Higher carbon price needed to phase out UK coal generation by 2025

Following plans with Canada to launch global alliance to encourage nations to phase-out coal use, the UK Government has been informed that a carbon price of £40 per tonne may be required to shut down all remaining coal plants by 2025.

Last week, Canada’s Minister of Environment and Climate Change, Catherine McKenna, and the UK’s Minister of State for Climate Change and Industry, Claire Perry issued a joint statement of intent to “champion a global alliance on the transition from unabated coal-fired electricity”, which will official launch at COP23 in Bonn next month.

As part of the statement, Canada confirmed its intention to phase-out all coal plant use by 2030, while the UK reaffirmed its commitment to shut down all coal plants and stop unabated coal generation by 2025.

However, new analysis from Aurora Energy Research suggests that the current carbon price support won’t be enough to facilitate the phase-out. Findings from the new report suggest that the UK Government faces “a tough decision” on the carbon price at the upcoming Autumn Budget.

“The Government faces a tough decision on the future of the carbon price – balancing its competing priorities of meeting carbon targets, ensuring security of supply, delivering affordable energy to consumers, and managing tax receipts,” the report states.

“It would be risky for the Government to cut carbon prices – as this would lead to a surge in coal generation, making it harder to deliver our carbon budgets. At the same time, increasing the gap in carbon prices between the UK and Europe would increase consumer bills, and lead to greater imports of electricity from Europe – offshoring GB emissions elsewhere.”

According to the report, the UK’s current carbon price of £23/tonne was responsible for almost 75% of the decline in coal generation since it was introduced in April 2013. During that time, coal generation has fallen from nearly 50% of the energy mix to just 2% as of July 2017.

The UK’s carbon price is five times that of the rest of Europe and has enabled the first British hour without coal generation since the industrial revolution on 10 May 2016, and the first day without coal generation on 21 April 2017.

Higher or lower?

The Aurora Energy Research report said that maintaining the current £23/tonne “risks a substantial increase in coal generation in the 2020s”, with China removing restrictions on coal production and a predicted LNG gas demand decline creating improved competitiveness for fossil fuels.

While raising the carbon price to £40/tonne will help the UK meet its phase-out, which was reaffirmed as part of the Clean Growth Strategy, removing it altogether would lead to a boon in coal generation. However, the report notes that scrapping the carbon price support would reduce total electricity costs by around £2.6bn annually, saving consumers around £30 on annual bills.

The higher carbon price would create extra financial support for low-carbon technologies, the report states, and would lead to a “modest” increase in electricity costs of £0.9bn per year – or £10 per household annually.

The report also found that increasing the UK carbon price support to more than £40/tonnes would not lead to an increase in carbon tax receipts, because it would erode the tax base by closing more coal stations.

The news arrives days after CDP revealed that there had been an 8-fold increase in the number of large multinational factoring an internal carbon price into business strategies over the past four years.

Matt Mace