Higher UK interest rates could increase energy costs by £29 billion by 2050
The cost of financing investment in the UK’s green energy sector could push up households’ costs by £29 billion by 2050 because they can no longer be relied upon due to low interest rates, according to new calculations by the Resolution Foundation think tank.
To take the next step in decarbonising the economy, the UK will need to quadruple its investment in the energy sector over the next decade. However, calculations made in a low interest rate environment do not take into account how much of these costs could be passed on to consumers, the study says.
By 2040, UK households will use 45% more electricity than in 2025, while road transport electricity use will increase 13-fold as heat pumps and electric vehicles become more widely used.
“The UK needs to massively increase its electricity supply and ensure energy can be transported efficiently across the country as we move towards a decarbonised economy using renewable energy, heat pumps and electric vehicles,” said Jonathan Marshall, chief economist at the Resolution Foundation.
“This will require investments in the tens of billions of euros per year – and even more over the next 15 years. Cleaner energy could be cheaper if interest rates return to the low levels of the 2010s.”
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Borrowing costs of 9 percent instead of 5 percent would increase the cost of an offshore wind project by 31 percent, while household energy spending would rise by an average of £400 in 2050, the study found.
The Resolution Foundation also said these higher energy prices would disproportionately affect low-income households. The poorest fifth of the population could see their energy spending rise by £700 a year – or 3.6 percent of income.
Wealthier households would be less affected as the higher energy costs would be offset by the savings from owning an electric vehicle and their energy spending would only increase by 0.3%.
The modelling used in the study represents an extreme result, as the markets are already pricing in interest rate cuts for June.
The BoE decided last month to keep UK interest rates at their current 16-year high of 5.25% for the fifth consecutive month.
The good news is that the cost of providing additional renewable energy, which is ultimately paid for through household energy bills, has actually fallen sharply over the past decade.
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For example, the cost of offshore wind power contracts has fallen from £164 per megawatt hour in 2014 to £51 at the renewable energy auction in 2022 (at today’s prices), the Resolution Foundation said.
This, coupled with forecasts made when interest rates were at historic lows, has led many to believe this investment boost can be achieved alongside consumer savings. The foundation points out that in a low-interest world, people’s energy spending on homes and cars could fall by 1-2 per cent of household income by 2050 compared to pre-pandemic levels, which would mean real-world savings of between £250 and £1,000 a year.
Although the future path of interest rates is highly uncertain, the think tank said the government should plan how to deal with this higher interest rate environment, including price reductions, price protection measures for low- to middle-income households, and balanced financing of investments between private households and the state.
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