Energy intensive businesses face bigger bills if the UK government sets a minimum price for carbon, says Jane Burston

The UK government is currently consulting on its proposal to implement a carbon floor price.

More than £110bn is required by 2020 to replace old nuclear reactors, upgrade the electricity grid and fund renewables, and a large majority of that investment needs to come from the private sector. A floor price is proposed as one mechanism which would give long term certainty about carbon prices to encourage low-carbon investment.

Low-carbon generation technologies are typically more expensive at present than conventional fossil fuel generation. Upfront capital and construction costs tend to be higher, though operational costs are generally much lower.

Current policies such as the Renewables Obligation, the European Union’s emissions trading scheme (EU ETS) and the Climate Change Levy (CCL) on electricity and fossil fuels already provide incentives to invest in low-carbon generation. However, greater low-carbon investment for electricity generation is required to meet the UK’s carbon emissions reduction targets and ensure security of supply.

The carbon price, however, has not been high enough or stable enough to provide certainty to encourage this additional investment in low-carbon technology. The introduction of a floor price is intended to build on the EU ETS to provide greater support and certainty to the carbon price.

Floor price fuel tax

Rather than fix a price on EU allowances, the carbon credits that industrial polluters have to buy, the UK government has decided to increase the price of fossil fuels, and hence bolster the price of electricity.

In the electricity market, there are currently no similar sized flexible low-carbon alternatives to gas, coal or oil-based generation, which can be turned on and off as required. As a result, fossil fuel generated electricity normally sets the price for all electricity.

If the cost of fossil fuels goes up, so does the price of electricity. Conversely, if fossil fuel prices fall, then electricity prices could fall to a level where the low-carbon generator is unable to recover the costs of investment.

Part one of the government’s floor price plan is to charge electricity generators a tax based on the carbon content of the fuel being used. This charge will apply to coal, gas and LPG and will be known as the CCL carbon price support rate. This is different from the current CCL from which power generators have to date been exempt.

Part two of the government’s plan is another method of increasing the price of fossil fuels: this time the cost of oils. Currently, fuel duty paid by power generators can be reclaimed in full: the Treasury now proposes a reduction in the amount of fuel duty that can be reclaimed. This will be known as the oils carbon price support rate.

Carbon £70 a tonne

The suggestion is that these two proposals will together create a more certain and higher cost of carbon.

The Treasury has set out three potential price trajectories for the short to medium term: aiming at £20, £30, or £40 a tonne by 2020. By 2030, the goal is a carbon price of £70 a tonne.

The floor price is predicted to increase investment in new low carbon capacity by up to 11 gigawatts as well as significantly reduce emissions from UK electricity generation.

Consumer pain now

The proposal has been criticised for its potential to increase electricity prices in the short term, but the Treasury believes low carbon generation will actually decrease electricity prices by the mid-2020s compared to doing nothing.

Businesses will be affected by the changing energy prices. The more energy intensive the business, the greater the possibility there is of profits being adversely affected in the short term.

On the plus side, increased carbon price certainty will help the case for investment in energy efficiency by non-energy intensive businesses as well as power generators, and with it will come the corresponding reductions in energy costs.

Businesses will also be rewarded with a lower carbon footprint due to the lower grid emissions factors arising from greener energy.

Jane Burston is co-founder of Carbon Retirement, a company which buys “permits to pollute” directly from the European emissions trading scheme and then permanently removes them from the scheme. www.carbonretirement.com



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