Power Engineering - French utility EDF proposes carbon hedge for nuclear plants amid UK warning

8 October 2007 - France's EdF Energy is proposing a new financial instrument to lay off the political risks associated with the price of carbon, something that will affect the investment decisions for all low-carbon generation such as new nuclear plant.

The so-called Carbon Hedge can hedge the carbon price risk for low-carbon investments and can be designed to be consistent with existing market and policy mechanisms, says EdF.

At the moment, financing new plant on the back of the EU Emissions Trading Scheme is seen to entail too much political risk because politicians influence the carbon price in a number of ways. They can set the length of the
ETS phases, rule how allowances are allocated and also set the scope of national targets.

One way to mitigate these risks, says EdF Energy, is to introduce a hedge mechanism for the carbon price.

Under the scheme electricity companies would bid in to supply a fixed volume of low-carbon electricity from a certain date in the future for a number of years based on an assumption that each unit of low-carbon electricity would displace the need for a unit of electricity from other forms of generation.

The bid price submitted to secure the hedge would determine a guaranteed floor price for CO₂ for the investor.

If the market price for CO₂ fell below the agreed floor price during the term of the hedge then the investor would be compensated for the difference between the floor price in the hedge and the actual market price of CO₂.

The investor would not receive any payment if the market price remained above the floor price agreed in the hedge.

Any carbon hedge offered would be competitive and this approach is technology-neutral, says EdF Energy. "The government is simply reducing the political risk faced by investors."

Meanwhile, EdF has issued a warning that a generation deficit of between 15 GW and 33 GW will arise by 2015 because of the closure of nuclear, oil and coal plants in the UK. In its submission to the government nuclear consultation, published Monday, EdF says the reason for the wide range is that the level of demand growth is uncertain. It is also uncertain whether coal plant will close in 2015 or later.

After 2015 there will be further nuclear closures, coal closures and, possibly, closure of some of the earlier combined-cycle gas turbines. This will all lead to a requirement for a further 15 GW and 20 GW of new capacity by 2025.

EdF says: "While nuclear is unlikely to be able to contribute to the initial energy gap in 2016, there will be a requirement for large volumes of new capacity from 2017 onwards."

Last week EdF Energy boss Vincent de Rivaz said that his company could get a new nuclear plant up and running by 2017. New nuclear will reduce the
UK's dependence on imported gas, says EdF in the document.

"This has the effect of reducing the potential impact arising from any gas supply interruptions and gas price volatility," it notes.

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