Tag: carbon pricing

Committing to a net zero power system as part of COP26

Dear Prime Minister, Chancellor, COP26 President and Minister for Energy and Clean Growth,

We are a group of energy companies investing tens of billions in the coming decade, deploying the low carbon infrastructure the UK will need to get to net zero and drive a green recovery to the COVID-19 crisis.

We welcome the leadership shown on the Ten Point Plan for a Green Industrial Revolution, and the detailed work going on across government to deliver a net zero economy by 2050. We are writing to you to call on the Government to signal what this will mean for UK electricity decarbonisation by committing to a date for a net zero power system.

Head of BECCS inspects pilot plant within Drax Power Station's CCUS Incubation Unit

Head of BECCS Carl Clayton inspects pipes at the CCUS Incubation Area, Drax Power Station

The electricity sector will be the backbone of our net zero economy, and there will be ever increasing periods where Great Britain is powered by only zero carbon generation. To support this, the Electricity System Operator is putting in place the systems, products and services to enable periods of zero emissions electricity system operation by 2025.

Achieving a net zero power system will require government to continue its efforts in key policy areas such as carbon pricing, which has been central in delivering UK leadership in the move away from coal and has led to UK electricity emissions falling by over 63% between 2012 and 2019 alone.

It is thanks to successive governments’ commitment to robust carbon pricing that the UK is now using levels of coal in power generation last seen 250 years ago – before the birth of the steam locomotive. A consistent, robust carbon price has also unlocked long term investment low-carbon power generation such that power generated by renewables overtook fossil fuel power generation for the first time in British history in the first quarter of 2020.

Yet, even with the demise of coal and the progress in offshore wind, more needs to be done to drive the remaining emissions from electricity as its use is extended across the economy.

In the near-term, in combination with other policies, continued robust carbon pricing on electricity will incentivise the continued deployment of low carbon generation, market dispatch of upcoming gas-fired generation with Carbon Capture and Storage (CCS) projects and the blending of low carbon hydrogen with gas-fired generation. Further forward, a robust carbon price can incentivise 100% hydrogen use in gas-fired generation, and importantly drive negative emissions to facilitate the delivery of a net zero economy.

Next year, the world’s attention will focus on Glasgow and negotiations crucial to achieving our climate change targets, with important commitments already made by China, the EU, Japan and South Korea amongst others. An ambitious 2030 target from the UK will help kickstart the Sprint to Glasgow ahead of the UK-UN Climate Summit on 12 December.

Electricity cables and pylon snaking around a mountain near Cruachan Power Station in the Highlands

Electricity cables and pylon snaking around a mountain near Cruachan Power Station, Drax’s flexible pumped storage facility in the Highlands

2030 ambition is clearly needed, but to deliver on net zero, deep decarbonisation will be required. Previous commitments from the UK on its coal phase out and being the first major economy to adopt a net zero target continue to encourage similar international actions. To build on these and continue UK leadership on electricity sector decarbonisation, we call on the UK to commit to a date for a net zero power system ahead of COP26, to match the commitment of the US President-elect’s Clean Energy Plan. To ensure the maximum benefit at lowest cost, the chosen date should be informed by analysis and consider broad stakeholder input.

Alongside near-term stability as the UK’s carbon pricing future is determined, to meet this commitment Government should launch a consultation on a date for a net zero power system by the Budget next year, with a target date to be confirmed in the UK’s upcoming Net Zero Strategy. This commitment would send a signal to the rest of the world that the UK intends to maintain its leadership position on climate and to build a greener, more resilient economy.


  • Rt Hon Boris Johnson MP, Prime Minister of the United Kingdom
  • Rt Hon Rishi Sunak MP, Chancellor of the Exchequer
  • Rt Hon Alok Sharma MP, Secretary of State for Business, Energy and Industrial Strategy and UNFCCC COP26 President
  • Rt Hon Kwasi Kwarteng MP, Minister for Business, Energy and Clean Growth


BP, Drax, National Grid ESO, Sembcorp, Shell and SSE

View/download letter in PDF format


Need for carbon pricing clarity at the first ‘Net Zero Budget’

Fishing village of Staithes near Scarborough on the north Yorkshire coast

Rt Hon Sajid Javid MP

Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road London SW1A 2HQ

29 October 2019

Dear Chancellor,

Need for carbon pricing clarity at the first ‘Net Zero Budget’

We are writing to you to urge you to maintain the UK’s robust approach on carbon pricing. The prolonged uncertainty regarding the UK’s carbon pricing future as it exits the EU reiterates the need for the upcoming Budget – at whatever final date is chosen – to provide some much-needed certainty in a potentially turbulent period for businesses across the UK.

