Rise in interest rates would ‘substantially’ increase net zero costs

A return of interest rates to historically more normal levels would “substantially” increase the cost of the transition to net zero, the chief economist of the National Infrastructure Commission has warned.

Giving evidence to the House of Lords Industry and Regulators Committee’s ongoing inquiry into Ofgem and net zero, James Richardson said the future trajectory of interest rates is a “key uncertainty” surrounding the UK’s ability to meet its 2050 carbon reduction goal.

He said interest rates are important because of the level of capital investment which will be required for cutting emissions.

While the fuel costs will fall as the use of fossil fuels decreases, Richardson said capital costs will increase, reflecting the increased investment required to replace generation plant and upgrade distribution and transmission networks.

Overall, bills will be “pretty similar” but more vulnerable to variations in the cost of capital, he said: “We are fortunate to be making this transition at a time of historically low interest rates. That is a factor that brings down costs but there is no guarantee that this period of low interest rates will continue.

“If we have a big jump of interest rates back to more normal levels that would start to add up very substantially.”

The UK has had historically low interest rates since the financial crash before when they were typically around five per cent.

Richardson also rejected the argument that the UK needs an overarching body to oversee the transition to net zero, arguing that politicians must be in the driving seat on the issue.

He said the existence of his own body and Climate Change Committee (CCC), which provide advice to government on how to meet its carbon reductions goals, means there is no “clear strategic policy gap” to be filled by a new agency.

Richardson added there is “no substitute” for a Cabinet committee of ministers to co-ordinate efforts to achieve net zero, given how it extends to so many different areas of government responsibility.

“We can’t have one body with responsibility: the task will be overwhelming.

“These decisions are so important and so political that only government ministers can make them. If we are going to tell every householder that they can no longer rely on natural gas for their heating and they have to pay more, that’s an inherently political decision.

“You can’t hand that to a technocratic delivery agency and expect them to get on with it: Ultimately the government is going to have to take those big strategic decisions and implementation will look very different in different sectors.”

Chris Stark, chief executive at the CCC, had earlier told the committee that the impact of low carbon generation levies on electricity bills will reduce from the end of this decade onwards

He said: “From the late 2020s, the costs of legacy low carbon investments start to come off the bill, potentially reducing costs quite significantly. Under current policy arrangements, bills will go up until the late 2020s and then start coming down.”