Doing so would jeopardise “crucial energy investment”. The rapid decline in the cost of renewables “is in part dependent on investor confidence”, which would be undermined by axing the mechanism.
“Substantial industrial lobbying effort is being directed at energy-environmental costs and the UK carbon floor price”, the report said. “Much of this is disingenuous. There is no overall risk to competitiveness, and moreover, those sectors potentially exposed in practice are largely either exempt from or are compensated for those costs.”
It continued: “Yielding to pressures from some industries to remove the carbon floor price… would amplify uncertainty in power sector investments…. and thus ultimately raise the cost of energy in the transition.”
The CPS has been the “prime factor” behind emissions reduction over the last three years by prompting the switch from coal to gas: “The price of £18/tCO2 improves the relative economics of gas generation by about £5-8/ MWh; this has been sufficient to make gas cheaper than coal operation for most UK plants.”
The researchers said the mechanism has garnered “international recognition” for its efficacy in reducing emissions, and that any impact on power prices will be diminished as coal leaves the system. They said by providing certainty and thereby reducing the cost of capital it has cut the cost of the Contracts for Difference (CfD) subsidies “by over £10/MWh”.
“In our view, a reasonable strategy would be to maintain the CPS at present levels until that transition is well established but to signal now that the floor price might escalate thereafter,” the report concluded.
Professor of international energy and climate change policy at the UCL Institute for Sustainable Resources Michael Grubb said: “Government and industry stress belief in market mechanisms and the UK has reaffirmed its commitment to phase out coal by 2025. The carbon price support is an important plank in that strategy, it supports gas investment and reinforces confidence that the UK is a safe place to invest in the low carbon transition.
“Pressure to scrap it reflects the worst of short-termism: the government could not afford the loss of revenues and damage to its credibility, and investment would be deterred by yet another sign of instability. Scrapping it now risks undermining crucial energy investment.”
The researchers also called for the government to “restore policies on energy efficiency” and implement its commitment to further CfD auctions this parliament. Last week the government outlined plans for the next CfD auction. It revealed the auction would open to applications in April 2017.
Furthermore, the researchers said the government should look into the direct public funding of “some or all the cost of large low carbon sources as infrastructure” with the aim of further lowering capital costs. “Possible candidates could include nuclear, CCS, tidal lagoons, and development of the Dogger Bank wind energy resource,” they added.
The report has been submitted to the House of Lords Economic Affairs Committee, which is holding an inquiry into whether the current energy market has become “dysfunctional”. The committee’s next hearing is due to take place later today (15 November).
The CPS was introduced in April 2013 as a top-up to the EU Emissions Trading System (ETS) to ensure UK generators pay a minimum price for carbon emissions, called the Carbon Price Floor. The CPS takes the form of a levy on fossil fuels used for generation.
Manufacturers organisation EEF has said the higher energy price resulting from the CPS has put British manufacturers at a competitive disadvantage. It has called for the scheme to be scrapped on the basis that coal plants are closing anyway and it is therefore “no longer needed”.
Earlier this month environmental campaign group Sandbag wrote to chancellor Philip Hammond, urging him to set out a “clear commitment” in the Autumn Statement to continue the CPS into the 2020s. It said in a report that the CPS is “under threat”, despite making “remarkable progress” in decarbonising the UK’s electricity system.
Cornwall Energy warned in October that getting rid of it would “shake up the power market” and lead to one last hurrah for coal.