With its approach to carbon pricing, the Powering Past Coal Alliance and its Net Zero commitment, the UK has been a leader in global efforts to meet the ambition of the Paris Agreement by phasing out coal, as well as incentivising low carbon energy development and helping drive cost reductions. This leadership should continue at the first ‘Net Zero Budget’.

As outlined by the Committee on Climate Change in its recent advice to the UK Government on its carbon pricing future1, reaching net zero “will require a strong and rising carbon price, in order to induce changes to both short-term behaviour and longer-term investment decisions”. Importantly, in the run up to COP26 in Glasgow in November 2020, it is important that the UK continues its global leadership and is not perceived to waver on its commitment to tackling climate change.

Given the uncertainty over the UK’s exit from the EU there is little clarity on what the carbon pricing mechanism will be in the near term and this is already impacting on the forward pricing of carbon in electricity markets. Therefore, providing certainty and stability is crucial when the Government sets the Carbon Price Support (CPS) rate for April 2021 and beyond. Any reduction in CPS rates made in isolation of wider clarity on the UK’s carbon pricing arrangements post EU exit risks sending a negative signal to low carbon investors and undermining the continuing need for a strong and rising carbon price.

In addition to the considerations on the CPS, the Carbon Emissions Tax (CET) – that will replace the EU ETS in the event that the UK leaves the EU without a deal – will need to be set out for 2020 as soon as possible. To minimise the potential divergence between the CET and the EU ETS over 2020 it is vital that the CET is set a level for 2020 that is comparable with recent EU ETS pricing.

We look forward to measures to help the UK meet its leading ambitions at the first ‘Net Zero Budget’, including certainty and stability on the CPS. Further clarity on the UK’s carbon pricing future following a successful linking agreement between a UK ETS and the EU ETS to be in place for 2021 should be provided as soon as is practicable.


Drax   |   Ørsted   |   SSE   |   Sandbag



Simon Clarke MP, Exchequer Secretary to the Treasury

Rt Hon Andrea Leadsom MP, Secretary of State for Business, Energy and Industrial Strategy

Rt Hon Kwasi Kwarteng MP, Minister of State for Business, Energy and Industrial Strategy

Lord Ian Duncan, Parliamentary Under Secretary of State for Business, Energy and Industrial Strategy

Rt Hon Claire Perry O’Neill MP, UNFCCC COP26 President

View the letter in PDF format

How the market decides where Great Britain gets its electricity from

Set of vintage glowing light bulbs on black background

The make-up of Great Britain’s power system changes constantly. Demand is always changing; in winter it may peak at 50 gigawatts (GW) but overnight in summer it will be less than 20 GW. Some days wind is the biggest source of the country’s electricity generation, other days it’s gas. Then there are days when, for a few hours, solar takes the top spot in the middle of the day and nuclear during the night.

In the past, Great Britain’s electricity came almost entirely from big coal and nuclear power stations. But as the need for decarbonisation has grown, so has the number of sources feeding electricity to the grid, creating an ever more complex and varied system made up of technologies that behave in very different ways. For example, some sources are weather dependent and can’t generate all day every day others stop and start flexibly to smooth out changes in demand or intermittent generation.

But in the event all sources are available, what dictates which sources actually generate, and when? The overriding influence is economics – the costs of starting up and running a turbine, the price of fuel or taxes on carbon emissions.

In Great Britain, electricity’s wholesale price is not set in stone by an entity such as a regulator. Instead it’s negotiated via trading over the course of a day between generators (power stations, storage and wind turbines) and suppliers, who transmit that electricity to consumers.

