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UK energy market faces instability due to delayed carbon trading

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Leading UK power companies have warned that the energy market is facing “unstability” unless the government provides urgent clarity on UK’s post-Brexit carbon trading plans.

Implemented at the end of the 1 January Brexit transition period to replace the European Union, the plan will reduce greenhouse gas emissions by capping the levels that heavy pollutants can produce and forcing the purchase of carbon credits. Designed. Covers annual output.

However, the government is still negotiating with the industry on key aspects of the plan that have not yet started trading. This has led UK power producers to sell power without knowing the associated emission costs.

Typically, electricity producers sell electricity up to two years ago, and Brexit UK companies before pricing forward contracts related to the cost of the EU plan.

The sector is still waiting for the government to set a date for its first auction beyond plans to hold the process on hold at some point in the second quarter.

Companies are also waiting for the UK government to decide how much carbon credits it will sell at its first auction and whether this plan will be linked to the world’s largest EU program to set pricing.

“I am worried about the complete shortage of carbon prices in the UK,” said Emma Pinchbeck, head of Energy UK, an industry association that includes SSE, RWE, Drax and EDF Energy.

“I’m very lucky not to see the instability as it is, but I’m curious how long it will last,” says Pinchbeck, adding that there is a risk of passing it on to consumers with highly volatile prices.

Many UK power producers have already purchased EU credits in anticipation that the plan will be linked. “Our carbon price is unknown and the market is running under the assumption that we will be connected to the EU,” she added.

However, Brussels said that no formal talks with the UK have yet begun on linking with EU initiatives. In a statement, the European Commission said in a statement, “At the moment we cannot say when negotiations will begin. We added Brexit deals that we expected both sides to take “serious consideration” in connecting each of the systems.

However, the government’s recent energy white paper has raised concerns that cannot arise in the industry. The policy document stated that the UK does not specifically name the EU and is generally open to international connections.

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Electricity producer Drax said the link between UK and EU trading plans should “start as soon as possible” because it will provide greater liquidity.

The lack of carbon credits trading has led to increased demand, and Louis Redshaw of Redshaw Advisors, a London-based carbon consulting firm, said the delay poses a risk of a “big” price spike.

The UK government has set a price lower limit of £22 per ton, but it is still well below the current price of the EU allowance, which now has a high of over 40 Euros per ton.

“At the first auction, there will be more buyers than sellers,” Redshaw said. The situation is “a car crash due to slow motion,” he warns. “Brexit is difficult enough for UK industry. Why is the government claiming this target for the cost of carbon?”

Electricity producer SSE said the UK will have to stop forward hedging for thermal power generation until a new plan is implemented.

Businesses must submit their carbon allowances this year by April 2022, but generators typically hedge their contracts a year or two in advance.

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VPI Generation’s policy director, Iwan Hughes, said tremendous uncertainty made it difficult for the power company to know whether or not the power plant was operating.

“Without the UK carbon market, neither industry nor gas generators know the marginal cost of operation,” he said. He warned that since leaving the EU system at the beginning of the year, every time a power plant produces electricity, “the unknown responsibility for carbon is increasing.”

In a statement, the government added that the new UK trade plan is “a critical step towards achieving the UK’s goal of eliminating our contribution to climate change by 2050,” adding that it is “more ambitious” than the EU plan. He said he will “consult soon” as to whether the plan will “meet our world’s best net zero goals.”

Further reporting by David Sheppard

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