What could be done with 1% of national budgets, and might it be enough to trigger the private investment we need?  We crunched some numbers.

The key question politically is: If the world shifts to renewable energy, what will happen to peoples' electricity bills along the way as the new wind turbines, photovoltaic panels, solar power stations and grids are being installed?  All governments fear a voter backlash, stoked by hostile sections of the media, if they allow electricity bills to rise too high or too fast.  That fear is one of the main reasons why most governments, even those that understand the risks of climate change, are not yet pushing ahead with renewables as fast as they should.  (Another major reason, of course, is very effective lobbying by some fossil fuel companies.)

In the Roadmap 2050 study, McKinsey’s calculations for the 100% renewable scenario took into account among other things the cost of building all the generating capacity, the new long-distance grid connections, the increased demand for electricity if we switch cars and building heating to electricity, the energy efficiency measures that we can easily take, and the major savings that would be achieved by using free renewable energy rather than expensive fossil fuels.  There would be big savings on transport, as an electric car is cheaper to drive than a petrol car.  But they found that, unless there are sharp rises in the costs of coal and gas, the price of electricity in 2020, if Europe shifts towards 100% renewables, could be roughly 20% higher than in a business as usual scenario.  After that, the price of electricity in the renewable scenario would gradually decline.   The price difference at the peak is likely to be even greater if the transition takes place as quickly as the UK Met Office is urging.

Put another way, if the very substantial up-front capital costs of building the new renewable infrastructure are entirely paid by private capital, the entire cost will be passed on to consumers in their monthly electricity bills.  In the long run, renewables will save us money as their costs steadily drop, but for just 10-20 years there may be an increase in bills for households and industry.

Using McKinsey's numbers, we went on to make a very rough  estimate of the total increase in electricity costs if we switch the world to renewable energy by 2050.  Our reasoning is that, while circumstances differ in different parts of the world, the shift to renewables requires much the same kinds of investment in all major regions of the world.  Indeed, most of us will use the same technologies built by the same manufacturers.  While Europe benefits from good wind resources, much of humanity lives closer to the equator, and therefore has better solar resources, but every region will harness both wind and sun.  The costs may be bigger or smaller in different regions, but the order of magnitude will be the same.  Much more work needs to be done on such calculations, but with this simple approach of “scaling up Europe” we can at least get a general idea of the costs involved. 

We include more detail in our strategy paper.  The conclusion is that 1% of national budgets amounts to roughly one third of the total increase in electricity costs as we shift to wind and solar power.  In other words, simply by investing 1% of budgets in the transition to renewables, we could reduce the price increase for consumers by at least a third.  If these funds come from reallocating within existing budgets, no increase in taxation is required.

In fact, we should be able to reduce people’s bills by more than that.  If some of those government funds are used in ways that reduce risk for investors (for example, through attractive feed-in tariffs or loan guarantees) then the interest rates that banks charge for renewable energy investments will fall significantly.  As noted earlier, a big part of the cost of renewable electricity is interest payments to banks.  By reducing interest rates, we can achieve a further reduction in the costs of the global energy transition.

One percent of the budget would achieve just as much in developing countries as it would in richer nations.  In India, even 0.10% of the Union Government’s budget over 20 years would be enough to equip each of the country’s 95,000 un-electrified villages with a renewable energy mini-grid.  That mini-grid could be powered by enough renewable energy to meet the basic electricity needs of every household.  

Investment of an equivalent amount (another 0.10% of the Union Government’s annual budget) could create new renewable energy power plants with a total capacity of 30 GW.  That would provide enough electricity to power health centres, schools and local council offices in each of over 600,000 villages of India.  In a nation where close to 40% of the citizens and 65% of the schools have no electricity, this would be a major achievement.

In short, 1% of national budgets would make an enormous difference to the speed at which the new renewable energy infrastructure gets built.  It could reduce the increase in the price of electricity by 1/3 or more, and it would enable governments to smooth out any sudden price spikes along the way.  Combined with incentives for private investment in which any cost increases are shared between consumer and government, it might even be enough to trigger all the private investment we need, without triggering a public rebellion over electricity bills.  And not least, it could help to bring energy for development to 1.6 billion of the world's poorest people who have no access to electricity today.

