Sam Friggens writes for Abundance Generation, a regulated online platform that allows investment in renewable energy.
Our economy is becoming more unbalanced than ever with our reliance on foreign fossil fuels a big part of the problem. But by building more renewables, we can stop a balance of payments crisis and put our economy back on track.
Back in 2010, before the coalition Government was formed, George Osbourne outlined his vision for a ‘rebalanced’ British economy. No more unsustainable growth fuelled by disproportionately high consumption and debt, but instead “a new model of economic growth, rooted in more savings, more investment and higher exports”.
But if a week is a long time in politics, three years is an eternity. New developments suggest that far from rebalancing, we risk becoming more unbalanced than ever.
The Government appears to be pursuing the “old” model of growth. The new ‘help-to-buy’ scheme, intended to boost the housing market, has been criticised by Sir Mervyn King and others who say it is sustaining a house price bubble and could leave taxpayers exposed to billions of pounds of private mortgage debt in years to come.
At the same time, macro-economic data shows that key components of the “new” economic model are declining in significance. Economist Duncan Wealdon has highlighted that in 2010 57% of future growth was expected to come from business investment and new trade, whilst in 2013 this fell to 31%.
A Balance of Payments Crisis?
All this is reflected in the UK’s increasingly dire balance of payments situation. The nation’s current account is running a deficit which is increasing over time. In other words, we import much more than we export, and money flows out of our economy.
The deficit almost trebled from £20bn in 2011 to a whopping £57bn in 2012 - that’s 3.7% of total UK GDP, far higher than current growth.
And when sustained over time, this a very bad thing for the economy.
To get the extra foreign currency we need to fund the gap, we can as a nation either borrow more and push ourselves further into debt, or sell more of our assets such as housing and infrastructure. Clearly, neither can continue indefinitely.
Ideally, to narrow the deficit we need to export more. Other options are much less palatable. In a recent speech Bank of England economist Martin Weale suggested these include further devaluation of the pound (increasing the price of everything we import), and an ‘improvement’ in productivity (most likely through falling wages).
Fossil fuel energy - part of the problem
Nowhere do we face the balance of payments dilemma as clearly as in our energy use. Only 10 years ago, the UK was a net energy exporter. By 2011 however, increased demand and a reduction in North Sea oil and gas production meant that we were reliant on imports to meet over a third of our energy needs. Almost all these imports are fossil fuels.
The chart below shows how our dependency on foreign oil, coal and gas is increasing year-on-year.
In 2011 the value of these net imports was £19bn. If these imports had not been needed, the balance of payments deficit in 2011 would have been all but eliminated.
Renewable energy - part of the solution
All this highlights the important role renewable energy can play tackling our balance of payments problems and building a new economy.
Not only is investment in renewable energy exactly the kind of infrastructure investment we need to kick-start our economy in the short term (read more here), but it means we will produce more domestic energy and see less of our money flow out of the country in the long-term. It truly is a win-win.
To understand the scale of the opportunity, consider this - according to a study jointly commissioned by Government and industry, harnessing just a quarter of the UK’s offshore renewable energy resource would mean the UK would become a net exporter of electricity.
And a word on shale gas. It’s clearly the case that domestic production would help our balance of payments too. But bare in mind estimates are highly uncertain, and even the industry itself says that fracking will, at best, only replace falling north sea production, not replace the need for imports. It is not a game-changer.
Maximising the economic benefits of a pro-renewables strategy
Of course the reality of securing maximum economic benefits of more renewables is complex. Even if we had produced enough domestic renewable energy in 2011 to negate the need for imports, it’s not the case that all £19bn would necessarily have stayed within the UK economy.
For example, the proportion of our energy bills which would have paid for foreign fossil fuels would instead have gone principally towards repaying the initial capital outlay of the extra renewable energy generators, as well as towards interest and profits for investors.
Thus, looking to the future, the first thing we must do is ensure the UK captures as much of the initial capital outlay associated with new renewables as possible. This will depend on how much of the manufacturing, supply chain and construction is based here.
As such, the defeat this week of the proposed decarbonisation amendment to the Government’s Energy Bill is unhelpful, to say the least. It would have given supply chain investors the long-term confidence they needed to commit to the UK. This will now be a more difficult task.
The second thing we must do is ensure more of the interest repayments and profits are recycled here. This will require more low-carbon infrastructure to be owned and financed by us. Energy cooperatives and financial innovations like crowd-funding have a big role to play here.
In sum, using renewables to meet our energy needs can help rebalance our economy and recycle our money. They should be a fundamental part of the Chancellor’s “new economic model”.
