The importance of carbon pricing in the UK's efforts to decarbonise cost-effectively

Pavel Miller is SSE Head of Wholesale Policy and following an article in the Financial Times this morning on the Carbon Price Floor he has written a short blog on the topic.

This morning the Financial Times ran a story entitled: “UK climate pledge faces stiff test amid carbon tax drive”. The article highlights a letter which SSE, along with others in the energy industry, sent to the Chancellor of the Exchequer, Phillip Hammond, ahead of the Autumn Statement.

The letter’s signatories – who own and operate coal, gas and renewable electricity generation – believe putting a price on carbon emissions, through the UK’s Carbon Price Floor, is a critical part of the UK’s energy policy. We believe it is one of the most important policy tools the government has to help industry continue to deliver reliable and lower carbon electricity cost-effectively.

Earlier this year SSE commissioned a report from the consultants at KPMG to look at the various impacts of the Carbon Price Floor – Martin Pibworth, SSE’s Managing Director of Wholesale gave his thoughts on it at the time. The report found the Carbon Price Floor can positively impact security of supply by encouraging investment in both new and existing gas-fired power stations; nuclear life extensions; and decarbonisation by encouraging electricity generators to switch away from coal to lower carbon gas, low carbon nuclear and renewables.

There are costs associated with this. But as noted at the time, the Carbon Price Floor provides a lot of policy ‘bang’ for the consumers ‘buck’. I would go further and say a robust, long-term carbon price set-out to 2025 will not only continue to deliver these benefits but also improve competition in the electricity markets and reduce risk for investors. This will ultimately benefit consumers as it makes investments cheaper.

Overall the Carbon Price Floor is already influencing decision-making as it was designed to do, in a way that is cost-effective. The industry currently has sight of the UK’s carbon price to 2021. Whilst this can, and has, supported energy investment, the fact is energy is a long-term investment and we are taking decisions now for the 2020s. We believe by extending the UK’s Carbon Price Floor to 2025 in the Autumn Statement the Government would be giving investors like SSE greater confidence in the direction of the UK’s energy policy – and help to continue to deliver a clean, secure and affordable electricity mix.