The golden age of municipal energy (1810-1950), and lessons for Net Zero at the local level

Britain has a new energy institution on the block, the National Energy System Operator (NESO). It marks a return to an older tradition of central planning. To counteract the risk that central plans fail when they hit local realities, the NESO has setup ‘Regional Energy Strategic planners’. In this post I will delve into the period from 1810-1930 for some lessons. A period when local level municipal energy companies flourished. A period when one of NESO’s ancestor institutions, the Central Electricity Board, executed a remarkable plan to corral a patchwork quilt of local organizations into a national ‘energy transition’.

TLDR:

• In the late 19^th century and early 20^th century, municipal energy companies were more effective than comparable private energy companies

• ‘Municipals’ were drivers of electrification; they used their efficiency to drive down prices and drive up consumption.

• In many ways the municipals were too successful. The downside was complexity and fragmentation. By 1926 Britain had too many small scale local ‘undertakings’.

• The Central Electricity Board was tasked with developing a nationally integrated electricity system. The plan had two pillars; build a new 132kV ‘transmission’ network and provide monetary incentives for local energy undertakings to supply electricity to the ‘grid’. The plan worked because the CEB had authority and money.

• If we want local energy transitions that have social and democratic consent, municipal energy could be a great model. But the 19^th century municipal model succeeded because local authorities had resources to get it going, and once established it gave those local authorities a significant non-tax revenue.

• Resourcing matters and today’s Regional Energy System Planners don’t have the mandate to resolve the resource constraints facing local authorities. This creates a risk that their plans are seen as technocratic impositions that favour those local authorities with the loudest voice.

• To emulate the CEB, the RESPs will need more power to make decisions and resolve trade-offs.

The return of central planning

The UK energy system is going through one of the biggest institutional shakeups since privatization began in 1982. In summer 2024 the ‘National Energy System Operator (NESO)’ will launch; an independent, public corporation responsible for planning Britain’s electricity and gas networks and operating the electricity system’. Why is this radical? (1) Planning energy networks will move from private companies to a not-for-profit governmental body. (2) NESO will build a ‘whole system plan’ across gas, electricity, hydrogen, and carbon capture & storage (CCS), whereas previously these ‘vectors’ were planned in separate organizations. NESO will join the pantheon of great institutions in the history of energy; the Central Electricity Board (1926-1948), the Central Electricity and Generation Board (1958-1990s) The Gas Council (1948-1972), British Gas Corporation (1972-1986), Ofgem (1986-Present). If NESO delivers on its mandate to solve the energy trilemma, it will surely be considered the Michael Jordan of energy institutions.

NESO represents a shift back to central planning in the style of the CEB and CEGB (1926-1980). NESO will (continue) to build the ‘Future Energy Scenarios (FES)’, but these scenarios will become ‘more directive pathways’. These will be converted into a ‘Strategic Spatial Energy Plan (SSEP)’ that will define the optimal mix and location of generation and storage. This will become a ‘Central Strategic Network Plan (CSNP)’ that defines the pipeline of electricity transmission investments for the next 12 years. The SSEP and CSNP will be expanded to include gas, hydrogen, and CCS over the next few years.

Centralized ‘directive’ planning faces risks when it reaches the local level. E.g. Overlooking local insights and a lack of local level democratic consent for the ‘plan’. The economist invited us to ‘hug a pylon’, but we should remember the words of CEGB Chairman Christopher Hinton about pylons in 1959 that ‘It is no use talking about knights in shining armour striding across the countryside. Knights in shining armour are a damned nuisance in the wrong place’. I suspect Ralph Fiennes would agree.

Could NESO also initiate a renaissance in local level energy transitioning through its ‘Regional Energy Strategic Planners’ (RESP)? To counteract the risks of central planning NESO will also become the ‘Regional Energy Strategic Planner’. In short, a team in the NESO will compare the various spatial plans (the national SSEEP, regional gas and electricity distribution network plans, local authority plans) and ensure common set of assumptions are used. The RESPs will also do a ton of stakeholder engagement to ‘coordinate’ local actors. Notwithstanding the risk NESO is overwhelmed by the sheer volume of new responsibilities, the RESPs seem like a cool idea with potential.

In recent years local authorities don’t have a great track record when it comes to entering the energy sector. In 2013 a new statesman article argued that local authorities should become energy suppliers; to reduce prices, create green jobs, and use the revenue to pay for public services. Some LAs did, like Bristol Energy, Together Energy (Warrington) and Robin Hood Energy (Nottingham). But in the supplier crisis of the last few years Bristol Energy, Together Energy and Robin Hood Energy faced financial difficulties or went bust. Critics suggested that the councils were ‘straying outside their lane’ and entering a complex and competitive industry where specialization and scale matter. Local authorities have also faced considerable capacity constraints when trying to plan physical infrastructure like on-street EV charging infrastructure.