As a result, the price of electricity fluctuates every half hour, responding to factors such as demand, cost of fuels, availability of resources (such as sun and wind), and carbon taxes.

For an example of the scale at which it fluctuates, we can look at the period 1-4 June this year, when the index price of electricity ranged from over £55/MWh down to around £5/MWh (see chart, above).

But while these figures speak to the overall price of a megawatt on the system, they don’t reflect all the individual sources, nor their individual costs. Each of the multiple sources on the grid have their own operating costs fluctuating on a similar basis.

These changing prices give rise to what is known as the merit order, a fluid, theoretical ranking of generation sources. This is not set by any regulator, economist or even by traders. Rather it is a naturally occurring, financial occurrence that explains what sources of electricity generation are feeding power onto the grid day-to-day.

What is the merit order?

The merit order dictates which sources of generation will deliver power to the grid by ranking them in ascending order of price together with the amount of electricity generated. This then determines the order in which power sources are brought onto the system. Ultimately, suppliers want the right amount of electricity for the best possible price, so in a system made up of many sources, it is the lowest cost, highest yield option that is brought online first, which in theory helps keep overall electricity prices down.

North Sea Wind Farm, Redcar

This means it is often sources such as wind and solar, which have no fuel costs, that sit at the top of the merit order. Nuclear may come next as it continually generates a large amount of power for a low cost, while taking a long time to turn down or off. At the opposite end of the merit order are sources like coal and oil, which have high fuel and carbon dioxide (CO2) emission costs (such as carbon taxes and the European Emission Trading scheme).

However, the merit order isn’t a set of hard and fast rules. “It’s an assumption used by traders or market commentators to guide what is likely to run and thereby the likely market price,” says Ian Foy, Drax Head of Ancillary Services. “There is no published merit order. It is like Santa Claus – it doesn’t exist, but it makes explaining Christmas easier.”

 The intricacies of being in and out of merit

If a generating unit is required to meet demand then it’s described as ‘in merit’, if it is not required at any particular point in time then it’s ‘out of merit’ – there’s no point in suppliers paying for another power station, for example, to start generating if demand is already being met.

“If the market is efficient, we generate from the lowest cost source at all times,” says Foy. “Costs are not simple, for example, you have to take into account the cost of starting or shutting down generating units. However, costs are not publicly shared so there’s no single view of the merit order. Each party has its own perspective on it.”

It means the merit order changes from season-to-season, day-to-day and hour-to-hour, as rates of supply and demand, and the availability of resources change.

Dungeness Nuclear Power Station in Kent

“An obvious example is gas tends to be cheaper in summer than winter, when it’s not being used for heating. Coal and gas also switch as global prices change,” says Foy. “Availability also changes over the year. There’s more solar in summer, but none in the morning and evening peaks of winter.”

There are also practical issues, such as repairs being made on wind and hydro turbines or planned maintenance outages on thermal and nuclear power stations, putting those generators out of action and knocking them out of merit.

And because the merit order is not an implemented working scheme, it can be deliberately manipulated by outside forces. One of the ways this is most clearly seen is in carbon pricing.

Merit in a changing system

The Carbon Price Support tax paid by coal and gas generators in Great Britain, alongside the European Emissions Trading System have increased the cost of fossil fuel generation: gas, oil and coal. Levied as £/tonne of CO2 emitted this has the effect of pushing fossil generation down the merit order. With coal emitting double the CO2 per unit of electricity compared to gas, we can see how the merit order can be influenced to achieve environmental outcomes.

This has helped steer Great Britain towards record breaking coal-free periods and stimulated the building of low carbon generation sources.

Other sources, such as interconnection with Europe and power storage facilities, also slot into the merit order. Their position often shifts due to highly variable prices dependent on power generation in neighbouring countries or the amount of electricity that can be stored at a low cost, respectively.

The grid is ever-changing. Over the last two decades we’ve seen huge shifts in how power is generated and delivered. This is unlikely to slow down in the near future, but the merit order will remain. Like the grid, it is in a constant state of change, adapting to the many moving parts of the electricity system. As long as Great Britain maintains its open electricity trading market, the merit order will continue to dictate where the country’s power comes from.

