Labour Party threat to UK’s carbon price support emerges

The UK’s Labour Party is the most likely major political party to banish the country’s controversial carbon tax on power generators if its wins the forthcoming general election on 7 May, according to a leading UK energy policy expert.

Wholesale power prices for affected delivery periods jumped when the policy was announced.

The carbon price floor (CPF), which puts in place a set penalty for carbon emissions from power producers, was introduced by the government to boost investment in low-carbon power generation such as renewables and nuclear.

Policy failure

But the policy, designed to remove the uncertainty of a volatile EU emissions trading system (ETS), has backfired in many areas.

The collapse of the EU’s emissions trading system has meant UK electricity generators pay a sizeable premium on carbon compared with European counterparts and has widened the disparity between UK and European wholesale electricity prices.

And until recently liable to change every year with a relatively short two-year lead time, the uncertainty over the tax’s future trajectory made pricing of forward wholesale power contracts difficult and repelled liquidity on later-dated contracts.

At the same time, a plunge in global coal prices has assuaged the damaging aspect of the CPF to coal-fired generators, with dark spreads – a measure of profitability for coal-fired plants – more than competitive against gas-fired generation.

“There’s a higher chance of it going with Labour given their background. But the devil on the shoulder of a Labour government will be ‘look at what it brings in’,” a research fellow at the Centre for Policy Studies said.

In opposition at the time of the policy’s formation, the Labour Party voted against the coalition government’s proposal.

Treasury and DECC battle

“It’ll be a battle between DECC saying that we could lose 20GW of plant [if the tax remains] and the Treasury saying ‘look at what it brings in,”

Asked what the Labour Party’s position on the tax was, a spokesman for shadow energy secretary Caroline Flint said the party was not making any unfunded spending commitments ahead of the election.

But he added that the CPF was an “obvious revenue earner” and would be a matter for the next chancellor.

However, he also admitted the party was concerned at its impact on consumer energy bills.

The tax was estimated to generate approximately £2bn (€2.8bn) for the Treasury in 2014 and this is expected to double in 2015 following the 100% increase in the actual rate, termed carbon price support (CPS) that took effect from April 1.

Introduced in 2013, the CPF was intended to rise incrementally to £30/tonne of CO2 equivalent (tCO2e) by 2020.

But within two years the CPS rate had reached £18.08/tCO2e, which was not only around three times the variable EU ETS price, but was charged on top of it, meaning UK generators were paying four times as much as most of the rest of Europe to emit carbon.

As a result the UK Chancellor was forced to freeze the CPS rate, at £18/tCO2e from 2016 until 2020 over concerns it would jeopardise the competitiveness of the UK’s manufacturing sector.

Pressure on coal

In addition to the squeeze on manufacturers, the encumbrance of the tax on coal-fired plants will only lead to one eventuality.

“It’s probably going to force the closure prematurely of 19GW of coal by 2022,” he said. “You’ll get a year out of the capacity market, run on high load and then close plant in 2021/22.”

He added that such a scenario would be exacerbated by what he believes is now an inevitable delay in completion of the 3.2GW Hinkley Point C.

The project, which is due to come online in 2023, has yet to secure the blessing of a final investment decision from its developer EDF as financing arrangements with investors remain undetermined.

Looking forward

The UK Independence Party (UKIP) is the only political party that has openly confirmed in its manifesto that it will discontinue the carbon price floor.

In addition, it plans for coal-fired power stations to continue running with carbon capture and storage technology while also pledging to scrap the large combustion plant directive (LCPD).

The Scottish National Party and Liberal Democrats have also referenced a desire for the EU ETS to be reformed but no explicit mention of the CPF was made in their manifestos.

The SNP, Liberal Democrats and Conservative Party were all asked to clarify their position on the policy but none had responded directly at the time of writing.

However, it is likely the tax will feature in the new parliament’s first budget as the exact composition of the government is almost certain to be different from that of parliament going into the election.

Source: ICIS Energy