Video report by ITV News Political Correspondent Libby Wiener
The former Cabinet minister said the Lib Dems have to "wake up and smell the coffee" after a series of disappointing general election results.
The Kingston and Surbiton MP, who has been acting leader since Jo Swinson lost her seat in the 2019 general election, defeated Layla Moran to win the leadership by 42,756 votes to 24,564.
Sir Ed said his job is to "rebuild the Liberal Democrats to national relevance” but acknowledged: "None of this is going to be easy, none of this is going to be straightforward."
'We have to wake up and smell the coffee,' says Sir Davey after being elected as leader
At an event in London to announce the leadership result, Sir Ed said: "We have to wake up and smell the coffee. Nationally our party has lost touch with too many voters."
"Yes, we are powerful advocates locally. Our campaigners listen to local people, work hard for communities and deliver results."
"But at the national level, we have to face the facts of three disappointing general election results."
The 54-year-old added: "The truth is: voters don’t believe the Liberal Democrats want to help ordinary people get on in life."
"Voters don’t believe we share their values. And voters don’t believe we are on the side of people like them," he added.
So who is Sir Ed Davey?
Sir Ed Davey has been a prominent figure in the Liberal Democrats for decades and now faces a battle to revive the party’s fortunes.
At the height of the Lib Dems’ influence under Nick Clegg, Sir Ed sat at the Cabinet table as energy and climate change secretary during the coalition with the Conservative Party.
But the decision to join forces with David Cameron proved disastrous for the party, with Sir Ed among dozens of Lib Dem casualties in the 2015 election, losing his Kingston and Surbiton seat to his Conservative rival.
He won the seat back in 2017 but did not stand for the leadership after Tim Farron quit, explaining that he wanted to spend time with his family – wife Emily and their children John and Ellie.
In the 2019 leadership contest, prompted by the resignation of Sir Vince Cable, 54-year-old Sir Ed was defeated by Jo Swinson, who subsequently lost her own seat in December’s general election.
It has been a long road to the leadership for Sir Ed, who was first elected in 1997 and was chief of staff to former leader Sir Menzies Campbell.
In 1994, before entering Parliament, Sir Ed won a bravery award for rescuing a woman who had fallen on to the tracks at Clapham Junction station in south London.
His early life was marked by tragedy, with his father dying when he was four and his mother when he was 15.
Sir Ed attended the private Nottingham High School – former Labour minister Ed Balls was in the year below – and then studied politics, philosophy and economics (PPE) at Oxford.
How have politicians reacted to Sir Ed Davey as leader of the Lib Dems?
Former Lib Dem leader Tim Farron tweeted: "Congratulations Edward Davey on becoming our new leader! Ed is a fantastic campaigner who has the experience and vision to move our party forward. Leadership elections are long and tough contests, so I want to pay tribute to Layla Moran who has run a really energetic campaign."
Conservative Party co-chairman Amanda Milling said: "At the election last year, the British people decided to move on from years of division and deadlock.
"But the Liberal Democrats want to keep on playing the same old politics."
She added: "They have a new leader in place, but he has shown time and again he does not share the values of the British people."
Ms Moran, who lost by more than 18,000 votes, congratulated the new leader and said: "I look forward to working with him to campaign for a better future for Britain."
On Twitter, she wrote: "Thank you so much to all my campaign team and volunteers. I am so proud of the positive, inclusive campaign we ran. I hope you’ll all join me in supporting Edward Davey as our new leader."
Green Party MP Caroline Lucas tweeted: "Congratulations to new Libdem leader Edward Davey – look forward to working together and with all opposition parties to hold this appalling government to account & to reform our archaic undemocratic electoral system for good."
Mayor of London, Sadiq Khan, tweeted: "Congratulations Edward Davey. Looking forward to working with you in the best interest of all Londoners."
What next for the Lib Dems?
The scale of the task now facing the new leader is clear – the Lib Dems won 62 seats in 2005 and 57 in 2010 but have since struggled in general elections.
In 2015 they were reduced to a rump of just eight MPs; in 2017 that rose to 12 but fell back to 11 in 2019.
But with Labour moving towards the centre following Sir Keir Starmer’s leadership victory, the space for the Lib Dems in British politics may be further squeezed.