Impact of the UK Carbon Price Floor

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					    Impact of the UK Carbon Price Floor



    OECD & E3G workshop: Beyond getting the prices
    right

    3rd April 2012

    Nick Screen
    Redpoint Energy




TO CLIMB A NEW ROUTE SUCCESSFULLY FOLLOWING
CAREFUL ANALYSIS AND PREPARATION
Contents


  • Policy background and Redpoint analysis (in conjunction
    with Trilemma) for Electricity Market Reform and
    Carbon Price Support consultations for DECC / HMT
  • Implementation and pricing of Carbon Price Support
  • Impact so far: GB merit order
  • European perspective
Carbon Price Floor: timeline


   • Original rationale: tackle uncertainty in EUA price for
     GB investors in low carbon technologies
   • Role of Carbon Price Support has evolved, in context
     of ongoing Electricity Market Reform
  May 2010: Coalition             March 2011: CPS            March 2012: CPS
  Agreement commits                level for 2013            level and details          From April 2013:
    to Carbon Price                announced in                announced in               Carbon Price
        Support                     Budget 2011                Budget 2012              Support at £4.94




   2010                        2011                  2012                        2013

  December 2010: Electricity                          December
                                    July 2011:
     Market Reform and                              2011: Electricity
                                    Electricity                           Ongoing development of EMR
    Carbon Price Support                             Market Reform
                                  Market Reform                                    policies
    Consultations (DECC /                              Technical
                                   White Paper
            HMT)                                        Update
Redpoint analysis for EMR & CPS consultations


   • We modelled the impacts of Carbon Price Support on
     investment decisions:
       • Expectation of higher power prices
       • Investor perception of earnings risk – possible
          reduction in project hurdle rates
   • Assumptions on certainty investor place on CPS are
     critical
   • For EMR, analysed the price required to decarbonisation
     power sector purely through existing policies combined
     with carbon pricing (£50/t in 2020, £70/t in 2030)
   • For CPS consultation, modelled a range of trajectories
          Redpoint analysis: Results


                 • Earlier reduction in GB carbon emissions, but with
                   higher near term wholesale prices
         120
                                                                                   600

         110
                                                                                   500
         100
                                                                                   400
         90
£/MW h




                                                                          g/kW h
                                                                                   300
         80


         70                                                                        200


         60                                                                        100


         50                                                                         0
           2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030                    2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
               Baseline   £30/t support   £40/t support   £50/t support
                                                                                         Baseline   £30/t support   £40/t support   £50/t support
Carbon Price Support and EMR


   • Our analysis indicated that, in the near term, CPS leads
     to higher costs to consumers and higher rents for
     existing low carbon generators
   • Assuming EUA prices do eventually rise, possible for
     CPS to be a net benefit
   • Questions on ability of CPS to provide long term signal
     for decarbonisation
       • Investor confidence in stability of taxes
       • Reduced long term signal as marginal carbon
         intensity of power system reduces
   • Implementation in combination with CfDs (and Capacity
     Mechanism & EPS) offsets this
Carbon price trajectory

                                                                                                    Indicative values to
                                                                                                    2030 level of £70/t
                        80                 Published                                                (no Government
                        70
                                           trajectory to                                            commitment to this)
                                           reach £30/t in
                        60                 2020
      £/t (real 2009)




                        50

                        40

                        30

                        20

                        10

                        0
                             2011




                                                                                                   2021
                                    2012
                                           2013
                                                  2014
                                                         2015
                                                                2016
                                                                       2017
                                                                              2018
                                                                                     2019
                                                                                            2020


                                                                                                          2022
                                                                                                                 2023
                                                                                                                        2024
                                                                                                                               2025
                                                                                                                                      2026
                                                                                                                                             2027
                                                                                                                                                    2028
                                                                                                                                                           2029
                                                                                                                                                                  2030
From a floor price trajectory to a tax:
setting the Carbon Support Price


   • CPS for 2014/15 set at £9.55 (nominal terms)
   • Set based on average of outturns of forward prices over
     year preceding 2012 budget
                     25


                     20
                                                                                                                                      Forecast 2014 CPS
                                                                                                                                      level
       £/t nominal




                     15
                                                                                                                                      Forecast average EUA
                                                                                                                                      price
                     10
                                                                                                                                      Target carbon floor

                      5
                                                                                                                                      Monthy average EUA
                                                                                                                                      price
                      0
                                                                                                           Dec-11
                                                     Jun-11




                                                                                                  Nov-11
                                   Apr-11
                                            May-11




                                                                                         Oct-11
                          Mar-11




                                                                       Aug-11




                                                                                                                    Jan-12
                                                              Jul-11


                                                                                Sep-11




                                                                                                                             Feb-12
 From a floor price trajectory to a tax:
 setting the Carbon Support Price

                                   35

                                   30

                                   25
                 £/t (real 2009)




                                   20                                                    CPS
                                                                                         EUA forward price
                                   15
                                                                                         CPS trajectory
                                   10
Declining EUA
                                   5
price leads to
total level lower                  0
than trajectory in                      2013 2014 2015 2016 2017 2018 2019 2020
both 2013 and
2014
                                                                            EUA forward prices as of 30 March 2011
  Impact on GB merit order


                                                  160

                                                  140
                                                                                                               SRMC
                                                                                  2013                         Nuclear
                                                  120
                      SRMC (€/MW h - real 2011)




                                                                                                               Lignite
                                                                                                               Coal
                                                  100
                                                                                                               Coal CCS
                                                                                                               Gas
                                                  80
                                                                                                               GT / Oil
                                                                                                               Hydro / PS
                                                  60
                                                                                                  2012         Biomass / Biowaste
                                                                                                               Onshore Wind
                                                  40                                                           Offshore Wind
                                                                                                               Solar
                                                  20                                                           Other

Fewer coal plant                                   0
                                                                                                               Demand


running – reduction                                     0   20       40            60        80          100
                                                                 Cumulative capacity (GW )
in carbon emissions
European perspective



     GB merit order                                                       NL merit order 2013
                                                                160

                                                                140
                                                                                                                      SRMC
                                                                                                                      Nucle
                                                                120




                                    SRMC (€/MW h - real 2011)
                                                                                                                      Lignit
                                                                                                                      Coal
                                                                100
                                                                                                                      Coal
                                                                                                                      Gas
                                                                80
                                                                                                                      GT /
                                                                                                                      Hydr
                                                                60                                                    Biom
                                                                                                                      Onsh
                                                                40                                                    Offsh
                                                                                                                      Solar
                                                                20                                                    Othe
                                                                                                                      Dema
                                                                 0
                                                                      0     5       10            15        20   25

                  NL now cheaper than
                                                                                Cumulative capacity (GW )




                  GB in this hour –
                  power flows to GB
Summary


  • In the context of Electricity Market Reform, Carbon
    Price Support has a more limited role to play in driving
    the long term structural changes required for
    decarbonisation of the GB power market
  • The impact of Carbon Price Support on the GB merit
    order and dispatch can lead to near term reductions in
    GB carbon emissions
  • To what extent will there be carbon leakage to Europe
    as a result of greater power imports and increased
    power prices for GB end users?
Contact:
Nick Screen
nick.screen@redpointenergy.com
020 3327 4270

www.redpointenergy.com

				
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