Emissions Performance Standards - Energy and Climate Change Contents

Examination of Witnesses (Questions 1-38)


12 OCTOBER 2010

Q1   Chair: Good morning and welcome to, I think, our first public session with the Committee. Congratulations on finding your way to this rather remote corner of the Palace, which might have been too much for some of my colleagues. Anyway, it is very good to see you again. Do you want to say anything by way of opening statement or shall we just crack on with some questions?

Lord Turner: I think we should just crack on.

Q2   Chair: Fine, okay. Perhaps a general one to start with because I know that the Committee has been very explicit about the dramatic decarbonisation of electricity generation that is needed by 2030. I think you talked about a 90% reduction in emissions from electricity. Do you think at the moment that the UK is on track to achieve that quite challenging target?

Lord Turner: Broadly speaking, if we think about the path that has got to occur, we are now at just under 500 g/kWh. We need to get to somewhere in the region of 50 g/kWh, or something like that, by 2030. The forecast would show us getting to somewhere in the region of 300 g/kWh by 2020. So you can break it into two questions: how realistic are the forecasts that take us to the region of 300 g/kWh in 2020; and what is our plan to drive it thereafter?

On the road to 2020, as we set out in the letter, which was public and went to the Secretary of State in relation to renewable energy targets, we basically believe that, if we manage to hit the renewable energy targets and they are doable but they require a lot of building, particularly of wind plants, between now and 2020, and if by 2020 we have one new nuclear plant in place, then, yes, that story of from here to 300 g/kWh, with the phase­out which is going to occur of several of the coal stations, is doable.

I think the challenge then is how we keep that pressure up in the 2020s where it has to come from some combination of a non­trivial element of nuclear, a further roll­out of wind—and possibly other renewables but still primarily wind—and a role for carbon capture and storage? I think our concern is whether that will occur without some category of new policy instruments including, we are suggesting, some quite fundamental reforms to the structure of the electricity market to make sure that there are incentives for that long­term investment. I think that is how I would sum up. I do not know, David, whether you want to add to that.

Dr Kennedy: Just in terms of investment requirements, to give you an order of magnitude, I would say that we need about 20 to 25 GW of low-carbon plant added to the system over the next ten years. Between 2020 and 2030, we are looking at up to 40 GW, so a very significant acceleration in the pace of low-carbon investment. We don't think that would happen under the current market arrangements, so there is a need for fundamental reform.

Professor Gibbins: If I can just add something here, in terms of where you want to be by 2020, I think you can characterise it as certain amounts of plants that are constructed, but you also need capacity in place, and that is actual physical construction capacity—people—and then also regulations so that you can do things rapidly in the 2020s. You cannot start from having done nothing on CCS, for example, and hope to get large numbers of plants built in the 2020s. So there is potential and preparation as well as actual metrics of plants built.

Dr Kennedy: And it tells you if you want to have this stuff coming on the system in the 2020s, you need to plan for it now; you can't wait five or ten years to change the market arrangements. We need to be really focused and do that for the next one, two and three years so that then investors can make decisions on, for example, nuclear plants.

Q3   Chair: We will come back, I think, on to the question of the reform of the existing market, which is clearly very relevant. Are there any other specific obstacles you see to making this programme?

Lord Turner: Obviously, apart from the reform of the electricity markets, there are crucial things that continue to be important simply on the planning regime. There have been reforms to the planning regime, but we are now, for instance on the nuclear side, going to come up to real tests as to whether things do go through that process in a reasonably smooth fashion. That is an important potential barrier, both in relation to wind and in relation to nuclear.

On CCS, of course, that is in a different category from either nuclear or wind in the sense that it is not yet a technology proven at full production scale rather than at experimental scale. Clearly, therefore, for us to have confidence that that is available as an option—both in relation to coal but also, we would flag, in relation to gas during the 2020s—it is important that it is tested at scale and demonstrated at scale. So that is an important part of the picture which has to happen during the next decade in order for it to be an option which is feasible in the decade thereafter.

Q4   Chair: Is it your view that we could produce enough electricity in the UK without commissioning any new coal­fired capacity?

Lord Turner: Yes, I think that is possible. There are trade­offs at the margin in terms of cost and, indeed, I think it is quite possible that the free market left to itself, with the carbon prices that are likely to exist in the 2020s, would do large amounts of gas rather than coal, but the system would still work. Indeed, one of the points we have made is that we should not, on the CCS story, entirely concentrate on coal. We see no feasible role for coal without CCS in the 2020s, given the then likely carbon price and given what we are going to achieve, but we are also increasingly concerned, if there are large amounts of unabated gas in the 2030s, that that also would be incompatible with achieving what we need to achieve by 2050.

