Renationalisation—the energy sector

 

Energy analysis: As part of a series on the continued debate around renationalisation, Lis Blundson, partner in the energy and regulatory team at Fieldfisher discuss Labour’s proposal to renationalise the energy sector, exploring the different forms renationalisation could take.

What is the background for the current discussion around renationalisation of the energy sector?

The Labour party, under its current leadership, has expressed taking key infrastructure back into public ownership. Rail and water are in its sights, but the first detailed policy paper to be issued relates to the energy sector, and more specifically the energy networks in mainland Great Britain.

The recently launched paper ‘Bringing Energy Home‘ sets out how the high voltage electricity and high pressure gas networks and the lower voltage electricity and lower pressure gas networks will be transferred into a new regulatory and ownership framework which will include a National Energy Agency, Regional Energy Agencies, Municipal Energy Agencies and Local Energy Communities.

What are the main arguments for and against the renationalisation of the energy sector?

Labour’s principal argument runs thus:

‘public ownership of transmission and distribution networks will deliver better value for the public, accelerate and coordinate the investments needed to roll out renewable and low carbon energy, provide democratic control over nationally strategic infrastructure and ensure decentralisation occurs equitably’.

Labour believes that since privatisation the owners of the networks have made ‘huge profit margins’, have overcharged customers by billions of pounds and have failed to invest enough to facilitate the transition to renewable energy.

The proposals tabled so far are very high level, so it is difficult to tell how, or if, they would work in practice (particularly as existing privately owned supply and generating businesses are not mentioned). So far, the main thrust of the arguments against the nationalisation plan have been around the valuation of the companies that would be nationalised and Labour’s plans to pay less than market value to existing shareholders.

National Grid are strongly opposed to nationalisation and have indicated they would take legal action to avoid it. What are the reasons behind their stance? And what legal actions could the National Grid take?

In the immediate aftermath of Labour’s launch of its nationalisation policy, shares in National Grid and SSE (which owns part of the Scottish electricity transmission system) fell sharply in value and National Grid warned that any attempt to pay less than market value for its shares would result in significant legal challenges from investors. National Grid also stated that, in its view, the shift to green energy would be hindered by the plans, and costs to consumers would ultimately increase.

The proposed change in ownership would require primary legislation, which once passed into law is, by definition, legal. Challenges are therefore unlikely against the decision of a sovereign parliament to change the ownership of the networks. Instead, previous owners and investors may to bring challenges against the valuation and compensation that any future Labour government puts in place. Claims may be brought because Labour has stated that the nationalisation of Northern Rock provides a precedent which allows Parliament to set the value of the business, with further deductions to be made for pensions fund deficits, asset stripping since privatisation, state subsidies since privatisation, the state of repair of the assets and stranded assets. Following this precedent could however be challenged on the grounds that Northern Rock was insolvent with a market value no higher than zero at the point when it was taken back into public ownership, whereas, by Labour’s own admission, the network businesses are anything but bust.

There are potentially several ways in which a claim could arise, under bilateral investment treaties, the Energy Charter Treaty or an interference with property claim under the ECHR.

How has the wider energy industry reacted to Labour’s proposal?

The Confederation of British Industry believes that Labour’s renationalisation plans would cause ‘profound harm’—damaging consumers whose pensions are invested in the utility companies, reducing investment and harming the improvements in network resilience that have been delivered since privatisation. The Energy Network Association, which represents the distribution businesses, perhaps unsurprisingly, feels that the proposals will not deliver Labour’s objectives and will be extremely costly to the public at large. Renewable UK described the plans as a ‘costly and complex option, when we also need to speed up the decarbonisation of our economy’. The Britain’s General Union (GMB) Union on the other hand have welcomed Labour’s ‘big and bold’ policy.

What form could the process of renationalisation take?

The proposals are based on a ‘nested system, that combines decentralisation and local participation with central authorities’. Decisions are to be taken ‘as closely as possible to citizens and communities, with central authorities performing tasks not deliverable to more local levels’.

A newly established National Energy Agency (NEA) will provide overall strategic guidance for the energy transition. It is described as being set up on the existing institutional base of the National Grid, as an independent, statutory Non-Departmental Public body, under the sponsorship of the Department for Business, Energy and Industrial Strategy. On day one after renationalisation, the NEA will own Great Britain’s electricity transmission infrastructure, the assets and workforce of the gas transportation companies will gradually transfer to the NEA over time, merging gas and electricity networks. Regional Energy Agencies (REAs) will own the distribution networks, and each will be established on the institutional basis of the current electricity Distribution Network Operators. Municipal Energy Agencies (MEAs) will be established where local authorities wish to ‘accelerate the energy transition locally’. REAs will be required to devolve ownership of distribution networks to MEAs where the relevant local authority can demonstrate the capability to run those networks. The scale of an MEA runs from a rural parish council, right up to a large metropolitan city. Finally, Local Energy Communities (LECs) will be established as vertically integrated bodies that can engage in supply, distribution, and generation of energy at a micro level. Potential issues with EU regulations on unbundling (whereby the owner of a natural monopoly such as a distribution network cannot also own generating or supply businesses) are not addressed. Brexit aside, would an LEC be required to allow a local MEA to use its distribution network, in competition to its own generation or supply activities? This is one of many questions that the renationalisation proposals have yet to expound.

The mechanics of transferring the assets would be undertaken in two stages—first an Act of Parliament would establish the various bodies and transfer the assets, second the former owners would be compensated through a bond issue by HM Treasury. The bond issue is stated to be cost neutral to the public purse as a liability (the bond) is exchanged for a profitable asset (the nationalised companies). Ofgem employees would be transferred to the NEA, the staff of the nationalised companies would transfer to the NEA under Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246 and the posts of senior executives ‘will be re-advertised on dramatically reduced salaries, capped by Labour’s 20:1 pay ratio policy’. No mention is made of rights of the senior executives under SI 2006/246.

What would happen to the private energy companies?

The companies which currently own the transmission, gas transportation and distribution assets will cease to exist once the Act of Parliament is passed. What is not clear is what would happen to the other companies in the energy sector. There is no talk of dismantling any of the other components of the current arrangements, so it is not immediately obvious what the relationships between the newly created bodies and the generators and suppliers already operating in the market would be. A particularly surprising omission is any discussion of public service obligations—which obligation currently rests with the larger energy suppliers (by virtue of the standard licence conditions), or how security and continuity of supply would be guaranteed. LECs, for example, would need access to the necessary assets and liquidity to be able to guarantee supply where their own generation assets are unavailable, which could have significant cost implications. Who would step in to provide supply if an LEC could not? And how would any entity stepping-in be paid?

It is fair to say that there needs to be a lot more detail on how the proposed arrangements would fit into the current framework. The energy system is complicated and changing one part of it without taking a thorough look at the whole risks causing more problems than it solves.

Interviewed by Aslak Ringhus.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Filed Under: Energy

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