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Davey: Climate change policies could halve negative impacts of energy price shocks

The negative impact that spikes in global oil, gas and coal prices have on the UK could be reduced by over 50% in 2050 as a result of climate…

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The negative impact that spikes in global oil, gas and coal prices have on the UK could be reduced by over 50% in 2050 as a result of climate change policies, Edward Davey said today.

The analysis, produced by Oxford Economics and commissioned by Government, shows how the UK’s sensitivity to oil and gas price shocks could be reduced by using low-carbon forms of electricity generation including renewables, new nuclear and through increasing energy efficiency.

Secretary of State, Edward 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.

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 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.

Notes for Editors

  • DECC commissioned Oxford Economics to carry out the research in 2011 - download the ‘Fossil fuel price shocks and a low carbon economy’ report
  • Two scenarios were analysed, a low carbon and business as usual (BAU) scenario which compared the impacts of a 50% increase in the global price of oil and gas on the overall UK economy and different components of the economy: consumption, investment, inflation, employment and sectoral impact.
  • The draft Energy Bill will be published next week. This sets out Government’s proposed reforms to the electricity market. It is being published in draft so that it can undergo pre-legislative scrutiny.
  • The draft Energy Bill will reach Royal Assent in 2013, with the first low-carbon projects being supported through it in 2014
  • The Electricity Market Reform White Paper published in July 2011 outlines Government’s proposals for transforming the power sector
Published 18 May 2012