Energy bills remain an inconvenient truth for politicians

Former No 10 energy adviser Tara Singh compares the political parties’ stances on energy and argues that neither Labour nor Conservatives are being honest about the cost of net zero.

With both the Conservative and Labour manifestos now published, on energy, one thing is surprisingly clear: there is not as much difference as the parties would have you believe. Despite talking up annual oil and gas licensing rounds, the Conservatives will also impose a windfall tax on oil and gas profits over the next Parliament. Both parties commit to offshore wind, whether it’s a tripling or a quadrupling, and both are committed to new nuclear, both large and small. Both are committed to energy efficiency and both promise to reduce retail energy standing charges. The price cap stays for both without any pledge to reform. The similarity between the two should be taken as a huge vote of confidence in the importance of climate for UK voters, although, depressingly, both parties are also dishonest about the cost.

There are, however, some important differences between the two parties, chief of which is Labour’s commitment to a more state-led approach to energy. The Conservatives reject Labour’s supposed “dogmatic, top-down approach” to net zero, but it is hard to see the UK getting to the target without embracing a more active role for the state. It is also hard to get to net zero without onshore renewables, which the Conservatives have repeatedly downplayed to the extent of a de facto ban on onshore wind. Germany’s post-Russia/Ukraine response increased onshore wind by 48% in 2023 by raising renewable auction prices, mandating land allocation for onshore renewables, and streamlining offshore wind development processes. Labour could significantly advance low carbon energy by doing the same.

Indeed, Labour’s manifesto is quietly revolutionary in three areas: implementing a comprehensive, decade-long industrial energy strategy; overhauling the planning system to streamline project approvals; and introducing partial state ownership in new energy generation projects through Great British Energy. Together, these measures have the potential to accelerate the deployment of clean energy, lower the cost of capital, and ultimately reduce energy bills – in the long run, at least.

However, let’s also be clear about the likely first casualty of a Labour regime: its punchy approach to oil and gas taxation, a more severe version of the Conservatives’ already stringent windfall tax. Although Labour argues that the 78% headline tax rate is the same as Norway’s, UK oil and gas fields are more mature and have higher operating expenses. Norway’s tax regime has also been stable for over 30 years, allowing for better planning and more predictable returns. The current proposed approach could create a 95% tax band for some fields, running the risk of potential premature decommissioning, jeopardizing jobs, and exposing the government to up to £20 billion in taxpayer-funded decommissioning liabilities. Expect Labour to quietly agree lower taxes or increase investment allowances for older fields, just as George Osborne did in 2012.

Beyond oil and gas policy, Labour’s biggest challenge will be delivering net zero without raising energy bills. Notably absent from either manifesto was any mention of the existing Conservative government’s 5GW floating offshore wind target by 2030, likely due to the high costs and complexity involved. Based on recent French auction results, delivering 5GW of floating offshore wind at c£96/MWh could nearly max out the GB Energy budget, as well as requiring £3.5 billion in port investment to 2030. When it comes to investing in hydrogen, CCUS and floating offshore wind, the next Labour government will face a difficult choice: allocate more funds to GB Energy, pass costs on to consumers through Contracts for Difference despite pledging to cut bills, or, more likely, do a lot less than planned.

Beyond bills, there are other difficult trade-offs too. Truly transformational energy efficiency and low carbon heat will require significant regulation. This can be difficult even in green countries like Germany, which saw a backlash over a proposed boiler ban. Labour’s manifesto explicitly states “nobody will be forced to rip out their boiler as a result of our plans”, a promise already made by the Conservatives. When it comes to clean heat, there is a risk that the UK ends up tinkering around the edges rather than delivering the true transformation required.

And then there’s the elephant in the room: the retail energy market. Labour and the Conservatives commitment to reduce standing charges mirrors what Ofgem is already doing. However, it was surprising to see no mention from either of social tariffs, despite both consumer groups and industry (which is drowning in bad debt) campaigning on this issue, again likely because of cost implications. Price cap reform, another contentious topic, was also left untouched by both.

What was mentioned by Labour – but has got surprisingly little pick up – is a plan for a strategic reserve of gas power stations to “guarantee security of supply” – a fleet of gas-fired plants kept outside the regular electricity market, to be called upon only in cases of emergency. Depending on how these plants are dispatched and compensated, this strategic reserve could potentially disrupt wholesale electricity prices, with far-reaching consequences for the entire power sector including renewable energy generators, which often rely on periodic spikes in electricity prices to offset their low revenues during periods of high wind or solar output. Without careful guardrails, the political risk we’ve seen in the retail market could spread to the wholesale market whenever power prices are deemed excessive.

In summary, Labour’s commitment to long-term planning, industrial strategy and GB Energy has the potential to transform the UK’s energy landscape in a way the more market-oriented Conservatives may struggle to achieve. However, it is also a plan that is fraught with challenges, trade-offs, and difficult decisions – including, likely, the need for bills to rise. 

This article first appeared in Utility Week’s Digital Weekly edition. Click here to read the issue in full.