COLUMN-UK energy price battle to pressure carbon tax: Wynn

Wed Sep 25, 2013 12:11pm EDT

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By Gerard Wynn

LONDON, Sept 25 (Reuters) - Britain's carbon tax may well be a casualty of a pledge by the opposition Labour Party to freeze energy prices for 20 months if it wins the next election.

Labour leader Ed Miliband proposed the freeze in a move to draw in voters who have been squeezed by four years of austerity. (For a related column: )

Britain's wholesale electricity prices are the highest in Europe, making UK power generation businesses more profitable than those in other countries. One big contributor to those high prices has been the introduction just this year of a carbon tax.

The Labour Party position may make it more difficult for the Coalition government to continue that tax, which will raise wholesale power prices by 5 to 10 percent. The tax is unique to Britain and is opposed even by some environmental groups.

WHOLESALE PRICES

Thomson Reuters data for baseload power contracts for winter 2014 show that Britain has the highest wholesale power prices in Europe, ahead of liberalised power markets in Germany, France, Italy and the Netherlands. (Chart 1)

As a result of such prices, Britain is one of the few countries where gas-fired power generation is still just about profitable, at least on the basis of spot prices and not covering capital costs.

It is difficult to say, however, whether that means British utilities overall, including gas sales, make bigger profits from households than do utilities elsewhere.

Utilities do not publish data on the internal profits that arise when their generation units sell power to their retail distribution arms.

Britain's power prices are higher for a variety of reasons including dependence on gas, less interconnection with other countries, lower deployment of zero marginal cost renewable power and the carbon tax.

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Chart 1:

Chart 2: (page 1)

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GREEN TAXES

Rising wholesale power prices alone could put pressure on the Coalition to scrap the carbon tax, which it introduced in April.

The tax is meant to fix carbon prices at a certain minimum level to encourage investment in technologies that lead to reductions in emissions, including nuclear power which the government favours.

The tax tops up prices of European carbon permits (EUAs) to push the cost of emissions to a minimum level, set at 16 pounds ($25.58) per tonne of CO2 this year. It results in larger profits for utilities with low carbon generation and adds to consumer bills.

The trouble is that EUA prices have dive-bombed, leaving Britain saddled with a rising tax while carbon costs have shrunk for other EU countries.

The British top-up tax for this financial year will be 4.94 pounds per tonne of CO2, rising to 9.55 pounds in 2014/2015 and 18.08 pounds in 2015/16.

The cost is passed through to wholesale power prices. The tax will account for about 4 percent of wholesale prices this year, rising to about 7 percent next year and more than 10 percent thereafter.

Wholesale power prices and utility profit margins amount to 58 percent of electricity bills in Britain and 67 percent of gas bills, according to regulator Ofgem.

Additional environmental charges, passed directly to consumers, account for 11 percent of power bills and 6 percent of gas bills. (Chart 2)

British utility Centrica responded to Miliband's pledge by attributing rising UK energy bills to "three factors - higher commodity costs where Centrica has to compete to buy gas in a global market; increases in regulated transportation and distribution charges; and environmental costs and taxes".

Actually, the picture is more complicated.

Utility groups could start by publishing figures on their full profits.

And all the main political parties in Britain should explain why the country needs a carbon tax. If it is really just a subsidy for expensive new nuclear power, they should say so.

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