Recent years have provided respite for those who thought Down’s median voter theory – that democratically elected parties converge towards the centre – was fine and good but basically quite boring.
On the left, the Labour Party has shifted its position on fundamental issues like the role of the state in the economy. As we set out in the first article in this series, the shift is influencing the political and media debate surrounding sectors and individual companies, and the party is winning votes in Parliament to government’s chagrin. To add to this there is a very real possibility the party could form a government at the next election – whenever that may be. Investors and businesses must consider the implications of Labour’s policy positions on their assets and operations, both in opposition and as a potential government.
This piece will focus on the party’s policies for the energy market, where the clear commitment to nationalisation may have one of the biggest impacts on shareholders, and on how the sector operates as a whole. The article will also look at the means by which nationalisation could be brought about, as this will be critical to whether shareholders see returns on their investments.
The 1970s called
While nationalisation is easy to promise in a manifesto, it can mean a vast array of different models in practice. From a centrally controlled system throughout generation, distribution and retail, to state backing for small-scale decentralised energy projects, the impact on businesses and investors could be very varied.
To untangle this, it’s important to understand exactly what Labour has pledged itself to and the models it is currently examining. The 2017 manifesto committed Labour to taking energy “back into public ownership” in three stages:
- Regaining control of the distribution networks through changes to their license conditions.
- Supporting local publicly owned energy companies and co-operatives to compete with existing private providers.
- Permitting publicly owned companies to purchase regional grid infrastructure and bring the regional and national grid into public ownership over time.
For Corbyn’s Labour, these changes are a symbolic showcase for a new form of nationalisation. The party is sensitive to criticism its policies are rehashed from the playbook of undemocratic 1970’s central state control. In response the party thinks decentralised generation and storage through local co-ops and municipally owned energy companies can be combined with a centralised distribution network to provide a modern, localised model of ownership, with the benefits of national oversight.
This model was detailed further at the party’s conference on alternative models of ownership. Corbyn contrasted Labour’s vision with a form of decentralisation where wealthy private individuals may own their own generation, such as rooftop solar panels, and storage such as Tesla’s battery pack. Instead co-operatives and municipalities would own generation infrastructure while the nationally-owned grid will “act as the great leveller”, distributing energy from plentiful areas to where it is scarce, and guaranteeing continuing supply.
Distributed Denial of Surplus
So could the party reach this goal of decentralised generation with a state controlled distribution system, given the costs involved? And would investors stand to lose out? Shadow Chancellor John McDonnell MP has said there would be no cost of nationalisation (in deficit rather than the debt terms) as the profits from energy companies would be used to service the interest on debt accrued through their purchase (though the Centre for Policy Studies points out Labour has pledged to use the same profits to reduce the cost of energy for consumers by £220 per year).
However profits are used, in this scenario Labour would likely make investors exchange shares for gilts. The government’s valuation method then becomes the critical factor for shareholders. If Labour offered a price above the current market rate, the offer might be taken willingly. Shareholders would be out of the energy game, but not out of pocket.
However, Labour has suggested valuations would be made on a case by case basis at a national level, with a role for Parliament in the process. Investors in companies judged to have behaved poorly, by paying ‘excessive’ dividends or not sufficiently investing in their assets, could lose out by not necessarily receiving the full market value of their holding. This means how the political reputation and record of companies would be reflected by a potential Labour government must be carefully considered before investing.
The example of Northern Rock has shown government can take control of companies without the need to fully compensate shareholders. Government judged the building society to be worthless, despite it not being in administration at the time. Though there has been protest, this decision has been bolstered by the failure of a High Court case brought by shareholders who lost their investments.
However, there remain few precedents for nationalisation of clearly profitable companies in the UK, so this model may prove unworkable. In addition, opponents point out such a move would alarm investors, driving capital abroad, while the larger debt burden on government would increase the cost of UK borrowing, increasing the cost of nationalisation. Many pension schemes, often large investors in energy companies, would also be hit, potentially increasing the need for government to provide support for pensioners further down the line.
So lower cost models for nationalisation could be sought. In electricity, the party intends to take charge of the companies that run regional power networks by changing their licence terms. This means private companies could be left owning – but no longer controlling – electricity lines and substations, reducing the cost to the public purse. Alternatively, control of companies could be achieved by buying majority stakes in companies rather than through full nationalisation.
Co-operative or not cut-out
For a sense of what Labour’s vision for energy means at a local level, we benefit from examples of currently operating firms. There has been a trend for local authorities to set up their own public energy companies, pioneered by Nottingham, Aberdeen and Bristol.
Taking Bristol as an example, public ownership means not just the principle of control, but ethical behaviour. Bristol Energy aims to give better advice to customers irrespective of its own business, from those seeking out the best deals in the market, to those in fuel poverty. But it also hopes to reinvest its profits into the city, leading to criticism the company may be drawn in two directions. Bristol Energy is currently losing money, running an £8.4 million loss, though is only in its second year. The city has given the company loans and guarantees worth £17m with the expectation that the company is profitable by 2021.
The Scottish government has also announced its intention to establish a public energy company by 2021. A study by PwC commissioned by the Scottish government into the possibility has set out several models for how this could be implemented, including taking over an existing socially motivated supplier; creating a central supply company and using councils to deliver energy; and the creation of a fully-fledged Scottish government company to supply and deliver energy.
However, the report also found that such a company may struggle to compete in the market with private sector competitors, given the sector operates on low margins, unless it was subsidised by the state. Such subsidies are currently banned by EU competitiveness rules, and may defeat the purpose of a publicly owned energy company.
Labour have said private providers will continue to operate alongside and in competition with public and co-operative ones, limiting the impact on investors, but meaning the party may face some of the same issues as the Scottish Government. Labour would address some of this challenge by devolving receipts from environmental taxes (such as the Climate Change Levy and CRC Energy Efficiency Scheme). This would provide a new revenue stream for local authorities and metro areas to develop initiatives, from seedbed funding to large municipal energy schemes like District Heating Networks or energy companies. This subsidy would give such providers a competitive advantage compared to the private sector, potentially boosting their customer base.
It is clear that some shareholders could stand to lose out should Labour implement their policies for nationalisation in energy. But as ever, change may also create winners. A new breed of municipally operated or co-operatively run energy companies would increase the market for experienced firms to advise on the structure and work of the new entities as they’re created and begin operation. Forms of energy geared towards local generation may benefit as these entities look to begin work, while investment in storage could be boosted by a nationally owned grid focussed on local generation through renewables, while balancing supply.
To explore all the implications of a future Labour government under Jeremy Corybn, WA is publishing a series of articles examining the internal dynamics of the party and the detailed policy thinking in key sectors for investors over the coming weeks. If you know someone that would like to receive these and other pieces from the WA Investor Services team they can sign up via WAInvestorServices@wacomms.co.uk.