Drax and SSE plead for ‘robust and strong’ carbon price

Power companies write to chancellor to call for visibility over carbon price in 2020s

Drax and SSE have petitioned chancellor Philip Hammond to commit to a “robust and strong” carbon price in his upcoming autumn budget.

The power companies have urged Hammond to provide clarity over the trajectory of the carbon price in the 2020s to enable them to invest in new fuel-efficient gas generation.

In a letter to the chancellor, the firms welcomed the recent publication of the government’s Clean Growth Strategy, before going on to write that: “An equally critical decision, but perhaps less celebrated, has been the UK’s leadership on carbon pricing.

“This started with the UK’s role as a key proponent of the EU Emissions Trading Scheme, including the recent reforms to strengthen it, and the decision to introduce a unilateral Carbon Price Floor since 2013. Pricing carbon in this way has provided a striking example of what can happen when a meaningful carbon price is imposed on fossil fuel generation.”

The letter cites the 59 per cent drop coal generation emissions and 6 per cent fall in overall emissions between 2015 and 2016 as proof of this success.

The companies argue that maintaining a “robust and strong” carbon price will drive continued emissions reductions; deliver the government’s pledged coal phase out by 2025 without further regulation; and accelerate investment in low-carbon generation and the flexible technologies needed to securely integrate renewables into the power system.

There is currently no visibility over the trajectory for the carbon price beyond April 2021 when a cap on the Carbon Price Support (CPS) rate comes to an end.

The CPS was introduced in 2013 in response to the perceived failing of the EU Emissions Trading System, which has produced a consistently low carbon price in recent years due to a chronic oversupply of allowances. The CPS was designed to ensure that generators in Great Britain pay a minimum price for carbon emissions, called the Carbon Price Floor (CPF), by topping-up the European carbon price through a tax on fossil fuels used for generation.

However, the top-up payments have been capped at £18 per tonne until 2021 to enable British businesses to remain competitive with those across the channel. For this same reason, manufacturers organisation EEF and the Energy Intensive Users Group have previously called for the CPS to be scrapped entirely.

Drax and SSE say the chancellor needs to provide visibility over what will happen to the carbon price in the Great Britain once this cap comes to an end, particularly because “without it generators have less clarity as they seek to deliver a new generation of efficient gas plant in the next capacity market auction in February 2018.”

“The budget announcement on 22 November presents an opportunity for the government to reaffirm its commitment to carbon pricing by providing clarity on the UK’s carbon price in the 2020s,” the letter concludes. “We urge you to continue the UK’s leadership and build on the Clean Growth Strategy.”

A report by Aurora Energy Research, published last week, concluded that coal generation is set for a “revival” in the early 2020s without an increase to the carbon price. According to the analysis, a total carbon price of at least £40 per tonne would be needed to bring about the complete phase out of coal generation by 2025 without further intervention by the government.

Appearing on a panel at Energy UK’s annual conference on Thursday, RWE supply and trading chief commercial officer Tom Glover argued that the CPF “doesn’t make any sense” as it leads the UK to effectively export emissions to the rest of Europe.