But it hasn’t always been this way. Go further back in time and we find that local authorities were extremely effective energy suppliers. In fact, they were too successful. By the 1920s the UK had a system that was highly ‘disaggregated’, with too many local authorities with vested interests preventing rationalization. And the story of how the NESO of the time, the Central Electricity Board, overcame this quagmire of vested interests is instructive for the kind of authority that the RESP’s will need to be effective.

The Golden Age of municipal energy

In the earliest stages of the development of gas and electricity private companies were firmly in the driving seat (gas 1810-1850, electricity 1880-1900). Integrated utilities that undertook generation, transportation and retail competed for ‘patches’. The state’s involvement was limited to establishing rights of way. The risk that competition would create duplicate networks was tolerated, especially when there were technological uncertainties and the state didn’t want to ‘pick a winner’ (e.g. allowing AC and DC systems to compete). In short, private enterprise dominated when the risks were greatest.

Once gas and electricity were established and the business models were mature, local authorities entered the market. The main motivation was to gain access to non-tax revenue. This explains why municipal ownership was strongest in urban areas with expensive public health programmes. For Robert Millward, one of the greatest economic historians of network utilities, ‘Ideology was important only in the freedom it gave local authorities’. Figure 1 shows the increase in municipal energy undertakings between 1895 and 1935. The model worked particularly well in electricity. By 1920 municipals dominated with 60% of the market share, having grown from 16 to 358 organizations since 1895. The remarkable success of British municipal electricity supply is even clearer when we compare it to other countries. Only Norway showed a higher market share for municipals (figure 2).  

Figure 1: Municipalization of Gas and Electricity, 1890-1940

Figure 2: Municipalization of Gas & Electricity in the UKs vs other countries, 1890-1918

Why were municipal energy undertakings so successful? This was a vibrant debate at the time, with an eerie similarity to the debate today. One side argued that on moral grounds the municipal state should provide gas, electricity and water to the population because these were basic rights. Moreover on economic grounds, municipal organizations would be more cost effective as they could borrow at a cheaper interest rate and would not need to generate a profit to pay dividends. The other side of the debate claimed the growth of the municipals was temporary, driven by uneconomic pricing. Private undertakings were better long-term asset stewards, and the municipals were ‘living off their capital, and in a few years their plant and equipment will be worn out’ (Baker, 1913). Private companies were more effective because of specialization. Municipal entities were trying to wear ‘two hats’; council and power company.  This would lead to bad outcomes, for example the municipals would pay extravagant wages to ‘vote catch’. Moreover, companies were more efficient because without the profit motive municipalities wouldn’t have an incentive to reduce costs.

Quantitative analysis showed that municipals were more effective than private companies. In 1913 the economist Ashmore Baker undertook a remarkably modern quantitative study of the difference between private and municipal operations. Baker recognized that scale had a significant impact on the efficiency of an undertaking. His dissertation included beautiful scatter plots of maximum load capacity on the x-axis and various other cost variables on the y-axis. Below are photographs of these charts from the original document (figure 3). Municipal undertakings had a lower cost structure than companies, and passed this onto customers in lower prices. This was partly because municipals didn’t need to turn a profit, but there were other inherent advantages to municipal ownership.  Municipal could also borrow at a lower rate of interest, which translated into less capex per kilowatt of maximum load. Contra the skeptics, municipals and companies had almost identical labour costs, meaning local authorities weren’t spending lavishly on workers to buy votes. Municipalities had a lower coal input cost, meaning they were either better located or better buyers. The starkest difference in cost structure was in management salaries, with companies paying significantly more for ‘leadership’. The net effect was remarkable; Baker estimated that ‘the municipalities would have earned more than 2-3x the gross profit per pound of capital than the companies’ .

Municipals had a positive long run impact on electrification. Baker’s analysis showed that municipalities had driven their prices down year on year in the decade 1900-1910 and electricity demand had grown (see figure 4). In contrast in company patches prices had been sticky, and volumes had remained relatively flat. Municipal electricity suppliers of the early 20^th century were the disrupters of the era. An innovative business model that created a powerful ‘flywheel’ effect. They used their lower cost structure to reduce prices, which in turn drove up demand, which generated economies of scale, which led to even lower cost per unit.

Figure 3: Ashmore Baker’s 1913 ‘scale vs performance’ curves for companies and municipals.

Figure 4: How municipals drove up electrification, from Ashmore Baker 1913.

