Britain needs energy investment surge, but rising interest rates threaten affordability

April 21, 2024

3 minutes read

Britain faces a crucial challenge in decarbonising its economy. A new report from the Resolution Foundation warns that significantly increased investment in the power sector is needed. However, rising interest rates could make this transition much more expensive for households, particularly low-income families.

The report, titled “Electric Dreams“, highlights the need for a four-fold increase in power sector investment over the next decade. This is driven by the projected rise in electricity demand as homes and transportation shift towards electrification with heat pumps and electric vehicles (EVs).

The cost of renewable energy sources like offshore wind has fallen dramatically in recent years. It has gone from £164 per megawatt hour in 2014, to just £51 in the 2022 (in today’s prices). But the report sounds the alarm on relying on pre-crisis assumptions of low interest rates.

The low interest-rate mirage

Previous forecasts assumed historically low interest rates would continue. In this scenario, the transition to clean energy could lead to lower energy costs for households. However, with current high interest rates, financing the necessary investments becomes much more expensive.

For example, borrowing costs of 9% rather than 5% would increase the cost of the same offshore wind project by 31%. This would result in households seeing their future energy spending increase by an average of £400 in 2050, rather than decrease.

The report estimates that higher interest rates, could add a staggering £29 billion per year to household energy bills by 2050. This burden would disproportionately impact lower-income households. It’s likely the poorest fifth potentially would face a 3.6% increase in energy spending as a share of their income.

Time for planning

“So now is the time for planning,” explains, Jonathan Marshall, Senior Economist at the Resolution Foundation. “Britain needs to massively increase its electricity supply and ensure it can be efficiently moved around the country, as we move towards a decarbonised economy of renewable energy, heat pumps and EVs.”

Marshall estimates this will require tens of billions of pounds worth of investment each year . This is more over the next 15 years than insulating homes or buying electric cars. Cleaner energy could be cheaper energy, if interest rates return to the low levels seen during the 2010s.

A world leader in offshore wind

Britain is already a world leader in offshore wind generation, with the shallow waters of the North Sea around East Anglia being particularly productive. These wind farms are a prime example of how renewable energy can be a cost-effective and reliable source of power. However, continued investment is needed to expand capacity and integrate it with the national grid to fully harness the potential of clean energy.

The grid itself needs an upgrade which includes a proposal to reinforce the high voltage power network in East Anglia. It will involve 184km of new power transmission lines from Norwich to Tilbury to deliver electricity to London and the southeast where it’s most needed.

Pylons at Dungeness power station. Photo credit: Oast House Archive via Geograph (CC BY-SA 2.0)

The new line has seen heavy opposition from residents, local authorities and politicians of all stripes, who want the cabling to be routed undersea around the coast and up the Thames to the Tilbury substation. National Grid has begun a new consultation on the controversial plans.

Planning for uncertainty

The Resolution Foundation urges the government to develop a plan that addresses the potential for high interest rates. Three key areas are highlighted:

Keeping costs down: The report calls for a renewed focus on securing cost-effective investments in renewable energy projects. This includes prioritising cheaper technologies like onshore wind and streamlining approval processes for necessary infrastructure.
Protecting vulnerable households: The government should implement a social tariff to shield low-income families from rising energy costs, particularly those who rely heavily on energy for heating.
Shifting the funding burden: While completely publicly funded investment isn’t feasible, strategically spreading the cost could be considered. Funding essential upgrades like grid modernisation through taxes, rather than solely through energy bills, would create a more equitable distribution of the financial burden.

The road ahead

Investing in a clean energy future is essential for Britain’s decarbonisation goals. However, this transition requires careful planning and consideration for affordability, especially for vulnerable populations. By focusing on cost reduction, targeted support programmes, and a potential shift in funding sources, the government can navigate the challenges of high interest rates and ensure a just transition for all.