UK clean spark spreads for 50% efficient gas-fired plants for 2019 and 2020 widened Tuesday as carbon emission costs ended up higher in the UK government's budget than expected by traders, UK power traders said.
On Monday, UK finance minister Phillip Hammond said in his budget announcement that the UK government would freeze the Carbon Price Support (CPS) rate at GBP18/mt for 2020-21.
In the event of a no-deal Brexit scenario, the government will introduce a Carbon Emissions Tax at a rate of GBP16/mt on carbon emitted over and above an installation's emissions allowance. The tax would apply to all stationary installations currently participating in the EU ETS from April 1, 2019 and would set the total carbon price to GBP34/mt, largely offsetting the benefits of a withdrawal from the EU ETS.
A UK-based power trader said that because of historically high EU carbon allowance prices, speculators in the market had been expecting a lowering of overall UK carbon costs, a move that would have favored coal-fired generation over gas-fired burn due to the former's higher carbon intensity.
"They sold clean sparks for the forward curve [but the stance] hasn't softened, so the sparks have moved up," he said.
S&P Global Platts data shows clean spark spreads for 50% gas-fired plants were up 13 pence on day on Monday GBP3.82/Mwh for Winter 2019. Winter 2019 was up about 4 pence on Monday at GBP3.59/MWh, and Summer 2020 was at GBP2.05/MWh. The CSS is the gross margin of power produced at a 50%-efficient gas-fired power plant after accounting for the cost of gas, emissions and the Carbon Price Support mechanism.
"There has been an increase in the curve sparks," a second UK power trader said. "I suspect that there was uncertainty over the carbon situation post March 2019 in a no-deal Brexit. There has been some certainty placed around that now and therefore there is some value being placed back in those sparks."
The government said it would seek to reduce the CPS from 2021-22 if the total carbon price (CPS + EU ETS) remains high.
