Brexit extension leaves business ‘extremely uncertain’ over carbon costs

The Brexit delay has left carbon emitters, including power generators, with uncertainty over multi-million pound emissions payments.

The uncertainty arises because it is not clear whether UK companies will take part in the EU Emissions Trading Scheme (EU ETS) in future.

This was among the issues raised by Iwan Hughes, head of policy and regulation strategy at VPI Immingham, in a recent interview with New Power Report.   “We don’t know what the cost of carbon is,”  Hughes said. 

If the UK makes a deal with the EU and remains in the EU Emissions Trading Scheme (EU ETS), thermal generators will require allowances for the first quarter of the year, as well as paying the UK’s carbon tax (to meet the Carbon Price Floor). It’s not clear what will happen under the article 50 extension.

In response to the Brexit delay, Hughes said, “The question around whether 2019 allowances are required is still up for grabs, as well as the timing of any release of free allocations to UK heavy industry.. I imagine most UK businesses will have already taken measures in the event a deal is achieved (eg covering a large part of their potential 2019 requirement). However, with EU ETS allowances (EUAs) trading at all-time highs, those with a large proportion of their EUAs coming from free allocations may be looking nervously at the market.

“Those who put in place protection against a fall in the price of EUAs (ie to limit the risk of unwinding their hedges at a lower price), also have to decide whether to continue incurring the costs of these arrangements, but with (no deal still being an option) many operators will be hesitant about doing this.

“The outlook for UK businesses and the UK ETS remains extremely uncertain, particularly given an orderly or disorderly exit could take place any time up to the end of October.”

The Financial Times says British Steel has held talks with the government in efforts to secure funding of £100 million to meet its carbon bill and avoid a steep fine under the scheme. The company has until the end of April to pay its bill for 2018. Normally it would have received free allowances for this year in February and used them to settle the bill, the FT says. However, the EU decided to suspend free allowances for UK companies until it was clear whether UK companies would participate in the EU ETS after Brexit.

No-deal tax

The government has said that in the event there is no deal a £16/t tax will be introduced. In his New Power interview, Hughes also says there is little information about that. “Although large parts of the market think they know how it’s been calculated, the calculation is not public, and the forward methodology is not public, so we don’t know quite how long it would remain or when it would be reviewed”. Companies trading power, “will be trying to optimise our assets out along the curve and so it’s important that the market has a reasonable degree of certainty around what the carbon tax may be.” 

Longer term, will the CPF remain stable? The relationship between national carbon markets, “is a significant cost of generation and the difference between carbon in one market versus another will also help determine what the direction of flow is between markets.”

Hughes also named capacity payments and the cost of gas among other uncertainties for gas

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Read the full FT story here

Further reading

EU ETS carbon allowances: one month to early submission

Lords committee complains over lack of BEIS analysis over carbon and power costs in ‘no-deal’ Brexit

Lords seek reassurance from minister over post-Brexit energy and carbon prices

Budget 2018: ‘Carbon Emissions Tax’ to replace EU ETS in event of ‘no-deal’ Brexit

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