Intriguingly, the 1% government target is matched by a similar statistic from the private sector.  To power the world largely from renewables within two or three decades, the additional capital costs to build the new generating capacity is in the order of $10 trillion, compared to the capital cost of traditional coal power stations.  That amount would be provided if the world’s major pension funds made an additional 1% of their investments in renewables over ten years.  If 1% of government budgets, combined with incentive programmes, could trigger 1% of pension fund investment, that might just be enough to solve the fossil fuel problem.

Increased public funding will also enable us to undertake some important research projects, or build some key grid connections, that simply might not be sufficiently profitable at first to attract private investment without government as a partner.

Indeed, research and development has to be a top priority for government spending in this area.  Until we reach the point where sun, wind and water are the cheapest energy sources on earth, there will always be a temptation to choose dirty but cheaper sources.  Even while we are rolling out today's technologies around the world, we should be pushing for constant improvements.  The day is fast approaching when renewable technologies such as wind turbines or advanced solar panels can produce electricity more cheaply than coal or gas, and when that day comes the transition to clean energy will be completed very quickly.  In the 1940s, the US government created a small city full of scientists to build an atom bomb – and years of work got done in months.  We should do the same now for the technologies we need to save the planet.

Some background from Roadmap 2050: a practical guide to a prosperous, low-carbon Europe (www.roadmap 2050.eu):

McKinsey’s calculations for its 100% renewable by 2050 scenario found that the price of electricity in 2020 could be roughly 20% higher than in a business as usual scenario – which they call their “baseline” scenario.  After that, the price of electricity in the renewable scenario would gradually decline as a result of economies of scale and technology improvements.  Their conclusions are summarised in this graph.

The Roadmap study looked at how to achieve the EU’s stated aim of reducing emissions by 80% by 2050.  If we are to achieve the 5% annual global reductions that the UK Met Office says is needed, Europe needs to make the transition to renewables even more rapidly than that.  This would mean that the price difference after the first ten years of the transition process could be greater still.

Of course, if peak oil and peak coal theorists are correct, the price of fossil fuels may rise so fast that the renewable scenario rapidly becomes the cheaper option.  But since this is difficult to predict, McKinsey used the fairly conservative projections for fossil fuel prices of the International Energy Agency leading up to 2030, and then assumed no further increases after that.

Using McKinsey's numbers, we went on to make a very rough  estimate of the total increase in electricity costs if we switch the world to renewable energy by 2050.  Our reasoning is that, while circumstances differ in different parts of the world, the shift to renewables requires much the same kinds of investment in all major regions of the world.  It is hardly precise, but with this approach of “scaling up Europe” we can at least get a general idea of the costs involved.

Looking ahead 10 years, we took the projection of the Energy Information Administration (EIA), in the US Department of Energy, for world electricity consumption in 2020.  Projecting current trends, with no rapid shift away from fossil fuels, the EIA foresees the world using some 25,000 TWh of electricity in 2020.  We have included here their “business as usual” projections for electricity growth from different sources.  If the price of electricity in 2020, during a transition to 100% renewables, might be around 20% higher, this translates into an increase in the order of €16 per MWh.  The total increase in the world's electricity bill in 2020 might therefore be around €400 billion, or US$560 billion.

Government budgets will be bigger in 2020, but if we take today's figure of $175 billion for 1% of national budgets, this amounts to roughly one third of the total increase in electricity costs.  Thus by investing 1% of budgets in renewables and new grids, we could reduce the price increase for consumers by at least a third.

In fact, as we mentioned earlier in this paper, we should be able to reduce people’s bills by more than that.  If some of those government funds are used for measures such as loan guarantees, then the interest rates that banks charge for renewable energy investments will fall significantly.  By reducing interest rates, we can achieve a further reduction in the costs of the global energy transition, perhaps even halving the increase in electricity bills when prices are at their highest point.

In addition to reducing prices, public funding can make possible the more long-range, speculative research on things like new photovoltaic materials, which could in time dramatically lower the costs of renewable energy.  It could also ensure that all the new grid connections we need get built as quickly as possible, though public-private partnerships.

Perhaps most important of all, a serious financial commitment from governments will convince banks and pension funds that the renewable energy revolution is finally about to happen – and that they need to be part of it.