Review of the Impact of the Carbon Price Floor on the GB Electricity Market

27 February 2014
Sean Gammons, Vakhtang Kvekvetsia, et al.

A NERA team led by Director Sean Gammons, Associate Director Daniel Radov, and former Associate Director Dr. Mauricio Bermudez-Neubauer was commissioned by CoalPro to conduct an independent analysis of the effects on Great Britain's electricity market of freezing the Carbon Price Support (CPS) rate from 2016/2017. The CPS rates, which are effectively a tax levied on fossil fuels used for electricity generation, are the mechanism by which the UK's Carbon price floor is implemented. This price floor is set to increase from £15.7/tCO2 in 2013 to £30/tCO2 in 2020 and £70/tCO2 in 2030 (in 2009 constant prices).

To isolate and analyze the effect of freezing the CPS rate, the NERA team designed two market and policy scenarios: a "Baseline" and a "Freeze" scenario. The scenarios were run on NERA's GB electricity market model, with a focus on output metrics relating to energy affordability, investment trends, supply security, and emissions.

NERA's study found that freezing the CPS rate at 2014/2015 levels in real terms (£9.55/tCO2) from 2016/2017 could significantly improve energy affordability for British consumers and energy cost-competitiveness for industry. End-user electricity prices would be significantly lower than in the Baseline scenario by ~£9/MWh in 2020/2021 and ~£17/MWh in 2024/2025, and could deliver savings per household per year of up to £63 by 2024/2025.

NERA also found that the Freeze scenario could provide an extended and more gradual phase-out of existing coal plants, enabling a "bridge" to carbon capture and storage (CCS) technology. In addition, the Freeze scenario could increase GB's supply security by deferring the need for investment in new generation capacity, as well as achieve long-term emissions objectives while limiting leaked (offshore) emissions from increased electricity imports.