Osborne Freezes U.K. Carbon Tax on Power to Cut Bills

U.K. Chancellor of the Exchequer George Osborne froze a tax on carbon emissions from electricity generation starting in April 2016 as part of a 7 billion-pound ($12 billion) plan to cut consumer energy bills.

The package is aimed at boosting “British manufacturers, with benefits for families and other businesses too,” Osborne said in a speech in Parliament in London today as he delivered his annual budget. “We need to cut our energy costs.”

Prime Minister David Cameron’s administration has come under pressure to rein in rising energy costs. Ed Miliband, the leader of the opposition Labour Party, vowed in November to freeze energy prices if he wins the next election in mid-2015, prompting the government in December to announce measures cutting green levies by 50 pounds per household a year.

The chancellor’s announcement may boost the biggest carbon polluters, such as Drax Group Plc, which mainly burns coal in its power plant in northern England. It may weigh on utilities with a bigger proportion of renewables and nuclear power in their mix, such as Infinis Energy Plc, SSE Plc (SSE) and Centrica Plc.

The government should bring in a stable policy to encourage investment in power generation, Energy UK, the industry’s main trade association, said in an e-mailed statement. The group, which has more than 80 members, including the “Big Six” utilities, said that while it supports the carbon tax freeze, the measure worsens the economics of generation from gas.

Stability Call

“Clear and stable policy is required to get the investment flowing to start building our secure energy future now, bring new gas plant on stream to meet demand, provide the back-up needed for intermittent renewable generation and create jobs,” Energy UK said.

Osborne said the freeze at 18 pounds a ton of carbon will last the rest of the decade and will save a mid-sized manufacturer almost 50,000 pounds a year. Families would save an average of 15 pounds a year. In total, it could save British businesses as much as 4 billion pounds by April 2019, according to documents posted on the Treasury website.

The government is creating policy uncertainty by “fiddling” with its rules, said Nicholas Stern, a member of Parliament’s upper chamber, the House of Lords, and head of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics.

Stern’s Rebuke

“It is disappointing that the chancellor has chosen to fiddle with the carbon price floor within a year of having introduced it,” said Stern, a former government chief economist. “Today’s budget has created more confusion for investors about the government’s sense of direction and commitment to the transition to a low-carbon economy.”

Osborne also extended by four years to 2020 a program to compensate steelmakers, paper mills and other energy-intensive industries for carbon costs. He introduced a new plan to make up to them the rising costs of renewables incentives. The two compensation plans will save business 500 million pounds a year from 2016, according to the Treasury.

The industry group RenewableUK estimates the freeze may depress investment in low-carbon technologies by about 4 billion pounds, matching the sum the Treasury expects to save industry.

Nuclear Reaction

In a joint March 11 letter with the Nuclear Industry Association to Osborne, it said the policy will “undermine confidence and will make it more difficult to secure the necessary investment.”

The Treasury also announced 60 million pounds of new funding for carbon capture and storage projects. Osborne said he’ll exempt electricity from combined heat and power plants from the carbon floor price.

The government introduced the carbon price floor in 2013 to set a minimum cost on emissions from power plants and compensate for lower-than expected prices of allowances in the European Union Emissions Trading System, or EU-ETS.

The U.K. floor targeted a price of carbon of 16 pounds a ton of carbon dioxide in 2013, rising in annual increments to 30 pounds in 2020 and 70 pounds in 2030. Ministers intend to achieve the floor price by adding a so-called Carbon Price Support to the cost of EU allowances at the time.

Carbon on the EU emissions trading system closed yesterday at 5.76 euros a ton. The carbon support level, set two years in advance, is set to rise on April 1 to 9.55 pounds from 4.94 pounds currently, and almost double to 18.08 pounds in 2015.

Annual increases were set to follow, with “indicative rates” of 21.20 pounds and 24.62 pounds outlined for the two following years. Instead, Osborne said he’ll freeze it at 18 pounds exactly.

The carbon price support freeze may damp wholesale power prices by as much as 6 pounds a megawatt-hour by 2020, according to Liberum Capital Ltd. Without the freeze, prices are forecast to rise to 70 pounds by 2020, according to the London-based broker. Month-ahead electricity was trading at 45.90 pounds at 1:28 p.m. London time, according to data compiled by Bloomberg.

Renewables Harmed

Liberum said today in an e-mail that Alkane Energy Plc, which uses methane from abandoned coal mines to generate power, may be the worst-hit company.

A freeze may benefit Drax (DRX), Deutsche Bank analysts James Brand and Martin Brough wrote yesterday in a note to investors. Renewable energy company Infinis may be harmed, as would the generation arms of Centrica and SSE, which have wind, hydro power and nuclear assets, they wrote. At the same time, it may relieve pressure on the retail supply units of those two generators, they said.

U.K. household gas bills rose by about 41 percent in 2013 from 2007, and electricity bills gained 20 percent, after adjusting for inflation, according to government estimates last year. Ministers last March projected the average household bill for power and gas will rise to 1,331 pounds in 2020 from about 1,255 pounds last year. Bills for the biggest corporate customers were projected to rise by as much as 36 percent.

To contact the reporters on this story: Alex Morales in London at amorales2@bloomberg.net; Rachel Morison in London at rmorison@bloomberg.net

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net Amanda Jordan

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