U.K. Coal Plants Risk Summer Closures as Carbon Tax Hits Profits

Some U.K. coal-fed power stations are at risk of halting for the summer after the doubling of a carbon emissions levy hurt the profitability of plants run by utilities from EON SE to Iberdrola SA.

The U.K. carbon price support, designed to help fight global warming, increased by 88 percent on Wednesday. That caused the clean-dark spread, a measure of profitability for coal-fed power plants, to drop 53 percent, according to data compiled by Bloomberg.

The price support is an additional fee introduced in 2013, when coal-fired plants were running 24 hours a day, to raise the cost of carbon from U.K. power generators above the price of European Union allowances. Making emissions more expensive was intended to encourage utilities to switch to burning natural gas or generating power from renewable sources.

“Coal plants will be not only running less, they’ll be switching off,” after the increase, Lakis Athanasiou, a utilities analyst at Agency Partners LLP, said by phone from London on Tuesday. “Some operators will even think of mothballing for the summer.”

The carbon price support will be 18 pounds ($26.57) a metric ton for the rest of the decade, from 9.55 pounds previously. Scott Somerville, an EON spokesman, and Paul Ferguson, a spokesman for Iberdrola’s U.K. Scottish Power unit, both said they weren’t immediately able to comment.

Month-ahead U.K. gas dropped 28 percent last year, the biggest annual decline since 2009, on ICE. Prices are 16 percent below their five-year average. Month-ahead coal fell 16 percent in 2014, according to broker data compiled by Bloomberg.

‘Some Hedging’

“There will have been some hedging before the gas price collapse which will protect earnings but at coal plants with these running patterns and exposure to this price, profits will be down,” Athanasiou said. “I could see the carbon price floor being revisited after the general election” on May 7.

The U.K.’s 19.2 gigawatts of coal-fed plants accounted for 27 percent of operating capacity this winter, according to a National Grid report. Among the biggest coal plants are EON’s 2,000-megawatt Ratcliffe, RWE’s 1,555-megawatt Aberthaw unit, the 2,400-megawatt Longannet plant owned by Iberdrola’s Scottish Power, Energeticky a Prumyslovy Holding AS’s 2,000-megawatt Eggborough station and 2,640-megawatts of coal at Drax Group Plc’s facility.

Scottish Power said it may close Longannet as early as next year if it fails to strike a deal on payments with National Grid Plc to provide reserve power.

The increase in the carbon price floor will boost wholesale power prices by as much as 2 pounds a megawatt-hour from now to 2020, according to Mauricio Bermudez-Neubauer, an associate director at NERA Economic Consulting in London.

The increase in the carbon floor price “substantially deteriorates the economics for running coal plants,” Bermudez-Neubauer said by phone today.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE