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Author: Rosa Fernandez Martin, Senior Lecturer in Economics and Finance, Keele University
Original article: https://theconversation.com/how-to-reverse-britains-chronic-underinvestment-in-energy-and-who-needs-to-pay-240139
The transition to a greener society will involve huge investments in wind farms, electric cars and trains, new ways to heat homes, and much more. Yet the UK government is sending mixed messages over whether it intends to finance such projects at anything like the rate required.
With her speech at the recent Labour Party conference, the chancellor, Rachel Reeves, sparked rumours she would change her approach to fiscal policy to enable more public spending. This came after months of the new UK government blaming a hole in the public finances for the need to make difficult decisions and spending cuts, so a shift in the opposite direction would be surprising.
Perhaps less surprisingly, the Guardian has since reported that ministers are being asked to draw up “billions of pounds in cuts to infrastructure projects” over the next 18 months. We will have to wait until the new budget is announced at the end of October to know which vision wins out.
Investment was at the heart of Reeves’ conference speech, and was cited as the solution to create economic growth. But we need to understand what type of investment is necessary and who is expected to invest.
In the private sector (businesses), “capital investment” generally means acquiring land, factories, machinery, or equipment that will be used to produce goods and services for a relatively long time. (Businesses also need to pay for their shorter term operating costs, such as staff salaries, raw materials or electricity bills, but these are non-capital or “working capital” expenditures and are typically not considered strictly an investment).
In the public sector, capital investment or expenditure, refers to the financing of big infrastructure projects such as roads or railways, or the building of facilities for public services such as schools and hospitals. The chancellor’s speech mentioned all these elements (schools, roads, hospitals). But while any changes to her fiscal rules will be aimed at increasing public investment, a big part of the discourse revolves around unlocking investment by business.
Overwhelming underinvestment
Investment hugely affects the plans for net zero and the green transition. The government’s official independent advisory body, the Climate Change Committee, has confirmed the UK is not on track to achieve its targets. Its latest report outlines a need to triple the annual installation of offshore wind, to double onshore wind installations, and to increase solar installations by five times. Other priority actions include installing heat pumps in 10% of UK homes, and a significant increase in the uptake of electric cars.
Jevanto Productions / shutterstock
But one of the barriers to achieving these goals is the overwhelming underinvestment in the UK’s energy infrastructure. For instance, around £54 billion will be required for the national grid alone, in order to improve connectivity and adapt it to the intermittent generation of renewable electricity. (The grid was designed to support the continuous flow of fossil fuel or nuclear energy, but you cannot control when the sun will shine or wind will blow.)
The grid is only one of the many areas where investment is falling short. So even if the rejig of fiscal rules does actually happen and produces a projected £50 billion windfall, that would still be nowhere near the amounts that the green transition demands.
In fact, recent academic research suggests that £50 billion in green investments will be needed every year by 2030. That figure will be even more difficult to reach if we add the fact the UK’s Green Investment Bank was privatised and no longer operates in the country, and that since Brexit there is no longer access to European Investment Bank funding, which was key to finance climate-related projects.
Investment in education
The green transition will also require huge investment in education. The UK faces a considerable shortage in the skills needed by new green sectors – heat pump installation, forestry, electric car maintenance, and so on. Closing this gap will require investment not just in schools but in adult training, through apprenticeships, life-long learning or university.
Importantly, green skills training can contribute to softening the loss of jobs in the so-called “brown” sectors of the economy like the oil and gas industry. But once again, and as tends to happen with public goods, the private sector is lagging behind in the necessary investments to train and reskill its workforce, and government intervention becomes complicated as different places and sectors have differing needs.
It is also difficult to estimate the funding required to close the green skills gap, with some figures suggesting an additional £13 billion per year by 2030, just in reskilling.
Bearing all that in mind, it is unlikely that any creative interpretation of the definition of a balanced budget at the end of October will produce a significant change. It won’t be enough to address the shortage in public financial resources to reach the investment needs of the green transition.
This makes it even more important to count on the private sector, which should be an active participant in large infrastructure projects and long-term investments. The need of private business investment has become a common institutional message internationally, but it increases the uncertainty of investment materialising and hence whether we can achieve our green transition goals.