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CO2 price floor may push investment into non-UK assets - SSE

21 Jun 2012 18:22:18 | edem

The policy director of SSE, the UK utility that last week bought an under-construction gas-fired power station and three sites for plant development in the Republic of Ireland, said the UK's carbon price floor may push potential investment in fossil fuel-burning capacity from the UK to its nearest neighbour.

On the same day as the first capacity auction for the new East-West interconnector between Ireland and Wales (see EDEM 20 June 2012), SSE's Keith MacClean warned that the UK's increasing interconnection with other energy markets could pose significant problems for UK utilities covered by the carbon price floor.

From April next year UK utilities will have to pay a top-up price for carbon, so that even when prices in the EU's emissions trading system are low, the UK government will unilaterally penalise its energy sector for its climate change-causing emissions.

The UK treasury has set the carbon price floor at £16.00 (€19.83) per tonne of CO2 (tCO2) for next year, and this is due to rise incrementally to £30.00/tCO2 by 2030 (see EDCM 21 March 2012).

By contrast, the benchmark carbon contract in the EU's emissions trading system was assessed at €7.50/tCO2e on Wednesday by ICIS.

"If we're having to pay £15 a tonne [of CO2] for burning the same amount of gas, then clearly there's a point at which it becomes more economical to do that in Ireland than in the UK," MacClean told ICIS from the sidelines of a meeting in the UK parliament organised by environmental organisation Sandbag.

The fact that the carbon price floor is a tax which can be "easily changed at every budget" also adds to uncertainty for utilities, making investment decisions harder, MacClean said.

Last week, SSE bought an under-construction 460MW combined cycle gas turbine (CCGT) plant in the Republic of Ireland from Spain's Endesa, which is expected to be commissioned in 2014.

SSE also acquired three options for future development of electricity generation in Ireland - a proposed 450MW CCGT plant and two development sites.

It also bought 1GW of fuel oil and gasoil plants, for peak supply into the Irish market (see EDEM 15 June 2012).

MacClean would not be drawn on SSE's plans for future development of new CCGT capacity in Ireland or elsewhere.

Price premium

At present, selling power from Ireland into the UK market is hindered by the premium Irish prices hold over the UK's, which is linked to capacity payments in Ireland. But this premium is likely to be eroded by 80-90% by 2015, when new EU rules on market coupling are implemented, according to one Irish power trader. As such, MacClean's comments make sense, the trader said.

"SSE's comments are probably slanted towards recent investment decisions they've made - and poking a stick at the UK government to see the flaws in their carbon price floor policy. It's a fair comment at the moment - but they're not going to see a return on their investment [in Ireland] just because of that," the trader said.

However, Ireland has "one of the most efficient CCGT fleets in Europe" due to the recent ramp-up of newly built capacity, which means the country's gas generation has the potential to be very competitive, he added.

Competitiveness

The UK carbon price floor will pose major problems for thermal generators in the north of Ireland, analyst Brendan Cronin of consultancy Pöyry said.

The price floor means thermal plants in the Republic of Ireland will be far more competitive when selling into the island's single electricity market than thermal plants north of the border, because installations in the north will be covered by the UK's carbon price floor, Cronin said.

"It will damage the competitiveness of thermal generators [in the North] when they bid in. It's an interesting moment, because we have a single market on the island but half the market will have a different carbon price to the south," he said.

Earlier this year, the UK parliament's Energy and Climate Change Committee warned that the carbon price floor could lead to "carbon leakage" in the energy sector, not least due to the anticipated increase in interconnection capacity. Carbon leakage occurs when environmental policies in one jurisdiction lead to higher emissions of the greenhouse gas in another jurisdiction.

"[The Department of Energy] expects there to be as much as 10GW of interconnection with other countries by 2020 - some 10% of installed capacity. This makes electricity generation more susceptible to leakage than other sectors," the committee said in January (see EDEM 26 January 2012).

MaClean recently told ICIS that the company has concerns over the sustainability of the carbon price floor because it is a tax, which subjects it a high degree of political uncertainty. This has prompted SSE to factor in a reduction in the projected price floor of 30-40% in its investment planning out to 2020 (see EDCM 13 June 2012). VF

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