Interest rates may increase renewable energy costs

Apr 22, 2024

Resolution Foundation, a leading think tank, has cautioned that sustained high interest rates could significantly increase the cost of the UK's shift to renewable energy, potentially adding £29 billion annually to household energy bills by 2050.

These higher costs are attributed to the global surge in borrowing rates following the COVID-19 pandemic and geopolitical tensions, which prompted central banks worldwide to hike interest rates to curb inflation.

The report ‘Electric Dreams' presents two scenarios: a high-cost future in which interest rates remain elevated and a low-cost alternative in which rates revert to pre-pandemic levels.

Under current conditions, the transition could still result in annual savings of £14bn for households by 2050 compared to today's high energy costs, despite the added investment expenses. In contrast, if rates fell to 2019 levels, savings could increase to £47bn annually.

The think tank underscored the necessity of accelerating investment in the UK's power sector to effectively decarbonise the economy. It argues that reducing the pace of the green transition is not feasible, given the urgent need to mitigate global heating and the UK's reliance on unpredictable fossil fuel supplies, which expose households to global energy shocks.

The report highlights the need for Government intervention to manage these costs effectively, suggesting the promotion of cheaper renewable options like onshore wind and public funding for projects such as modernising the energy grid.

This approach would distribute costs more equitably between affluent and less wealthy citizens. Additionally, a social tariff is proposed to shield lower-income, high-energy-consuming households from the disproportionate impact of energy costs.

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