Can the UK afford Net Zero?
Text of a talk given to the Academy of Ideas on 27th June 2024
This is the speaking text for my talk. Since the time available is limited, the actual talk will be an abbreviated version of this text, but this constitutes the reference source of what I intend to cover.
Most discussions of Net Zero in Britain and elsewhere focus on the “should”, i.e. the policy choice about whether the expenditure of money and other resources on achieving Net Zero yield benefits commensurate with the large costs involved. In this talk I will focus on the “can” issue. In a trivial sense the answer is yes, provided that collectively we are willing to accept a sufficiently large reduction in our levels of consumption to free up the resources required.
An alternative answer, the one preferred by the Climate Change Committee and many lobbyists, is that only a very small sacrifice is required and even that will be rapidly offset by magical opportunities for green growth. After more than 10 years of such claims, we know with certainty that this is pure snake oil salesmanship. Everything turns out to be more difficult than claimed, costs have not fallen dramatically, and no green growth has materialised.
Over the last 2-3 years several sources have estimated the costs of achieving Net Zero for the UK, Europe, OECD countries and the world. The numbers are so large that they are Monopoly money – almost beyond anyone’s comprehension. One reputable group at McKinsey give an estimate of $275 trillion by 2050 for some – not all – of the costs. Who knows what figure is right? I prefer an alternative way of thinking about the issue. The investment required will be equivalent to a minimum of 5% of GDP for the next 25 years, but there is a high probability that this may be close to 10% of GDP once you allow for the cost inflation and overruns that almost invariably affect such large programs.
To make this more concrete I want to use the Labour Party’s goals as an example. This is not intended as a political commentary, since the differences between parties are small. The Labour Party claims that it will decarbonize the UK’s electricity system by 2030. Of course, anyone with even slight knowledge of electricity systems and projects knows that this is pure fantasy, but this is typical of political virtue-signalling.
Allowing for supply constraints it takes 4-5 years to design, finance and build a major wind farm or solar plant. The UK would need to build over 100 GW of new solar and wind capacity in 6 years at a probable cost of nearly £400 billion to meet Labour’s goal. On top of that an additional £150 billion is required to upgrade transmission and distribution networks via projects that take even more time. It is all cloud-cuckoo land stuff.
Today I would like to focus on money. Again, anyone with minimal interest knows that the UK faces a fiscal black hole for at least 5 or 10 years with the prospect of becoming like France by 2030 with a public sector debt of close to 120% of GDP – and that is without any large spending on Net Zero. If the government attempts to add 25% of GDP in new debt to fund Net Zero the whole house of cards will collapse via a vicious cycle of increasing interest rates, inflation and a collapse in the currency. For those old enough to remember, we have been here before in 1976. This is not shroud-waving but a complete certainty.
The only option is to attempt to delay the bill being presented by transferring the debt to private balance sheets with the promise that consumers of electricity will bear the cost via various kinds of taxes or levies to make up the difference between market prices, which will fall, and actual costs which will rise. Bear in mind that the wholesale cost of electricity is currently about 20% of the price paid by consumers. This ratio will fall to, perhaps, 10% - it is 14% now in Germany.
Financial investors are often dumb but are they that stupid? Japanese institutions are among the biggest sources of finance for solar and wind projects in the UK. Are they – or anyone – likely to contribute a large share of £300+ billion of debt finance for the UK electricity system. Their regulators at the Bank of Japan and the directors of the MUFG Bank (formerly the Bank of Tokyo-Mitsubishi) might have something - not very polite - to say about that. It would be obvious to everyone that a very large amount of debt was, in practical terms, secured against the willingness of the UK government to impose large taxes on electricity or energy prices. On reasonable estimates these levies would at least double electricity prices in real terms.
