Chancellor George Osborne announced in the 2014 budget that the carbon price support will remain stable until 2020 making it cheaper to burn coal rather than gas, until 2018.
It is expected that coal output will drop from 39-16% once coal prices exceed gas in 2018.
“The U.K. is not abandoning its carbon price floor policy,” New Energy Finance lead European power analyst Jonas Rooze, told Bloomburg.
“The cap will stop the all-in U.K. carbon price from exceeding the price floor trajectory by as much as it otherwise would.”
The U.K. chancellor capped the carbon price support at 18 pounds ($A32) a ton from 2016 until 2020 to reduce pressure on consumer energy bills.
According to a report by New Energy Finance, the cap on carbon costs will reduce U.K. electricity prices by about Â£3 per megawatt-hour in 2016 and as much as Â£5 in 2017.