CRC - What Price? During the 2010 Spending Review the Government announced the CRC Energy Efficiency scheme would be simplified to reduce the burden on businesses, with the first allowance sales for 2011-12 emissions taking place in 2012 (based on historical data) rather than in 2011 as originally proposed (when it would have been based on forecast data). The Spending Review stated that revenues from the allowance sales would total £1 billion a year by 2014-15. “The allowance price will be £12/tCO2 during the first phase. For the costing it has been assumed the price will rise to £16/tCO2 during the second phase, planned to begin in 2013-14”. It would therefore be reasonable for businesses to assume a fixed CRC allowance price going forward (either with known escalators or a published forward allowance price). Some commentators have suggested that the CRC Allowance price will follow the trajectory of the the Carbon Price Floor; but is this reasonable? Carbon Price In the March 2011 Budget, the Government announced a carbon price floor for electricity generation is to be introduced from 1 April 2013. The carbon price floor will start at around £16/tCO2 and follow a linear path to £30 per tonne in 2020. The intention is that the carbon price floor will drive investment in the low-carbon power sector. 2013 £16.00 2017 £24.00 2014 £18.00 2018 £26.00 2015 £20.00 2019 £28.00 2016 £22.00 2020 £30.00 So is the Carbon Price a reasonable trajectory for the CRC allowance rate to follow? It equates to an annual average 9% increase (12.5% at start falling off to around 7% by 2020). At this level, the annual increase is well above current and anticipated forecast in-flation rates. By comparison, using a fixed 3% escalator on a fixed £16 allowance price in 2013 would see levels at just above £20 by 2020. However... However, recent months have seen the collapse of the UK Power forward curve beyond Summer 2013 as well as the cost of emission allowances (see market review for Graphs). In April 2011 Powerisk reported Summer 13 Baseload at £60.2/MWh and Winter 13 Baseload at £64.6. The Emission price was €18/tCO2 for 2012 and €19.4/tCO2 for 2013. Current prices have seen some recovery responding to the current cold snap but Summer 13 Baseload is still only offered at £50.95/MWh and Winter 13 at £56/MWh while the Emission price has recovered around €2 and is currently trading at €8.74 /tCO2 for 2012 and €9.47 /tCO2 for 2013. In November it was reported that traders in the UK energy markets were beginning to place bets that the Government will not go ahead with its controversial Carbon Price Floor. It seems there is a real fear that the Carbon Price Floor, which when announced last Spring added over £4.00MWh to the Summer 13 contract, could force energy intensive businesses to move abroad given the economic climate. This would result in carbon leak-age: essentially causing the emissions to move elsewhere rather than reducing them. This loss of industry is also something the economy can ill afford given the need for growth and some believe that the Government will review and possibly reverse its decision to intro-duce a Carbon Price Floor. Such a move would have a significant impact on the CRC and the proposed fixed price levels of £12 (£16 by 2013). EU Emissions Trading Scheme - The Benchmark It certainly does not seem sustainable for the UK to operate a scheme whereby British business is faced with a carbon tax at levels significantly higher than those seen in the European emissions traded market. Given the over supply of emission allowances it doesn’t look as though the EU Allowance (EUA) price is likely to recover significant any-time soon either. The fall of EUA prices is understandable as the overall CO2 emission cap was set at a time when economic growth was much stronger. The subsequent recession has resulted in a drop in demand for the fixed supply of allowances. The ability to carry allowances across into Phase III, which starts in 2013, is what prevents the EUA price tending to zero. Certainly with EUA’s at this level, there is no financial signal being sent to trigger invest-ment in emission reducing technology. It is anticipated that there will be some changes to the scheme before the start of Phase III to ‘tighten’ the credit supply. Some have called for the emission reduction target to increase to 30% from the current 20% reduction target by 2020 on 1990 levels. This is unlikely to receive unanimous support though and some fore-cast suggest the cap will remain at 20% with prices averaging around €12/tCO2 during Phase III. Other suggestions include the introduction of a Reserve Price or setting aside carbon al-lowances (essentially delaying their release) with the aim of stimulating the short term market. Whether this will be sufficient to stimulate investment is questionable though with many arguing that allowance prices need to be nearer €30/tCO2 for this to happen. Indeed it was the lack of investment incentive two years ago that triggered the UK Government to propose its Electricity Market Reforms arguing the EU ETS had failed to stimulate invest-ment in forms of low carbon generating capacity within the necessary timeframe to meet British requirements. If some intervention does occur and some recovery of EUA prices is seen, then the British Government will have some support levels for its own policies. Clearly there must be some sort of compatibility between carbon prices although how this can be achieved where the price is dictated in one scheme (Carbon Price Floor/CRC) and allowed to find a market level in another (EU ETS) is questionable. Time is running out and British business is lobbying hard for a level and competitive play-ing field. The Government must find a balance between tax revenue raising policies and stimulating economic growth. The CRC policy proposals expected this quarter will be key. read more ...