Professor Gibbins: Can I just add something there, though? I think there may be an interim period when existing coal plants would still be useful as back­up, essentially for other activities, because you can store coal—it does not evaporate; you can have a coal stockpile. There is also some interest in looking at running or converting existing coal plants to biomass. If they still retain the capacity to use coal, as they would, that could also be a useful national security back­up.

Lord Turner: Can I just say I think we would agree with that? One of the things which we did flag at an earlier stage is that one of the things that one could be doing with unabated coal in the 2020s is having a hours­per­year limit on it. So it would still be part of what was available to meet peak capacity or downturns in other things going off the system, but with a sufficiently small hours-per-year running that it does not make a fundamental difference to the average grams per kWh.

Q5   Chair: Eventually would the same apply to unabated gas?

Lord Turner: Yes. I think eventually unabated gas would only have a role as a peak capacity element. It cannot be something running all the time. Basically, if you have got to get below 50 g/kWh by 2030 and lower thereafter, you cannot have much in the system running at the sort of 300 g/kWh that is typical of a gas system.

Dr Kennedy: We should just differentiate. If you get to 2020, there is very limited scope to add any new gas capacity to the system and decarbonise at the same time. There is a question of what you do with that capacity that we add to the system over the next five and 10 years. You would run that, but you would run it at reducing load factors over time.

Q6   Sir Robert Smith: Can you just clarify on that back-up role of coal? Obviously we are looking here at carbon emissions mainly, but do the other emissions from coal mean that it won't be able to fulfil that back-up role?

Professor Gibbins: It depends on what sort of derogation you have if it is not fully fitted with emission reductions. But, actually, I think most of the plant that will be around in the 2020s will have quite advanced emission controls on it, if it is there, so I don't see that as being a serious problem.

Q7   John Robertson: I wonder if we could move on a wee bit. Do you think the Government's aims for an EPS—emissions performance standard—to provide certainty to investors and to contribute to reducing emissions from the electricity sector are appropriate and adequate? Would you suggest any alterations or additions?

Lord Turner: I will let David talk in detail about this, but our overall attitude is that there could be a role for an EPS system. Of course an EPS system can be applied in a number of ways, from corporate average EPS through to something very specific on individual coal plants requiring them to achieve a degree of capture. We certainly see it as one among the tools which is available to help drive decarbonisation, but we have also become increasingly convinced that it is not adequate in itself, or necessarily the best instrument in itself. We also see a role for more fundamental reform of the electricity market to create elements of price and quantity certainty for low-carbon providers, and these can be done by, essentially, contracting for long­term delivery. You can keep price discipline through a tendering process. These are fundamentally tendered feed­in tariff-type systems rather than administered feed-in tariff type-systems. We will be talking in our December report about things that go above and beyond EPS. David, do you want to comment on that?

Dr Kennedy: We had recommended an EPS in two specific contexts. One was the investments in unabated coal, where we had said that there is not a role for significant generation from unabated coal through the 2020s, and a way to signal that would be an EPS which basically says, "You will not run a plant unless it has CCS beyond a certain point in time."

The second recommendation is that, given very limited scope for investment in unabated coal or gas generation beyond 2020, you could have an EPS which effectively says you can't invest in unabated coal or unabated gas.

You wouldn't want to put those in place on their own. These are stick instruments. You would want, as Adair says, a carrot in the form of long­term certainty that you can give to investors so that they can put their money into nuclear or renewable sources.

Q8   John Robertson: So the Government's ambition is to try and accelerate CCS. Is it feasible to do that?

Professor Gibbins: It certainly is feasible, yes, given where we are now. We are not moving very fast but things are moving. Obviously, doing CCS for the first time takes longer than you think it does, going into it, but certainly there could be movement. The biggest obstacle at the moment, I think, is guarantees about funding. The levy was a very strong signal. We now know it is potentially under threat, and I think that would send a disastrous message in terms of accelerating CCS.

As regards what you might achieve with accelerated CCS, the Advisory Committee on Carbon Abatement Technologies to DECC, which has recently finished, said that we could probably achieve 5 GW of CCS capacity by 2020 in a combination of gas and coal. I think that target is still achievable, and I think one of the things that we should actually bear in mind is that—David was talking about capacity and what needs building—you cannot confuse some renewables capacity, particularly wind, with CCS capacity. You have to divide the wind by three or multiply the coal by three. So actually even 5 GW of CCS is quite a lot of wind—it is of the order of 15 GW. That is significant. I have to say I think that, if you actually want to be in a position of rolling out tens of gigawatts of CCS in the 2020s, 5 GW is not too much, and it is not actually that many plants. You are talking about five significant sites.

