British utilities will probably escape a tax on profits they make from a European Union carbon trading scheme -- but the issue has sparked fierce debate about the size of windfalls and how utilities spend them.
British utilities will probably escape a tax on profits they make from a European Union carbon trading scheme -- but the issue has sparked fierce debate about the size of windfalls and how utilities spend them.
British Prime Minister Gordon Brown wants to help households cope with rising fuel bills and may ask power companies to pay money into a voluntary fund making homes more energy efficient, government and industry sources say.
That would ignore some members of parliament who have asked for a tax on utilities' windfall profits. Companies have argued that a tax would be a policy u-turn requiring Brussels approval.
Analysts, industry leaders and policy makers disagree sharply on the size of and justification for windfall profits which UK energy regulator Ofgem in January estimated at least 9 billion pounds ($16.02 billion) through 2012.
"I would argue that they're completely over-compensated... (it's) a handout to industry," said UBS analyst, Per Lekander.
The EU emissions trading scheme allows power generators to add to electricity prices the cost of carbon emissions permits many of which they get for free, resulting in a profit.
The size of the profit depends on how many permits companies have to buy -- which depends on the size of their free quota and how polluting they are -- and how much cost they can pass on to the wholesale power price.
"There are no windfall profits," said David Porter, chief executive of the Association of Electricity Producers.
"This is how the scheme is meant to work (until 2012), to avoid shocks where it might become too expensive to run our power plants. Governments may not have been explicit about that. It costs money to keep on running Britain's heavily fossil fuel-dependent power stations."
After 2012, utilities will have to pay for most if not all of their emissions permits.
In August Britain's biggest coal plant Drax reported in its financial results for the first half of 2008 that it spent 107 million pounds on buying carbon emissions permits.
The company also gets a free quota, but says it does not make net profits from the scheme. Analysts at New Carbon Finance and the Energy Research Centre of the Netherlands estimated Drax's net profits from the scheme at 22 million pounds ($39.15 million) and 46 million euros ($66.78 million) respectively for the first six months of 2008.
"Before 2013 it's absolutely crystal clear Drax is making a windfall profit," said UBS analyst Lekander.
ARGUE
"There's a tendency to simplify calculations," said a Drax spokeswoman. "There's no question in our minds over phase 2 of the scheme (2008-12) carbon will be a net cost."
Drax's carbon emissions rose in the first half of 2008 compared to the same period last year.
Utilities say that they need the windfalls to invest in low-carbon technologies. Drax plans to spend 180 million pounds to cut carbon emissions, for example to allow it to burn more biomass.
Centrica makes windfall profits from the EU trading scheme of about 95 million pounds a year, back of the envelope maths suggest. "It's somewhere in that ballpark," a Centrica spokesman said. "We've argued strongly there should be no free allowances."
Centrica spends over a billion pounds a year on investment in new plant, upgrades and maintenance, the spokesman added.
