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Carbon Floor Won’t Drive U.K. Energy Investment, Analysts Say

Adopting a minimum price for carbon dioxide will do little to encourage investment in the U.K. power sector and risks souring relations with continental Europe, according to Citigroup Inc. and Virgin Green Fund analysts.

“A carbon price floor doesn’t do much for policy, it’s more of a tax for the Treasury,” Citigroup analyst Peter Atherton said today at a parliamentary hearing. Investors and utilities need to have confidence that reforms will “hold up under pressure.”

The British government is in the process of reshaping the country’s energy market to drive investment in low-carbon power plants and replacing aging nuclear reactors. The government made four proposals in December, including setting a floor price for CO2 emissions and guaranteeing long-term prices for low-carbon generators.

“It’s important to not do things in isolation to the continent,” said Shai Weiss, a partner at the Virgin Group Ltd.-affiliated private equity fund. A carbon price is “clearly going to be a political problem,” he said.

The U.K. has pledged to get 15 percent of its energy from renewable sources by the end of the decade and about a quarter of the country’s generation capacity will go offline by 2015 as old plants get retired and others are shut to meet European emissions targets. The cost of replacing existing plants and building renewable projects will be about 200 billion pounds ($321 billion), according to an Ernst & Young LLP report.

The two other proposals being considered by government regulators are capacity payments to encourage the construction of reserve plants and an emissions performance standard for new coal-fired power plants.

Four Proposals

Assuming all four proposals are adopted and companies invest at the rate they are supposed to, energy prices will rise significantly by 2020, driving record profits, Atherton said.

“Affordability is by far the biggest issue,” he said, adding that investors and companies are wary of government policy changing again in 10 years if there is a public outcry over high energy prices and profits. “It’s too much, too fast.”

One way to trim costs may be to keep plants scheduled to close open as so-called peaking plants, Atherton said. The plants would only operate at moments of peak demand and mean companies don’t have to spend money building new plants purely for back-up purposes, he said.

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