EY comments: Carbon Price freeze is short term relief but mid flight policy changes harm investment

19 March 2014

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Tony Ward, Head of Power & Utilities at EY comments on Carbon Price Floor (CPF) freeze:

"The immediate imperative for the freeze in the CPF is clear - to reduce upward pressure on electricity costs to all end users and in turn to avoid a growing competitive disadvantage for the UK's energy intensive industries.  With the rest of Europe's leading economies stalling over their previous commitment to driving low carbon investment and a more pronounced self interest now guiding many of their decisions, it is time too for the UK to reassess the speed and route it wishes to take to re-engineering its generation mix.

“The difficult balancing act that Government is trying to achieve is to encourage investment in low carbon, sustainable and indigenous power generation while at the same time protecting energy users from the costs of doing so. Freezing the CPF and offering support to energy users to mitigate rising costs clearly addresses the latter objective.

“However, relief felt by energy users may be temporary. This change of heart on a measure to quickly increase the cost of carbon in order to incentivise low carbon investment so soon after its introduction is the latest in what looks to be an emerging pattern of policy adjustments in mid-flight.  With the changes to solar feed in tariffs, to the ECO scheme and now this change to the CPF so early in its life, investors who have committed to build assets or businesses off the back of the original policy instrument will be increasingly suspicious of any new UK government policy.

“While not retrospective in form, such changes increasingly will feel to have just that effect  in substance. The consequences for the wider sweep of much needed UK energy infrastructure investments may be negative - both in undermining confidence that investors have to commit funds to projects, but also in the returns that they will require if they do proceed.  Both of these in the longer term will lead to higher end user costs than would otherwise have been the case."

For more information on the 2014 Budget, visit the EY 2014 Budget page.