The UK is boosting energy exports, helped by cheap pollution costs

(Bloomberg) — The United Kingdom will increase energy sales to the continent this winter as lower carbon prices make it cheaper to produce electricity at gas and coal plants.

This price gap is a result of the UK government’s recent decision to reduce the burden on emitters as part of market reforms. The abundance of permits has seen carbon prices fall by 50% this year, compared to less than 3% for EU futures. This means a competitive advantage for the UK’s power station fleet compared to those on the continent.

Costs are likely to remain lower in the UK, which will lead to increased exports via submarine cables to France, the Netherlands and Belgium. While Britain will remain a buyer overall, net imports to the island will be just under four terawatt-hours in the first quarter, or half compared to the previous year, S&P Global Commodity Insights said, without exceeding actual exports.

“Gas stations in Europe are usually dispatched before the UK, but that arrangement has changed,” said Jean-Paul Harriman, director at industry consultancy EnAppSys BV. “This means that Britain will likely send more energy than usual to its neighbors on the continent this winter, or import less.”

The carbon price is supposed to be a deterrent to pollution. For every ton of emissions released, fossil fuel-fired factories and power plants need to purchase a permit. These factors, along with fuel prices, are major components of generation costs.

In a paper detailing its decision in June to launch additional permits, the UK government’s Department for Energy Security and Net Zero said it was intended to allow “time for market participants to adapt” and “facilitate” the transition to net zero.

But after prices in the UK fell to around £37 per tonne, allowances are trading at around half the level of those on the continent. The discount is approaching its widest scope since the British regime separated from the European Union more than two years ago.

“The one thing that is at least clear is that UK imports would have been higher without this carbon price differential,” said Fabian Ronningen, energy analyst at Rystad A/S. He said Britain may become a net exporter this winter if continental supplies start to become scarcer.

This means that it may make more sense for traders in France, for example, to import from the UK and pay extra to transport electricity across interconnectors rather than pay local plants to generate it.

Excluding energy flows from Norway, where cheap hydropower is the dominant source, Britain will be a net exporter this winter, according to S&P Commodity Insights.

This week, UK power prices for the first quarter of next year were trading at around £124 per megawatt hour, around 2% lower than the equivalent French price of €147.

While more demand from abroad will be a boost for generators including commodities giant Vitol Group and German utilities RWE AG and Uniper SE, it is bad for pollution at home. Emissions from the UK energy sector reached their highest level in six months last week, according to James Huckstep, a strategist at BNP Paribas.

If supplies are tight at times this winter, scheduled exports could push up prices in Britain. National Grid Plc said in its early winter forecast that it expects a more comfortable winter this year with more grid-scale batteries, helping to deploy renewable energy, and expanding reserve supply.

Investors are demanding clarity on how the government intends to regulate carbon prices in the future. It’s a driver of the price of building energy storage systems, which are just as resilient as gas plants and can be relied upon in times of high demand.

Tom Vernon, chief executive of Statera Energy Ltd, which is developing gas-fired plants, said: “Although we may see cheaper power from gas power plants this winter, the government needs to be clearer about the cost of carbon going forward.” “. in the UK. “More clarity will provide more certainty about the long-term viability of these plants and low-carbon assets such as batteries.”

(Updates with Norway flows in the tenth paragraph.)