British Energy reported pre-tax profits of £599m saying it had benefited from the higher electricity prices. Of course it is news to no-one that power prices have risen, but what is interesting is that some players have claimed that emissions price rises are causing power prices to rise, and perhaps more interestingly, some claim that power price rises are causing emission prices to rise. However, a fall in one of the commodities does not automatically lead to a corresponding fall in the other.

The theory for power prices to rise as a result of emission price gains is easy to explain. Power producers now treat emissions as a cost of generation. In order to generate, one has to have emissions allowances. If these are valued higher, then in order to maintain profits, the power price must reflect a corresponding rise.

The emissions theory is less easy to explain but if one assumes that a price is set by demand and supply, then if power prices increase, this would be as a result of an increase in demand. It could then be argued that the corresponding increase in supply would be met by the buying of fuel and emissions in order to generate. This theory is particularly well documented in the German power market, and less in the UK.

In reality power players in both Germany and the UK have a portfolio of plant and know that demand for power is stable year on year with demand increasing by a maximum of 1.5% a year. Most power grids have 20% over supply to be able to operate in a market which has extreme within year demand fluctuations and therefore, as a result, it is less and less likely that the power market should drive the emissions price.