A price worth paying? Why the Treasury should maintain a higher carbon price

Last week it was Green GB Week, a nationwide campaign supported by the UK government, showcasing the country’s green credentials and progress in transitioning towards a low carbon world. It is therefore timely that ahead of the Autumn Budget, the energy industry should be speaking about measures, such as the Carbon Price Support mechanism, which are within the power of government to help keep Great Britain on track in meeting its decarbonisation goals.

Aurora Energy Research, a leading energy research and analytics firm, has produced fresh analysis that suggests that maintaining a higher carbon price is key to phasing out coal power generation and decarbonising the UK electricity sector in a timely, cost-effective manner. 

Is the carbon price at risk?

In April 2013, HM Treasury introduced the ‘Carbon Price Support’ – a tax paid by coal and gas generators in Great Britain. In part, this was a response to low costs in the European ‘Emissions Trading System’ which requires generators to buy certificates against their emissions. At the time, the UK Government felt that these certificates were too cheap and wanted to impose a higher carbon price to drive a more modern, low-carbon energy mix.

This Carbon Price Support has had a huge impact, particularly on coal. Prior to its introduction, coal represented 50% of power generation but since it has fallen to record lows. 2017 saw the first day without any coal on the power system since the industrial revolution. Records continue to be broken throughout 2018, with coal generation falling to 1% during summer months.

However, 2018 has also seen prices within the Emissions Trading System surge. Prices started this year at €8/tonne and now seem to be steadying at roughly €20/tonne. This has created uncertainty over the future of the UK Carbon Price Support scheme. Many in energy, from power generators to environmental campaign groups are worried that the Treasury might respond to rising European prices by slashing the Carbon Price Support in this year’s Autumn Budget, which could threaten to undo the success the UK has had in decarbonising its energy mix.

The carbon price is needed to keep coal at bay

Aurora has tested the impacts of different trajectories for the carbon price going forward to 2040 and the implications are significant, particularly for coal.

Aurora’s analysis shows that if government maintains the current Carbon Price Support rate of £18/tonne, then at current EU ETS futures levels, coal should come off the GB power system in 2021-22. By contrast, the same analysis suggests that if Chancellor Philip Hammond were to reduce the Carbon Price Support to £7/tonne, then coal power stations would stay on the system until 2025 and increase generation during that time, as illustrated below.

Source: Aurora Energy Research

This would make it difficult for the UK to meet its carbon targets. The UK government has committed to reducing greenhouse gas emissions in line with 5-yearly ‘carbon budgets.’ Cutting the Carbon Price Support rate to £7/tonne would result in 29 million tonnes of additional carbon dioxide (CO2) during the 4th carbon budget period, which runs from 2023-27. This is an increase of almost 20% on total power sector emissions – against a carbon budget that the UK is currently on track to miss.

The cost of the carbon price

A higher carbon price raises electricity prices slightly, but the mechanics of this are complex and the rising price of electricity is somewhat offset by lower subsidy payments to low carbon generators. Comparing a ‘status quo’ scenario to one where the Carbon Price Support falls to £7/tonne raises annual power system costs by £700 million (average over 2021-40), which translates to roughly £9 a year on the average household’s electricity bill.

Source: Aurora Energy Research

Decarbonisation affects not just the future of GB’s power system, but also its international reputation and progress in meeting climate change targets. The Carbon Price Support has helped to make GB’s power system a success story in reducing carbon emissions while keeping costs reasonable.

There are always trade-offs to be made in policy but cutting the carbon price would threaten the progress Great Britain has made in decarbonising its energy mix, making it harder to meet emissions targets.

Download the report: Carbon Pricing Options to Deliver Clean Growth

Aurora’s press release: Clarity on carbon pricing is needed in Autumn Budget – a cut risks a resurgence of coal

Drax Power CEO Andy Koss’ comments on the Aurora report report 

Coal comeback pushes up UK’s carbon emissions

UK coal production

10-year high gas prices1 have prompted a resurgence in coal-fired power across Britain – and with it a 15% increase in carbon emissions from electricity generation.