That is not all. Once the investments have been made there is very little to prevent a future government abrogating or compulsorily renegotiating the financial arrangements. This has happened in the past in many countries – most recently in Spain – when political pressures about the costs imposed on consumers outweigh concerns for future investment. Consider how the North Sea oil and gas sector has been treated over the last decade. If I were an adviser to a lender or an investor, I would suggest that some kind of adverse tax or other changes were almost a certainty.
On top of this, where would the equity come from? To support the debt required, investors would have to find about £100 billion in equity. Forget the PR. When they talk privately to each other, European utilities complain that their renewable projects are less profitable than they had expected, in part because market prices are so variable and often near to zero or negative. They shouldn’t be surprised. Sensible economists predicted this pattern 5 years ago. But who listens to Cassandra?
National Grid has announced that it needs to spend at least £50 billion on its transmission system. Where will the money come from? Currently NGET, the transmission company, has assets valued at about £17.5 billion backed by equity of about £4.5 billion – i.e. a debt-equity ratio of 75:25. Simply to maintain that ratio it would need to raise over £13 billion but all it could manage was less than £1 billion via a rights issue. Even if National Grid had access to the personnel and technical resources required (which it does not), its plan is financial fantasy without a very large amount of government funding.
Now let us step back to put these financial constraints in the macroeconomic context. Over several decades physical investment (called gross fixed capital formation in tangible assets) in the UK has averaged about 17% of GDP and has rarely exceeded 18%. Currently it is at a historic low, excluding wartime periods, of about 14%. Most of that total is accounted for by expenditures on renewing our existing capital stock
The decline in net investment is reflected in extreme pressures in three areas that will compete with Net Zero for capital expenditure.
1. Housing. Labour has promised to build 1.5 million new houses over 5 years. After the inevitable slow start that will mean at least 350,000 to 400,000 new house per year in the later years, which is an increase of over 200,000 on the current rate of building. With 15% higher building costs to meet Net Zero standards, annual investment in housing must increase by at least 2% of GDP to meet this target. Even this is insufficient to meet the pressures on the UK housing stock due to population growth.
2. Social infrastructure. The UK has cut public investment in and maintenance of social infrastructure – health and social care, education, courts, police, prisons – to the point where it cannot cope with what is needed to handle a growing population. Remedying this neglect is likely to require annual investment of at least 1% of GDP.
3. Economic infrastructure and business assets. The UK’s recent productivity growth has been dismal. There is little doubt that this has been worsened by under-investment in economic infrastructure (including transport) and business assets. As a broad indicator, to increase GDP growth by 1% per year requires capital investment in such assets of 3%-4% of GDP.
Together these figures imply that the UK’s gross investment should increase from 14% to 20% of GDP just to get back to where we were two decades ago and with very limited provision for meeting the costs of Net Zero. Remember the “cost of living crisis”. Double that and assume that it lasts for 5 years. That gives a flavour of what getting back to levels of investment in the past would require.
The political version of the story is that growth avoids the need for a squeeze on consumption. That is nonsense. Yes, in the long run allocating the proceeds of economic growth to fund investment eases the choice. However, this ignores the fact that growth follows investment, often by 5 years or more. [In the 1990s I managed a research project that unequivocally demonstrated pattern.] The die for economic growth under the next government is already cast, subject only to random external shocks or bits of luck.
What is also forgotten is that a large part of recent economic growth has been due to population growth. Over the last 15 years average growth in real GDP per person has been 0.7% per year. In the 15 years before that, the average was 2.2% per year. That decline of 1.5% per year is a measure of the challenge that we face. It is not implausible to believe that at least some of fall is due to the diversion of large amounts of capital investment into low productivity and high capital-intensive projects in renewable energy and associated activities.
To raise the share of tangible investment in GDP to 20% through growth over 5 years it would be necessary to (a) raise the growth in GDP per head to 2% per year, and (b) keep private and government consumption per head constant in real terms for 5 years! If, as seems probable, the share of GDP allocated to government consumption – and thus public employment – were to stay constant, it would be necessary to reduce private consumption as a share of GDP by 15% to provide the resources required to increase investment in housing, infrastructure and business assets.
