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Government walks a carbon floor price tightrope

Source: Reuters - Thu 8th Jul 2010

With carbon reduction targets and a number of coal and nuclear power plants scheduled to close, Britain plans to introduce a minimum price for emitting climate-warming carbon to encourage investment in clean energy and draw in billions of pounds of investments needed to keep power flowing.

Although a high floor price is needed to reduce risks associated with nuclear and renewable projects, analysts said this may eventually feed into power prices and large energy consumers would end up paying for carbon twice.

"Even if we assume that it is to be applied to the power sector alone, costs could be eventually passed through the customers and therefore result in unnecessarily higher costs in industries - like steel for example - which are already covered by the EU's Emissions Trading Scheme (EU ETS)" said Omar Abbosh, managing director of Accenture's UK and Ireland Resources group.

The CBI business lobby group for the most part supports the introduction of a carbon floor price, but would like the costs spread out across all customers to stop industries from relocating factories to other countries.

"There is a competition risk to industry from energy price increases that international competitors are not putting in place" Murray Birt, CBI senior policy advisor said.

"You've got the EU ETS, the floor price, the renewables obligation, the renewable heat incentive, the feed in tariffs, all have to be paid for and adding pressure to energy bills."

Suggestions to mitigate a rise in power prices include a phased approach, which would increase over time in line with long-term forecasts.

"One option would be to implement a floor, which increases over time, informed by long-term market forecasts, but with sufficient predictability to underpin investment planning" said Richard Gledhill, global climate change leader at advisory service Pricewaterhouse Coopers.

The CBI would also like government policies to spread higher power costs across different sectors.

"The question is how are these costs are being borne across the economy. Our most intensive energy users must not be disadvantaged by our energy policy" Birt said.


In the June budget, the government said it would publish proposals for reforming the climate change levy to support a carbon floor, with legislation expected in the finance bill in 2011. Before then, the floor price remains debated within the sector.

"For years it is clear that a carbon floor price of $50 or 50 pounds is what's needed to catalyse serious changes in behaviour and combat emissions" said Chris Stubbs, director at environmental consultancy WSP.

Inenco energy analyst Ian Parrett said a price of around 50 euros a tonne of carbon would also be needed for nuclear new builds, while 330 euros a tonne would be needed for carbon capture and storage for fossil fuel fired power plants.

"There is no realistic way that carbon prices can go that high. This highlights the need for government subsidies (for CCS)" Parrett said.

Meanwhile, a PWC carbon market poll for the International Emission Trading Association showed 68 percent of the participants felt a carbon price of at least 40 euros was needed to prevent global warming by two degrees Celsius.

European carbon futures have been trading in a 12.50 to 16 euro range for the last six months.


Some analysts have questioned a need for a carbon floor price for new nuclear plants, if a government forecast of carbon rising to 70 pounds a tonne and gas prices to increase to 74 pence a therm by 2030.

"Mathematically speaking, a carbon floor price is not needed to ensure investment in new nuclear power stations" Datamonitor senior renewables analyst Alex Desbarres said.

"A carbon floor price might well be an interim step towards a self sustaining nuclear industry rather than the only means to a make nuclear cost efficient. Putting a number on that though, that's a complex proposition" colleague David Mayne said.

Britain's utilities - including E.ON UK, EDF, RWE Npower, and Centrica have also declined to give a specific number for the floor price.

"We don't think a floor price is going to sufficient anyway, we think there needs to be a low-carbon obligation which promotes rather than penalises," an E.ON UK spokesman said.

Energy companies are expected to invest billions of pounds in new UK power generation. Britain's Centrica has a 20 percent stake in British Energy - owned by France's EDF - which is aiming to build four nuclear reactors, while German utilities E.ON and RWE also plan to build new nuclear plants in Britain.

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