The chancellor, George Osborne said Whitehall will cap the carbon price support (CPS) rate at £18 per tonne of carbon dioxide (CO2) from 2016-17 to 2019-20. The government will extend the compensation scheme for energy intensive firms like steelmakers for another four years.

In his speech, Osborne said the government will review the carbon price floor (CPF) trajectory for the 2020s, including whether a continued cap on the CPS rate might be necessary, once the direction of reform of the EU Emissions Trading System is clearer.

Tony Ward, head of power and utilities at EY, said: ‘The immediate imperative for the freeze in the CPF is clear - to reduce upward pressure on electricity costs to all end users and in turn to avoid a growing competitive disadvantage for the UK's energy intensive industries.  However, relief felt by energy users may be temporary. This change of heart on a measure to quickly increase the cost of carbon in order to incentivise low carbon investment so soon after its introduction is the latest in what looks to be an emerging pattern of policy adjustments in mid-flight.’

‘The consequences for the wider sweep of much needed UK energy infrastructure investments may be negative - both in undermining confidence that investors have to commit funds to projects, but also in the returns that they will require if they do proceed.  Both of these in the longer term will lead to higher end user costs than would otherwise have been the case,’ Ward warned.