Maintaining the current Carbon Price Support (CPS) rate of £18 per tonne could push all coal generation off the power grid by 2021/22, according to new analysis from Aurora Energy Research.
By contrast, the market intelligence firm said lowering the CPS rate in response to the recent rise in the price of EU Emissions Trading System (ETS) allowances could result in a comeback for coal in the 2020s, making it much harder for the UK to meet its climate change targets.
As well as being required to purchase enough EU ETS allowances to cover their emissions, generators in Great Britain also pay a top-up tax on the fossil fuels used for generation called the Carbon Price Support (CPS).
The CPS was introduced in April 2013 to ensure they faced a minimum price for carbon emissions known as the Carbon Price Floor (CPF). At the time, the price of EU ETS allowances stood at around €5 per tonne – a level which was seen as too low to drive investment decisions.
From a starting point of £16 per tonne, the CPF trajectory was set to rise to £30 per tonne in 2020 and £70 per tonne in 2030. However, since 2016 the CPS has been frozen at £18 per tonne due to concerns over the competitiveness of British businesses when compared to their EU rivals.
In last year’s autumn budget, chancellor Philip Hammond said the Treasury would seek to maintain the total carbon price at its current level – then around £24 per tonne – until the coal phaseout is completed. The government has committed to getting rid of all unabated coal generation by 2025.
In the meantime, the passage of reforms to the ETS to address a chronic oversupply of allowances has led to a massive increase in the EU carbon price.
In September, it briefly surpassed €25 per tonne – the highest level in almost a decade. At the time of writing, the allowances were trading at €19 per tonne, resulting in a total carbon price for generators in Great Britain of nearly £35 per tonne.
The CPS has been the driving force behind a dramatic reduction in coal generation in recent years, bringing the first coal-free day in Great Britain since the onset of the industrial revolution in April 2017. Over the three months to the end of June this year, coal accounted for just 1.3 per cent of total generation.
The new study commissioned by Drax suggests lowering the CPS rate to £7 per tonne to bring the total carbon price back down to the level seen during the most recent budget could lead to a resurgence during the 2020s.
Aurora predicted that coal plants would be able to keep running all the way up to 2025, generating an average of 12TWh of electricity each year between 2021 to 2025. During the fourth carbon budget, covering 2023 to 2027, carbon emissions from the power sector would be 20 per cent higher than if the CPS rate was kept at its current level.
Cutting the CPS rate would put downward pressure on power prices, but this decrease would be offset by higher subsidy payments for renewables under the Contracts for Difference scheme.
Whole-system costs would be reduced by £700 million per year between 2021 and 2040 – the equivalent of £9 on the typical household’s annual electricity bill. However, the Treasury’s yearly tax receipts would also be £330 million lower for the period of 2021 to 2025.
Aurora research director Richard Howard said: “The government faces a difficult decision in the upcoming budget about the future of carbon pricing.
“Maintaining the Carbon Price Support at least at current levels would ensure that the government achieves its stated goal of phasing out coal power generation and contribute towards the achievement of carbon targets.
“If the carbon price was cut, then households would save around £9 per year – but this risks a surge of coal power in the early 2020s making it extremely difficult to meet our climate goals.”
Aurora additionally modelled a scenario in which the CPS rate is raised in future to align the total carbon price with the CPF trajectory. The company forecast that an extra 10GW of renewables would come online by 2040 – mainly onshore and solar – as they became viable without subsidies sooner.
Howard said the accompanying reduction in carbon emissions would be relatively small, with coal having been driven off the power grid in the early 2020s regardless of the increase.
Last week, the bosses of SSE, Drax and Orsted wrote an open to the Treasury urging the chancellor to maintain “strong” and “stable” carbon price in his upcoming budget on 29 October.