A report published this week has found that Britain could more than half the effects of fossil fuel price rises on energy bills by the middle of the century by continuing to de-carbonise the economy and increasing the amount of installed renewable energy capacity.
The report was commissioned by the Department of Energy and Climate Change and produced by the economic forecasting consultancy Oxford Economics. The report examines the path set out in the Government’s Draft Energy Bill (published this week) for the country’s future energy mix. The Draft Bill advocates pursuing a mixture of renewable energy technologies, new nuclear plants, carbon capture and storage for fossil fuel power plants, as well as increased energy efficiency and the introduction of a carbon tax.
The report begins by explaining that “high and volatile energy prices have a negative effect on the economy of a fossil-fuel importing country such as the UK: they dampen economic activity and they lead to an increase in the price level and potentially an increase in the inflation rate.” It continues: “One way of reducing the UK economy’s exposure to developments in energy markets is to reduce its dependence on fossil fuels either by reducing the energy intensity of output or by increasing the use of renewable energy in both energy production and energy use by households.”
According to the report the proposed carbon tax would have a significant role in determining the impact of a shock rise in fossil fuel prices; “without any carbon tax, a 50% shock to all fossil fuel prices (assuming no change in the energy mix) would feed through to a 50% rise in domestic energy prices [also serving to underline the importance of expanding the country's installed renewable capacity]; but with a carbon tax set at 100% of domestic energy prices, the 50% shock to fossil fuel prices would result in a 25% rise in domestic energy prices; and with the carbon tax set at a level of 200%, the 50% shock to fossil fuel prices results in a 17% rise in domestic energy prices. This shows that raising the level of carbon tax will result in declining marginal benefits in terms of reducing the sensitivity of domestic energy prices to an energy price shock.”
As well as impacting upon household energy bills, fossil fuel price shocks would also have a significant impact upon the country’s GDP; “a 50% commodity price shock results in a GDP decline of almost 0.8% in 2020 without carbon taxes, compared to a 0.7% fall in the LC [low carbon] scenario. In 2050, the same shock results in a GDP decline of 0.5% without carbon taxes, compared to 0.3% in the LC scenario.”
The report concludes by noting that there is a “legal and moral imperative for the UK to cut significantly our carbon emissions and to be a world leader in the climate change challenge. So we must de-carbonise Britain’s electricity generation.” As seen by the contents of this weeks Draft Energy Bill, renewables will be a key part of this process.
The publication of the report was welcomed by both government and business groups. Secretary of State for Energy and Climate Change, Ed Davey made the following statement:
“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 rices, 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.”
Niall Stuart, chief executive of Scottish Renewables commented:
“This independent report by one of the world’s leading forecasting and research consultancies goes to show that not only is the renewable energy sector providing jobs and investment in the economy now but that this investment is also helping to insulate the UK from fossil fuel price shocks in the future..
“We know that energy bills are rising faster than people’s income, and this is being driven mainly by increases in the wholesale price of gas. This report shows that if we invest now in a low carbon future, with renewable energy at the heart of it, we can help reduce consumer’s dependency on a volatile energy source that is driving up their bills.
“The renewable industry in Scotland is already supporting over 11,000 jobs and providing around 35% of Scotland’s electricity demand so we already know full well the benefits that renewable energy can bring to the economy but people don’t always realise the benefits it can bring to energy security as well.
Jennifer Webber, Director of External Affairs for RenewableUK remarked:
“We’ve seen energy bills soar over the last eight years – increasing five times faster than household income. This increase has been driven by the rising cost of fossil fuel. It’s clear that we need to find a way of cutting our dependence on gas, oil and coal – not just to combat climate change, but to limit these unpredictable rises.
“This report demonstrates that renewables can play that role, eventually helping to cut the impact of future price hikes by up to half by 2050. The Government’s Energy Bill must ensure that the expansion of renewable energy is at the heart of our energy strategy. We already know that by 2020 renewables can deliver tens of thousands of jobs and billions of pounds of investment – today’s report reaffirms they’re the best option for cash-strapped households too.”
As the report indicates both the security and affordability of energy supply is heavily dependent on the further roll-out of renewable energy technologies.