OBR’s Net Zero Costings

By Paul Homewood

 

 One of the stories to emerge while I was away was the OBR’s report on Net Zero costs.

I reposted the GWPF’s response at the time:

 

https://www.thegwpf.com/obr-turns-a-blind-eye-to-net-zero-policy-risks/?mc_cid=d45acd1443&mc_eid=4961da7cb1

 

The OBR were rightly criticised for uncritically accepting the costs given them by the Committee on Climate Change. Worse still, even their pessimistic scenario, euphemistically labelled Headwinds, was still highly optimistic.

Even then the OBR were forced to admit that the central scenario would cost £1.4 trillion by 2050, though they did try to convince themselves there might be some savings to offset part of this cost.

Two of the areas identified by the GWPF as being over optimistic were:

• Costs of electric cars
• Costs of offshore wind

I have analysed these in a bit more detail.

Electric Cars

The GWPF wrote:

But that net saving is critically dependent on reductions in the cost of transport in spite of a shift to electricity and hydrogen. The OBR reports that these technologies will deliver “operating savings” of £30 billion a year in 2050 (p. 108), justifying this claim by reporting that “over the next decade, battery prices are projected to fall rapidly”, with “running costs” becoming cheaper than petrol and diesel as early as 2025.

The cause of this incredible fall in running costs must be attributed primarily to the assumption of low cost renewable electricity (see p. 119), but also to the imposition of a carbon tax on fossil transport fuels. The OBR assumes that consumers will quietly accept a carbon tax of £101 per tonne of carbon dioxide in 2026, roughly double the Social Cost of Carbon, and five times the UK Emission Trading Scheme (UKETS) price, rising to over £180 a tonne in 2050.

 

And the OBR clarify:

 

https://obr.uk/frr/fiscal-risks-report-july-2021/

 

It surely goes without saying that the Headwinds scenario should start on the assumption that the price of EVs remains the same as now. This is certainly a credible scenario, given the upward pressure on cobalt and lithium prices. And whilst manufacturers may benefit from some economies of scale, they will also need to recover the massive costs of transitioning from conventional to electric cars.

The OBR note that EVs are currently a third more expensive, something like £8000 for a typical car. With annual sales of 2.7 million, this adds £22 billion a year to the cost of Net Zero, a total of £440 billion between 2030 and 2050.

The savings on running costs are also optimistic. Many drivers will be forced to use public chargers, and for them the cost of charging will be much higher than refuelling currently. And as the GWPF point out, electricity prices may also end up being much higher than the CCC project.

The OBR also appear to have made no allowance for the cost of finance for car purchasers. Typically drivers pay 5% a year in interest. With EVs costing £8000 more, annual interest payments will rise accordingly.

Electricity Costs

As the GWPF has repeatedly pointed out, there is concrete evidence to suggest that offshore wind costs are much higher than reported. Cost data from offshore wind operators own Annual Accounts indicated that capital costs may be double that implied in the latest CfD auctions.

If this is so, the OBR’s calculation of a cost of £481 billion for extra investment in the power sector may end up being closer to £1 trillion. Offshore wind is of course the main plank upon which Net Zero plans are based.

 

 

Naturally some of this investment cost is offset by reduced operating costs for wind farms, but that is all rather jam tomorrow, and of no advantage to the public for the next decade or so.

Adding in these new, more realistic assumptions, we could argue that the cost of Net Zero is not £1.4 trillion, but £2.4 trillion. As we have seen,  most of the “savings” envisaged by the OBR are illusory.

Buildings

Finally it is worth looking at the OBR assumptions for residential buildings, where they claim a cost of £254 billion, offset by savings of £131 billion. Both of these numbers are absurdly optimistic.

According to the OBR:

Costs are estimated net of those that would be incurred in the baseline – for example, the cost of installing heat pumps is net of the cost of replacing gas boilers.

The OBR’s breakdown shows a total cost for heating of £194 billion, but this is only £7000 per household. Allowing for the cost of a boiler at around £3000, that suggests a total cost of £10000 for heat pumps or alternative lows carbon solutions. However heat pumps, including new radiators, are likely to cost much more than this.

There is no evidence either that other solutions, such as hydrogen, will work out any cheaper.

The OBR also give a cost of £55 billion for energy efficiency, £2000 per household. This again is a gross underestimate of the real costs, particularly as householders will have spend many thousands on insulation if their heat pumps are to work.

 

The OBR’s figures become even more preposterous when you look at the savings. According to them, householders will save £34 billion in running costs for their new low carbon systems. As we know, heat pumps and hydrogen will add massively to energy bills for anyone with a gas boiler now.

 

 

Even under the OBR’s rose tinted assumptions, Net Zero will cost the country an eye watering amount for the next couple of decades. But the real cost could end up being double.