What did the Carbon Price Floor ever do for us?
At every budget the energy industry waits with interest to see whether any changes will be made to the Carbon Price Floor (CPF), and the forthcoming budget is no exception. But does this policy really make a difference to the cost effective delivery of secure and low carbon energy?
At SSE we have consistently argued that the cheapest way of decarbonising the economy is through strong and bankable carbon pricing. If we can get to a market where, over time, technologies can compete on a price which appropriately factors in the cost of emitting carbon dioxide into the atmosphere then it is always going to be more efficient for the consumer than bespoke policy instruments for each technology. However, with the UK Government now considering the policy post 2020 we asked KPMG to take a look at broader issues raised by the CPF, and ask what would happen if the scheme was retained or removed?
KPMG found that retaining the CPF could positively impact security of supply by providing a clearer signal for investment in new large scale gas-fired capacity and, although not by design, encourages greater interconnection, which is influenced by the GB-EU price gap. Removing it, they found, would call into question the future of about 2GW of marginally profitable gas plant. They also called out the policy’s strong influence on nuclear life extensions borne out by EDF Energy’s recent announcement.
Supporting low carbon electricity is a contentious issue. KPMG found that retaining the CPF and factoring a proper carbon intensity into the electricity price means subsidies can be phased out over time, helping to facilitate the Government’s stated ambition of removing itself from the market by 2025. On the other hand, removing the CPF could clearly negatively impact decarbonisation, most obviously by discouraging coal to gas switching in the short-term.
In terms of cost, KPMG’s analysis examines the interlocking complicating factors and projects that, compared to a scenario where the CPF remains flat in real terms at £18/tonne, abolishing the CPF would lower average annual electricity bills by four per cent for households and five per cent for a small-sized business in 2020-21. It has a three per cent impact on energy intensive industries which already benefit from relief on the CPF costs. Given the benefits it delivers I would argue the scheme provides a lot of policy ‘bang’ for the consumers’ ‘buck’.
Of course, I would rather that carbon pricing came at a pan-European level through the EU ETS – and focus on reforming this scheme is also a high priority – but until the EU ETS produces a stronger signal the CPF is a sensible substitute to help decarbonise electricity at lowest cost.
Overall the CPF is influencing decision making, as it was designed to do. The examples I’ve cited from the KPMG report underline this.
But that does not mean there is no room for improvement. It is, for example, susceptible to change at the budget. This means that whilst investors do factor it into their decisions the recent changes mean they have to ‘discount’ it, so it doesn’t provide as strong a signal as it could. This is very fixable though, the longer it is left untouched the more investors will trust it – and if the government was able to provide five, rather than two, years certainty this would significantly strengthen the signal.
Ultimately, I agree fundamentally with the Treasury that “a market-based approach to pricing carbon provides the most efficient and cost-effective policy framework to meet our environmental goals”. The CPF is an integral part of this already. It has been assimilated into the policy framework and is helping to shape positive change. If we can bring more certainty to the scheme we can achieve more with it still.