Should we re-nationalise the energy sector?

When the gas and electricity companies were privatised in the UK in the 1980s the rationale was clear: privatisation would make these bloated inefficient public sector enterprises efficient, dynamic, responsive and profitable and we would all benefit. Roll forward to the present day and there is an increasing cry for the energy companies to be re-nationalised.

Leaving aside the practicalities of how you would do it, what are the pros and cons of such an approach? Those that favour re-nationalisation argue that privatisation is a failed experiment. Energy companies like bulb are failing, and there are questions about the nature of price control in the industry. This is more than a reaction to the war in Ukraine and sanctions in Russia the re-nationalisers argue – it’s about fundamental problems in the market. Energy prices have been rising since 1996 and now 3 million people live in fuel poverty. These problems are exacerbated by oligopolistic competition amongst energy firms, and a structure that encourages payments of dividends to investors rather than service to the customer.

On the face of it that sounds like a damning case. So what’s the case for the defence? The first is that privatisation appears to be working. A 2019 study found a couple of things:

• that private ownership is associated with better outcomes for consumers; and
• privately owned networks have lower costs and deliver higher customer service standards than publicly owned counterparts; and

In short, if you look at the facts there doesn’t appear to be much of a case for privatisation.

The other argument for staying with privatisation is about humans. The re-nationalise argument runs – that Government can take long run public orientated decisions. This view however has two flaws. The first is that the very reason we have independent economic regulators is to create stable long term environments for investment that outlast the electoral cycle and are more suited for investment in infrastructure. The second is that implicitly, the re-nationalise argument is that politicians are better at running our power companies than the private sector Executives that do it now, and that seems a big ask.

When things go wrong in a privatised industry its very tempting and very easy to argue for re-nationalisation. There might be plenty of reasons why that might be a good idea – but economics isn’t one of them. The evidence suggests that privatisation is working. That doesn’t mean we should be complacent and we can do better, but re-nationalisation isn’t the answer.