Energy Prices The Focal Project

Looking back at 2022 – a volatile year for energy policy

In 2022 energy policy rose to the top of the political and economic agenda, as energy prices soared due to economies opening after Covid lockdowns and of the war in Ukraine. CEP has sought to understand and provide commentary and analysis on the multiple policy announcements including the energy price caps, the Spring Statement, the Energy Security Strategy, the cost of living crisis support, the UK Government Energy Plan, the Energy Prices Bill, and the Autumn Budget along with a range of blogs and longer commentary pieces.

As the year draws to a close we take a moment to reflect back on that changing energy landscape and the insights our research has brought to that rapidly evolving context.

The impacts of the energy price shock on the lowest income households

Rising energy prices have hit the lowest-income households hardest. Our analysis shows that the 20% of UK households on the lowest incomes are being hit by a 50% larger increase in the cost of the average basket of goods and services that they buy. Heat and food make up a significant proportion of their baskets and they spend a higher proportion of their disposable income on these.

Our research showed that the increases seen by those on the lowest-incomes are two and a half times more than those on the highest incomes. Even after the £400 Energy Payment given to households, the lowest income households will be over £350 worse off in real terms.

Chart 1 – Changes in the aggregate price of good of services paid by each household income quintile (household quintile CPI) due to 2-year electricity and gas price shock

This effect is spreading beyond those on the lowest-incomes, with our results suggesting that 40% of UK households are facing cost-of-living increases at least 25% higher than the UK average.

In 2023 our research will continue to focus on how the energy price shock will impact households and businesses and explore how outcomes could be improved through actions such as energy efficiency and market reforms and achieve more affordable energy prices.

What does energy efficiency and heat decarbonisation do for the economy?

In 2022 CEP continued work and collaboration with policymakers to understand how implementing a large-scale energy efficiency programme across the UK might impact households and the economy more generally.

We identified two routes and types of effects that control how deploying energy efficiency might impact the wider economy.

  • The first is new economic activity associated with delivering energy efficiency projects. Here, the likelihood and magnitude of a transitory net GDP impact depends crucially on how actions are funded, the extent and length of the government programme and the extent to which resources are displaced and consequent price responses.
  • The second is the impacts of households facing lower energy bills and realising gains in real income available for spending on other goods and services as a result of energy efficiency projects delivered. Here, sustained net gains in GDP can be expected to evolve over time. Ultimately, the magnitude and composition of evolving and sustained GDP gains will be dependent on constraints and price/cost responses across the economic system.

Our work on the UKERC funded ‘Delivering a sustainable and equitable heat transition’ also continued, with some initial findings and insights being published in a recent blog which explores the following issues:

  • Distributional impacts across income groups are likely to vary, with particular pressure on lower income households.
  • Uncertainties remain around the role of hydrogen in domestic heating.
  • Sectoral and regional impacts: there will be winners and losers.
  • Pressure on skills and jobs to support the transition to low carbon heat.

Look out for a series of policy briefings related to this work in the first half of 2023.
Industrial Decarbonisation – the opportunities and trade-offs associated with carbon capture and storage.

Industrial Decarbonisation – the opportunities and trade-offs associated with carbon capture and storage

In 2022 our work on industrial decarbonisation, and in particular CCUS, focussed on the importance of the labour market in relation to CCUS project delivery and in driving outcomes of CCUS deployment including impacts on GDP, exports, household incomes and the cost of living.

Our work also explored the tensions that might arise with regional policy and ‘just transition’ employment agendas if polluting industries are required to pay the full costs of carbon capture deployment. This could have knock on impacts for competitiveness leading to negative consequences for wider regional and national economies. Our work highlights the need for policy support to enable UK industry to build and exploit an early mover advantage.

We also looked at the policy trade-offs in introducing a CO2 transport and storage industry to service the UK's regional manufacturing clusters. Public support for the deployment of a new CO2 transport and storage industry can help avoid industrial competitiveness challenges, which are likely to trigger offshoring of both industry activity and emissions, alongside extensive job losses and cost-of-living pressure. However, public funding is costly, resulting in reduced consumer demand in other sectors of the economy or increasing public budget pressures. Moreover, persistent supply constraints in the UK labour markets mean the roll out of new CO2 transport and storage industry will bring producer and consumer price pressures alongside new job creation.

Overall, there is a need to focus time limited public funding on enabling the deployment of a CCUS networks in a manner that does not damage the competitiveness of UK industry and avoids offshoring of production, jobs, and emissions. Crucially this period must be used to build efficiencies and develop competitive advantage.

What role does carbon pricing have to play in an ‘economically-efficient’ Net Zero transition?

In 2022, we sought to understand the importance of labour market responses, competitiveness impacts, and revenue recycling in determining the political economy costs of broad carbon taxation in the UK. Our work highlighted the broad-ranging impacts on producer costs and competitiveness and the wider economy and households of extending carbon pricing/taxation across the UK economy, and also explored the potential role carbon pricing might have to play in an ‘economically-efficient’ Net Zero transition? Going forward, we will continue to undertake analysis to support effective policy making around the implementation of carbon pricing (including the UKETS).

Continuing to deliver impactful research and policy analysis

So all in all it’s been a busy year, with a continued focus on delivering policy-focused research and impact. It was rewarding to have this work recognised through CEP’s part in the School of Government and Public Policy’s submission to the Research Excellence Framework (REF), which Times Higher Education ranked as #1 across the UK in the Politics and International Studies Unit of Assessment. Virtually all of the School’s research outputs were rated as ‘world-leading’ or ‘internationally excellent’ and 100% of the impact of this research, which included a CEP impact case study, was rated as outstanding.

As we head into 2023, we will continue to engage widely with industry, policy makers and wider stakeholders to continue to deliver impactful research and policy analysis that works towards the Centre’s mission of working to ensure that transitions to mid-century net zero targets deliver sustainable and equitable prosperity.