Feb. 5 (Bloomberg) -- Freezing or changing plans for the U.K. carbon floor price would “severely damage” power market liquidity, according to Electricite de France SA.
The floor price, set in the national budget each April, will rise to 18.08 pounds ($29.42) a metric ton of emissions in the year through March 2016, up from 4.94 pounds, the Treasury said last March. The government plans to freeze the carbon price from 2016, the Daily Mail newspaper reported Jan. 25.
The U.K. set its minimum carbon price last April to encourage investment in clean-energy projects by increasing the cost of burning fossil fuels. Emitters such as factories and power stations must pay the floor price in addition to buying European emissions allowances, which have fallen over the past three years.
“Suppliers will have already bought forward a significant proportion of their power,” Ravi Baga, head of upstream policy and regulation at EDF Energy, said at a conference in London. Retroactive changes would damage liquidity for longer-dated products, he said.
Power for delivery in summer 2015 reached a record 55 pence premium to the 2016 contract on Jan. 30. When longer-dated contracts are cheaper than nearer-term ones, the market is said to be in backwardation. The two contracts both last traded at 50.20 pounds a megawatt-hour, according to broker data compiled by Bloomberg.
Power prices for delivery after 2016 have fallen as traders rushed to sell at higher levels that took account of a rising minimum charge, Nick Campbell, an analyst at Inspired Energy Plc, said yesterday by e-mail.
European Union emission permits for delivery in December rose 4.1 percent to 6.15 euros ($8.32) a ton at 3:30 p.m. London time on the ICE Futures Europe Exchange. The 2014 contract fell 29 percent last year, its third annual decline.
“It is no secret that the trajectory for floor prices is way out of line with carbon prices,” Michael Fallon, minister of state for energy, told delegates in London. “This is significant for industry and we are bound to show an interest in this.”
The treasury must decide on the floor price, he said, declining to comment on whether the government will freeze it.
“A minimum carbon price sends an early and credible signal to help drive billions of pounds of investment in low-carbon electricity generation,” the treasury said today in an e-mailed statement. “However, ensuring U.K. industry remains globally competitive is a priority and government acknowledges that rising energy costs are a key issue for many businesses. This is particularly true given the lower than expected European carbon price.”
The carbon floor price will add 10 percent to electricity prices by 2015, according to Gareth Stace, head of climate and environment policy at manufacturers’ organization EEF.
“Some of our members would be happy to see it abolished altogether,” Jeremy Nicholson, director of the Energy Intensive Users Group, said yesterday by phone from London. “We are arguing for the trajectory for the carbon floor price to come down towards the end of this decade and beyond.”
The lack of clarity on the carbon floor price is unsatisfactory, according to Tim Yeo, chairman of the House of Commons Energy and Climate Change Select Committee, said in London.
“I can sympathize that it provides a healthy revenue stream and the chancellor doesn’t want to lose it,” he said.
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