Almost every week a new report quantifies the investment needs for part of British infrastructure. Without unfailingly consistency, the researchers specify requirements for large numbers of billions of pounds to modernise energy, transport, water supply or similar sectors. Strikingly, these figures are never put into context. We are not told whether the additional capital investment represents a large or a tiny fraction of GNP, nor how they compare to other countries. It’s time to change this.

This article is an attempt to pull together some of the estimates contained in the recent analysis from the UK’s National Infrastructure Commission and compares these figures with the total investment volumes in the British economy, with international averages and with comparable figures, particularly as regards energy, that have been produced by other sources. It concludes by suggesting that, if carried through, new capital going into energy will require allocation of at least 1.5% of GDP. But other sectors will also need major injections and the rebuilding of the British economy will absorb at least 5% of national income over the next decades. This is a major - and unremarked - shift in the structure of the economy but the growing evidence of inadequate capital spending across the UK makes the investment increasingly urgent.

The data

The UK currently puts about 18.4% of its national income into capital investment across the economy.[1] This includes such things as the purchase of machine tools or robots for a factory, the construction of new houses or transmission masts for mobile phones.

18.4% is low compared to most countries. The average in the EU is 21.6%, about 17% higher than the UK.

UK GDP was around £2,500 billion in 2022.[2] Investment therefore ran at about £460 billion in that year.

Most of that money was spent by the private sector. Government investment was approximately 2.8% of GDP in 2019. If this share has remained the same, it represents be around £70 billion in 2022. The OECD average for public investment as a percentage of GDP averages around 3.2%.[3]

· The estimates of how much extra investment the UK needs for infrastructure: National Infrastructure Commission (NIC) study, October 2023[4]

This study suggests the following requirements for the UK energy system on its trajectory to full decarbonisation by 2050. (A summary table is below).

o £20-£35 billion a year of private investment between 2025 and 2050 for decarbonisation and increased electricity supply. This seems to cover power generation, transmission and distribution as well as a carbon capture network and hydrogen production, storage and transmission.[5]

o £5.1 billion of public funding between 2024 and 2030 (7 years) on the Social Housing Decarbonisation Fund to improve insulation standards. This equivalent to about £0.7bn a year.

o £8.8 billion of private investment, although mandated by government, to install insulation improvements in low income households between 2024 and 2035 (12 years). This amounts to about £0.7bn per year.

o £28.9 billion of public investment in improving the energy efficiency of public buildings, spread over the 2024 – 2050 period, but with 75% (£21.6bn) spent prior to 2035 (12 years). Between 2024 and 2035, this is £1.8 billion a year.

o £33.8 billion of public funding between 2024 and 2050 to deliver low carbon heat for social housing of which 35% is spent before 2035 (12 years). This amount would provide about £1.0 billion a year.

o £41.7 billion of public investment to help subsidise lower income households decarbonise their heat supply, principally by installing heat pumps. 35% should be provided by 2035, implying expenditure of about £1.2 billion a year.

o Public subsidy of £7,000 per new heat pump installed between 2024 and 2035. The National Infrastructure Commission targets 7 million installations before the end of the period, implying a total subsidy of about £4.1 billion a year.

o The NIC also recommends a scheme offering the buyers of heat pumps a zero interest loan. The cost of this is not calculated in the report so I use the following assumptions: 5% cost of interest subsidy, an average debt of £3,500, 7 million installations by 2035. This costs the government about £1.2bn a year.

o To get to 300,000 public EV chargers by 2030, the UK will need about 35,000 new chargers a year. Making the crude assumption that 20% will need to be rapid chargers (50 kW or more at £30,000 installed cost) and the rest slower (7 kW+, averaging £8,000), very approximately the cost will be £0.45 billion a year.

The table below summarises these cost estimates.

Source; analysis and estimation partly using NIC data

Combining both public and private investment, the NIC is suggesting a figure of around £38 billion a year between now and 2035 to transform the energy system. This is approximately 1.5% of national GDP. If achieved, the UK would still sit well below the average investment ratio of EU economies. Public investment, now running at around £70 billion, would rise about 13%, or approximately to the same level as the average for the OECD.

· Other assessments of how much will be needed in investments in the energy system

Are the NIC assessments reasonable and well-supported? The data in the report is extremely sparse, particularly on the estimates of £20-£35 billion a year for the transformation of energy supply and storage. For example, there’s absolutely no analysis of the amount of battery storage required or its price. Important questions like the direction of the cost of offshore wind are ignored. So we have considerable reason to be doubtful of the quality of the numbers provided.

One potential check is to make estimates of the money required just for the construction of electricity generation and the improvement of electricity networks. The government targets 50 gigawatts of offshore wind by 2030 and 70 gigawatts of solar by 2035. (Each of these two types of generation have about 14 gigawatts of UK capacity today).

o The cost of offshore wind. About 5 gigawatts a year are targeted between now and 2030. The cost of offshore wind is about £3m a megawatt at present, implying a total cost of around £15 billion a year. Any onshore wind would be additional.

o Solar will need to rise by about 3 gigawatts a year. It costs about £700,000 a megawatt in late 2023 if installed on open land. That is about £2 billion a year.

o National Grid estimates that the amount of capital investment required to connect the new wind farms to the high voltage network will be about $21.7 billion before 2030, or £3bn a year.

These three items add up to £20 billion a year. In addition, there will need to be extensive battery farms, hydrogen production, new distribution infrastructure on the lower voltage grid and many other improvements. These will almost certainly take investment needs up to £35 billion or beyond. So the NIC estimates are probably too low.

· The other sectors covered by the NIC

Transport and environmental resiliency are the other main sectors covered by the NIC 2023. It estimates that transport improvements will demand £28 billion a year between now and 2050. Much of this cash will need to be spent on the obviously necessary improvements to public transport, particularly in cities.

Environmental resilience, particularly against flood and drought will require £8-12 billion a year from the private sector and another £1-1.5 billion from public funds.

In total, the NIC’s report suggests a need for around £39 billion of private investment each year and approximately the same amount from government. In total, this is over 3% of national income and, if carried through, would take the UK up to around the EU average for investment as a share of GDP. This looks possible. However inside this total the NIC is proposing an increase in public investment of more than 50% in the next few years, which seems a more challenging task.

· Capital needs not covered by the NIC

In addition, we know that several other sectors, such as water supply and treatment, that are not covered by the NIC will also need major additional tranches of new capital. For example, the water companies have bid for the right to invest £96bn over the five year period of 2025-2030, almost double what they are currently investing.[6] The request is therefore for an investment of £19 billion a year, or almost 0.8% of GDP.

Add in other sectors requiring more capital, such health care provision, and the percentage of UK GDP devoted to investment will probably need to rise by at least an additional 5%, adding nearly a quarter to total capital spending. This will be an unprecedented change in the economy, temporarily reducing the amount of money available for immediate personal consumption.

[1] Source: World Bank, https://databank.worldbank.org/source/world-development-indicators/Series/NE.GDI.TOTL.ZS

[2] Source: House of Commons Library, https://commonslibrary.parliament.uk/research-briefings/sn02783/#:~:text=In%20the%20latest%20calendar%20quarter,£2%2C506%20billion%20in%202022.

[3] Office for Budgetary Responsibility; https://obr.uk/box/international-comparisons-of-government-investment/

[4] https://nic.org.uk/app/uploads/Final-NIA-2-Full-Document.pdf

[5] Data is from page 16 of the report.

[6] https://www.water.org.uk/news-views-publications/news/water-companies-propose-largest-ever-investment