UK Coal Plants Risk Summer Closures as Government Carbon Tax Hits Profits

Some UK coal-fired power stations are at risk of shutting for the summer after the doubling of a carbon emissions levy hurt the profitability of plants run by utilities from EON, SSE to Iberdrola SA.

The UK carbon price support, designed to help fight global warming, increased by 88 percent on Wednesday 1st April. That caused the clean-dark spread, a measure of profitability for coal-fed power plants, to drop 53 percent.

The price support is an additional fee introduced in 2013, when coal-fired plants were running 24 hours a day, to raise the cost of carbon from UK power generators above the price of European Union allowances. Making emissions more expensive was intended to encourage utilities to switch to burning natural gas or generating power from renewable sources.

“Coal plants will be not only running less, they’ll be switching off,” after the increase, a utilities analyst said by phone from London on Tuesday. “Some operators will even think of mothballing for the summer.”

The carbon price support will be 18 pounds ($26.57) a metric ton for the rest of the decade, from 9.55 pounds previously.

Month-ahead UK gas dropped 28 percent last year, the biggest annual decline since 2009. Prices are 16 percent below their five-year average. Month-ahead coal fell 16 percent in 2014, according to data.

‘Some Hedging’

“There will have been some hedging before the gas price collapse which will protect earnings but at coal plants with these running patterns and exposure to this price, profits will be down,” the utilities analyst said. “I could see the carbon price floor being revisited after the general election” on May 7.

The UK’s 19.2 gigawatts of coal-fed plants accounted for 27 percent of operating capacity this winter, according to a National Grid report. Among the biggest coal plants are EON’s 2,000-megawatt Ratcliffe, RWE’s 1,555-megawatt Aberthaw unit, the 2,400-megawatt Longannet plant owned by Iberdrola’s Scottish Power, Energeticky a Prumyslovy Holding AS’s 2,000-megawatt Eggborough station and 2,640-megawatts of coal at Drax Group Plc’s facility.

Scottish Power said it may close Longannet as early as next year if it fails to strike a deal on payments with National Grid Plc to provide reserve power.

The increase in the carbon price floor will boost wholesale power prices by as much as 2 pounds a megawatt-hour from now to 2020, according to an associate director at NERA Economic Consulting.

The increase in the carbon floor price “substantially deteriorates the economics for running coal plants”