A permanent move to higher interest rates could add billions of pounds to the UK’s renewable energy transition, a leading think tank has warned.
Borrowing costs have soared since the easing of pandemic lockdowns and Russia’s invasion of Ukraine, as the world’s major central banks raised interest rates to combat inflation, raising the cost of infrastructure investment across developed countries, including green power schemes. ing.
Therefore, the Resolution Foundation estimates that a scenario in which interest rates continue at current high levels would add £29bn a year to households’ energy bills in 2050, compared to a situation in which borrowing costs return to pre-pandemic levels. He said that there is a possibility that
But he said a green transition would still save consumers billions of pounds compared to current very high energy costs, and said slowing the transition was not an option.
The think tank said investment in the UK’s electricity sector would need to quadruple to deliver a significant next step towards decarbonising the UK economy, and that it would require a four-fold increase in investment in the UK’s electricity sector if interest rates remained at current high levels. He said there needs to be a plan in place to fund this investment.
The report comes amid a backlash against environmental policy from right-wing politicians who say the costs of achieving net zero are too high. Labor cut its green investment plans earlier this year over concerns about rising borrowing costs and a Conservative campaign to weaponize the affordability of the £28bn price tag.
However, the Resolution Foundation said the green transition remains important despite higher investment costs. The report says decarbonising the power sector is key to combating global warming and will also help reduce the UK’s dependence on volatile fossil fuel supplies, which was witnessed after the Russian invasion. He said there was a risk of exposing households to a similar global energy shock.
“Responding by pausing or slowing the pace of power sector decarbonization is not an option,” the report said.
The government is committed to decarbonising the power sector by 2035 and achieving net zero by 2050, with Labor pledging to meet this target five years in advance.
The report, Electric Dreams, outlines two scenarios for future costs up to 2050. One is a “high-cost” scenario in which global interest rates remain at current levels, and the other is a “low-cost” scenario in which borrowing costs return to pre-COVID-19 levels.
Decarbonising the power sector could save households £14 billion a year by 2050, compared to historically high energy bills in 2023, the report says. However, lower interest rates could lead to significant savings of up to £47bn a year. It has returned to 2019 levels.
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However, compared with 2019 levels before the wholesale energy market surge, the high-cost scenario would see household bills rise by £11bn a year by 2050. If interest rates fell to a similar level to 2019, households would save £18bn a year, a difference of £29bn between the two scenarios.
The report calls for a focus on keeping prices low when delivering new investments, such as encouraging the development of onshore wind power, which is cheaper than other renewable energy alternatives. The report notes that paying for investments through taxes rather than energy bills could spread costs more equitably between rich and poor households, making some projects such as energy grid modernization more affordable. He said there is a possibility that public funds could be invested in the project.
It also called on the government to introduce a social charge system for low-income households, which could help protect poorer households, especially those who use large amounts of energy.
Jonathan Marshall, senior economist at the Resolution Foundation, said policymakers cannot expect interest rates to return to pre-pandemic levels in the future. “If interest rates remain high, energy costs will rise rather than fall over the next few years,” he said.
“Therefore, now is the time to focus on lowering contract prices, protecting prices for vulnerable households, and rethinking the role of the state as an investor on how to deliver a surge in energy investment while protecting low-income households. It’s time to plan.”
