Green interest rate could reduce electricity costs by £1.9bn a year

A green interest rate that encourages investment in clean energy projects could boost renewables and reduce electricity costs by more than £1.9bn a year, new analysis by the New Economics Foundation (NEF) has found.

As the price of fossil fuels continues to drive inflation and the need to reduce carbon emissions grows, researchers at the independent think-tank have said the Bank of England could promote investment in renewables and reduce bills by reducing rates for clean energy investments.

Analysis suggests a 2.5% decrease in interest rates for renewables and grid upgrades could cut the cost of electricity by more than £1.9bn a year from 2030. This would reduce bills by £24 per household each year.

This could be achieved if the Bank introduced a temporary Term Funding Scheme for Energy Price Stability (TFSEPS) that would offer commercial banks long-term loans, at a rate below Bank rate, to enable them to lend cheaply to clean energy projects and buildings retrofits.

This would help increase clean energy supply and reduce demand for fossil fuels, protecting the economy from further price shocks which have left households across the country struggling to afford the essentials.

Theo Harris, researcher on economic policy at NEF, said:

“It’s clear that the main driver of the UK’s worst bouts of inflation is always fossil fuel prices. People are struggling to pay their energy bills, but the Bank of England isn’t doing anything to address the root causes of the problem.

“If it’s serious about tackling inflation, the Bank needs to support the transition to home-grown clean energy, rather than hinder it with high rates that harm clean investment.

“Otherwise, the next geopolitical shock that puts up gas prices will send us straight back to square one with soaring inflation and another cost-of-living crisis.”

ENDS

Contact

James Rush – james.rush@neweconomics.org

Notes

The full briefing, Reducing interest rates for clean energy investments, is available here.

Energy prices were the largest factor in the recent inflation spike. The Office for National Statistics has shown that energy-price effects (direct and indirect) accounted for three-quarters of the 10.4% consumer price index (CPI) inflation witnessed in the 12 months to February 2023. Analysis published by the National Energy System Operator (NESO) shows that reducing our reliance on fossil fuels will provide protection against future shocks. NEF analysis of NESO figures show that achieving clean power by 2030 would save £230/​year off energy bills in the event of another gas price shock, compared to a scenario in which no additional clean energy measures are taken.

NEF recommends that the Bank of England calibrate the TFSEPS to target a reduction of at least 250 basis points (2.5%) on interest rates for renewables, grid upgrades, and buildings retrofits. This is sufficient to tangibly increase investment volumes and decrease energy bills.

To estimate the cost savings on electricity bills, we reconstruct NESO’s methodology for calculating the costs of a clean power system in 2030, under the ​“Further flex and renewables” scenario. We adjust the weighted average cost of capital (WACC) to isolate the effects of a 2.5% reduction in the cost of debt on all as-of-yet uncontracted renewables capacity, as well as transmission, distribution, and offshore network upgrades for the years 2026 – 30. The difference in total annual system costs by 2030 is £1.9bn. Using NESO figures for household consumption, this approximates to £24 per household. Even after the end of the TFSEPS, the electricity bill savings would continue for many years, particularly given the Contracts for Difference which fix renewables prices for 15 years. The £1.9bn number is a lower-bound estimate, as it does not include the savings from buildings retrofits.

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