Not only were municipal electricity suppliers highly effective ‘vertically integrated’ utilities, but they were as effective as private companies when it came to operating generation assets. One popular argument for privatization in the 1980s-1990s was that vertically integrated utilities needed to be split up so that the natural monopoly parts (networks) weren’t used to cross subsidize the competitive parts (generation and supply) which could be more effectively run by the private sector. History provides a wonderful ‘natural experiment’ of this hypothesis. In 1926 the Central Electricity Board was selected the best generation stations to supply the new ‘National Grid’. In an inventive study the economic historians James Foreman Peck and Michael Waterson used this event to test the relative performance of municipal vs company generation stations. The CEB selected more company stations than municipal ones, suggesting that the private model was better. However, when Peck and Waterson controlled for scale and fuel inputs, and compared the performance of all generators (whether selected by the CEB or not), they found that municipal generators were as efficient as company ones.

State backed rationalisation

The municipals were too successful, resulting in a fragmented electricity system. By the end of the Great War there emerged a consensus that the UK electricity system was too complex and disaggregated. In 1919 a Ministry of Reconstruction committee headed by Lord Haldane and with input from the great consultant engineer Charles Merz fired a broadside against ‘British Parochialism’ as a cause of national decline. ‘Parliament was convinced that the generation and supply of electricity must be dealt with… they were, however, apparently afraid to insist on the amalgamation of the existing lighting enterprises which… were… limited to a few miles of area instead of covering, as they should, a few counties’. Reformers cited the low level of electricity supplied per kwh per capita compared to other countries (see 1920 in figure 7).

The Central Electricity Board was established in 1926 to solve the problem of fragmentation. It would be responsible for constructing and operating a new 132kv ‘National Grid’. Once constructed, the CEB would then select generating stations, buy power from them, and resell the power nationally. The CEB would also be responsible for standardizing voltage, current and frequency.

The CEB plan was innovative and uniquely British. Up until that point ‘electricity transmission’ was about connecting hydro-electric supply with urban centers over long distances. California and mainland Europe were the pioneers. The CEB plan was different; the objective was ‘system integration’. By connecting supply and demand nationally, the fleet of generating stations could be run more efficiently because the ‘diversity of load’ and ‘load factor’ could be increased. Figure 5 is an illustration of this concept from the British born but Chicago based pioneer of electricity, Samuel Insull. In time the less efficient stations could be shutdown, which would reduce the system wide cost.

Figure 5: Diversity of load and load factor, Chicago, Samiel Insull c 1910.

Figure 6: The Original National Grid in 1932 (LHS), and the split of country into municipal and company areas in 1939 (RHS).

Note: Black areas on right hand side are municipal areas, grey are private company areas.

The CEB plan worked. The system load factor went from 25% in 1926 to 37% in 1939. Britain had the biggest increase in electricity consumption per capita of any mature economy (see figure 7). Electricity prices fell dramatically. The level of spare ‘reserve’ capacity fell from 43% in 1925 to 10% in 1938.

Figure 7: UK leap in electrification 1920-1938.

The CEB learnt from the failures of the interwar period, and knew that voluntarism and persuasion would not overcome parochialism. The competitive race of the 19^th century had led to deep mistrust between companies and municipals, and between municipals in different areas. From 1919-1926 the British state tried to rationalize the system through the Joint Electrical Authorities; fifteen regional entities that would try to persuade municipal and company undertakings to interconnect on a voluntary basis. Their only tools were consultation. The 1919 Act gave them the pathetic right to ‘designate electricity districts after holding a local enquiry and providing ample opportunity for advice and consultation with all parties concerned’. In short, the regional JEAs could only integrate within areas if the utilities decided to do so. The 1920s were a story of interminable public enquiries and deadlock. Companies feared interconnection would mean being gobbled up by larger municipal undertakings, and municipal utilities feared integration would lead to higher prices due to the companies needing to make a profit.

To break this deadlock, the CEB needed to be well designed and well resourced. The CEB was an innovative institutional construct, with some similarities to the NESO today. The CEB was a public body, but not part of the civil service, which meant it escaped salary constraints. It could hire several prominent engineers from within the electricity supply industry. This gave the institution gravitas and an image of commercial practicality. In being public bodies, the CEB and NESO are alike. The CEB also had considerable access to capital as it was able to raise its own funds on the stock market. It had the option of a treasury guarantee, but never exercised this right (and this seemed to satisfy conservatives that it was not a nationalized entity). Here the CEB and NESO are not alike. NESO won’t be able to raise capital to fund grid infrastructure. This will fall to the privatized Network Operators.