Lord Turner: I would say on CCS that there have to be two things. There have to be some very clear signals, which can include EPS signals, that tell the generators that if they want to have fossil fuel plants running in the 2020s, they are going to have to have CCS on them of some certain percentage of capture. That depends on what you set the grams per kWh within the EPS. That determines whether they have got to get 80% capture or 90% capture or whatever, so it is a sort of sliding scale. That is, as David has said, the stick—the driver—that means that they know there will be limits on their ability to run unabated. But it is also vital that we actually have the capability created, and that is why I think the demonstrations are important and the funding for the demonstrations is important.

Professor Gibbins: And subsequent reference plants. Can I just say, though, Lord Turner, I think the idea that if the generators want to run unabated fossil fuel, they won't be allowed to, is not tenable. If the country wants electricity, we will have to run fossil fuel plants in the 2020s. Now, whether those have CCS is clearly an option, but not running fossil fuel plants in the 2020s is not an option.

Lord Turner: We think it is an option to be not running coal plants. You could be running gas plants and certainly we could end up with no unabated coal plants. We see that there will continue to be unabated gas but we would like that coming out of the system during the course of the 2030s and being, therefore, replaced with, probably, CCS gas—gas with CCS.

Professor Gibbins: I agree entirely—

John Robertson: Can I interrupt? I am sorry to interrupt, but you are now having a conversation and I feel I am out of it.

Chair: It is a very, very interesting one.

Q9   John Robertson: Let me try and bring together what I think you are saying to me here—I am trying to clarify it into very simple terms—and that is that we are talking about cost here and how much money is going to be invested. So how would that affect the price of carbon? What would you have to have in the carbon price to achieve what you are suggesting?

Dr Kennedy: We haven't worked this out as a price of carbon. I think the estimates are that the four demonstration projects that are planned at the moment will cost up to £4 billion in support through the levy or through some other mechanism. But certainly for us that £4 billion would be money well spent, and if we don't move ahead with it—if we don't have the four demonstration projects—you have to question actually is it plausible then to decarbonise the power system through the 2020s just based on nuclear and based on renewables? So there is a significant investment, but it is an investment that will have a pay-off in terms of our longer term objectives.

Professor Gibbins: May I just say something, Chair, on the price-of-carbon issue? It is interesting that we would expect the cost of carbon capture and storage to be highest at its inception. So we have carbon capture and storage with a falling cost and we expect carbon price to increase over time. So there is a natural mismatch in using the carbon price to incentivise carbon capture and storage. One starts out high and goes low; the other starts out low and then goes higher.

Q10   Chair: Just to be clear on what you said a moment ago, Professor Gibbins, are you saying that if next week in the CSR we learn of any change in the funding for the CCS competitions, that will be disastrous?

Professor Gibbins: I think it will certainly delay, depending on the change, whether or not CCS is available to deploy in the UK in the 2020s. It takes a long time to develop technology. Even if we could import the technology, we still need to have practice in regulation and deploying pipelines and infrastructure, and that has to be with our particular country. You can't import that sort of experience.

Q11   Chair: I think a lot of what has been said in the last 15 minutes emphasises the importance of having that ready by 2020.

Professor Gibbins: As I say, we will be running fossil fuel plants to keep the lights on. It will have to be done.

Q12   Dr Lee: I get the impression that we are a bit late to the party and that we are trying to play catch­up a bit here, in that we have got this gap to fill in time and, if we don't do this, we are going to have to do this, and it's because it is all a bit late. I was just struck by this interconnector between Norway and Holland—the electricity connector that has actually paid for itself already and has only been in since 2007. Norwegian electricity is 100% renewable. We had an interconnector plan and it did not happen because it wasn't viable. I wonder, in terms of the fact that we need almost to buy ourselves some time from a renewable source so that we can hit CO2 emissions targets, etc., is it cheaper to proceed with that even if it requires some subsidy than pursuing some of the other paths that we have just been discussing now in terms of buying in electricity that is from a cleaner source?

Professor Gibbins: My understanding is that Norway in some years has been a net exporter and in other years has been a net importer of electricity. They have done badly in dry summers. There was a period when they were importing coal-fired electricity from Denmark to meet a shortfall. The have had some wet summers recently, so they have managed to export a bit. But their main value is a balancing. In other words, you can effectively use them as long­distance pumped storage.

Dr Kennedy: We are just actually finishing off some work on interconnection as one of a number of options for providing more system flexibility and we will publish this in our report in December. I think the key message is that this is not a substitute for investment in low carbon capacity; it is a complement.

Q13   Dr Lee: What about the shortfall, because clearly there is some debate as to whether we are going to need coal or not, or gas, in terms of the timing of everything? I am just wondering whether one way we might circumvent that is by importing it from a renewable source.

Dr Kennedy: Well, if the objective is just to keep the lights on over the next ten years—

Q14   Dr Lee: I think at the moment that is probably the number one objective, being realistic.