If coal-fired electricity remains cheaper than gas-fired (as analysts predict), we could see the first year-on-year rise in carbon emissions from Britain’s power sector in six years. This highlights the importance of retaining a strong carbon price if we are to ensure the successful decarbonisation of the power system is not reversed.

After dropping to a historic low of just 0.2 GW during June and July, Britain’s coal power generation doubled in August, and has shot up to 2 GW during the first week of September.  The last time coal output was this high was during the Beast from the East, when temperatures plummeted in March.

With these coal power stations running instead of more efficient gas plants, Britain is producing an extra 1,000 tonnes of carbon dioxide (CO2) every hour.2  Carbon emissions from electricity generation are up 15% as a result.  These coal plants are not running solely because they are needed to meet peak demand, but because gas prices have risen sharply and carbon prices have not kept up, making coal power stations more economic to run than gas-fired ones.

It became cheaper to generate power from coal than from gas (see thick lines, chart below) in late August.  Even though carbon prices now double the cost of generating electricity from coal,3 coal plants are consistently “in the money” at the moment, meaning they can generate power profitably all day and night.

Estimated cost of generating electricity from coal and gas in Quarter 3 (thick lines), and the output from coal power stations in Britain (thin line)

Estimated cost of generating electricity from coal and gas in Quarter 3 (thick lines), and the output from coal power stations in Britain (thin line)

The cost of emitting CO2 has increased sharply, up 45% so far this year due to the ongoing rally in European Emissions Trading Scheme (EU ETS) prices.  Rising carbon prices should make gas more economical to burn as it emits less than half the CO2 of coal.

However, wholesale gas prices have also risen 40% since the start of the year, as supplies and storage are squeezed in the run up to winter.  Gas prices are at a ten-year high, currently 14% above their previous quarterly-average peak back in 2013 (see chart below).  These rising costs are feeding through into wholesale power prices, which have risen by a third over the past year to hit £60/MWh.

The cost of generating electricity and carbon cost

The estimated cost of generating electricity from fossil fuels over the last 20 years, along with the cost of emitting CO2.

Britain’s carbon price strengthened dramatically through 2014–15 due to the government implementing a Carbon Price Support scheme.  This caused gas to become competitive against coal for power generation, leading to carbon emissions from the power sector halving.  Unless Britain’s carbon price can once again make up the gap between coal and gas prices, we risk rolling back some of the world-leading gains made on cleaning up our electricity system.

The Committee on Climate Change has made it clear that power is the only sector that is pulling its weight when it comes to decarbonising the UK.  Clean electricity could power low-carbon vehicles and heating, but this opportunity will be wasted if the electricity comes from high-carbon coal.

UK electricity system

So what can be done?  The sharp rise in gas prices hints at a lack of flexibility in the energy system.  Britain came uncomfortably close to gas shortages in March, in part due to the closure of the country’s largest gas storage site.  With nearly half of the electricity generated in Britain coming from gas, plus five-sixths of household heat, diversifying into other – cleaner – energy sources would help insulate consumers and businesses from price spikes.

No one country has the power to determine international fuel prices.  Several factors have come together to push up gas prices, including a lack of transmission capacity, depleted stores of gas after the long hot summer and a lack of wind power increased output from gas-fired stations. Suppliers which don’t wish to be caught short after the Beast from the East, are also stocking up on gas.

Any knee-jerk reaction to try and lower the cost of electricity (for example, slashing the cost of carbon emissions) may only have a short-term impact, and could easily lead to longer-term damage (such as the resurgence of coal) which would require further interventions in the future.

Britain does have control over its carbon price. Its power stations and industry currently pay the Emissions Trading System price (determined on the Europe-wide market) which has fluctuated wildly over the past week between €25 (£22) and €19 (£17) per tonne, plus £18 per tonne in Carbon Price Support which goes to the Treasury.  This needs to be maintained or strengthened further to save the power system from backsliding, and to show strong climate leadership on the international stage.

Explore this data live on the Electric Insights website

View Drax Power CEO Andy Koss’ comment

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

[1] The three-month average cost of generating electricity from gas exceeded £60/MWh for the first time since 2009.  Short-term price spikes have been higher than this, such as the first week of March during the Beast from the East.

