Cost of CO2 rules risk more UK energy price hikes

Fri Oct 26, 2012 11:37am EDT

Related Topics

* UK carbon costs could top 2 bln pounds in 2013

* Environmental costs to make up bigger portion of bills

By Susanna Twidale

LONDON, Oct 26 (Reuters) - Britain's utilities face a 2-billion-pound ($3.2 billion) bill in 2013 from schemes to cut carbon dioxide emissions, Reuters data show, risking higher prices for consumers and more discomfort for a government anxious to keep energy costs down.

Prime Minister David Cameron threw Britain's energy policy into confusion last week when, amid rising prices, he gave an unexpected pledge to parliament that energy suppliers would be forced to give customers their cheapest tariffs.

Rising wholesale gas prices have been blamed for the bulk of energy bill price increases coming into effect in the next two months by five of Britain's big six power providers. .

But climbing environmental fees have also contributed to the hikes, according to utilities, and these are set to soar next year when requirements under the EU Emissions Trading Scheme (ETS) and a domestic tax applied by the government kick in.

Complying with these schemes will land a sixfold increase in costs for British utilities next year compared with 2011, according to Reuters calculations.

"In the past five years gas price movements have been a major cause of rising consumer bills. Going forward the cost of support for low carbon technologies will become an increasingly large part of consumer bills," said Phil Grant, a partner at consultancy firm Baringa Partners.

The EU's ETS caps the emissions of 11,700 utilities and industrial firms in the 27-nation bloc, forcing them to pay for carbon permits to cover their emissions' output if they exceed the limit.

To ease the transition, utilities received a generous amount of free permits, called EUAs, in the earlier years of the ETS, but from next year the rules will be tightened and the costs for companies to cover their emissions are set to multiply.

Analysts at Thomson Reuters Point Carbon forecast the UK heat and power sector will emit 166.1 million tonnes of carbon dioxide (CO2) in 2013.

The free permit allocation for the sector is set to plummet from over 111 million in 2011 to 4.5 million EUAs next year, for a few smaller generators, figures from the UK's Department of Energy and Climate Change show, meaning the sector overall would have to pay for permits to cover 161.6 million tonnes of CO2.

Based on latest analyst forecasts for EUA prices in 2013 polled by Reuters, this could cost companies up to 1.47 billion pounds, compared with the 326 million pounds stumped up by British power generators in 2011.

BRITISH TAX

While carbon costs will rocket for power companies across Europe, the bill for British firms will be ramped higher still by an extra tax imposed by the government in the form of the carbon price floor.

From April 2013, UK generators will pay the difference between the price of carbon allowances traded in the EU ETS, and the UK's notional carbon floor price, devised by the government primarily to drive investment in low-carbon electricity generation.

Government budgets have set this annual levy for each tonne of CO2 emitted at 4.94 pounds from April 2013 and 9.55 pounds in April 2014.

This could add a further 798 million pounds to the carbon bill for UK utilities in 2013/14, taking the total bill to almost 2.3 billion pounds, although the actual figure could be lower as some combined heat and power units will be exempt from the UK price floor tax.

The government hopes its extra carbon tax will play a small part in helping to spur the 110 billion pounds investments in low-carbon power generation it says is needed to replace the country's aging power stations.

But lawmaker Tim Yeo, chairman of the cross party Energy and Climate Change Select Committee, said the measure will place an unnecessary burden on British homes and businesses, while merely shifting CO2 emissions from power generators to other parts of Europe not subject to the price floor.

"It raises the costs for consumers without reducing carbon emissions," he told Reuters.

The Treasury said it expects companies to recoup at least 40 percent of the costs relating to the carbon price floor from consumer pockets, upping bills by 1 percent in 2013 and by 4 percent in 2016.

However, the government believes its raft of initiatives, including the "Green Deal" which will help pay for energy efficient boilers and household insulation, will ultimately lead to lower household bills.

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