Dr Kennedy: We can quickly add gas-fired generation to the system. We know actually that more capacity already has planning approval in terms of gas-fired generation than we will need over the next 10 years, and the lead times for those projects are relatively short. I think the risk of security of supply can be dealt with.

Professor Gibbins: But you are talking about quite large amounts of electricity. Interconnectors are of the order of a few power plants, not tens of power plants, and they may not have the capacity themselves to generate that much electricity.

Lord Turner: I think also that if you said, "We'll do an interconnector and then we'll have somebody else's low-carbon electricity," the fact is that everybody else is driving for low-carbon electricity, so it's highly likely that that is going to be at the expense of them at the margin of doing something else.

Q15   Dr Lee: I am not suggesting it is a long­term solution. I am just suggesting, without wanting to get party political, that in view of the fact that we have arrived at this a bit later than perhaps we should have done, I wonder whether we just need to—

Lord Turner: I think some of the things that we were late doing but are now rapidly catching up on are things like the issues of Scotland-to-England grid connections—the ability to take some of the large developments of wind power in Scotland and bring them south, where there have had to be quite significant changes in the degree of strategic outlook of National Grid, and the whole greater willingness to take a more planned approach to that has been important. I think we probably were at one stage behind in our thinking on that, but that has gone through a significant acceleration over the past few years

Dr Kennedy: Looking forward, the key thing is decarbonisation of the power sector, which is central to moving towards the 80% target. That is still in play, but it is in play only if we support the CCS demonstration and it is in play only if we reform the electricity market. If we don't do those things, you have to ask a question.

Q16   Dr Lee: In terms of where the UK fits in in the CCS race, are we fast coming up? Are we up front here, because it strikes me as an opportunity?

Professor Gibbins: Yes, we are actually. Just to use an example with which I am fairly familiar, if you look at Canada, which has traditionally been fairly active on CCS, they have a couple of projects for which they have got funding approved. They also have one to do with tar sands and also a coal plant in Alberta, but nothing has been built. We are very, very close to that ourselves. If the levy was there, we would be at exactly the same position with Longannet particularly, where we have an existing plant that is ready to retrofit. We have also got the project at Peterhead—an existing plant ready to retrofit. These are very analogous to the projects that are being talked about in Canada. Also, if you look at the FutureGen project in the States, which has now turned into a retrofit of oxy-fuel on to an existing plant, that is just at exactly the same stage. They are doing design studies and waiting to make the final financial commitment. So we are actually almost parallel with those countries.

Dr Kennedy: The fact that there are other countries active here, whether it is Canada the States, Australia or China, is a good thing as well because if we get a critical mass in the UK, we are in the club and we can share their learning. We can leverage what we learn here, and it is good for us then to be able to deploy the technology in the 2020s.

Q17   Sir Robert Smith: But what happens if there is not a levy? Is there anther way of trying to keep the momentum going without a levy?

Dr Kennedy: It's not clear what that would be, and if you are looking for £4 billion, given the current fiscal situation, without the levy, you have to question where would that come from? I think we would be in the situation we have been in for the past few years before we had the levy, and that was we had one demonstration project. It took many years to get to where it is now, which is we are at the engineering-feasibility-study stage, and the reason it took many years was because there was not a funding source for that one project. Now, looking forward, we're talking about four projects which wouldn't have a funding source and it's not clear what that funding source could be.

Q18   Chair: Let's not assume the news is going to be bad. Just turning to the EPS itself, of which there are a whole variety of different designs, do you have a view about which one would be particularly effective in achieving the goals we have talked about?

Dr Kennedy: It depends what you are trying to address. If you are trying to give a signal to potential investors in conventional coal, you would have something that is plant-specific that says there is a limit on how much you can run this coal. If you want to give direction of travel for the system as a whole and investors thinking of investing in anything for the 2020s, you would look at something that is broader which says you can't invest in anything that is unabated fossil fuel. There is a third option, which says, "Okay, if this is the path that we want the sector to achieve—to go from 300 gCO2/kWh to 50 over a 10-year period between 2020 and 2030—you could divide that path up and give it to the energy companies."

Now, for us, there are a lot of complexities with that third option. It is not something we would dismiss, but we are not absolutely confident that that would deliver. I think the first two you would have in conjunction with broader electricity market reforms around tendering of long­term contracts or low-carbon tariffs, which Adair has referred to.

Q19   Chair: Is there a case for saying that we should wait until we know about the outcome of the work on CCS before we start playing around with EPSs?

Lord Turner: I don't necessarily think that is the case. I think, for instance, the role of unabated coal in the 2020s is so clear and, as I think we agreed earlier, not essential to keep the lights on—let's draw a distinction between that and unabated gas—that I think it would be very valuable to be making it clear that that is simply not going to be allowed, or allowed for only a certain number of hours per year. That could take the form of some category of EPS which is setting either some limit on the grams kWh that is going to be allowed, or basically some sliding scale that says you can have so many hours at this grams per kWh that are unabated, but that if you want to run it for more than that, you are going to have to have it down to X g/kWh, which will require CCS.

