Britain faces a critical juncture in its efforts to decarbonise the economy, with a new report from the Resolution Foundation underscoring the need for significantly increased investment in the power sector. Titled “Electric Dreams,” the report emphasizes the imperative of ramping up power sector investment to meet escalating electricity demand driven by the shift towards electrification in homes and transportation, including the adoption of heat pumps and electric vehicles (EVs).
While the cost of renewable energy sources like offshore wind has plummeted in recent years, from £164 per megawatt hour in 2014 to just £51 in 2022 (in today's prices), the report raises concerns about the impact of rising interest rates on the affordability of clean energy transition. Pre-crisis assumptions of persistently low interest rates, which previously underpinned forecasts of lower energy costs for households, are now called into question.
The report highlights that higher interest rates could significantly inflate the cost of financing necessary investments in clean energy infrastructure. For instance, a hypothetical increase in borrowing costs from 5% to 9% could inflate the cost of an offshore wind project by 31%, translating to an average increase of £400 in future energy spending for households by 2050.
According to the report's estimates, the escalation in interest rates could potentially add £29 billion annually to household energy bills by 2050, disproportionately burdening lower-income households. The poorest fifth of households could face a 3.6% increase in energy spending as a share of their income.
Jonathan Marshall, Senior Economist at the Resolution Foundation, stresses the urgency of proactive planning to address these challenges. Marshall asserts that Britain must substantially expand its electricity supply infrastructure and ensure efficient transmission across the country as it transitions to a decarbonised economy reliant on renewable energy, heat pumps, and EVs.
The report underscores the necessity of tens of billions of pounds in annual investment over the next 15 years, surpassing expenditures on initiatives such as home insulation or electric vehicle adoption. It suggests that cleaner energy could be more cost-effective if interest rates revert to the low levels observed during the 2010s.
While Britain has made strides in offshore wind generation, continued investment is imperative to fully harness the potential of renewable energy sources. Expansion of capacity and integration with the national grid are crucial steps to bolstering the reliability and cost-effectiveness of clean energy.
However, proposed infrastructure upgrades, such as reinforcing the high voltage power network in East Anglia, face opposition from residents, local authorities, and politicians. National Grid's consultation on the controversial plans underscores the complexities involved in modernising the grid to accommodate increased renewable energy capacity.
The Resolution Foundation calls on the government to develop a comprehensive plan that addresses the challenges posed by high interest rates. Key areas of focus include securing cost-effective investments in renewable energy projects, implementing measures to shield vulnerable households from rising energy costs, and exploring alternative funding mechanisms to ensure an equitable distribution of the financial burden.
Investing in a clean energy future is imperative for Britain's decarbonisation goals, but it requires careful consideration of affordability concerns, particularly for vulnerable populations. By prioritising cost reduction, targeted support programmes, and innovative funding approaches, the government can navigate the obstacles posed by high interest rates and facilitate a just transition towards a sustainable energy future.