[2] Extra generation from coal reduces the output from gas plants, which are their main competitors, as nuclear, wind and solar already run as much as possible.  Calculation based on 1934 MW of coal generation (the average during the first week of September) emitting 937 gCO2 per kWh (1812 tonnes per hour) instead of gas generation which would have emitted 394 gCO2 per kWh (762 tonnes per hour).

[3] The coal that must be burnt to produce 1 MWh of electricity now costs around £31, and the CO2 pollution costs an extra £31 on top.  For comparison, producing 1 MWh of electricity from gas costs £50 for the fuel and £15 for the CO2.

What will happen to the carbon price after 2020?

Great Britain’s electricity is cleaner than ever. As wind, solar, biomass and hydro continue to make up more and more of our energy mix, the power system edges ever closer to being entirely decarbonised. The GB power system has leapt up the big economies’ low carbon league table from 20th in 2012 to seventh in 2016.

But this shift to lower-carbon power isn’t owed only to growing renewable electricity capacity. A fall in gas prices has helped and importantly, government policy has ensured coal power generation has become increasingly uneconomical vs electricity produced with gas (gas and coal compete for contracts to supply power to the National Grid).

Introduced in 2013, Great Britain’s Carbon Price Floor sets the minimum price on carbon emissions. A stricter policy than the EU’s volatile EU Emissions Trading System (EU ETS) which puts a much lower price on carbon dioxide (CO2) emissions, the Carbon Price Support as the British policy is also known tops up the EU ETS. Together, they have had a significant impact. According to Aurora Energy Research, the Carbon Price Floor is a major factor in coal generation emissions falling.

In Great Britain, the Carbon Price Floor (CPF) is currently capped at £18 per tonne of CO2 and the EU ETS sits at around £5 t/CO2 – meaning power generators and heavy industry pay around £23 t/CO2 altogether. When initially formulated by the coalition government in 2010, it was intended the CPF would reach £30 per tonne by 2020 and £70 per tonne by 2030. However, the EU ETS has since fallen therefore the UK government chose to cap the carbon price support at £18 per tonne until 2020.

Now, as we reach the end of the decade, questions remain as to what will happen to this crucial mechanism post-2020. Will the government price coal off the system once and for all or will the fossil fuel make an unlikely comeback?

Four visions of carbon pricing’s future

In its research, Aurora has identified four potential future scenarios for the UK’s carbon pricing strategy.

Status Quo: If the UK chooses to continue supporting the phase-out of coal and promotes low-carbon investment, the Carbon Price Floor will steadily increase post-2020, reaching an estimated £52 per tonne by 2040. In this scenario the UK’s carbon pricing structure remains about £18 per tonne higher than the EU ETS which is currently around £5 per tonne.

Catch-up: In the post-Brexit landscape (whatever it may look like) the UK may choose to seek parity with the EU over decarbonisation. In this scenario, the total UK carbon price remains flat with EU ETS, which rises until convergence. In this scenario the UK and EU’s price per tonne of carbon reaches £35 by 2040.

Low Priced Carbon: In the event that the UK government removes the carbon price from 2021 and the EU ETS never recovers beyond its 2017 level, the short-term effects could be a drop in the price of coal power and cheaper energy bills. CO2 emissions increase in the UK as demand for power rises in the late 2020s and beyond (as recently witnessed in the Netherlands where coal generation has increased, in part, due to a low EU ETS). The expected price per tonne of carbon could be as low as £6 by 2040 and investment in lower carbon and renewable forms of power generation stalls.

High Priced Carbon: In order to meet the UK’s fourth and fifth carbon budgets set by the Committee on Climate Change, this scenario sees the electricity system decarbonise more quickly, with coal removed as an energy source. The carbon price rises dramatically over the next two decades to hit £153 per tonne by 2040.

Stopping the coal comeback

Of these four scenarios, the steadily increasing prices of the Status Quo scenario could see the UK meet its power sector target within the fourth carbon budget of 100 g CO2-eq/kWh  – achieving a 51% reduction from 1990 emission levels by 2030. But Aurora found that keeping things as they are could see a radical swing the other way, some years earlier in its scenario: coal could make a comeback in the early 2020s.

