UK carbon price support rate in question as Autumn Statement looms

The UK government may be poised to announce a revision of the carbon price support (CPS) rate which inflates power market values along the length of the forward curve, a number of sources indicate.

The rate, of £18.00 (€21.00)/tonne CO2 equivalent (tCO2e) is currently in the first year of a five-year freeze which will not expire until April 2021.

But rumours have recently emerged that chancellor Phillip Hammond could be planning to either adjust the rate within this widow, or scrap it altogether, after the freeze although a full-scale cancellation seems highly unlikely given a parallel drive to phase out coal-fired power plants by 2025.

Either way, any adjustment would be announced in Hammond’s first autumn statement – in effect a half-yearly update on the annual budget – on Wednesday 23 November.

A number of sources, including traders from some of the market’s largest companies, have told ICIS that nervousness around the future of the tax is influencing the market.

Sources have pointed to recent heavy selling on the far curve as an indication that the market could be pricing in a potential cut to the CPS.

“We cannot relate this [losses on the far curve] to a strong pound sterling anymore,” said one trader at a continental utility. “The dirty spark dropped massively,” he added, in relation to the power-to-gas spread.

A treasury spokesman told ICIS on Wednesday that the department would not comment on speculation about the future of the CPS. “We keep all taxes under review, and do not comment on speculation around the autumn statement,” he said.

Movements

Strong downward price movements were seen on the far curve of the UK power market towards the end of last week when rumours initially began to circulate. A sharp increase in the value of sterling against the euro was at the time partly implicated.

Power transactions way out on the forward curve suggest that traders could be pricing in a cut to the CPS at the very least, while the likelihood of any increase as was initial intended when the mechanism was first introduced, is being disregarded altogether.

Trade data reported to ICIS showed that one Summer ‘21 Baseload trade occurred on 28 October, when one clip changed hands for £39.25/MWh. This transaction was below the closing assessment for the Summer ‘20 contract on the same day, suggesting that the counterparties involved in this transaction were not anticipating any increase to the CPS.

Some price movements could even indicate that the rate may be adjusted within the period of what is currently the rate freeze.

“Summer ‘19 power in particular has disproportionately lost value,” said one trader at another utility. “It had a big gap down last week.”

ICIS data shows that on 10 and 11 November, Summer ‘19 Baseload shed £3.975/MWh, or 10.7% of its value across the two days, while Summer ‘20 was off 8.5%.

But a year closer in, Summer ‘18 was down just 4.5%.

This could reflect the pricing-in of a potential downward adjustment to the rate from April 2019 – two years before the freeze, as it stands, expires.

The UK power market has previously reassessed valuations of far curve contracts in anticipation of expected changes to the CPS. Rumblings that the rate would be frozen in early 2014 led to a similar devaluation of the far curve ahead of the budget announcement (see EDEM 18 March 2014).

Anxiety

A number of the largest generators active in the UK have been lobbying the government to maintain the tax until at least 2025. In a recent blog post , utility SSE called on the government to maintain the tax in order to provide confidence for investors in the direction of the UK’s energy policy.

More recently, national newspaper The Times reported that a group of large energy companies were among signatories of a letter to the chancellor urging him to keep the CPS.

Lobbying moves such as these are a firm reflection of anxiety about the future of the CPS in the market, particularly as post-Brexit Britain may not be tied to EU carbon reduction targets at some point in the future.

The carbon floor has been the subject of controversy during its time, with representatives from the steel sector and other areas of power-intensive industry saying that it disadvantages British manufacturers.

Coal phase-out

Sources have said that a reduction to the CPS could be unlikely, given the publication by the Department for Business, Energy and Industrial Strategy (BEIS) last week of its plan to formally phase out coal by 2025.

The 2025 target – intended as a measure to help Britain meet its EU emissions goals which for the foreseeable future remain in place – is largely reliant on creating unfavourable market conditions for coal-fired generation.

Any reduction to the CPS would improve the profitability of coal-fired generation and potentially jeopardise the phase-out process. christopher.somers@icis.com