Historic energy transitions produced great advances in human well-being. The major gains in food security, education, income, and longevity, over the past 150 years have a singular taproot: the massive exploitation of fossil fuels. The devastating impacts of climate change now drive a transition based on decarbonization. But make no mistake about it: fossil fuels underpinned unprecedented improvements in the human condition.
Is it possible to measure the benefits to consumers from switching from one energy source to another? Economists measure such benefits by consumer surplus, which happens when the price consumers pay for a product or service is less than the price they would have paid. Suppose you pay $15 per month for a content streaming service, but you would have paid as much as $25 per month. The $10 represents your consumer surplus. Note that consumer surplus is not money in your bank account, but economists argue that it does improve your welfare.
The energy historian Roger Fouquet calculated the consumer surplus generated by the major energy transitions in the United Kingdom from 1800 to 2000.1 The focus was on energy services (illumination, heating, and transportation) rather than on individual fuels (wood, coal, oil, gas) and technologies (horses, cars, trains). The advantage of this approach is that the demand for services remains comparable with the introduction of new goods and technologies. To gain perspective, the value of consumer surplus was expressed as a percent of Gross Domestic Product (GDP).
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Advances in lighting revolutionized daily life. For example, gas lighting made work, education, and social activities much easier to undertake (or cheaper to ‘produce’) at night. The expansion of street lighting also promoted urbanization and reduced urban crime. Electricity enabled cheap quality lighting to penetrate every aspect of household and community life. But by the 1950s continued advances in lighting had more modest impacts on welfare because it had saturated most of its potential uses.
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The dramatic rise in consumer surplus in transportation reflects the extent to which increased mobility radically altered society. Beginning in the 1840s, many upper- and upper-middle-class UK households chose to move away from the crime, sewage, and smoke of the cities. As more people reached higher income levels, they moved to the suburbs and traveled more. The expansion of urban railway networks made this possible. The growing use of cars beginning in the 1950s enabled personalized and flexible transport. In these ways transport transformed lives and improved people’s well-being. The consumer surplus of passenger transport was the equivalent of nearly 30% of GDP by the 1960s.
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Improved heating services did not have the same transformative effects as advances in lighting and transport. The advent of new heating methods certainly made people more comfortable as evidenced by the increase in consumer surpluses caused by the introduction of central heating in the 1980s. However these improvements did not create new experiences and lifestyles. For most consumers, gas and electric heating are simply substituted for coal heating.
What are the major takeaways of this analysis? The first is that major energy transitions produced great benefits for consumers. The UK history reveals dramatic increases in consumer surplus due to the transitions in transport services from stagecoaches (4 percent of GDP in 1830) to railways (nearly 20 percent of GDP in 1900) to cars (close to 30 percent of GDP in 2000); and in lighting services from candles (1 percent of GDP in 1800) to gaslight (10 percent of GDP in 1900) to electric lighting (13 percent of GDP in 1950).
Another insight is that the benefits from energy transitions exhibit diminishing returns. At high levels of income and consumption of energy services, incremental improvements in technologies generate smaller increases in consumer surplus because people are already very well off.
The history of the United Kingdom may have important implications for countries in very different development stages. Consumers in developing economies are likely to gain greatly from growth in energy service (and also energy) consumption, although it may take several years for the net benefits to be observed. Conversely, future technological development and energy transitions in industrialized countries may benefit consumers less than they did in the past.
1 Fouquet, Roger. “Consumer Surplus from Energy Transitions.” Energy Journal 39, no. 3 (May 2018): 167–88. https://www.iaee.org/en/publications/ejarticle.aspx?id=3082