The damaging knock-on effects that unpredictable spikes in global oil, gas and coal prices have on the UK could be reduced by over 50% by 2050 as a result of climate change policies, Energy Secretary Ed Davey revealed today.
The analysis, produced by Oxford Economics and commissioned by the UK Government, shows how the nation’s sensitivity to oil and gas price shocks could be reduced by using low-carbon forms of electricity generation including renewables, new nuclear and Carbon Capture and Storage (CCS), and through increasing energy efficiency.
Secretary of State Ed Davey said: “Every step the UK takes towards building a low-carbon economy reduces our dependency on fossil fuels, and on volatile global energy prices.
“Only last year, the impact of the Arab Spring on wholesale gas prices, pushed up UK household bills by 20%.
“The more we can shift to alternative fuels, and use energy efficiently, the more we can ensure that our economy does not become hostage to far-flung events and to the volatility of market forces.
“Of course, there are costs to building more low-carbon plant, but the gains are so much greater, and crucially they are lasting.
“This is about building a more resilient economy and providing more stable energy prices for the generations that follow us”.
Energy prices have been trending up over the past decade and are becoming increasingly volatile.
Once the UK fully transitions to a low-carbon economy, the negative impacts of energy price volatility on these 4 factors are halved:
• Halving the impact of energy price volatility on disposable household income, and therefore reducing amount households would have to put aside to spend on energy bills.
• Halving the negative impact on the level of business investment.
• Halving the impact on inflation
• Halving the impact on levels of unemployment, which could rise through increased economic inactivity caused by high energy prices.
Climate change policies have the potential to mitigate against the volatility of fossil fuel prices, by reducing the UK’s reliance on fossil fuels.
Out to 2050, as the UK economy becomes less energy-intensive through improved energy efficiency and through reforms to the electricity market, these impacts will be more than halved.
Gaynor Hartnell, chief executive of the Renewable Energy Association, welcomed today's report findings and said: "Clearly investing in renewables and energy efficiency will help protect the economy against increasing and volatile fossil fuel costs.
“Householders and businesses will benefit even more if they become more energy efficient and produce their own renewable energy. Fossil fuel price rises added over £160 to the average energy bill last year, whereas support for renewables only accounted for £20 of the average energy bill.
“There are so many other benefits that investment in renewables brings. We’d also like to see the Government audit the impact on employment, export earnings, increased tax revenues, improved balance of trade, greater energy security and increased choice and competition in the energy markets.
“William Hague in his letter to the Prime Minister and Peter Hain in his campaigning for the Severn Barrage both argue that investing in renewable infrastructure makes sense even from a purely economic point of view."
Next week, the Government will publish the draft Energy Bill which will set out in detail how the UK’s electricity market can be reformed in order to keep the lights on, bills down and the air clean.
It will set out how the UK can attract the £110 billion of investment required to build new low-carbon plant, by designing a more attractive market with stable returns for investors and fairer prices for consumers.
The Government claims the reforms will allow the UK to meet its climate change targets, an 80% reduction in emissions of greenhouse gases by 2050, whilst incentivising the construction of a balanced mix of renewables, new nuclear and CCS.