Last week, the energy company Bulb became the latest and largest victim of a bloodbath that has seen 25 firms go to the wall. Emergency procedures for “special administration” have been used for the first time, with Bulb effectively being bailed out by the taxpayer to avoid leaving its 1.7 million customers without power. As a result of the UK’s energy crisis, we face a situation where just a few large firms dominate the market, with millions of households expected to face hardship this winter as fuel bills soar. Sound familiar?
Not so long ago, the outsized power of big energy companies was a major political issue. People in the UK paid more for their energy and were less satisfied with their suppliers than almost anywhere else in Europe. Thousands of people were dying every winter because they could not afford to heat their homes. We were told that more competition was the answer: the fresh air of the free market would ventilate the UK’s broken energy system and solve these problems at a stroke. When Ed Miliband first proposed an energy price cap in 2013, he was decried as a mad Marxist – only to see the Conservatives adopt his policy four years later.
But recent events have brought us full circle. The competition experiment has well and truly failed. Once lauded as the solution to overcharging and fuel poverty, small challenger firms are now being castigated as irresponsible, reckless and “badly run”. Intussen, the Big Six are revelling in their new status as heroes, piously declaring that customers need “a sustainable and responsible supplier market” – in other words, them. Firms are also taking aim at the energy price cap, complaining that it has left them shouldering unsustainable losses as wholesale gas prices spike.
So how can we make sense of all this? We need to start with a crucial but underappreciated fact: energy supply companies – the firms that we buy our electricity and gas from – do not own our energy system. They are essentially middlemen: buying energy on the wholesale markets, selling it on to you and pocketing the difference. They aren’t responsible for generating the power that keeps your lights on, or for running the networks that supply it to your home. In practice, some of the Big Six firms do some of these things – but the law requires them to run these activities through separate entities from the ones you pay your bills to.
The obvious next question is why on earth you would design an energy system this way. The answer is ideological. In the 1980s, the Thatcher government had a problem. It was committed to privatising the power stations and grids that produced and supplied our energy. But its doctrine of efficient markets didn’t work for a system that, like the railways, was a natural monopoly. Its solution was to create a completely new, separate function of “energy supply”, whose sole purpose was to turn this natural monopoly into an artificial market.
The theory was that this would force companies to compete for customers – driving prices down and boosting investment. The reality was rather different. Customers rarely bothered to switch and, as long as wholesale energy prices stayed low, the new system was a licence to print money. Even when competition did start to emerge, the odds were still stacked against new entrants. This is a business with high fixed costs and huge economies of scale. Companies need a “hedging strategy” to manage the risk of yo-yoing wholesale prices. This favours large firms that can afford to employ whole trading floors of people to bet on the future price of energy on financial markets. When Big Six firms brand failing rivals “less well run”, what they really mean is “less enormous”. It’s their sheer size and access to capital, not superior talent, that has left the old titans of our energy system as the last men standing.
This has also demolished a different vision for how competition could fix the market, a view most clearly expressed by Lisa Nandy when she declared in die 2020 Labour leadership contest: “If I’m honest, I think nationalising the energy companies is a waste of money. Disrupting them by setting up municipal energy companies and energy co-ops around the country is a much better route.” She was not alone in finding hope in this prospect. Many were inspired by the progress made in Germany and Denmark towards local, democratic renewable energy, and thought the UK could emulate this through municipal firms such as Nottingham’s Robin Hood Energy.
But these plucky young Davids were, op die ou end, no match for our energy Goliaths. All went under after a previous bout of market turbulence in 2018. Even had they succeeded, they could never have lived up to the burden that was placed on them. The phrase “municipal energy” painted a picture of cities producing their own energy and distributing it to local people. But without control of the grid, which is owned by a patchwork of private monopoly companies, it was not within local authorities’ power to do this. They were simply playing the wholesale markets in a game that was rigged against them.
It’s not that progressives were wrong to aspire to a green energy system that is decentralised and democratic. While the grid itself is a natural monopoly, the energy that powers it can – and should – be generated by a range of democratically owned renewable sources, from community solar co-ops to large-scale public offshore wind. But trying to out-compete the Big Six while leaving the rest of the system untouched was never a plausible route to this future. Wat meer is, liberalised energy markets – a model now exported from the UK across Europe – have actually undermined such efforts: community energy co-ops have struggled to compete with corporate giants when bidding to supply the grid.
The attempt to create competitive energy markets has caused more problems than it has solved. Opponents of public ownership need to explain how they plan to solve the problems that competition was supposed to fix. And big firms that declare that only they can manage the risks of fluctuating prices need to explain why this is preferable to having a single public utility. Na alles, as last week’s bailout shows, when push comes to shove these risks will be socialised anyway. The reason why the government cannot allow a firm such as Bulb to fail is simple: access to energy is an essential public good. So why don’t we treat it like one?