London, 24 March 2014
Chancellor George Osborne said in his 2014 Budget last week that the UK’s carbon price support rate would be capped at GBP 18 per tonne until 31 March 2019. The carbon price support is the amount levied on top of the EU emissions price – in other words, the premium that UK industrial companies and utilities pay for carbon above the price paid by their European neighbours.
However, analysis by Bloomberg New Energy Finance indicates that even with that support price cap, the all-in cost of carbon paid by UK utilities between 2015-16 and 2017-18 will be well above the original Carbon Price Floor trajectory, and much more than the GBP 10 per tonne of CO2 UK emitters currently pay. The analysis indicates that UK power companies will have to pay GBP 35.05 per tonne of carbon in 2016-17 – substantially more than the expected GBP 17.05 per tonne carbon price in Europe.
In fact, the all-in UK carbon price could overshoot the floor by GBP 6.10/t in 2016-17, according to calculations based on Bloomberg New Energy Finance’s in-house spot EU Allowance (EUA) price forecast, which accounts for the impact of “backloading” in the EU Emissions Trading System. The UK’s carbon price floor stands at around GBP 28.95 per tonne in 2016-17.
The conclusion of this research contrasts with much of the post-Budget commentary in recent days, which has presented the introduction of the cap as an emasculation of low-carbon policy.
2016-17 (nominal GBP/t) UK carbon price support (a): 18.00 BNEF forecast EU carbon price (b): 17.05 All-in UK carbon cost (c = a + b): 35.05 UK carbon price floor (d): 28.95 Forecast UK carbon price floor overshoot (e = c – d): 6.10
Jonas Rooze, lead European power analyst at Bloomberg New Energy Finance, said: “The UK is not abandoning its Carbon Price Floor policy. The cap will stop the all-in UK carbon price from exceeding the price floor trajectory by as much as it otherwise would. But carbon costs may still overshoot that line, and UK utilities will still pay more than the government planned when it set the trajectory in 2011.”
This is because the two-year forward prices used to calculate the support price do not capture the full additional cost of the EU decision to start to “backload”, or delay, many of the bloc’s auctions of carbon permits.
The cap on carbon price support is likely to have several other effects:
- The cap will have a downward impact on baseload power prices between 2016 and 2019. BNEF's EUA forecast suggests that the cap will depress prices by between GBP 1 and GBP 5 per MWh. - Gas generation will be the biggest loser, continuing to struggle in the face of competition from coal. The cap will result in higher coal-fired generation, of the order of 20%, 40% and 33% respectively in the years 2016-18, all at the expense of gas-fired generation.
Rooze added: "The cap does beg the question: what happens to the Carbon Price Floor trajectory from 2020? This will likely depend on whether there is more enduring reform of the EU ETS and how much ground carbon prices make up at the European level."