U.K. Proposes Carbon Floor, Set Price to Cut Emissions

The U.K. government made four proposals to ensure aging power plants are replaced and climate targets met, including setting a floor price on carbon emissions and guaranteeing long-term prices for low-carbon generators.

“The current energy market cannot deliver,” Secretary of State for Energy and Climate Change Chris Huhne said in a statement to parliament today. “Left untouched it would lock carbon into the system for years to come.”

The announcement marks the biggest shift in British energy policy in two decades, reining back the market structure put in place by Margaret Thatcher. The changes are needed to drive investment in low-carbon power plants, Huhne said. More than 110 billion pounds ($172 billion) is required by 2020 to replace old nuclear reactors, upgrade the power grid and build renewable projects like offshore wind-farms and nuclear reactors.

“The picture looks positive for new investment in lower carbon generation - enabling clean to be built in preference to cheap,” Paul Golby, chief executive officer of E.ON AG’s U.K. unit, said in a statement.

The U.K. Treasury suggested using the climate change levy and a fuel duty on fossil fuels to implement a carbon floor. The Treasury laid out three scenarios that set a minimum price on carbon of 20, 30 or 40 pounds a ton by 2020, rising to 70 pounds a ton by 2030.

Contracts for Difference

Under the proposals, a contract for difference feed-in-tariff would be paid to low-carbon generators if electricity prices fall below a certain level, Huhne said. Such a contract would compensate utilities for lower-than-expected energy prices or charge them if prices are higher, in this way locking in returns and allaying concerns that costly projects won’t get paid off.

Renewable power projects and nuclear reactors are expensive to build and cheap to operate, making investors especially sensitive to long-term electricity prices. The expansion of wind power across Europe may also lead to periods when supply exceeds demand, resulting in negative prices.

The Department of Energy and Climate Change’s third proposal is to use capacity payments to encourage the construction of reserve plants, likely to become more important as the U.K. boosts its use of more volatile renewable generation like offshore wind farms. The final proposal was an emissions performance standard for new coal-fired power plants. The new laws will be in place by 2012, Huhne said.

“The energy companies are not the Salvation Army,” Huhne said, speaking to journalists today. “They’re not in this for anything other than the bottom line for their shareholders.”

Drax Falls

Drax Plc, owner of Western Europe’s largest coal-fired power station, dropped 2.5 percent to 367.5 pence in London. Centrica Plc, which owns a 20 percent stake of all of Electricite de France SA’s nuclear power plants, rose 1.1 percent to 333.9 pence.

British power utilities will pay an additional 27.3 billion pounds in equipment costs in the 20 years through 2030 under the proposals. On the other hand, the companies will buy fewer carbon allowances in the European Union’s emissions market, saving about 11.5 billion pounds, according to the government’s impact assessment.

“In the new, reformed U.K. electricity market, the economics of low carbon will stack up like nowhere else in the world,” Huhne said. “By 2030, three quarters of our electricity could be low carbon.”

The U.K. has pledged to get 15 percent of its energy from renewable sources by the end of the decade and reduce carbon-dioxide emissions by 80 percent by 2050 from 1990 levels. Achieving this will require as much as 40,000 megawatts of low-carbon energy projects, according to a Dec. 7 report from the Committee on Climate Change.

The new market arrangements will provide “greater certainty of delivering on time,” Huhne said in a Bloomberg television interview earlier today, resulting in electricity bills that are 4 percent lower than they would have been otherwise.

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