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Soon we’ll all know the price of CO2

You might think twice before switching on the lights. Brussels has finally agreed reforms to Europe’s energy markets that should weaken our addiction to fossil fuels and at the same time lighten our wallets.

The reforms strike at the heart of the power business, forcing generating companies to pay real money for the right to emit greenhouse gases. Beginning in 2013 power generators will no longer be given their carbon allowance gratis but will be forced to bid for a limited number of carbon dioxide permits, an incentive to avoid very cheap fuels that emit lots of greenhouse gases, such as coal and natural gas. If permits are scarce (and the EU intends them to be scarce) power companies will opt for more expensive energy, such as nuclear power or even renewable energy.

Over the next decade, the price of carbon dioxide may become as familiar to us as the cost of a barrel of crude oil or a litre of petrol. It will become very noticeable as power generators pass on the rising cost of pollution in our electricity bills. Carbon dioxide allowances represent about 10 per cent of the cost of electricity now but Centrica estimates that the price of carbon needs to double in order to justify the cost of building new coal power stations that store carbon dioxide.

The commission’s own estimate of the cost to consumers of low-carbon energy looks disingenous; a rise in electricity bills of 10-15 per cent is suspiciously low given the need for a high carbon price to justify investment in new technology. Moreover, the target for renewable energy imposed on Britain, 15 per cent, will be very costly, if not impossible, to achieve.

It means raising the share of renewables from 5 per cent to 36 per cent by 2020. According to the British Wind Energy Association, it implies an extra 30 gigawatts of wind power. That suggests that another 12,000 wind turbines need to be built, at a cost of some £30-40 billion.

The engineering challenge in building such a vast turbine fleet is enormous, at a time when the Government is also backing a nuclear revival.

National Grid has given warning that a big extension of the power grid will be needed to deliver power from disparate wind farms to urban areas. There are simply not enough trained power engineers to build this infrastructure. However, the regulations that will force us to pay the bill are already on the way to becoming a reality.

Carl Mortished: Analysis

The Times

24 January 2008