Keir Starmer’s victory became assured in the autumn of 2022. This was the moment when the tension between the Bank of England’s attempts to reduce energy-driven inflation and the inability of financial markets to absorb higher interest rates humiliated Kwasi Kwarteng, a rookie chancellor determined to go on a borrowing splurge. A political party that offered three prime ministers – Boris Johnson, Liz Truss and Rishi Sunak – in 50 days could not be taken seriously as a governing force. But it was the nature of the economic crisis that trapped the Conservatives in the sumps of unpopularity. The very financial conditions that put Sunak in office in October that year forced his chancellor, Jeremy Hunt, to withdraw most of the energy-support package that Truss had introduced and eschew pre-election tax cuts.
The Labour leadership has internalised the financial markets’ disciplining power. Writing in the Financial Times in September 2023, the then shadow chancellor, Rachel Reeves, declared that Labour’s commitment to the electorate “starts today with a very simple promise: never again”. Whatever else happens, “with a Labour government, never will a prime minister or chancellor be allowed to repeat the mistakes of the ‘mini’ Budget”. The result is that despite the party’s landslide win, Labour’s approach to public expenditure is unlikely to differ that much from that of the previous government.
But there is little evidence that the Labour cabinet has grasped the acute interaction between this macroeconomic environment and Britain’s energy troubles. If Labour were to achieve its aim of decarbonising electricity by 2030 and reduce bills by doing so, this would still leave around 80 per cent of British energy consumption exposed to another inflationary shock. This would only change if the government also made rapid progress in electrifying the country’s heating and transportation systems. That would be dependent on spending large sums of borrowed money to subsidise consumers buying electric vehicles and heat pumps. Even then, the more electricity that is substituted for fossil fuels in these sectors, the harder it will be to achieve 100 per cent low-carbon electricity.
Prices for fossil-fuel consumption are determined by international markets over which the UK government has scarcely any influence. The gas-price shock of 2021-22 began with a spike in China’s demand for imports and was intensified by Germany’s entry into liquefied natural gas (LNG) markets following Russia’s invasion of Ukraine. Even Joe Biden’s administration – aided by a large domestic oil base and a much larger Strategic Petroleum Reserve – has been unable to drive US oil prices down much below the level it found politically intolerable before the 2022 midterm elections.
Geopolitical tensions, as well as the sense of political uncertainty in Washington, only intensify Britain’s impotence. British naval vessels have been in action since last December in a US-led military operation to reopen the Red Sea to Western shipping, but there were more Houthi attacks in June than in any month so far this year. If he is elected president again, Donald Trump could prove unwilling to continue with Operation Prosperity Guardian, since the US has a limited economic interest in the Suez Canal compared to the Persian Gulf. But since Britain now imports more than a quarter of its gas from the US rather than Qatar, another Democratic administration that insisted on the primacy of its domestic consumers, and which hardened Biden’s move against new LNG export approvals, could be just as much of an energy security risk over the course of this parliament.
Whatever the follies of Kwarteng and Truss, their fall exposed a structural vulnerability in the British economy to crisis dating from 2004, when Britain became a net importer of energy. Britain does not export enough goods to service its rising energy imports, required because of declining North Sea production. At times of financial market turbulence, the ensuing trade deficit risks a fall in sterling, making dollar-priced energy imports more expensive. In the last year of Britain being a net energy exporter, the current-account deficit was 1.8 per cent of GDP and sterling started 2004 at around $1.80. When the Truss shock hit, the current-account deficit had widened to 4 per cent and sterling had fallen to $1.07. While sterling has recovered from that nadir, it still has only briefly touched $1.30 again.
The Labour leadership will argue that the answer is growth and using the energy transition to boost exports. During the election campaign, Ed Miliband, now the Secretary of State for Energy and Net Zero, proclaimed, “The offshore wind industry is the beating heart of our mission to make Britain a clean-energy superpower.” But there will be no electricity-exporting superpowers in the way that Saudi Arabia, Russia and the US are fossil-fuel superpowers, because electricity cannot be distributed across oceans.
Far from being behind the curve on wind, Britain is already a pace-setter. It has the largest offshore-wind capacity in the world, and opened the first ever floating wind farm, off the Aberdeenshire coast in 2017. At the end of 2023 and the start of 2024, renewable electricity, mostly from wind, hit record levels – more than half of the total UK electricity generation. Yet this success has not translated into any kind of industrial or macroeconomic reward: there is not one UK company in the top-20 wind turbine manufacturers in the world, and in the first quarter of 2024 net electricity imports were higher than ever. Rather than being the basis of an exporting renaissance, a large wind sector locks Britain into a set of hourly trade interdependencies with other European countries to provide electricity when the wind does not blow. Allowing for onshore wind, as Labour now has, cannot change that fact.
In embracing net-zero-led growth to reindustrialise Britain and rejuvenate the east coast, Labour is making the same wishful bet Johnson placed in 2019. The symbol of the Tories’ failed ambitions came in January 2023, when the government-backed battery start-up Britishvolt, which had planned to build a gigafactory in Blyth, went into administration. Quite simply, the energy-driven inflation of 2021-22 ended the favourable monetary environment in which Britain’s net zero policies were formulated in 2019. From servicing debt to building materials, costs are now higher. Even the world’s largest offshore wind turbine manufacturer, the majority state-owned Danish company Ørsted, has announced plans to shed jobs and cancel two large-scale offshore wind projects in the US.
Labour’s promise to create Great British Energy as a “new, publicly owned clean-energy company” is premised on a vision of an economic world that has passed. It is also based on the assumption that Britain is behind on its net zero emission targets simply because the Conservative Party refused to harness the power of government to the task. Perhaps state-backed investment in floating offshore wind will, in time, facilitate greater private investment in that sector. But only lower interest rates and low fossil-fuel energy prices for manufacturing and construction could decisively improve prospects for the corporate wind sector anywhere in Europe.
The Great British Energy commitment betrays Labour’s confusion about energy. According to the party’s manifesto, the company’s stated purpose is confined to electricity: “It will be owned by the British people and deliver power back to the British people.” But in his first message to staff after his appointment, Miliband proclaimed that Great British Energy would entail “taking back control of our energy”, as if energy and electricity are the same thing. In reality, it will not be a firm delivering or controlling energy at all, but, as Starmer told a radio interviewer during the election, “an investment vehicle”, and one at the mercy of the monetary environment.
For heavily indebted European states, there can be no escape from the interaction of the financial markets, interest rates and energy. In making energy central to a British economic recovery, Labour has made promises in a policy area that is prone to crisis. Avoiding another financial reckoning arising from Britain’s predicament as a net energy importer with a weak currency will be a matter of fortune, not political will. If it comes, it will be no less unforgiving for Labour in its consequences than it was for the Conservatives.
[See also: Can Labour end our national addiction to prison?]