Copenhagen Results In Higher Energy Prices

Posted on 22. Dec, 2009 by Ross in Energy Prices, Energy Shortages, Europe, United Kingdom

Whilst power companies in the USA’s Ostrich Block are relaxing in the aftermath of a weak Copenhagen deal, their European counterparts are warning consumers that higher energy prices lay ahead as a result of the feeble international agreement on climate change and its direct effect upon the carbon market, and are calling for the market cost of carbon to be increased artificially.

Why? Unlike their counterparts in the US, European utilities operate in a business environment with strong environmental targets and an effective cap-and-trade scheme. This has led EU power companies to steer clear of investing in new coal power stations, looking instead to nuclear and renewable energy as the future.

This investment in more expensive power generating technologies - and the additional infrastructure to support it - has led to increased energy prices with further price rises expected: the UK alone is investing £7 billion in its grid infrastructure over the next five years, with businesses and households expected to foot the bill.

Energy prices are expected to further rise with the mandated roll-out of smart meters to businesses and domestic properties as well, with the costs passed on under the pretence of the savings with smart meters might realise depending on the smart meter’s capabilities.

European energy companies are committed to fighting climate change, but the economics has suddenly taken a battering in the aftermath of Copenhagen. The price of carbon permits on Europe’s emissions trading market plummeted by 10% on the first day of trading after the weak climate conference, primarily in response to Europe abandoning the top end of its carbon reduction target in the absence of strong targets from international counterparts. The EU now intends to cut emissions by 20% on 1990 levels by 2020, rather than the 30% which it had been prepared to offer.

That new caused the price of carbon to fall like a lump of coal to a six-month low, prompting E.ON and Centrica to warn that they could not invest the billions of euros necessary in new nuclear power stations with such a low carbon price.

As a result, several energy companies are increasing their calls for a high floor price for carbon, guaranteeing a more reliable return on investment.

In the interim, power companies are likely to let aging power stations reach the end of their life and let energy prices soar as demand outstrips supply in order to allow the economics to become favourable.

The result will be higher energy prices and serious energy shortages which will hit European businesses hard, and leave households in the dark.

Image of Amsterdam Stock Market by Perpetualtourist2000 @ Flickr