(BN) U.K. Proposes Carbon Floor, Set Price to Cut Emissions


U.K. Proposes Carbon Floor, Set Price to Cut Emissions (Update1)
2010-12-16 14:48:53.12 GMT

(Updates with reaction from E.ON in fourth paragraph.)

By Kari Lundgren
Dec. 16 (Bloomberg) -- The U.K. government made four
proposals to ensure aging power plants are replaced and climate
targets met, including setting a floor price on carbon emissions
and guaranteeing long-term prices for low-carbon generators.
"The current energy market cannot deliver," Secretary of
State for Energy and Climate Change Chris Huhne said in a
statement to parliament today. "Left untouched it would lock
carbon into the system for years to come."
The announcement marks the biggest shift in British energy
policy in two decades, reining back the market structure put in
place by Margaret Thatcher. The changes are needed to drive
investment in low-carbon power plants, Huhne said. More than 110
billion pounds ($172 billion) is required by 2020 to replace old
nuclear reactors, upgrade the power grid and build renewable
projects like offshore wind-farms and nuclear reactors.
"The picture looks positive for new investment in lower
carbon generation - enabling clean to be built in preference to
cheap," Paul Golby, chief executive officer of E.ON AG's U.K.
unit, said in a statement.
The U.K. Treasury suggested using the climate change levy
and a fuel duty on fossil fuels to implement a carbon floor. The
Treasury laid out three scenarios that set a minimum price on
carbon of 20, 30 or 40 pounds a ton by 2020, rising to 70 pounds
a ton by 2030.

Contracts for Difference

Under the proposals, a contract for difference feed-in-
tariff would be paid to low-carbon generators if electricity
prices fall below a certain level, Huhne said. Such a contract
would compensate utilities for lower-than-expected energy prices
or charge them if prices are higher, in this way locking in
returns and allaying concerns that costly projects won't get
paid off.
Renewable power projects and nuclear reactors are expensive
to build and cheap to operate, making investors especially
sensitive to long-term electricity prices. The expansion of wind
power across Europe may also lead to periods when supply exceeds
demand, resulting in negative prices.
The Department of Energy and Climate Change's third
proposal is to use capacity payments to encourage the
construction of reserve plants, likely to become more important
as the U.K. boosts its use of more volatile renewable generation
like offshore wind farms. The final proposal was an emissions
performance standard for new coal-fired power plants. The new
laws will be in place by 2012, Huhne said.

Drax Falls

Drax Plc, owner of Western Europe's largest coal-fired
power station, dropped 1 percent to 373 pence as of 2:20 p.m. in
London. Centrica Plc, which owns a 20 percent stake of all of
Electricite de France SA's nuclear power plants, rose 0.8
percent to 332.8 pence.
British power utilities will pay an additional 27.3 billion
pounds in equipment costs in the 20 years through 2030 under the
proposals. On the other hand, the companies will buy fewer
carbon allowances in the European Union's emissions market,
saving about 11.5 billion pounds, according to the government's
impact assessment.
"In the new, reformed U.K. electricity market, the
economics of low carbon will stack up like nowhere else in the
world," Huhne said. "By 2030, three quarters of our
electricity could be low carbon."
The U.K. has pledged to get 15 percent of its energy from
renewable sources by the end of the decade and reduce carbon-
dioxide emissions by 80 percent by 2050 from 1990 levels.
Achieving this will require as much as 40,000 megawatts of low-
carbon energy projects, according to a Dec. 7 report from the
Committee on Climate Change.
The new market arrangements will provide "greater
certainty of delivering on time," Huhne said in a Bloomberg
television interview earlier today, resulting in electricity
bills that are 4 percent lower than they would have been

For Related News and Information:
U.K. power market stories: TNI UK PWRMARKET <GO>
Top energy news: ETOP <GO>
U.K. electricity prices: ELEU <GO>

--With assistance from: Catherine Airlie and Mathew Carr in
London. Editors: Will Kennedy, Stephen Cunningham.

To contact the reporter on this story:
Kari Lundgren in London at +44-20-7073-3442 or

To contact the editor responsible for this story:
Will Kennedy at +44-20-7073-3603 or