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23 October 2017

Four major UK power firms urge for extension of the carbon tax

Drax (DRX.L), SSE (SSE.L), VPI Immingham and InterGen wrote a letter to the British Chancellor Philip Hammond asking for more clarity on what the future of the carbon tax will be during the 2020s.

The companies said in the letter: “We urge you to ensure the UK has a robust and strong carbon price”.

“At the moment the industry only has sight of the carbon price to April 2021”.

“This is welcome but we now need to understand the trajectory of the UK’s carbon price into the 2020s, particularly as without it generators have less clarity as they seek to deliver a new generation of efficient gas plants in the next capacity market auction in February 2018”.

UK generators pay the floor on top of their obligations under the EU’s Emissions Trading System, forcing companies to let go of one carbon permit every time they emit one tonne of CO2.

Currently, the UK floor price is at £18 per tonne until 2021, whereas the EU carbon price is set at approximately £7 per tonne.

Therefore, British power companies pay the difference between the EU and the UK price, which is currently approximately £12 per tonne.

The letter came short after a newly published report by Aurora Energy Research drew attention to the importance of the “Carbon Price Support” in the coal phase out, which fell from nearly 50 percent of total power generation in early 2013 to a record-low of 2 percent in July 2017.

According to the report, three quarters of this reduction was attributed to the Carbon Price Support as the main driver.

Most British power companies support the carbon tax tool, as it encourages them and gives them at least mid-term security to invest in clean energy technologies.

SSE, the UK’s second largest energy supplier and Drax, which runs the country’s biggest power station in North Yorkshire have plans to build new gas power stations, needing reassurance that their plans will remain lucrative.

Drax has applied for planning permission to change two of its three remaining coal units to gas.

On the other hand, the carbon tax floor has also received criticism from industrial groups such as fracking firm Ineos and companies from the carbon intensive chemicals sector, which have called for its abolishment claiming that it has made British electricity prices uncompetitive.

The Aurora Energy Research report resulted that to phase out coal, a £40/tonne carbon tax will be needed in 2025.

Through their intervention, the companies called for a decision to be made in the upcoming Autumn Budget on the 22nd November.

Read the Executive Summary of “The carbon price thaw: Post-freeze future of the GB carbon price” here

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