In July this year, coal accounted for just 2% of electricity generation in Great Britain and in 2016 as a whole it accounted for 9%, producing the lowest amount of electricity since the start of World War II. Without solid growth of the Carbon Price Floor it could become a much more competitive fuel. This potential is further increased by a predicted rise in natural gas prices post-2020, when the current surplus of liquefied natural gas (LNG) is set to end.

If the government chooses not to set tough prices on carbon emissions, Aurora predicts that on average coal will account for 9% of electricity generation between 2021 and 2025 – a change in the declining coal power trend seen in recent years. A Low Carbon Price future would see coal grow to almost 12% of the total electricity generation mix during the same period.

By contrast, in the High Carbon Price scenario, coal is almost completely driven out of the energy system, accounting for an estimated 2% of electricity generation between 2021 and 2025.

Signalling to the future

What is crucial for British power generators at this stage is clarity beyond 2020, when the £18 per tonne cap ends. This can allow the industry to react to future carbon pricing and prepare for whatever future scenario the government is most likely to adopt.

If the government chooses to continue decarbonising the energy system in a significant way – as it should do – coal facilities can be converted to renewable or lower-carbon units, such as biomass or gas. New interconnectors, renewable sources, storage facilities and demand-side response will also need to be installed at a greater capacity to meet the energy system’s demands.

As the amount of low carbon generation continues to grow, it will increasingly be the marginal generator. This means that power stations such as Drax’s biomass units, which run with an 87% lower carbon footprint compared to coal across their entire supply chain, could be used to meet the last megawatt hour (MWh) of demand – and this would see the carbon price having a diminishing impact on the wholesale price of power.

As has already been shown, the Carbon Price Floor is one of the most effective ways to reduce Great Britain’s electricity emissions. But to continue this impressive progress, the government needs to use it appropriately to set a path towards a decarbonised future.

In October, Drax joined British energy company SSE, climate NGO Sandbag and others to write to Chancellor Philip Hammond, calling on him to back the Carbon Price Floor beyond 2020 and in doing so, provide certainty for businesses investing in lower carbon and renewable capacity. Read the letter here

Taxing coal off the system

In the Spring Budget 2017, the Chancellor announced that the Government remains committed to carbon pricing. Philip Hammond’s red book revealed that from 2021-22 ‘the Government will target a total carbon price and set the specific tax rate … giving businesses greater clarity on the total price they will pay.’ Further details on carbon prices are to be ‘set out at Autumn Budget 2017’.

Researchers at Imperial College London have modelled what would have happened during 2016 with no carbon tax and also with an increased carbon tax. They have compared both with what actually happened. Their conclusion?

No carbon tax would mean:

  • More coal
  • Less gas
  • Higher emissions.

A higher carbon tax would mean:

  • Less coal
  • More gas
  • Lower emissions

Since it was announced in 2011, the Carbon Price Support (CPS) has encouraged generators and industry to invest in lower carbon and renewable technologies. It has also forced coal generators to fire their boilers only when they are really needed to meet demand, such as during the winter months or at times of peak demand and still or overcast weather conditions during the summer months.

The introduction of the carbon price has meant that gas power stations, which are less carbon intensive than coal, have jumped ahead of coal in the economic merit order of energy generation technologies and produced a greater share of the UK’s power. The same is the case for former coal generation units that have since upgraded to sustainable biomass – three such units at Drax Power Station result in savings in greenhouse gas (GHG) emissions of at least 80%.

A coal cliff edge?

The Carbon Price Support has resulted in significant savings in the country’s greenhouse gas emissions, helping the UK meet its international climate change commitments. Removing or reducing the CPS too soon and Britain’s power mix risks going back in time. It would improve the economics of coal and encourage Britain’s remaining coal power stations to stay open for longer creating a risk to security of supply through a ‘cliff edge’ of coal closures in the mid-2020s. Changing the economics to favour coal also makes it harder to reach the UK government’s goal of bringing a new fleet of gas power stations online.

What if …

Dr Iain Staffell from the Centre for Environmental Policy at Imperial College London has modelled a scenario in which the Carbon Price Support did not exist in 2016. “If the government had abolished all carbon pricing, we would probably have seen a 20% increase in the power sector’s carbon emissions,” said Staffell.

