European power sector calls for stable carbon pricing post-2030

Power companies push EU for stable carbon market after 2030

European electricity generators want the EU to guarantee a steady carbon price after 2030. They are calling for fewer political interventions in the Emissions Trading System and stronger automatic stabilisers. The industry says predictable prices are essential for decarbonisation investment decisions across the power sector.

The request comes as Brussels prepares its post-2030 review of the ETS. Utilities argue that the carbon market should guide low-carbon investment through clear price signals, not through repeated emergency fixes. Consequently, they want the European Commission to strengthen the tools that automatically balance supply and demand for carbon allowances.

Eurelectric, the association representing Europe’s electricity industry, has argued that a well-functioning ETS should deliver a carbon price signal to encourage sustainable investment. The group is proposing changes to the Market Stability Reserve, the mechanism that adjusts the supply of allowances when the market becomes oversupplied or tight. These changes would make the reserve more responsive to demand fluctuations.

The EU ETS launched in 2005 as the world’s first major carbon market. It now covers electricity generation, heat production, industrial manufacturing, aviation, and maritime transport. The system operates as a cap-and-trade scheme in which the total volume of allowances declines each year. According to the European Commission, it has cut emissions from European power plants and industrial sites by approximately 47% compared with 2005 levels.

Why electricity companies want price certainty now

Power generators make large, long-term investments in generation capacity. A gas plant or offshore wind farm typically operates for 20 to 30 years. Therefore, companies need confidence that carbon prices will remain high enough to justify building clean capacity instead of fossil infrastructure.

Carbon prices feed directly into electricity prices in Europe. The Commission’s own analysis confirms that the power sector is the largest buyer of auctioned allowances and the main channel through which carbon costs pass through the economy. As a result, carbon price volatility affects wholesale power markets, retail tariffs, and the business case for new generation projects.

Recent market behaviour has increased industry concern. Carbon prices have fluctuated significantly in the past two years, driven by energy market shocks, regulatory uncertainty, and speculative trading. Moreover, political proposals to intervene in the market have unsettled investors. Utilities argue that frequent rule changes undermine confidence and make it harder to secure finance for decarbonisation projects.

The electricity sector also faces a structural challenge. Clean technologies such as onshore wind and solar now have lower operating costs than fossil generation in most European markets. However, their upfront capital costs remain high. A credible carbon price helps justify these investments by guaranteeing that fossil competitors will remain more expensive over the project lifetime.

Independent research supports the industry position. One analysis found that a carbon price around €65 per tonne of CO2 equivalent is already sufficient to give mature clean power technologies a clear economic advantage over fossil generation in the EU. The study suggests that price stability matters more than further price increases for driving the energy transition in the electricity sector.

Market Stability Reserve at centre of reform debate

The Market Stability Reserve sits at the heart of the utilities’ proposals. This mechanism automatically removes allowances from the market when supply exceeds demand and releases them when supply becomes tight. It was introduced in 2019 to address a persistent oversupply of allowances that had depressed carbon prices.

The reserve works by monitoring the total number of allowances in circulation. When this number exceeds a certain threshold, the system removes a percentage of planned auction volumes and places them in the reserve. Conversely, when supply falls below a lower threshold, allowances flow back into the market. This creates an automatic stabiliser that reduces price volatility without political intervention.

Eurelectric and other industry groups want the reserve’s parameters adjusted. Specifically, they propose making the thresholds more responsive to market conditions and increasing the volume of allowances that can be removed during periods of oversupply. They also want clearer rules about when and how allowances return to the market from the reserve.

The Commission has acknowledged that the reserve has improved market functioning. Official EU materials note that it has helped match allowance supply with demand, supporting more stable prices. Nevertheless, policymakers face pressure from some member states and industrial sectors to intervene when carbon prices rise sharply, which utilities say undermines the reserve’s credibility.

Environmental groups and some economists have expressed concern that strengthening the reserve could lead to higher carbon prices in the short term. However, power companies counter that predictable prices are more important than low prices for driving investment. They argue that uncertainty causes companies to delay decisions, slowing the transition to clean energy.

Commercial impact on UK businesses and supply chains

British companies need to understand these EU developments because they affect cross-border electricity trading, carbon pricing policy in the UK, and supply chain relationships. The UK left the EU ETS in 2020 and established its own emissions trading scheme in 2021. However, the two systems remain closely linked through the electricity market and potential future cooperation agreements.

UK generators compete with European producers in the wholesale electricity market. When EU carbon prices rise or fall sharply, they change the dispatch order of continental power stations. This affects electricity flows through interconnectors between Britain and Europe. Consequently, EU carbon price movements influence UK wholesale power prices, even though British generators operate under a separate scheme.

The UK government has repeatedly said it wants to link the UK ETS with the EU system. A linked market would allow companies to trade allowances across both schemes, creating a larger and potentially more liquid market. However, linking requires the two systems to have compatible rules and similar levels of ambition. Therefore, changes to the EU ETS design after 2030 could affect the feasibility and terms of any future link.