For nearly 15 years commentators have complained about austerity in public spending and asserted the need to spend more on decarbonisation, even though both have grown significantly as shares of GDP. The shift has been achieved by sacrificing tangible investment in infrastructure and other economic assets, thus undermining economic growth.
Ultimately, pursuing Net Zero is a choice about consumption – both now and in the future. How would young voters react if told that they can have either more housing or decarbonisation but certainly not both? Similarly, older voters given the choice between access to social care or a greener future? The reactions would probably be very sceptical because everyone has been told implicitly that no such choices are necessary. Unfortunately, that is why economic growth is so dismal and public services are deteriorating so visibly.
It is hard to avoid clichés. If the painful choices implied by pursuing Net Zero are not addressed, then British economic growth will continue to stagnate. Many aspects of public and private life will get greyer with increasing levels of discontent. Borrowing ever greater sums, whether against the security of tax revenues or energy bills, is at best a temporary fix. Since the lenders know that all too well, the cost of postponing choices will become higher until borrowing becomes self-defeating. This is a path taken by many countries in the past. When the inevitable crash happens, the consequences of the shock to the political and economic system will be profound and unpredictable.
The UK cannot reasonably afford the costs of Net Zero over the next 5 or 25 years. Sadly, policymakers are likely to continue digging themselves into an ever deeper hold for some time before that realisation sinks in. All too often, policy changes are only possible after some exceedingly painful collision between blind hope or ignorance and reality.
Notes on sources and further reading:
[1] All statistics are obtained from the Office of National Statistics – UK National Accounts, The Blue Book: 2023. The original version was published on 31st October 2023, but I have used the amended spreadsheet published on 31st January 2024.
[2] For those not familiar with national accounting statistics, gross investment (including the renewal or replacement of existing capital stock) is divided between gross fixed capital formation (GFCF), changes in inventories, and acquisition less disposals of valuables. GFCF is in turn split between investment in tangible assets and investment in intellectual property. While intellectual property is very important if you are Ireland, for a country like the UK it is tangible assets – infrastructure, houses, machinery, etc – that matter.
Since inventories are essential for business operations, my figures on physical investment are the sum of investment in tangible assets plus changes in inventories. If changes in inventories had been excluded the share of physical investment in GDP is just over 13%. For comparison, in China physical investment has averaged more than 30% of GDP for the last two decades. The UK’s level of physical investment has usually been low by comparison with other European countries, and this has got worse since 2000.
[3] For a longer discussion of some of the issues covered here, refer to: Gordon Hughes – Financing the Energy Transition: Do the numbers add up?, Global Warming Policy Foundation, March 2024, https://www.thegwpf.org/content/uploads/2024/03/Hughes-Financing-Energy-Transition.pdf.
[4] I have examined the Labour Party’s plans for decarbonising the electricity system by 2030 in an article published on my Substack: https://cloudwisdom.substack.com/p/labours-energy-promises-vision-and. David Turver is another analyst who has published several pieces on plans for decarbonising the electricity system on his Substack Eigen Values at
Another person who has published extensively on related issues is Kathryn Porter of Watt-Logic, https://watt-logic.com/blog/.
Both Turver and Porter have independently extended my analysis of trends in the costs of renewable generation. They have concluded that the standard story of a rapid and continuing decline in costs is simply a myth, actively promoted by those who know little or nothing about the detailed finances of the electricity sector but at complete odds to what insiders claim and company accounts show.
Another Substack author – Katherine Brodsky - has recently written an article on why false claims are so persistent. See:
The first two of her factors – confirmation bias and repetition – are extremely strong in this context. Politicians and officials want to believe that renewable energy is much cheaper than it really is. By repeating it often enough they convince themselves for a time, but this leads to yet more painful collisions with reality.