The Impact of Carbon Regulation on Power Generation

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • The current and likely future dynamics shaping the interrelationship between gas, oil, coal and carbon suggest that carbon prices will rise long term
    • The prices of gas and carbon are exhibiting increased positive correlation trends, destabilized mostly by the seasonality of gas
    • Oil is acting as a positively correlated non-seasonal gas proxy for carbon prices
    • In the long term, carbon prices and energy prices are likely to increase
    • Going forward, three likely scenarios will dictate the future correlation between fossil fuel prices and carbon prices
  • Utilities are unlikely to decommission viable power plants unless the variable costs of continued operation exceed revenues
    • Commercial breakeven without carbon pricing or incentives is caused by an inflexion in energy use, not fossil fuel switch-off
    • The rapid scaling of ' green' energy sources will impact the commercial breakeven of all power generation technologies
    • Carbon policies and peak oil dynamics are designed to steepen the fossil fuels supply curve, making clean energy more attractive
    • To date, European utilities have gained more than they have ' pained' from European carbon regulation
    • Power generators have three means of switching to less polluting thermal generation to hedge against the carbon externality
    • An incumbent power utility' s decision to switch is generally made on the basis of different decision rules
    • At current prices, a technological switch from coal to gas appears unlikely, regardless of the pricing rule adopted
    • Under the EU ETS, long-term substitutions between coal-fired units and CCGT plants will take place under very restrictive conditions
• APPENDIX
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
• List of Figures
  • Figure 1: The 60-day rolling correlation between gas and EU Allowance (EUA) prices has a long-term mostly positive upward trend
  • Figure 2: The 60-day rolling correlation between Brent spot and EUA spot returns has a long-term upward trend and is largely positive
  • Figure 3: Global cap and trade mechanisms will lead to higher carbon prices as the demand side scenario prevails
  • Figure 4: Without carbon pricing, thermal plant breakeven varies with overall energy demand
  • Figure 5: Theoretical plant commercial breakeven is driven down by (cap and trade) carbon pricing
  • Figure 6: The divergence in ' 07 and ' 08 EUA prices has increased the potential and scale of windfall profits in the power sector
  • Figure 7: The threshold carbon price varies depending on the decision rules adopted by power utilities
  • Figure 8: When considering a switch, pricing and decision rules must first be considered
  • Figure 9: Currently, EUA prices appear to be well below all of the power generation switching threshold scenarios