The Welfare Cost of Energy Insecurity

Although energy security is considered as an important objective of energy policy in many countries, there is limited information about the consequences and the economic impact of energy insecurity. Most of the literature on energy security has focused on the definition and indicators, and little attention has been placed on quantifying its economic cost. The aim of this paper is to contribute to this literature quantifying the welfare cost of energy insecurity. We focus on the economic risks and, therefore, we relate energy security to the volatility in the energy price. A standard Dynamic Stochastic General Equilibrium (DSGE) model is used to quantify the welfare cost of energy price fluctuations. We calibrate the model for the Spanish economy, and find that in the last 30 years the welfare loss of energy insecurity has been around 0.8% of average consumption as a percentage of output.