UK: Chancellor unveils carbon price floor, commits extra £2bn to Green Investment Bank

The British Chancellor, George Osborne, has in today’s budget set out plans for the world’s first ever carbon price floor. Mr Osborne said that it would be set at GBP16/t in 2013, rising to GBP30/t by 2020. The initial figure is close to the current price of carbon on the EU ETS, which was today trading at around €17/t (GBP14.8/t).

The introduction of a carbon price floor is thought to be one of the key policies required to ensure that utilities considering new nuclear build in the UK invest on the scale required to ensure grid stability as old power plants are retired on economic and environmental grounds. It is estimated that the UK’s energy sector will require GBP200bn in investment to meet EU climate change targets for 2020, with offshore wind farms, nuclear power plants and carbon capture and storage (CCS) facilities responsible for the lion’s share. Yesterday, speaking on the sidelines of Marketforce’s “Future of Utilities” conference, Volker Beckers, CEO of RWE npower said that his company had initially been looking to make an investment decision in 2013 as part of its Horizon Nuclear Power venture with E.ON UK, but this was contingent on the completion of the Generic Design Assessment being completed by 3Q11, which is now expected to be set back by three to six months due to the review sparked by the nuclear crisis in Japan.

The carbon floor price will also heavily impact on coal-fired power generators and may well accelerate the roll out of CCS plants. Redpoint Energy undertook supporting analysis for HM Treasury and the Department for Energy and Climate Change (DECC) on the Carbon Price Support. Director, Duncan Sinclair, said: “We estimate that wholesale electricity prices may be around GBP5-6/MWh or 10% higher by 2020 given the levels of carbon price floor announced today.  This will have a significant impact on the earnings of power generators; with renewables and nuclear generators benefitting from the higher prices, while coal and older, less efficient gas plant will be hit by higher carbon costs, potentially accelerating closure.” Sinclair added, “The Carbon Price Support may stimulate more investment in low carbon generation, although we expect the Feed-in Tariffs with Contracts for Difference as announced in DECC’s December consultation to be a more significant factor.”

Possibly the biggest losers from today’s budget are oil and gas companies, given the decision to increase the North Sea oil and gas levy from 20% to 32%. Commenting on the decision, Andrew Lister, Partner, KPMG Energy and Natural Resources practice said: “Today’s announcement of yet another windfall tax is a huge blow to the oil industry.  The proposed tax increases can only reduce the attractiveness of investment in the North Sea. The potential for the tax rate to be reduced if the oil price falls will be of no consolation to the UK’s oil and gas producers and offshore service companies.

“While the Chancellor spoke about ensuring the UK is an attractive place to do business, with these announcements, the effective rate for many North Sea fields has more than doubled in less than a decade.  At the beginning of 2002, the rate was 30%, which increased to 40% in that year’s budget when a supplementary levy was introduced.  This was then doubled in 2006, taking the effective rate to 50% in 2006 and today’s increase brings it to 62%. For some older fields, the rate can be up to 81% as they also pay a petroleum revenue tax”

The Chancellor committed an extra GBP2bn to the Green Infrastructure Bank (GIB), with the additional funds to be raised via assets sales and underwritten by the Treasury. This is on top of the GBP1bn pledged in the spending review. According to Mr Osborne, the bank will be up and running in 2012, a year earlier than planned. However, it will not be able to borrow until at least 2015. Mr Osborne claims that the bank will be able to leverage GBP15bn in private funding during the lifetime of this parliament.

James Cameron, Vice-Chairman of Climate Change Capital told delegates at the “Future of Utilities” conference that such an organisation would be needed to make long-term decisions regarding the UK’s energy sector and would benefit from being insulated from the five-year political cycle. He also commented that the bulk of capital deployment for offshore wind on the scale envisaged by the government would take place over the 2014-16 period, suggesting that the GIB will have an important role to play in delivering this investment.