Daily Telegraph, 21st January 2008
By Russell Hotten, Industry Editor
The European Commission believes that some of the most polluting electricity generators are making huge windfall profits, according to documents leaked to The Daily Telegraph.
The commission said it is time to change EU rules to eliminate the practice, which has been strongly denied by power companies, many of which have hiked their domestic prices over the past three weeks.
Brussels' admission that some companies are enjoying windfalls at the expense of consumers will add weight to a suggestion from UK energy regulator Ofgem that the Government impose a special tax to claw back ?9bn over the next five years. Ofgem boss Alistair Buchanan raised the proposal with Chancellor Alistair Darling at a meeting last week.
This Wednesday, the commission is due to present its long-awaited draft proposals to reform the European Emissions Trading Scheme, which is designed to help reduce global warming.
Under the ETS, companies get allowances for the amount of CO2 they can emit. These permits, which can be traded, put a price on carbon emissions and are increasingly valuable as pressure grows to reduce pollution.
But Brussels hands out these allowances for free. Consumer groups have long suspected that some companies treat this free handout as a cost - and load that cost on to bills.
Now the commission agrees. In a comment likely to outrage companies, the commission said in the document that its proposals "will also eliminate windfall profits" made by electricity producers. Ofgem has estimated that each UK consumer pays ?31 a year to finance the ETS.
In a radical change to the ETS, the commission wants to auction permits. "Auctioning should be the basic principle for allocation, as it is the simplest and most economically efficient system. Consequently, and taking into account their ability to pass on the increased cost of the CO2, full auctioning should be the rule for 2013 onwards," the document said.
Under the current phase of ETS - which runs from 2008-2012 - the price of CO2 allowances is trading at €22 (?16.20) per tonne, yielding the ?9bn windfall mentioned by Ofgem to Mr Darling. Deutsche Bank estimates allowances will reach at least €35 a tonne from 2012, potentially giving some companies an even higher windfall.
David Porter, chief executive of the Association of Electricity Producers, said the idea companies were making windfall profits was fanciful. Any attempt to "pick the pockets" of the industry would be resisted. He said a "retrospective tax would send a damaging signal to investors in a vital UK industry".