Resources were critical to overcoming local level vested interests and ensuring the national system made economic sense for every area.  In short, the CEB used its financial muscle to construct three bribes.

• Bribe 1: When the CEB selected a station, it would have disposal of the entire capacity. It was not obliged to use that capacity. However, it did take on responsibility for the costs of the station regardless of whether it used the station or not. This included any of the ongoing capex costs and interest on any capital raised in the past.

• Bribe 2: The CEB guaranteed to supply utilities with power at a price lower than would be incurred if the selected station generation. Any difference was repaid through a rebate. The process for calculating these rebates became extremely complex over the 1930s.

• Bribe 3: The CEB Chairman Sir Andrew Duncan was a savvy Scots negotiator, who realized that selection of a station by the CEB would confer career benefits and prestige on the associated engineers. That plus bribe 1 and bribe 2, meant that the best way to guarantee buy in from every area was over selection. The original 1926 plan was for 60 stations to be selected, but in the end the CEB selected 140.

Whilst the CEB succeeded in rationalizing generation, it wasn’t as successful when it came to distribution and supply. The market remained fragmented. In 1939 there were 400 undertakings responsible for responsible for less than 10% of sales. Civic rivalries prevented comprehensive rationalization and technical standardization. The enduring ‘stalemate’ in distribution was one of the justifications for the nationalization of the entire electricity industry in 1945.

Lessons for today

1.  If we want local energy transitions that have social and democratic consent, municipal energy could be a great model.

Democratic consent and economic practicality are often juxtaposed. But the Golden Age of energy municipals demonstrates it is possible to have both. Between 1850-1920 when local authorities had sufficient resources to make a substantial commercial play, they were extremely effective at delivering energy solutions for their citizen-customers. Lower profit margins, lower cost of capital and lower management salaries all contributed. Municipal energy is common in other countries. There are many countries that have municipal utilities. 100s of the Stadwerke in Germany are municipal. Eneco in the Netherlands was municipal up until 2013.

2.  But there is no getting around the fact that local authorities need resources.

The 19^th century municipal model succeeded because local authorities had sufficient resources to get it going, and once established it gave those local authorities a significant non-tax revenue stream. Resources matter. In contrast the Regional Energy Strategic Planners of today can’t really resolve the resource constraints of local authorities. They can provide ‘proportionate resources to local authorities where needed’ such as tools, data and advice.  Without more substantial support there is a risk local authorities come to see the regional plans as being imposed upon them by far off technocrats. And if some authorities continue to have substantially more resources than others there is a risk that the RESPs are seen as being swayed by the loudest voices. As one stakeholder eloquently put it in a research report by the NESO last year:

‘Where you've had groups of local councils together that have thought about energy needs, those have been picked up by the DNO and put into their plans for future investment. where that hasn't happened, effectively it's the louder voices and the more organized places that have got the investment.’ (Public First report for NESO on RESPs p. 19).

3.    … And to be effective the RESPs need power.

The RESPs are just another coordination layer in our already complicated energy system. They will overlay the plans of local authorities, gas & electricity networks and other ‘stakeholders’ to reveal inconsistencies. Then they’ll use powers of persuasion to get to a ‘single source of truth’. The aspiration that ‘joined up thinking’ will emerge through this exercise.

Getting to a ‘single source of truth’ will involve make decision on trade-offs and who gets what. This isn’t just a technical modelling exercise. There will be multiple pathways to net zero for any one area, and different stakeholders will have a preference based on their incentives. Gas and electricity networks will probably have different views. Which areas get to benefit from green jobs? Who gets the pain of traffic disturbances when roads are dug up? The RESPs will be stuck in the middle, with no power to override decisions made by other actors. (Note – I am indebted to Adam Bell for highlighting this).   

The lesson from the Central Electricity Board is that a coordinated national and regional level plan requires a central body with democratic authority, and the power and resources to resolve trade-offs. As it stands it is unclear whether the RESPs will have the authority and resources required. In November Ofgem said ‘we will introduce a governance mechanism for RESP’s that embeds democratic representation and accountability in the process’. But ‘we haven’t defined the form of the mechanism’. Where there are conflicts between the plans of local actors the RESP’s will use ‘arbitration and conflict resolution steps’. But we don’t know what that means. There will be a ‘feedback loop’ between the RESPs and FES ‘to ensure than the regional FES pathways produced by FES do not inadvertently promote one region over another’. (Ofgem, Decision document on the CSNP). Does that mean it would be ok to advertently promoting one region over another? How will the national ‘Strategic Spatial Energy Plan’ be delivered without favoring certain regions with certain factor endowments over others?

In conclusion, the RESPs have promise but we need to know more about how they will resolve trade-offs