There would be a return to the market conditions seen in 2014 “when coal-fired generators were running baseload and gas-fired stations were pushed to the margin”.
The cost of the Carbon Price Support (CPS) for coal-fired power stations is currently around £15.5/MWh – the equivalent of roughly 34 per cent of the marginal cost of generation. By comparison the cost for plants using combined cycle gas turbines (CCGTs) is just £6.60 – equal to 15 per cent of the marginal cost of generation.
In combination with falling gas prices, the CPS has had a “significant impact” on the relative economics of gas- and coal-fired power stations. They pushed coal to a record low 5.8 per cent share of the generation mix over the second quarter of 2016 and therefore helped to cause some of the “unusually high baseload power prices and imbalance prices seen this year”.
“If the CPS were to be removed it could cause another significant shake up of relative gas- and coal-fired economics,” said senior consultant at Cornwall Energy Tom Edwards. “Without the CPS the estimated marginal cost of a coal-fired power station would fall to £30.3/MWh, compared to £37.9/MWh for a 50 per cent efficient CCGT.”
Even though there would still be the “looming cliff edge” of the 2020 deadline comply with the Industrial Emissions Directive for plants signed up to the Transitional National Plan, it would still hand coal generators some extra time to “make hay while the sun shines”.
There would also be a “knock-on effect” on the capacity market, enabling coal plants to delay retirements and outbid new CCGTs. Edwards has said previously that, even as things stand, the clearing price in the upcoming auction is likely to be too low to secure a significant volume of new CCGT capacity.
The renewables industry would “feel the pinch” too, as wholesale price for the coming winter fell by around £12/MWh: “A sudden downward revision of power prices coupled with the loss of LECs and review of embedded benefits could put their business models in jeopardy.”
In November last year the energy secretary at the time Amber Rudd committed the government to phasing out all unabated coal-fired generation by 2025. However, Edwards said there has still been “no movement” on this “widely trailed” policy and that clarity is needed “as soon as possible”.
The comments came after a group of energy companies, including Drax and SSE, wrote to the treasury ahead of the autumn budget statement, urging it to ‘reconfirm’ its commitment to the CPS through to the middle of the next decade.
Manufacturers organisation EEF has said higher energy price resulting from the CPS have 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. Aurora Energy Research said in August the CPS will become “irrelevant” beyond 2025.
The CPS was introduced in April 2013 as a top-up to the EU Emissions Trading System (ETS) to ensure generators in Great Britain pay a minimum price for carbon emissions, called the Carbon Price Floor. The CPS takes the form of a levy on the fossil fuels used for generation.
The top up rate has been capped at £18 per tonne until 2020/21 to ensure British businesses remain competitive with their European counterparts. The freeze was introduced in response to an increasing divergence between the carbon price paid by generators in Great Britain and those on the continent.
Last month, former chair of the Committee on Climate Change Lord Turner, told the House of Lords Economic Affairs Committee that the costs of decarbonisation on British industry are “basically trivial”. The Department for Business, Energy and Industrial Strategy recently published analysis showing Britain has “amongst the lowest” energy prices in the EU when they are adjusted to take account of the relative purchasing power of the pound.