Fossil energy risk exposure of the UK electricity system: The moderating role of electricity generation mix and energy source

Abstract

The UK's energy policy aiming to reduce carbon emissions has effectively driven down the use of coal in its electricity generation mix. But unless the power system can transition to a predominantly renewable mode of generation, it may still be unable to significantly reduce its reliance on traditional fossil fuels. To observe the effects of energy policies in the UK, this paper measures risk exposure of the UK electricity system to fossil energy prices. We analyze the moderating role played by the electricity generation mix and energy sources in the relationship between the two. The study finds that although the UK power system has greatly reduced its dependence on coal in its power generation mix, the risk of coal price shocks in electricity prices remains significant. Self-sufficiency in the UK gas market is essential for electricity price risks. The results imply that in addition to carbon reduction, the UK must propose policies to increase incentives that will encourage power companies to pivot towards renewable energy generation. This will allow the electricity market to reduce fossil fuel dependence. In doing so such policies offer the potential to achieve the goals of Electricity Market Reform: an affordable and sustainable power system.