The UK’s controversial carbon price support mechanism could be frozen from April 2015, a research note published by a major investment bank has predicted.
The note, sent by the equity research department of Barclay’s Capital and seen by ICIS on Friday, said: “We believe a combination of the UK carbon tax (even though we now expect this to be frozen at £18.08/t from 2015/16) and rising spark spreads will push up wholesale power prices by over 20% over the next three years.”
The UK carbon price support level is set two years in advance, so the price British carbon emitters pay can diverge widely from prices in the volatile carbon market. The 2014-2015 rate revealed in the government’s 2012 budget was £9.55/tonne CO2 equivalent (tCO2e), or €11.22/tCO2e.
Just 12 months later, the price for 2015-2016 of £18.08/tCO2e was revealed, which marked a near doubling of this in a single year ( see EDEM 22 April 2013 ).
Despite the overall bullish power market forecast, any freezing of the carbon price would wipe some value from seasonal contracts, beginning with Summer ’16.
However, an element of doubt has presided over how much risk premium the power market should hold on the back of carbon price support. This is because the instrument enforces an ever-increasing spread between the price paid by power generators in the UK to cover emissions, and the emissions trading system price. As such the policy carries with it inherent political risk.
Therefore how much premium should be sold out of longer-dated seasonal contracts in the event of a carbon price support freeze is debatable.
With electricity supply margins set to tighten from Winter 2015, the forward curve would be supported by the longer-term fundamental outlook, which could also limit the impact of any re-evaluation of longer-dated contracts.
Neither Barclays Capital’s UK power analyst, nor the Treasury carbon floor spokesman, had returned calls requesting comment late on Friday. Jamie Stewart