I think that is something that we could have as part of the armoury at the moment because I think it is very important for the generators to understand and therefore for them themselves, along with public support for CCS, to have a very strong incentive for CCS—to know that they will need CCS on coal in order to be able to run it on a significant scale.

Dr Kennedy: There is a specific opportunity, and that is the broader consultation on electricity market reform that DECC will publish in November. We would expect to see discussion of an emissions performance standard as part of those broader sets of reforms and then expect to see it in a White Paper next spring.

Professor Gibbins: Chair, could I just say something here? I think, since we have already agreed that coal is not essential to keep the lights on, coal is not essential to the utilities either. If the emphasis is on coal, all that will happen is we will get unabated gas, and since we will have gas in shed loads and we won't have that much coal, if we don't have CCS on gas, and if the utilities are in a position where they can claim that they cannot be forced to have CCS on gas, we will be in a mess. I think this emphasis on coal is interesting but it is yesterday's fight. It was a fight that was important when coal was relatively cheap compared with gas. That isn't the situation we are in now.

The point was made in the debate on the previous Energy Bill whether existing measures for the permitting of new coal plant gave sufficient power to the Secretary of State to say that they would not be built without fitting CCS. I think that power is already there and I think it is at least worth considering whether or not we have sufficient measures in place for new coal plant, should they be built, and it's pretty unlikely that they will be built.

I think what we really ought to consider is the message that is going in on gas and the development that is ready on gas and that will really convince the utilities that CCS is needed. If they think CCS is needed on gas then for sure they will think it is needed on coal. But if they think it might not be needed on gas, they will leave no stone unturned to preserve gas as not needing CCS.

Lord Turner: I agree with this and it is interesting. The attention has changed—I think legitimately and appropriately over the last year—from coal to gas, both with the realisation of outlooks for the gas price, which now looks relatively cheap relative to coal, with the whole shale gas issues, combining with our increasing realisation that the decarbonisation that we require to meet our climate requirements actually requires that we are abating gas as well. So those two things come together and that was one of the reasons why we wrote to the Secretary of State earlier this year arguing that it is important to have gas CCS projects as part of the four projects, not just coal CCS projects.

Q20   Chair: This is also behind your thinking about how an EPS could apply to new gas after 2020?

Lord Turner: Yes.

Q21   Sir Robert Smith: One of the other questions is what impact an EPS would have—whether it would encourage other lower-carbon technologies like large­scale biomass.

Professor Gibbins: It would do if the EPS was applied properly to biomass. With large-scale biomass at the moment we are seeing some travesties of environmental do-goodery, in fact, because we are seeing 295 MW biomass plants being built, which is 5 MW under the capture-ready limit. If you are going to build a large biomass plant like that, it should have CCS at that scale. It is a very large source of carbon; it's about the same amount of carbon as an 800 MW gas plant. So, yes, it could encourage things but it needs to be applied properly. If you give people an out with large biomass plant from capturing the very large stream of CO2 that is coming out from it, they will do it. You need to look at all large sources of carbon; not capture-ready for biomass is just as wasteful.

Q22   Sir Robert Smith: Do there need to be more safeguards in how biomass is calculated?

Professor Gibbins: Absolutely, yes.

Dr Kennedy: In calculating it. They need to be thinking as well, "If we've got constrained biomass here in the UK and globally constrained biomass, where is it best used?", and it's not clear that it is best used in electricity generation when you have alternatives to decarbonise it. It may well be best used, for example, in energy-intensive industries where we haven't got a good story about how we will cut emissions.

Professor Gibbins: Can I just differ from that? I think if it's used in electricity production with carbon capture and storage, then actually it is as good as using it anywhere and better than most. It is the carbon capture and storage in conjunction with the biomass that achieves the benefit because you can effectively transfer the negative emissions from your power plant to your industry, if that is more convenient.

Dr Kennedy: Yes, but you would use CCS on biomass in industry as well and decarbonise the whole sector and you would be in a better position.

Professor Gibbins: If you can do that. But if it is unabated biomass anywhere, it's probably not as effective as biomass with CCS.

Dr Kennedy: Yes.

Q23   Sir Robert Smith: The other question is what should be done about combined heat and power? Is it a Cinderella still, in the sense of not having a recognition of the efficiencies that come from the heat it produces?

