The British government has introduced a carbon price floor to the European Union's Emissions Trading Scheme (EU ETS) of GBP16/tonne ($26) in 2013, rising to GBP30/tonne by 2020.
The EU ETS is viewed by industry analysts as a flawed system beset by market interference that has resulted in a carbon price too low to incentivize investment in low-carbon generation. However, while the eventual floor price will almost double in seven years, the initial level of GBP16/tonne may be viewed as too low.
On Wednesday, EU ETS carbon allowances were trading at around EUR17/tonne ($24).
Redpoint Energy undertook supporting analysis for HM Treasury and the Department for Energy and Climate Change (DECC) on the Carbon Price Support.
Duncan Sinclair, director of Redpoint Energy, said: “We estimate that wholesale electricity prices may be around GBP5-GBP6/MWh or 10 per cent higher by 2020 given the levels of carbon price floor announced today.
"This will have a significant impact on the earnings of power generators; with renewables and nuclear generators benefitting from the higher prices, while coal and older, less efficient gas plant will be hit by higher carbon costs, potentially accelerating closure.
“The Carbon Price Support may stimulate more investment in low carbon generation, although we expect the Feed-in Tariffs with Contracts for Difference as announced in DECC’s December consultation to be a more significant factor.”