pdf

(14) https://www.cgf-fcc.ca/content/documents/CGF_Press_Release_Idealist_Capital.pdf

(15) https://www.irena.org/News/pressreleases/2023/Mar/Potrzeby-inwestycyjne-35-trillionów-USD-do-2030-dla-successful-energy-transformation