Dr Kennedy: This is something we have not considered in detail as the Climate Change Committee until recently. We will publish a view on the future of CHP and district heating as well. We think actually now it has been a bit neglected. You have to differentiate between CHP that uses unabated gas, which you cannot regard as low-carbon and so there can't be a long­term future for that, but there is CHP that is CCS, or there is CHP where you are using, for example, the waste heat from nuclear and piping it to residential areas and district heating. There may be a very useful role for those kinds of CHP and district heating in the future. I don't think we're anywhere near having a policy framework to support that, and actually we don't understand the potential role, so a lot more thinking needs to be done in this area.

Q24   Sir Robert Smith: Should an EPS for a CHP, though, recognise—not just applied to the electricity but applied to the heat—the advantages coming from that heat being made use of? Obviously one plant is sitting there wasting the heat and another plant is using the heat.

Professor Gibbins: Can I just say, sir, the efficiency of a CHP plant for heat is no better than a good condensing boiler, and in fact it is probably worse? So, as the benchmark for heat, we have already achieved perfection, effectively, with condensing boilers. Now, if you have a CHP plant, the heat is no better than a condensing boiler. The electricity is maybe 100% efficient if you are running the plant very precisely. A central natural gas plant is achieving nearly 60% efficiency on its electricity already, so there are actually relatively small savings. I think it would be quite relevant actually to say you have got to do better for your heat than you can do in a condensing boiler for it to be seen as a significant advantage.

Dr Kennedy: So the principle that you would not expect investment in a carbon-constrained world, and that you wouldn't expect investment in conventional gas-fired generation beyond 2020, I think you can extend to conventional CHP, and we would want to look at other forms of low-carbon CHP for that period.

Sir Robert Smith: Chair, I forgot I should have reminded the witnesses—and I think it is relevant to this inquiry because I think they put it in their submission—that I am  a shareholder in Shell on the entry in the Register of Members' Interests.

Q25   Dr Lee: What progress has the Committee on Climate Change made in its analysis of the implications of the fourth carbon budget and renewable targets for market reforms? Have you reached any conclusions about the role for an EPS?

Lord Turner: We are working on the recommendation for the fourth budget period, which is the period 2023 to 2027, which we will produce in December, but in working on that, rather than just focusing on the years 2023 to 2027, we thought about 2030—we have thought about where we want to be by the end of the 2030s. We still have—indeed, if anything, we have intensified it—our story about the importance of decarbonisation of electricity, both to take out the emissions from electricity itself and also to then enable low-carbon electricity to be used in new uses, whether they be surface transport or domestic and other heat. So we see it as incredibly important, and I commented in relation to the Chair's question earlier about what was our confidence level that we would achieve the degree of decarbonisation. We think it is technologically possible but we think there are more instruments required.

What we will be commenting on in the fourth budget is the issue of electricity market reform. We believe that the time has now come really to look in depth at the issue of how we run our electricity market. We have an electricity market which was designed to achieve some very specific effects which it achieved in the early 1990s. It drove some cost efficiencies in de-manning in particular functions. It drove a shift from coal to gas, and it is organised in a very particular way. Basically, you invest in your plant, and 15 or 20 years later you are getting a stream of revenues which depends on a fluctuating price of electricity which fluctuates during the day.

Now, this is a system which works and has some advantages if you have a set of competing alternative fossil fuel providers, each of whom has a capital cost but also a significant marginal cost. It is a system which, if your system entirely existed of low carbon, in which you broadly invest in the ground and then have zero marginal cost—or close to zero marginal cost as you do with wind and nuclear—you would never have designed this system because not only would it not be optimal, but it couldn't work at all, because when you have competing zero marginal cost providers, they would compete the price to zero on a marginal basis and they would never get paid back for their investment. So we have a system that was designed for one purpose and, as we head towards a more low-carbon basis, which tends to be or has this feature of incredibly high capital intensity and very low marginal cost, is just not an effective system.

You can pull through the low-carbon investment by chucking money at it. You can increase the ROCs higher and higher and higher, you can have a very high carbon price, and there is some level of price at which you will just subsidise it through. But that may not be actually the most efficient way for society to make sure it gets low-carbon electricity. The Government have the ability to change the rules of the game so that you take some of the risk off the table for the low-carbon providers. There are some risks you shouldn't take off the table for them. They have got to own the risk of the construction and the operation. That should clearly exist with the private players, but we can have a structure where, in some fashion, they are being given—tendering for—contracts for future delivery at pre-set prices. That is doable. That is the sort of thing that we are going to be talking about, and we are wary of the idea that it is always possible when you have an existing system to say, "Well, okay, I'll make the existing work by doubling the ROCs here or increasing the carbon price there or doing some fiddles with it." We think we are now at the position where we've really got to step back and say, "What is a logical structure of incentives within an electricity system which has huge amounts of very high capital cost, low marginal cost production?"

Q26   Dr Lee: Would you agree that an EPS should be introduced as part of a package of measures by government or should it be a stand­alone policy?

