The negative impact oil, gas and coal price spikes have on the UK could be more than halved by using low carbon forms of electricity generation and increasing energy efficiency, the Department for Energy and Climate Change said today.
Research commissioned by the department and carried out by Oxford Economics outlines how energy prices have been increasing over the past decade and becoming increasingly volatile.
Fossil fuel price shocks and a low carbon economy explains how a global commodity price shock will push up consumer prices, squeezing household incomes and dampening investment. Energy-intensive sectors such as heavy manufacturing will be hit hardest, while domestic demand is also hit as the Bank of England tries to control inflationary pressures.
Policies aimed at reducing the UK's dependence on fossil fuels will 'intuitively' reduce the economy's vulnerability to these fluctuations in global commodity markets. In particular, DECC highlighted the benefits of using renewable, new nuclear and carbon capture and storage.
According to the research, a 50% increase in oil and gas prices would have reduced UK gross domestic product by 1% in 2010. However, if oil demand is reduced by 50% of 2010 levels by 2050, gas demand reduced by 70% and coal reduced by 90%, this impact could be reduced to just 0.4%. The research assumes that the reductions in energy demand will be found through improved energy efficiency across sectors rather than lower demand.
'Sectors with the largest energy intensity of production in 2010 (such as transport services and manufacturing) are likely to witness the greatest benefits over the forecast period (but also the
largest adjustment costs), as it will be these sectors that would make the largest adjustments in terms of improved energy efficiency,' it added.
Energy Secretary Edward Davey said the link between volatile global energy prices and the cost of electricity in the UK had been illustrated last year when the Arab Spring's impact on wholesale gas prices contributed to a 20% increase in UK household fuel bills.
'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.'
Next week, the government plans to publish its draft Energy Bill, setting out its plans for electricity market reform. The bill will also outline how DECC plans to attract £110bn of low carbon investment by designing a more attractive market with stable returns for investors and fairer prices for consumers.
