Decoding Labour’s 10-point energy plan
Labour has released its new energy policy, and it’s harking back to the golden days of… Thatcherism. In a 10-point plan, Labour tells us how it would “make the energy market work” – a plan that includes reintroducing some ideas from the dawn of energy privatisation under the Thatcher government. The manifesto is in proudly wonkish language, so here’s our attempt at a translation.
1. “End operational vertical integration by ring-fencing supply and generation businesses”
Each of the ‘big six’ energy companies have two arms: as well as generating electricity, they supply it to people’s homes.
One of the major obstacles to working out how much profit energy companies make across their operations is figuring out how much they make from each operation. For instance, if rising wholesale energy prices dent a company’s supply arm profits, the generation arm could cover them (or vice versa).
Labour is proposing to force these operations to separate. That would mean they report their profit results separately and should make it easier to see where energy companies make profit, as well as how much.
2. “Improve competition and transparency in the wholesale electricity market through an open pool”
Energy suppliers buy energy from generators in separate, private deals. Quite frequently, because companies both generate and supply energy, they buy energy from themselves.
This system makes it very difficult to know who is buying what, and how much they are paying for it. It also makes it hard for smaller suppliers – not one of the ‘big six’ – to enter the market.
In the past, the system worked differently. When the electricity market was privatised in 1989, the government established a system where wholesale electricity and gas was traded through one central ‘pool’. This system was abolished in 2001. Labour wants to reintroduce it, on the grounds that it will increase the transparency of the market, and make it more competitive.
3. “Increase transparency in the wholesale gas and electricity markets by formalising uncleared over the counter (OTC) trading”
At the moment, analysts and policymakers have to rely on price reporting agencies to get information on around 75 per cent of gas trades – or OTC trading. That makes the process opaque and confusing, as the agencies have different methodologies, and don’t share their data.
Labour’s proposal would require companies to publish anonymous details of these trades, making it easier to scrutinise the market without exposing how much specific companies are paying.
4. “Simplify tariffs so consumers can compare prices and engage with the market”
Currently, companies offer over 900 different tariffs. While the new energy law currently working its way through parliament will force suppliers to only offer four packages each, this doesn’t mean they’ll be easy to compare as there’s no standard way of designing a tariff.
Labour’s proposal would force energy companies to make things simpler. Under its plan, only two items would appear on the bill: A ‘daily standing charge’ (how much a household pays to be supplied each day) and a ‘cost per unit’ (how much a household pays for the energy). Labour thinks standardising bills would make the tariffs easier to compare, allowing consumers to find the best deal more easily.
5. “Abolish Ofgem and create a tough new energy watchdog”
Market regulator, Ofgem, has been having a rough time of it lately, with an ever-growing gaggle of politicians calling for it to be reformed or scrapped.
Labour is in the latter camp. It says Ofgem has “failed to protect the interests of consumers in the energy market”. It wants to replace it with a new organisation, which has its goals set by parliament, and would be required to report back each year on what it’s doing to meet those targets.
6. “Deliver value for money on policy costs that impact on bills”
This rather vague-sounding promise appears to refer to just one ‘green’ measure. In its report, Labour says it plans to reform the Energy Company Obligation (ECO).
ECO is an energy efficiency measure requiring energy providers to seek out and subsidise home insulation for low-income households. It’s paid for through a levy on consumer energy bills, but the big six suppliers have criticised the programme for being too expensive. Sound familiar? It may do, because ECO has been in the news rather a lot recently. George Osborne will announce a relaxation of the energy companies’ targets under ECO next week, according to the BBC.
Labour has a different plan. It says it would overhaul ECO and replace it with an ‘energy save local’ scheme, where local authorities and “other trusted local organisations” play a much greater role in delivering energy efficiency programmes. The approach would also be area based – with local authorities effectively ‘blitzing’ specific geographical areas with support for energy efficiency measures.
7. “Take forward the system of contracts for difference to encourage investment”
The new energy bill will change the way low carbon sources of energy are subsidised. In the past, the subsidy has been tied to the wholesale price of electricity.
The new ‘contracts for difference’ system tops up the wholesale price, and guarantees a particular price for low carbon generators’ electricity – known as the ‘strike price’.
Labour is simply saying it would continue this system, instead of reverting back to the old subsidy schemes.
8. “Set a 2030 power sector decarbonisation target to boost investor confidence”
There was a big battle between the Lib Dems and the Conservatives over whether the government would set a target for how much carbon dioxide power plants would be allowed to emit by 2030. This was known as the decarbonisation target.
In the end, a compromise was struck where the government has the power to set a decarbonisation target, but doesn’t have to do so until 2016. Labour is pinning its green credentials to mast, however, saying it would put a decarbonisation target in the energy bill.
9. “Create an Energy Security Board to plan for and deliver on our energy needs”
At present, responsibility for planning how many power plants are going to get built, and who will run them, is divided up between the Department of Energy and Climate Change, market regulator Ofgem, and system operator National Grid. The trouble is, having so many organisations trying to make those decisions often leads to conflict.
Labour proposes creating an organisation to act as a “guiding mind” for energy policy decisions – known as the ‘energy security board’ – to bring in to referee into the big energy wrestling match.
10. “Give the Green Investment Bank the power to leverage new investment”
The government established the Green Investment Bank in 2012 to try and attract investment in the UK’s low carbon projects. But it has been hamstrung from the start because it doesn’t have the power to either borrow or lend money like normal banks do. If elected, Labour would give it those powers.
… And the big one: Freezing energy prices
So high-profile, Labour didn’t even put it on its list. It says that while legislating for all these other changes it would freeze household energy prices for 20 months. It hopes that by specifying the move is only temporary, it could stop the market from panicking and potentially hiking prices just before the new rule came into effect.