Power Generation and Climate Change
New Chatham House paper looks at the issue

A new policy paper called "Climate Change Policy Uncertainty and the Electricity Industry: Implications and Unintended Consequences" by Rory Sullivan of Insight Investment and William Blyth of Chatham House looks at the effects of climate change policy on the electricity industry.
The new paper provides an overview of how climate change policy uncertainty is affecting investment decisions within the electricity industry. It assesses the implications of this uncertainty on climate policy goals and suggests how the unintended consequences of this may be addressed. The paper's main points are:
• Power generation companies are among the biggest emitters of greenhouse gases and are, therefore, potentially among the most exposed companies when it comes to regulatory risk and uncertainties in climate change policy. In practice, however, their risk exposure is reduced by the ability of power companies to pass through the additional costs to the price of electricity.
• Uncertainties in climate change policy create a financial incentive for power generation companies to delay new build and to keep old plant running for longer. This may, in turn, lead to greenhouse gas emissions remaining higher for longer than would otherwise be the case.
• The challenge for policy-makers is to balance climate change policy goals with issues such as the impacts of climate change on competitiveness and uncertainty over the future international framework for responding to climate change.
• While the EU Emissions Trading Scheme (EU ETS) has established a price for carbon dioxide (CO2) emissions, CO2 prices have not yet resulted in a significant degree of fuel-switching or changes in investment patterns. This is partly due to the high price of gas at present, but is also caused by the risk that current CO2 prices will not be sustained for long enough to give a return on investment in low emitting technologies.
• In order to address the issues caused by policy uncertainty, policy-makers need to make it clear that emissions trading is an integral part of the policy framework for responding to climate change; clearly communicate the post-2012 ambition – including the establishment of clear national and international greenhouse gas emission targets for 2020; and signal their willingness to provide public money to support action on climate change, at least over the short and medium term.
Chatham House/WaluEurope9 August 2006