Select Committee on Trade and Industry Written Evidence


APPENDIX 55

Memorandum by Nigel Yaxley, Independent Consultant

INVESTMENT IN GENERATION AND THE EU EMISSIONS TRADING SCHEME

  Whatever the outcome of the Energy Review, it is without doubt that much new generation capacity will need to be built over the next 10 years or so. The recent report of the Environmental Audit Committee rightly noted that a new nuclear programme could not realistically be delivered in this timescale. It is also inconceivable that renewables and energy efficiency alone can fill the gap, and new fossil fuel capacity will surely be needed.

  There are strong security of supply and economic arguments for some of this capacity to be coal-fired. Whilst a large-scale programme of carbon capture and storage also could probably not be delivered in a short timescale, it would be feasible to build a new generation of coal stations which are highly efficient, giving significant carbon savings compared to the opted-out plant which they replace, and which are "carbon capture ready". This would also position the UK to benefit from the massive growth in China and India, much of which will be coal based.

  In the absence of major state intervention, the generation mix will continue to be determined by market signals such as the relativity of coal and gas prices, and Government-created market mechanisms such as the Renewables Obligation and the EU Emissions Trading Scheme, (EUETS). It is the EUETS which is the major barrier to investment in clean coal.

  Emissions trading could potentially create strong economic signals for investment across the whole range of low-carbon technologies. However, the timescale of the existing scheme, even including Phase II which runs to 2012, is far too short to bring forward the type of large-scale major investments which must be a part of the solution to climate change, such as nuclear or clean coal. The current EUETS is capable of doing little more than optimising for minimum carbon emissions across the existing plant portfolio.

  The National Allocation Plan for Phase II of the EUETS is currently the subject of a DEFRA consultation. This will consider the method of allocation in immense detail. The outcome will distribute windfall profits amongst some players, largely at the cost of consumers, and create good opportunities for gaming by traders. But without clear guidance about what happens post 2012 it is unlikely that the best long-term investment choices will be made.

  This conundrum has been recognised in Germany, where emissions permits are granted for up to 18 years where an operator wishes to replace an old, low-efficiency plant with benchmark state-of-the-art technology. This is bringing forward investment in high efficiency coal capacity, and is making Germany a more secure environment for such investment than the UK. This model should be studied carefully by the UK Government. With the right lead from Government, and in the context of a long-term stable regulatory framework, the necessary investment should then be forthcoming.

  I would be grateful if your Committee could give consideration to these issues.

27 April 2006





 
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