Lord Turner: We would see it as part of a package. We would like to see—

Q27   Dr Lee: If that's the case, a package of what? What other policies would you like to see?

Lord Turner: As I was just describing, there is, we believe, a need to do electricity market reform that has this nature of providing low-carbon, high-capital-intensive providers with the ability, in advance, to contract for the delivery of future electricity with pre­set quantities and prices. That is the proposition we are putting on the table. That is not incompatible with also doing some other things, like having a carbon price underpin—mechanisms to make sure that although the carbon price oscillates it has a minimum level within it, which essentially can be done by a variety of different devices. So we are not against that. We think there may be a role for EPSs and we think there may be a role for a carbon price underpin, but we think the really fundamental thing we have got to do is to look at this fundamental electricity market reform.

Professor Gibbins: Can I just comment on that? I'm not familiar with the mechanism, but clearly for CCS you are exposed also to a significant fossil fuel price risk. I think with nuclear and wind you know what your construction costs are and you could actually build a business model on firm prices out forward. With CCS, you would be taking a very big risk if you did that because you don't know what international fuel prices are. But there's still a large capital cost.

Lord Turner: I think what you have got to recognise here is that we have two different things. With CCS, because it fundamentally has somewhat higher capital requirements but still has this large marginal cost, you could imagine, if everything was CCS, essentially adjusting the existing system to have a high enough carbon price so that it would pull through. If it was all CCS, we would not necessarily need the fundamental reform. The fundamental reform comes in relation to nuclear and wind, and that is why I think we need a variety of different aspects of the total package that include a more certain carbon price—a carbon price underpin. I think that will be relevant for the CCS technology.

Professor Gibbins: There is also, though, a differentiation I think between how you would run the market in a steady state post 2030 and how you would make the transition from now to 2020 and from 2020 to 2030. I think you might well want different mechanisms there, because in 2030 just about everything that is running any significant amount of time wants carbon capture and storage, but in the transition, in this decade, we are looking at building a limited number of demonstration and then larger reference plants—plants that we would actually like to build. Then, in the 2020s, what we want to achieve, starting out with maybe four or five plants, is we want to build one and then another one and then another one. We do not want to do it across the board. That is not an economically efficient way of doing it. So you might need a different mechanism there to keep on adding a plant at a time than you would do in the 2030s when you want to run the plants you have got and you want to build the occasional new plant with CCS from the outset.

Q28   Dr Lee: If one can look at it in terms of UK plc—and clearly there are upfront costs for CCS; that goes without saying—is there a view that, if Britain takes the hit in this decade, it is going to benefit in the medium to longer term because it would then be able to do the CCS, because, ultimately, our emissions are pretty paltry in comparison with places like China?

Professor Gibbins: Yes, but it's not a hit in the sense that we do not actually expect that carbon capture and storage is going to be significantly more expensive than other low-carbon options.

Dr Kennedy: There's an upfront investment, which is the up to £4 billion. Is that worth doing? The pay back is in the 2020s because if you don't have CCS and if we don't demonstrate it—whether it's available in other countries, you've got to question could we deploy it here—we will be at the back of the queue. So if it's not available here, what happens in the power system? Either you invest more in offshore wind, which is expensive, or you revert to investing in unabated gas, which doesn't have a long­term future, and you buy carbon credits to offset the emissions from it and then you strand it. So there is a quick payback from it.

Q29   Dr Lee: My point is: is this an industry that we can create for ourselves?

Professor Gibbins: Yes, it most certainly is.

Dr Kennedy: It is an industry we can create for ourselves through deploying the technology here and possibly for exporting the technology as well, if we can become a leader in it. So there are two benefits from it.

Chair: Robert Smith's disclosure reminds me that I should also remind colleagues about my entry in the Register of Members' Interests as chairman and a shareholder in AFC Energy, whose fuel cell technology may conceivably be applicable to CCS. Robert?

Q30   Sir Robert Smith: I have just a couple of things on the back of that. In your new reformed electricity market, who is driving the decision making about where the priorities go?

Lord Turner: Well, it does require that we have made a strategic national decision that we want low-carbon electricity, but we have made that—we have got an 80% CO2 reduction target. Within that, it then essentially says, okay, what we want, because we recognise this is the structure the market requires, is to buy future low-carbon electricity at a price now that we know while also maintaining the price-competition discipline of a tendering process. Right? So you are basically tendering for the future delivery of low-carbon electricity. From the point of view of the generator, once it is in place, it gives them the same certainty as a feed­in tariff, but it does not require that we say, "Okay, I am willing to pay you 7p per kWh." It basically says, "I would like somebody to deliver me so many TWh of low-carbon electricity in 2025. What am I bid?" We go through a tendering process and the lowest tender gets that promise to pay, but once that promise to pay is there they have a certainty of future price and quantity.

