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The UK government is using a carbon price more than three times higher than its current price to help shape energy policy over the next two years, raising questions over its strategy to weaken the cost of pollution.
A paper published by the Department of Energy Security and Net Zero last week argued new wind and solar projects will be substantially cheaper than new gas-fired generation from 2025, using a carbon price of near £150 per tonne to underpin its analysis.
But the UK carbon price is currently about £40 a tonne, far below the price for its European Union counterpart, having fallen sharply after the government last month released more carbon allowances and eased reduction targets for polluters.
The higher pricing assumption in the document and the changes to the UK’s market for trading emissions have raised questions in the energy industry, which believes Westminster is sending mixed messages while asking them to invest billions of pounds in green projects.
Carbon pricing has led to the almost complete phasing out of coal in the UK energy mix, by making it more expensive relative to cleaner fuels or renewables.
Under the UK Emissions Trading Scheme (UK ETS), electricity generators and heavily polluting industries must pay for every tonne of CO₂ they emit over and above allowances handed to them by the government.
“Electricity generation costs are a fundamental part of energy market analysis, and a good understanding of these costs is important when analysing and designing policy to make progress towards net zero,” Desnz said in its paper, adding that they had raised their carbon price assumptions “significantly” compared with their last report in 2020.
The authors acknowledged this would result in fossil fuel generation appearing to become more expensive.
Desnz, which is run by energy minister Grant Shapps, said that the carbon price assumptions underpinning its analysis were not “publicly available” adding that sharing them would “prejudice commercial interests and cause market interference”.
But the paper included a carbon cost for each megawatt of electricity generated in new gas-fired plants built in 2025 or 2030, allowing energy specialists to calculate the apparent assumptions the report’s authors were using.
The analysts said it appeared the government had effectively ignored the recent fall in carbon prices and had instead “drawn a straight line” from the UK ETS’s all-time high of just under £100 a tonne last August to reach the near £150 assumption in 2025.
They also questioned whether the pricing was evidence of a split within the department over the government’s intervention to weaken the carbon price, which has reduced the cost of emissions.
A spokesperson for Desnz, when shown the analyst calculations, said the numbers they had used were “illustrative assumptions and not government projections”. They described the analysts’ calculations as “based on crude and simplified assumptions” adding that the department’s own figures were “illustrative assumptions and not government projections”.
The government’s move to offer the market more permits to pollute pushed the UK carbon price to a 45 per cent discount to the EU emissions trading scheme.
Environmentalists and the energy industry in the UK criticised the move, with industry body Energy UK calling it “pennywise and pound-foolish”, and suggested it would likely increase the long-term cost of electricity if it derailed investments in renewables.
The Desnz paper suggests onshore and offshore wind and solar projects would have lower total lifetime costs than new gas-fired generators even without the inflated carbon price assumptions, but the difference between the two would be substantially smaller.
Offshore and onshore wind farms commissioned in 2025 would cost £44 per megawatt hour on average over the lifetime of the project, while “large-scale” solar would cost £41 per MWh.
Using the current UK ETS price, new gas-fired generation projects in 2025 would come in at around £74 per MWh. But with the government’s inflated carbon assumptions that would soar to £114 per MWh.