Coal comeback on the cards without carbon price boost

Aurora Energy Research says coal revival could undermine efforts to meet fourth carbon budget

After reaching historically low levels over the past year, coal generation is set for a comeback unless the carbon price is increased, a new report has concluded.

Analysis by Aurora Energy Research found a total carbon price of at least £40 per tonne would be required to induce the complete phase out of coal generation by 2025 without further government intervention.

The report says the carbon price support (CPS) has been “instrumental” in the collapse of coal generation in Britain from around half of all generation in early 2013 to just two per cent in July 2017. It claims the CPS is responsible for nearly quarters of the decline, while falling gas prices also played a part in hindering the price competitiveness of coal.

However, gas prices are expected rebound in the early 2020s as global glut of liquefied natural gas (LNG) comes to an end. The removal of production restrictions in China means coal prices are also likely to fall. If the carbon price remains the same, coal generation will see a “revival” which could undermine efforts to meet the fourth carbon budget, Aurora warned.

The CPS is a tax on fossil fuels which was introduced by the government in 2013 to ensure that generators paid a minimum price for carbon emissions, known as the carbon price floor (CPF). The levy acts as a top-up to the European carbon price under the EU Emissions Trading System.

The current trajectory for the CPF sees the minimum price rise to £30 per tonne in 2020 and £70 per tonne in 2030, but the CPS top-up payments have been capped at £18 per tonne until 2020/21 to ensure UK businesses remain competitive with their continental counterparts. Nevertheless, the total carbon price in the UK stands at around £23 per tonne – nearly five times the price for the rest of Europe (£5 per tonne).  

Even if the status quo was maintained, there could be a “substantial increase” in the amount of coal generation during the first half of the 2020s, according to the report. If the CPS was scrapped, as manufacturing trade body EEF has urged, there would be a “surge”.

Under the EU’s Industrial Emissions Directive, coal plants must meet stringent emissions limits, be signed up to a transitional plan for meeting them, or agree to close by 2023 and run for no more than 1,500 hours each year. Axing the CPS could lead the coal plants which opted to close by 2023 to undertake upgrades to enable them to meet the emissions limits and therefore run unconstrained, the report states.

In the Clean Growth Strategy unveiled last week, the government confirmed its intention to phase out all unabated coal generation by 2025 and promised to provide “further details” on the carbon price for the 2020s in the upcoming autumn budget.

Aurora's report says removing all unabated coal from the system, without further intervention, would require at total carbon price of at least £40 per tonne by 2025. This would increase wholesale prices by £4/MWh during the following decade – the equivalent of £10 per household per year. By contrast, removing the CPS would cut wholesale prices by £10/MWh over the same period.

Summarising the findings, Aurora said the government faces a “tough decision” on the future of the carbon price: “Aurora’s analysis suggests that it would be risky for the government to cut carbon prices – as this would lead to a surge in coal generation, making it harder to deliver our carbon budgets.

“At the same time, increasing the gap in carbon prices between the UK and Europe would increase consumer bills, and lead to greater imports of electricity from Europe – offshoring GB emissions elsewhere.”

Dave Jones, policy analyst at environmental think tank Sandbag, commented: “Reducing the carbon price support would be disastrous for the UK, leading to a rise in CO2 emissions, and putting the coal phase-out at risk, as operators would fight for loopholes to keep coal plants alive past 2025. 

“The Netherlands will have a carbon floor price of €18 per tonne in 2020, and Germany and France are both considering options for carbon pricing on coal power plants.  The UK led the way in carbon pricing, so the worst time to backslide is when other countries are considering copying our model.”

A spokeswoman for Energy UK said: “While Brexit negotiations continue and government considers its future carbon price policy, it is important for the energy industry to have certainty as far as possible in advance, therefore the chancellor must set out the approach to the future of carbon pricing in this autumn’s budget.”

Previous research by Aurora concluded that the CPS will become irrelevant after 2025 due to the government’s planned phase-out for coal. The report said getting rid of the scheme could actually reduce overall emissions over the medium-term due to less coal power being imported via interconnectors.

However, it also warned there could also be a “detrimental impact” on investment in low-carbon generation over the long-term.

The decarbonisation of power sector saw a major milestone in April when, for the first time in nearly a century and a half, no coal was burnt to generate power in the UK for an entire day. 

Author: Tom Grimwood,
Channel: Markets & Trading , Policy & Regulation

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