LONDON British electricity prices may be almost double those in Germany within three years due largely to the impact of a new tax aimed at supporting renewable power generation, a report by bank Credit Suisse showed on Wednesday.
Rises in retail prices have become a popular bugbear in Britain at a time when wages are falling in real terms. The bank's analysis showed wholesale prices, which form the backbone of energy bills, would top those in Germany by 85 percent in 2016-17 and would be higher in general for the next 7-10 years.
The bank blamed the roughly fivefold rise in the government's new tax on carbon-dioxide emitting power generation over the next seven years, while also pointing to Britain's lack of infrastructure to import power from the European mainland.
Prices in the two countries had tracked one another for years, but they diverged last year as Germany spurred a boom in renewable energy generation by pouring billions into subsidising the green sector.
The Credit-Suisse figures show that in the winter of 2016/17 UK power prices will trade at an 85 percent premium to German equivalents, compared with a 25 percent divergence currently.
"Our analysis suggests these differentials will continue for the next 7-10 years," analysts at the Swiss bank said in a report to clients.
The British government introduced the mandatory tax on carbon emissions at 4.94 pounds per tonne of CO2 earlier this year, adding to the carbon charges already in place under the European Union's Emissions Trading System (EU ETS).
The two costs calculated together will rise to 30 pounds per tonne in 2020, an expense which will significantly increase British power prices.
German power prices have fallen on the back of the boom in solar and wind power but the government has now moved to rein in subsidies in recognition that the expansion may have come too fast given concerns over profitability and problems with managing the flow of green energy.
Seeking to learn from that, the UK model is to cap the value of subsidies annually in the hope that taxing carbon heavily will encourage the market to invest more in the renewable sector.
But Credit Suisse said the net effect over the next decade would be to cap the growth of renewable capacity.
The lack of substantial interconnection capacity with other countries also means that the UK will not benefit from the effect of low prices on the mainland, they added.
Higher wholesale power prices in the UK have led to much better stock market performance by UK utilities compared with those in mainland Europe over the past 18 months.
Share prices in UK power utilities have increased around 28 percent over the period, while European stocks are down 8 percent.
UK utility SSE is the Credit Suisse's top pick for shares to buy due its diverse range of generation fuels and its business exposure in Britain as well as Ireland.
(Reporting by Karolin Schaps; editing by Jason Neely and Patrick Graham)