UK power firms hit as regulator proposes carbon windfall tax

www.environmental-finance.com/
Fri, 18 Jan 08

London, 17 January: Share prices of carbon-exposed UK power generators slipped yesterday, following proposals from the market regulator to claw back windfall profits from the EU Emissions Trading Scheme (ETS). Drax Group, which owns the biggest coal-fired power station in western Europe, fell 5.2%, while Scottish & Southern Energy shares dropped 2.2%. The FTSE 100 was down 1.4% on the day by comparison.

Ofgem has calculated that electricity companies could see windfall profits of £9 billion ($17.7 billion) from the EU ETS over 2008-12. The EU ETS has led to a cost of carbon being added to the price of electricity in Europe, which is currently borne by consumers. However, because generators receive a free allocation of emissions allowances, they are able to profit from the scheme. This windfall should be reclaimed by the government to help alleviate fuel poverty, Ofgem added.

"There's not necessarily any immediate threat of the government implementing Ofgem's proposal to redistribute free carbon benefits to the fuel impoverished, but we believe the general threat this raises of some degree of political intervention will likely weigh on sentiment in the UK utilities sector," said Colin Pollock, UK utilities research analyst at Credit Suisse in London.

"This is a genuine suggestion," said a spokesman for the regulator, adding that it had originally floated the idea in its response to the government's 2006 energy white paper. "We think it is an idea whose time has come." The government was lukewarm in its response, saying that this was just "an Ofgem proposal" and that "decisions on tax policy are a matter for the Chancellor in the context of the Budget and Pre-Budget cycles." A finance ministry spokesman added that increased auctioning of allowances in the EU ETS will help address this issue.

The UK is set to auction 7% of its allowances for Phase II of the EU ETS, and the European Commission is expected next week to propose 100% auctioning for the power sector in Phase III of the scheme, which will run 2013-20.

Ofgem estimates that the EU ETS adds £31 to consumers' electricity bills each year. The government's Renewables Obligation, which requires power suppliers to source an annually-increasing amount of power from renewables, adds a further £10 a year. The Carbon Emissions Reduction Target, which sets energy suppliers targets to reduce household emissions by increasing energy efficiency and microgeneration, is expected to add £38 a year once it comes into force this April.