Leading power companies in the UK have expressed concerns over the lack of clarity regarding the post-Brexit carbon trading scheme. The scheme, which replaced its EU counterpart, aims to reduce greenhouse gas emissions by setting caps on heavy polluters and requiring them to purchase carbon credits. However, negotiations between the government and industry are still ongoing, leaving power producers uncertain about the cost of associated emissions.
Uncertainty and Potential Instability:
Power producers typically sell electricity up to two years in advance and previously priced forward contracts based on the EU scheme. The lack of clarity regarding the start date of the UK scheme's first auction, the volumes of carbon credits to be sold, and the possibility of linking with the EU scheme has caused instability and uncertainty. Power companies are concerned that this volatility may lead to higher prices for consumers, as the market operates on the assumption of linking with the EU scheme.
Call for Clarity and Linkage with the EU Scheme:
Emma Pinchbeck, the head of Energy UK, expressed worry about the absence of a carbon price in the UK, highlighting the potential risk of instability and its impact on consumers. Many UK power producers have already purchased EU credits, assuming linkage with the EU scheme. However, formal talks on linking the schemes have not yet begun, according to the European Commission. The lack of trading in carbon credits has caused pent-up demand and may lead to a significant price spike.
Operational Challenges and Uncertainty for Power Companies:
The uncertainty surrounding the UK carbon trading scheme makes it difficult for power companies to make decisions about operating their power plants. Without a UK carbon market, power companies and gas power generators are uncertain about their marginal cost to operate and the potential liability in carbon emissions. Power producer SSE has indicated the possibility of suspending forward hedging of its thermal power generation until the new scheme is operational.
Government Response and Future Consultations:
The UK government sees the new trading scheme as a crucial step toward achieving the country's target of eliminating its contribution to climate change by 2050. The government plans to consult on how the scheme will align with the net-zero target and has stated that the UK scheme is more ambitious than the EU scheme.
The lack of clarity on the UK's post-Brexit carbon trading scheme has created uncertainty and potential instability in the energy market. Power companies are concerned about the unknown costs of associated emissions and the impact on consumer prices. Urgent clarity from the government, including the start date of the first auction and potential linkage with the EU scheme, is needed to provide stability and enable power companies to make informed decisions.
