Yahoo Finance Higher UK interest rates could add £29bn to energy bills by 2050
The cost of financing investment in Britain's green energy sector could amount to a bump of £29bn in household bills by 2050, due to the fact that low interest rates can no longer be counted on, according to new calculations by think tank the Resolution Foundation.
The UK needs to increase investment in its power sector four-fold over the next decade to deliver the next step in decarbonising the economy, but calculations made in a low interest rate environment don't account for how much of this cost might be passed on to consumers, the research claims.
By 2040, Britain’s homes will consume 45% more electricity than in 2025, while road transport electricity demand will increase 13-fold, as heat pumps and electric vehicles (EVs) become commonplace.
“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," said Jonathan Marshall, senior economist at the Resolution Foundation.
“This will require tens of billions of pounds worth of investment each year — more over the next 15 years. Cleaner energy could be cheaper energy, if interest rates return to the low levels seen during the 2010s."
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Borrowing costs of 9% rather than 5% would increase the cost of an offshore wind project by 31%, while households would see their future energy spending increase by an average of £400 in 2050, the research shows.
The Resolution Foundation also said that these higher energy prices would fall disproportionately on lower income households. The poorest fifth could see their total energy spending rise by £700 per year — or 3.6% as a share of income.
Richer households would be less affected as the higher cost of domestic energy bills would be offset by savings from EV ownership, and their energy spending would rise by just 0.3%.
The modelling in the research is an extreme outcome, due to the fact that markets are pricing in rate cuts as soon as June.
The BoE decided last month to leave UK interest rates on hold at their current 16-year high of 5.25% for a fifth consecutive time.
The good news is that the costs, which are ultimately paid via household energy bills, of providing more renewable energy, have actually fallen sharply over the past decade.
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For example, the cost of offshore wind contracts has fallen from £164 per megawatt hour in 2014, to £51 in the 2022 renewable energy auction (in today’s prices), the Resolution Foundation said.
This, coupled with forecasts made when interest rates were at historic lows, have led many to say this investment surge can be delivered alongside consumer savings. The Foundation notes that in a low interest rates world, energy spending on people’s homes and cars could fall by between 1% and 2% of household income by 2050, compared to pre-pandemic levels, offering real terms savings of between £250 and £1,000 a year.
While the future path of interest rates is highly uncertain, the think tank says the government should plan for how it would deal with this higher interest rate environment, including pushing down on prices, price protection for low-to-middle income households, and balancing the financing of investment between household bills and the state.
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