ANALYSIS-Low carbon price to cut renewables investment

LONDON Thu Feb 12, 2009 4:38pm GMT

LONDON Feb 12 (Reuters) - Record low carbon prices have cut the attractiveness of investments in renewable energy and may even favour the construction of new, high-carbon coal plants, conflicting with the aims of Europe's carbon market.

The EU emissions trading scheme is the 27-nation bloc's main weapon to fight global warming. It imposes a cap on carbon emissions by factories and power plants using a fixed quota of emissions permits.

The scheme is meant to force power plants, for example, to cut their emissions by switching from coal to lower carbon gas or to wind power, or else buy carbon permits.

"If you look at the price today it may start to become very attractive, not for compliance purposes today, but for compliance purposes for years," said Citigroup's head of emissions trading, Garth Edward.

The prospect of utilities buying cheap permits in bulk to cover their emissions for several years into the future did not pose a threat to the scheme, however, said Edward.

"The purpose of an emissions trading programme is to deliver emissions below a certain cap, end of story. We all probably want the advantage of investment into (low carbon) technologies, but that's an indirect and uncertain effect," he added.

Analysts do expect the present record-low carbon price to cut investment in low-carbon renewable energy, by cutting the cost of carbon emissions.

"It's going to make new renewable capacity less attractive," said Deutsche Bank's Mark Lewis.

Bigger reputation problems for the scheme would emerge if utilities started exploiting the low carbon price to build new coal plants.

"Then I think you really would have a question mark (over the objectives of the scheme)," said one analyst who declined to be named.

"Absolutely there is a danger of that, potentially, and that would be terrible."

FREE

Prices of carbon permits called European Union Allowances (EUAs) CFI2Z9 have lost three quarters of their value since last July and are already down nearly 50 percent since Jan. 1.

EUAs traded at about 8 euros ($10.20) a tonne on Thursday, a record low for the 2008-12 trading period of the scheme, and could fall as low as 5 or 6 euros, traders and analysts said.

That fall is partly due to sagging industrial output and therefore falling carbon emissions and less demand for EUAs.

However, also to blame and contributing to an "over-sell" is a feature of the EU emissions trading scheme where participating companies got most or all of their EUAs for free.

That means that they now have an incentive to sell their surpluses, to raise cash during the downturn. Exaggerating that effect, companies can borrow EUAs from future years until 2012 -- meaning they can now dump five years' worth of estimated surpluses at little risk.

Utilities usually only buy EUAs to cover their expected emissions from power production, for example from coal or gas plants, which they have sold two to three years into the future.

But the prospect of a 5 or 6 euros carbon price could entice them to make longer bets, unconnected to any power sales, especially given that many will have to pay for all their carbon emissions from 2013.

"If you're a utility looking to build coal plants in post-2012 this is a bargain," said a trader at a bank. (Reporting by Gerard Wynn; editing by Guy Dresser)

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