Household energy bills are rising very rapidly, and are now expected to be over £4,000 per year by October and possibly over £5,000 per year by early 2023. Many commentators, including most notably Gordon Brown, are saying that we should now nationalise the energy companies and bring bills down. Would that help?

It’s rather unclear what is being proposed by those that advocate nationalisation. We can think of the energy sector as having three layers. First, there are those that create or collect energy. These are firms that run wind farms, hydroelectric plants, solar panels or nuclear power stations, or mine coal or drill for oil or gas. At this layer there are many, many firms operating in a highly competitive international market.

It is at this layer that prices have skyrocketed. The removal of Russian gas supply at a point at which aggregate energy supply was already stretched because of adjustments to green energy (with non-green energy sources removed or running down but many big green energy projects still a few years from completion) has meant there is not enough energy to go around at previous prices. A bidding war in markets has ensued, pushing up prices for the remaining energy.

The firms at this layer of the market are making high profits at present. That is not a result of any monopoly power or other market failure. It is the market working correctly, with prices rising to ration demand – when demand for energy would otherwise outstrip the energy available. High prices will also create strong incentives to expand production as much and as fast as possible this winter, to avoid or reduce blackouts.

Do those advocating nationalisation have in mind the nationalising of all the plethora of energy producers? Every wind farm, every biomass producer, solar plant, oil drilling field, gas field, nuclear power plant and the rest, to create some massive nationalised ‘British Energy’ firm? To what end? Would British Energy have a monopoly on the supply of energy in Britain? Would we ban the importing of additional energy? Would British Energy be forbidden from selling its energy on international markets?

Is the idea that British Energy would sell at much lower prices than the current market price? But then there wouldn’t be enough energy to go around, so energy would have to be rationed (as a number of European countries are already planning to do this winter). How would we ration energy? Is the idea that the NHS, schools and poorer households get guaranteed continual supply, but the sweets factories, tanning salons and pubs are only allowed to run for a few hours per week this winter? Who would decide who is worthy enough to receive power? If you aren’t woke enough or are too woke, will you be cut off? Do immigrants get energy? Will public sector employees? Does your union negotiate a special energy supply guarantee deal with the government? If prices don’t rise, what incentive will there be to produce additional supply this winter? If energy production is a nationalised monopoly, will people still be permitted to buy wind turbines or solar panels or wood-burning stoves for their houses?

Maybe advocates of nationalisation don’t want to take over the energy producers. The second layer is transmission and distribution. This is the regulated part of the energy sector, with the well-known ‘energy companies’ in the electricity and gas sectors. These firms are regulated as regional monopolies (more or less), subject to price regulation and access regulation. They have their costs assessed by the regulator and are permitted to add something on to the price at which they buy energy to cover those costs.

How would nationalising that layer help? There is monopoly power there, but firms are not permitted to make excess profits anyway and it isn’t at that layer that prices have risen. Is the idea that the government would own that layer and buy in the energy at market prices but then charge only a much lower price for the energy after it is transmitted and distributed, selling it at a huge loss covered by taxpayers? But if we want to do that, why do we need to nationalise the sector? Why not just pay subsidies to the regulated energy firms, telling them the price we want them to sell energy at? And if we sold at low prices we’d again have to ration.

The final layer is the energy retailers, that deal directly with households. There are many of these and they compete (at least to a degree). This is the level at which the energy price cap applies. The old price cap drove many of these firms into bankruptcy last autumn and winter. Again, perhaps we could nationalise these firms and sell energy at a huge loss, covered by taxpayer subsidies, and then ration. But, again, what would nationalisation be supposed to achieve that subsidising these firms would not?

The reality is that high energy prices are not the result of any market power or other market failure. They are the result of there being not enough energy, because the Russo-Ukraine war has disrupted the market at a moment longer-term issues had left supply vulnerable. Nationalisation isn’t going to create any extra energy. It isn’t an answer to anything here at all.