The UK could end up having to pay more for vital investment in energy schemes as a result of the carbon price floor freeze.
That’s the view of energy data specialist EnAppSys, which said the move would create further uncertainty over the country’s energy policies, increasing the cost of capital and potentially deterring vital investment in UK energy projects.
The tax, which sets a floor for the price of burning carbon, came into effect last year with the aim of encouraging new energy-efficient power plants. The move triggered a wave of criticism from heavy manufacturers, such as steelmakers and coal plant operators, who claimed it made their business uncompetitive.
Chancellor George Osborne has tried to appease critics by announcing that the CPF would be frozen at £18 per tonne from 2016-17 until the end of the decade. Under original proposals, the CPF would have increased to almost £30 per tonne by 2020.
The freeze is part of a £7bn package of measures designed to cut energy bills for high energy-using manufacturers and encourage them to invest in schemes in Britain. But EnAppSys said it would trigger fresh confusion over the direction of Britain’s energy policies and force companies to increase the risk premium on investments in power projects in the UK. Crucially, it could also encourage them to consider switching to invest in energy schemes overseas.
Paul Verrill, Director of EnAppSys, said: “It will make companies extremely nervous about future policy changes, especially with the general election looming next year. It could force people to invest in countries where there is more clarity and certainty on policy.
“Effectively, the freeze will increase the cost of energy investments in the UK precisely at a time when the country needs a firm pipeline of new flexible gas projects to meet the coming capacity crunch. A rising carbon floor price would have made gas-fired generation more profitable at the expense of coal, but this situation will be reversed by the freeze.”
EnAppSys said the freeze would even unnerve operators of existing coal plants, despite reducing their costs in the short term.
Mr Verrill said: “In the long term there is still a great deal of uncertainty. Some coal operators could now decide to sweat existing assets and postpone investment in cleaner processes, especially with the EU Industrial Emissions Directive in place. Those stations moving to biomass will have their plans thrown into further confusion.
“The uncertainty is worse than rising costs. Companies, especially energy intensive users, could now choose to base their projects in countries where there is a clear trajectory of increasing power costs but, crucially, a firmer regulatory and political environment for making investment decisions.”
The company estimates that Britain will need between 10GW and 20GW of new capacity to meet demand as a result of falling capacity at ageing coal and nuclear plants – and the CPF freeze is unlikely to improve this dire situation.
Although the freeze could make it financially viable for operators to keep older coal plants running in the UK, it is likely to reduce investment in new gas-fired generation, biomass schemes and clean coal technologies. The savings to consumers from a lower CPF could be offset by higher premiums in the soon to be implemented capacity mechanism.
If anything, the overall effect of the CPF freeze could be to increase the capacity shortfall and delay the investment needed for a low-carbon future.