British businesses with European operations face direct compliance costs under the EU ETS. Manufacturing sites in Europe must surrender allowances to cover their emissions. The cost and predictability of those allowances affect production costs, investment decisions, and potentially the location of new capacity. Several UK-headquartered companies operate power stations or industrial plants across Europe.

Supply chain impacts extend beyond direct participants. European carbon costs affect the price of materials such as steel, cement, and chemicals. UK businesses that buy these products face higher input costs when EU carbon prices rise. Furthermore, the EU’s Carbon Border Adjustment Mechanism will apply carbon costs to imports of certain products into the EU. British exporters of covered goods will need to account for the carbon intensity of their production.

The debate about ETS stability also influences UK climate policy choices. British policymakers watch EU carbon market developments closely when designing interventions in the UK system. If the EU strengthens its stability mechanisms, the UK may face pressure to adopt similar measures to maintain competitiveness and facilitate future linking. Conversely, if the EU makes ad hoc interventions, it could encourage similar approaches in Britain.

What the post-2030 review will cover

• The European Commission will assess whether the annual rate of cap reduction is sufficient to meet the EU’s 2040 climate targets, which are expected to be confirmed in 2024.
• Policymakers will review the Market Stability Reserve parameters, including the thresholds that trigger allowance withdrawals and releases.
• The review will examine the balance between auctioning and free allocation of allowances, particularly for industrial sectors at risk of carbon leakage.
• Officials will consider whether the scope of the ETS should expand further to cover additional sectors or activities beyond the current coverage.
• The Commission will evaluate the interaction between the ETS and other climate policies, including the Carbon Border Adjustment Mechanism and renewable energy support schemes.
• Stakeholder consultation will address concerns about price volatility, market speculation, and the role of financial participants in the carbon market.
• The review will assess the effectiveness of existing provisions to prevent market abuse and ensure orderly functioning of the allowance market.

Investment planning under carbon price uncertainty

Companies making capital allocation decisions today need carbon price assumptions that extend decades into the future. A power station built in 2025 will still be operating in 2050. The economics of that investment depend critically on what carbon will cost over that period. Therefore, regulatory stability directly affects the cost of capital for clean energy projects.

Financial institutions require confidence in carbon price trajectories before lending to low-carbon infrastructure. Banks and investors use carbon price forecasts to model project revenues, assess risks, and determine financing terms. When those forecasts become uncertain due to policy instability, lenders either demand higher returns or withdraw from the market entirely. This increases the cost of capital for decarbonisation projects.

The electricity sector has particular exposure because carbon costs affect both revenues and competitive positioning. A wind farm developer needs to know that fossil generation will remain expensive enough to ensure demand for clean power. A gas plant operator needs to know whether carbon prices will make the asset uneconomic before it has paid back its construction costs. Both require credible long-term price signals.

Some companies have started using internal carbon prices to guide investment decisions, regardless of the external policy environment. However, these internal prices only work if they bear some relationship to actual compliance costs. If real carbon prices diverge significantly from company assumptions due to policy changes, previous investment decisions can be undermined.

The utilities’ request for stability reflects this commercial reality. They are not necessarily asking for higher carbon prices, although many support ambitious climate targets. Instead, they want confidence that the rules will not change suddenly and that the market mechanisms will function predictably. This allows them to make investment decisions based on economics rather than political forecasting.

UK businesses face similar challenges under the domestic emissions trading scheme. The UK ETS currently has a less developed stability mechanism than the EU system. The government has committed to reviewing the scheme’s design, including whether to introduce a Market Stability Reserve equivalent. Industry groups have made similar arguments to those heard in Europe about the importance of predictable carbon prices for investment.

Where to find official guidance and updates

The European Commission publishes detailed information about the EU ETS, including policy documents, market data, and consultation materials. The Climate Action section of the Commission’s website provides updates on the post-2030 review process and links to technical assessments. Companies can access this material at the EU ETS information page.

The UK government maintains guidance on the UK Emissions Trading Scheme through the Department for Energy Security and Net Zero. The UK ETS guidance collection includes information about current rules, future policy development, and potential linking with the EU system. Businesses can also find market data and auction results through this resource.

Eurelectric publishes policy positions and research on electricity sector decarbonisation, including detailed proposals for ETS reform. The organisation represents over 3,500 companies in the European power sector. Its materials provide insight into industry thinking on carbon markets and clean energy investment. These resources are available on the Eurelectric website.

For businesses needing support with carbon reporting, compliance planning, or net zero strategy development, specialist advisory services can help navigate both UK and EU carbon pricing requirements. Understanding how carbon markets affect your business costs, supply chain, and competitive position is increasingly important for UK companies trading with Europe or operating in energy-intensive sectors.