Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/472696
UTILITY WEEK | 6Th - 12Th March 2015 | 19 Finance & Investment T he EU carbon allowance market is back in the investor spotlight as the European Environment Committee voted for an early start for the market stability reserve (MSR) – a 'central bank' for carbon. Meanwhile, the UK's domestic carbon tax will be under scrutiny this year as it starts to push a switch from coal to gas generation. What will be the next government's policy on putting a price on carbon? Two years ago, the EU Emissions Trading Scheme seemed beyond redemption, with a proposal to delay the issuance of allowances rejected and the carbon price collapsing to €2/tonne. However, progress on tackling the surplus since then has allowed the price to recover to €7/tonne, and some are hoping it could go much higher. Even the proposed reforms could take until 2030 to put enough allowances into the stability reserve to create a tight market. Nevertheless, given that it would cost more than €30/tonne to save carbon from switching from coal to gas gen- eration, even the distant prospect of a carbon allowance shortfall could drive up today's price. While a higher carbon price would raise the cost of generation, it is seen as positive for generators as a whole in Europe, because clean genera- tion (nuclear, hydro, market-exposed renewables) would see higher power prices without suffering from higher costs. In a world of falling coal, oil and gas prices, rising carbon prices offer hope of a positive driver for revenues. What does this mean for the UK? The UK-specific carbon price support is a tax on generation fuel on top of the EU carbon price. It is due to increase once again to more than £18/tonne from April this year, which would already be sufficient to make gas cheaper than some coal stations in the summer. A rising traded EU price could accelerate this fuel switch and pose an interesting question to an incoming government this May: is the UK carbon price a green instrument or a revenue-raising tax? A green government might celebrate the fact that the combined EU and UK carbon price was reducing domestic emissions. On the other hand, the Treasury might miss the lost revenue if a shi to gas generation cuts the tax take. Perhaps the true colour of the UK carbon tax is about to be revealed. Martin Brough, utilities equity analyst, Deutsche Bank "Even the proposed reforms could take until 2030 to put enough allowances into the stability reserve to create a tight market." Investor view Martin Brough "Rising carbon prices offer hope of a positive driver for revenues" ment and construction schedules to this timetable, and they will all be looking for financing commitments and then closing at the same time. Quite what the knock-on effects on supply chain, financing and per- mitting are going to be remains to be seen. The termination triggers also mean that the best way to manage the risk of not hit- ting the trigger dates once a CfD is awarded is to ensure that the project is well developed before applying for the CfD. That may work for the larger, well-financed developers, but it will be difficult for the developers with- out serious balance sheet backing to justify incurring high development costs without any certainty that a CfD will be forthcoming. This looks like something of a double whammy for smaller developers, particularly those looking to build more risky technolo- gies. Certainly there will be plenty of such developers taking a long hard look at their development portfolios now that we know the results of the first allocation round. Lis Blunsdon, of counsel, Hogan Lovells "The prices achieved by the onshore [wind] industry show what utter folly it would be to choke off this low- cost form of low-carbon power" Maria McCaffery, chief executive, RenewableUK "The auction has driven down prices and secured the best possible deal for this new clean, green energy" Ed Davey, energy secretary "as we warned, solar has only been able to win a tiny amount of cfD contracts. This is very disappointing" Paul Barwell, chief executive, Solar Trade Association Quoted