Budgeting for a carbon floor price

The pertinent part of the Budget for the energy sector is the carbon floor price, says Mathew Beech.

George Osborne’s Budget next week is likely to focus on the long-term economic plan of the Conservatives, and therefore the coalition government, and how as a country we need to stick to his plan to ensure the economy grows and people will be, and feel, more prosperous in the future.
As for the utility sector, there is only one thing the chancellor is likely to mention, and that is the carbon floor price. There is no movement expected in the water sector. Osborne is expected to tell MPs and the nation that the carbon floor price will be frozen at the 2015/16 level for up to four years. This means it is likely to remain at £18.08 per tonne of CO2 emitted (tCO2e) until 2020, when the predicted escalation of the carbon tax would have seen it approaching £30/tCO2e.
Those parties who would accept a freeze fall into two camps: those who want it scrapped but would settle, albeit reluctantly, for no further increases; and those who want it to continue on its pathway to £30/tCO2e by 2020 but would settle, albeit reluctantly, for it to remain in place with no decreases.
Those in the latter camp include groups such as the Renewable Energy Association and RenewableUK, who view the carbon floor price as a way to push up the cost of carbon-intensive generation, making low-carbon technologies cheaper and more attractive to investors. They are keen for the carbon floor price to remain in some form, because the aim of a low-carbon transition remains, albeit the actual transition needs more incentives to spur it on.
In the other camp are those who would lose out if the price of carbon increases, due to higher electricity bills – the consumers. Consumer group Which? is among those calling for the carbon floor price to be frozen, saying it us an “unnecessary burden on consumers”. Tony Cocker, chief executive of Eon UK, has long called for it to be scrapped, and fellow big six boss Keith Anderson at Scottish Power agrees. He says £33 a year would be taken off a typical dual fuel bill by scrapping the scheme.
Energy-intensive industries would also be appeased if the carbon floor price was frozen, because they face energy bills soaring by up to 40 per cent if it increases as originally planned.
If, as expected, Osborne does freeze it, he will undoubtedly say it is the best of both worlds: helping limit the costs to businesses and consumers, while also still helping low-carbon generation to develop.
However, this compromise may actually be the worst of both worlds. As Liberum Capital analyst Peter Atherton told Utility Week: “Freezing it for a few years could be a halfway house that doesn’t satisfy anyone.”