“Removing the Carbon Price Support would have the equivalent environmental impact of every single person in the UK deciding to drive a car once a year from Land’s End to John o’Groats.”

Without the Carbon Price Support, emissions from electricity consumption would be 20% higher, meaning an extra 250 kg per person (equivalent to driving a car 800 miles).

Running the numbers

The Carbon Price Support is capped at £18/tCO2 until 2021. In his Budget on 8th March 2017, Chancellor Philip Hammond – rightly, in the view of Drax – confirmed the government’s commitment to carbon pricing. Using data from National Grid and Elexon and analysis from Dr Iain Staffell, Electric Insights shows how coal power generation was only needed last winter when electricity demand was greater than could be produced by other technologies alone. Coal was only used at times of peak demand because it was among the most expensive energy technologies, in part due to the CPS.

What if that wasn’t the case and the government had decided to scrap the CPS before that point in time? More coal is burnt, particularly during the daytimes – on average coal produces 2,500 MW more over this week (equivalent to four of Drax Power Station’s six generation units).

And what does Dr Iain Staffell’s model suggest would have happened if the cap was doubled to £36/tCO2? The change is stark. Even for a week in the winter, with an average temperature across the country of 8.6oC, to see coal generation reduced so much compared to the actual CPS of £18/tCO2 or the £0/tCO2 scenario model, illustrates the impact of the Carbon Price Support.

Could bill payers save?

One argument for reducing the Carbon Price Support – or scrapping it altogether – is the possibility that consumers and non-domestic electricity bill payers would save money. It’s worth noting that apparent savings for electricity bill payers are lowered when the whole way that power is priced is accounted for, by the time it reaches homes and businesses.

“Carbon price support does increase the cost of wholesale power,” says Staffell. “But if you add the extra taxes, other renewable and low carbon support measures, transmission and balancing charges and fees imposed by electricity suppliers, the overall impact on consumer bills is modest. So, if the government abolished all carbon pricing, we could expect a 1 p/kWh reduction in our tariffs, but a 21% increase in our carbon emissions.”

As a report by economic consultancy NERA and researchers from Imperial College London has already shown, there are other ways to save bill payers money, while encouraging a low carbon future. Their analysis published in early 2016 found that households and businesses could save £2bn if the government considered the whole system cost of electricity generation and supply when designing its competitions for support under its Contracts for Difference (CfD) scheme.

2016, redux

Without the Carbon Price Support, the UK wouldn’t have managed to send carbon emissions back to 19th century levels.

So if 2016 was played out one more time but with no Carbon Price Support:

  • Coal generation would have increased by 102% (28 terawatt-hours) to 56 TWh
  • Gas generation would have decreased by 21% (-27 TWh) to 101 TWh
  • Carbon emissions would have risen by 21% (16 million tonnes of carbon dioxide) to 92MT CO2
  • The carbon intensity of the grid would have increased by 20% from 290 gCO2/kWh to 349 gCO2/kWh

And if 2016 had seen a doubling of the CPS to £36/tCO2:

  • Coal generation would have decreased by 47% (-12.9 TWh) to 14.7 TWh
  • Gas generation would have increased by 9% (11.8 TWh) to 139.5 TWh
  • Carbon emissions would have decreased by 10% (7.3 MT CO2) to 68.6 MT CO2
  • The carbon intensity of the grid would have decreased by 9% from 290 gCO2/kWh to 263 gCO2/kWh

The two scenarios presented above only modelled the impact of no or a higher Carbon Price Support on nuclear, coal and gas power supply. In the real-world, changes to the Carbon Price Support would also impact on energy technologies that operate under the Renewables Obligation (RO) such as two of Drax’s three biomass units and much of the country’s other renewable capacity. CPS changes would also likely impact imports and storage.

While no analysis is perfect this clearly illustrates the significantly negative impact that scrapping or reducing the Carbon Price Support would have on the UK’s decarbonisation agenda. It also highlights the benefits that the government’s decision to remain committed to carbon pricing will deliver.

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.