The mechanism will have far less of an impact on emissions once the coal phase-out is complete and the Treasury will still face pressure from energy intensive industries to bring down prices, Aurora Energy Research has told Utility Week.
There will have been “sighs of relief” at many energy companies as Philip Hammond revealed that the CPS would continue to be capped at the current rate until 2020/21, said project leader for research and publications Mateusz Wronski. “Some expressed the fear that the CPS would be scrapped. This did not happen, so at least in the short term the government has managed to provide certainty to industry that it is committed to maintaining that rate.
“Crucially, the government failed to provide any clarity on its intentions for the CPS beyond 2020/21. Under the old government, the expectation was that we would at least learn what the rate would be for 2021/22, and that perhaps a longer trajectory would be outlined. Nothing of this sort happened.”
He continued: “Despite the short-term relief, the overall atmosphere around the CPS is such that the industry still has some important reasons to worry. We see three big reasons for the government to potentially abandon the scheme or decrease the rate going forward.”
Firstly, its impact on emissions will be drastically reduced once the phase-out of coal is complete. “Of course, there is an argument about the efficiency of dispatch, and ascribing the appropriate social value to carbon is inherently an economically sensible thing to do,” Wronski noted. “But at the same time if you look at the carbon price in the post coal world you might conclude that there wouldn’t be that much of real impact on reducing emissions.”
Secondly, there is the failure of the EU to take sufficient action to push up carbon prices in the Emissions Trading System, and of Germany and France to implement their own national carbon prices. France floated the idea earlier this year but now looks likely to take more direct action targetting coal specifically. Germany has already taken that route, paying coal plants not to generate. “For the UK to maintain a carbon price that’s effectively £18 above European levels is increasingly difficult to justify,” said Wronski.
Last of all, the government will continue to face pressure from energy intensive industries to scrap the mechanism to make British companies more competitive, particularly given its commitment to implement a new industrial strategy. Wronski said the completion of coal phase out is likely to sap the government’s will to resist: “Once coal is closed raises significantly less money for the Treasury so it’s easier for it to potentially forgo this as a source of revenue.”
The CPS will become “irrelevant” after 2025, analysis by Aurora concluded in August. Think tank Policy Exchange said last week that reforming the mechanism could cut consumers’ bills by £12.5 billion by 2030.
Read the initial reaction to the autumn budget statement here.