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29 July 2010

How much more will low-carbon energy cost?

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The price of decarbonising versus the price of business as usual: both are variables

Ofgem and others have estimated that the cost of overhauling the UK’s energy infrastructure will cost some £200bn.

The vast sum of money reflects the gigantic task: decarbonising energy generation, weaning ourselves off of fossil fuels for much of private and public transport, reducing domestic and industrial demand through radical energy conservation measures, and replacing our current ‘dumb’ distribution grid with a smart one.

The debate about whether this will happen is largely over; the focus now is on how fast? Those who oppose rapid decarbonisation usually cite the cost. Decarbonising energy production will cause huge rises in energy bills rise for consumers and business, they argue, conjuring up the spectre of hypothermic pensioners and energy-intensive businesses fleeing the UK for less carbon-averse shores.

But saying low-carbon energy will cost more implies a comparison. More than what exactly?

If the assumption is that decarbonised energy will cost more than what we do now – that is, largely rely on fossil fuels – then any increase in the price of those fuels has to be factored into the comparison.

The price of oil and gas are fairly closely linked. If the price of oil remains where it is today at roughly $80 a barrel, then, according to analysis from DECC, decarbonising energy generation will cost businesses and consumers more than if we stuck with fossils.

But at $100 a barrel, oil and gas start to become more expensive over the long run than low-carbon energy. And that’s without factoring in the environmental externalities.

At $108 a barrel, the saving from green energy becomes even greater. And who would bet against oil prices spiking again like they did a few years ago?

No one denies that energy is going to become more expensive, but this applies to all forms of energy, not just the low-carbon variety.


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