Thursday, December 23, 2010

Carbon tax to hit electricity generators

A second effective 'carbon tax' is to be levied - in addition to the Carbon Reduction Commitment for large electricity users - this time targeting all companies that import fossil fuels into the economy.

The proposal, together with various ideas as to the level of the tax, comes in two linked consultations being conducted by the Treasury and DECC in a search for policies that will stimulate the investment necessary to meet the targets set by the Climate Change Committee (CCC) and others for de-carbonising the economy and reducing overall greenhouse gas emissions.

The specific CCC target is a reduction in carbon-intensity of power generation to below 100gCO2/kWh by 2030. In 2009 this figure was around 490gCO2/kWh.

Ofgem has estimated that to achieve such a drastic reduction in nineteen years implies the investment of around £200bn in new generation, electricity networks and gas infrastructure.

Only reform of the electricity market can deliver this, DECC says. The consultation argues that such reform must include support for the price of carbon - the creation of a floor price - to provide long-term certainty for investors around the additional cost of running polluting plant.

This is an admission of the failure of the EU-ETS (Emissions Trading Scheme) to deliver this support so far. Currently the price of carbon is remaining stubbornly below 15 Euros, and needs to be at least double this to stimulate investment. It is also volatile and unpredictable.

Supporting the price of carbon

The proposals state that from 1 April 2013 a 'carbon price support mechanism' will be introduced by applying the climate change levy (CCL) to all fossil fuels used in electricity generation and taxing their use and, in the case of oil, removing rebates.

According to HM Revenue and Customs, there are 255 of these companies, which break down as follows:

Energy product No. of registered suppliers
Electricity: 117
Gas: 71
Solid fuels: 36
LPG: 31

The Treasury says that the exact rates for the tax will take account of the commodities’ average carbon content and will be known as the ‘CCL carbon price support rates’. The consultations discuss different levels - from £20/tCO2 to £50/tCO2, with the preferred rate being £30/tCO2.

According to the Treasury's own reckoning, the only scenario that leads to the required carbon-intensity of power generation by 2030 is a carbon price support starting at £3/tCO2 on top of the prevailing EU ETS price in 2013, rising to target a combined carbon price (support plus EU ETS) of £40/tCO2 in 2020 and £70/tCO2 in 2030.

However this scenario also results in the highest rise in domestic energy bills. A single pensioner's bill would rise by 35% in 2020, compared to 16% if the starting support price was £1/tCO2, rising to £30/tCO2 in 2020. Adopting that scenario, however, leads to a carbon-intensity drop to only about 120gmCO2/kWh.

Other policies

DECC, in a linked consultation about the best policy context for the tax, offers four scenarios, of which it prefers a combined set of policy tools that include contracts for difference and carbon price support plus Emissions Performance Standards and a capacity mechanism. One reason for this is that "the [cash] flows from government to generators would be lower than without carbon price support."

An Emissions Performance Standard (EPS) would limit how much carbon the most carbon intensive power stations - coal - can emit, and encourage carbon capture and storage.

Long-term contracts for feed-in tariffs, a revised Renewables Obligation, much more low-carbon generation, and demand-management strategies also figure in the consultation as collectively being necessary to secure the targets.

Capacity payments would be introduced to encourage security of supply through the construction of flexible reserve plants, a policy which acknowledges the intermittent and inflexible nature of much low-carbon generation.

"The key factor in the effectiveness of the policy is the reaction of potential investors, and whether the mechanism is “bankable” for the purposes of raising finance for new low-carbon generation investments," says DECC.

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