Q31   Sir Robert Smith: And that system would fit in with the EU's liberalisation agenda under Lisbon?

Dr Kennedy: There are possibly some legal questions about whether you could have that kind of market arrangement under current EU legislation.

Lord Turner: I think if that is a barrier, we have got to face it. I think, to be blunt, there is an element to which we have been so proud of our complicated liberalised energy market, which was created for a particular set of purposes, that we have managed to sell it to Europe and they are rolling ahead to try and make everybody have to have it just at the point where we are realising that it is not necessarily the most efficient way to drive a low-carbon economy.

Professor Gibbins: Just to paraphrase one of my colleagues, Rob Gross, it was designed to sweat assets and build gas, and it does that quite well. It did it very well and we have reaped the benefits of it but we are not reaping them now.

As to the point about tendering for different sorts of low-carbon electricity, we have seen one tender, if you like—I think done in public—about the London Array where the builders said, "We would like two ROCs." After a bit of thought, the Government said, "Okay, made it two," but doing public procurement to one-significant-digit precision by a tendering process like that is not really very adequate. What we are suggesting here is a very effective way of getting people the money they need but not significantly more.

That would also apply, I think, with some proviso about fuel price allowances, to carbon capture and storage—certainly some of the larger projects. If, for example, you followed some of the recommendations that were made by a study group last year that I was part of to have a national carbon storage authority that would actually take carbon for a fee from people and transport and store it, that is something that could also be delivered against a tender.

Q32   Sir Robert Smith: One other interaction obviously with Europe is that if we have a successful EPS system, we could well lower the price of carbon. Could this hinder then the carbon abatement in the rest of Europe relying on the ETS?

Lord Turner: That doesn't just apply to EPS. That almost says anything you do in your traded sector—your EU ETS—by whatever means: building a gas plant not a coal plant; running a gas plant not a coal plant. At the margin, if you are not changing the EU ETS cap, it is, of course, reducing the price of carbon and shifting supply and demand within the carbon market. But I don't think you can have that as an argument against. The crucial thing in here is: is the cap within the EU ETS tight enough? If it is tight enough, obviously it is the case that somebody who, within that, takes an abatement opportunity is then in a position to buy fewer credits or sell credits that they would not otherwise be able to sell.

I think the crucial issue here is: is the EU ETS cap tight enough? I think the answer is no, and I particularly think it is no because it has not been adjusted to deal with the very significant influence of the recession across Europe. I think that if one had known in advance that that was going to occur, one would have a different EU ETS cap than is in place at the moment. We do have significant concerns that the present EU ETS cap that has been set is not sufficiently tight to drive the sort of carbon price for the carbon price to be playing the role that it should be playing along with other instruments in driving through low carbon, both in the power sector and indeed in industrial sectors. So I think the big issue here is the overall tightness of the overall cap.

Dr Kennedy: It comes back to your earlier question. It would not make sense for the UK to be decarbonising the power sector at a rapid pace and no other European member state is doing the same thing. The way to get around that is, as Adair says, tighten the ETS cap to make sure everyone is decarbonising but get a consistent set of electricity market arrangements across Europe of the kind we are talking about, which are based on long­term contracts for low carbon.

Q33   Sir Robert Smith: So quite a big role—quite a major redirection of European strategy is really going to be needed.

Dr Kennedy: There's a legitimate question around that. Lord Turner: It relates to the debate about whether Europe is on 30% targets or 20% targets, post Copenhagen and post whatever happens at the end of this year. I think there clearly is an issue about the tightness of the EU ETS cap. Across Europe, as in the UK, there were very significant reductions in CO2 emissions last year with the recession, which had not been previously anticipated and which, therefore, have produced quite a significant shift in both the present year but also the future expected years' supply-demand balance within the carbon market. Professor Gibbins: We are now in a situation—and we always are in a situation—where it is hard to see how European emissions collectively would be any lower than the cap, irrespective of what individual countries do. The only way we could get lower emissions is if the UK cut its own emissions and also retired some allowances. Of course, you can retire allowances at any time anyway. So I think there is a serious question here not just of the price but also the effect on CO2 emissions, and that is just because we have a cap and you don't exceed the cap but also rarely do you go under it.

Q34   Dr Lee: Can we move on to energy security? How do you see an EPS affecting energy security—positively, negatively? What's your general view?

Professor Gibbins: A typical academic response: what do you mean by "energy security"?

Q35   Dr Lee: Allow me to be a layman and say that for me it is do we know that we have enough power on the island to run business and domestic need?

Professor Gibbins: I think the question there comes down to what role we see for coal in the future mix, and I think there is a role in that coal is an easily stored energy source and a source that can be accessed from a lot of different countries. At the moment we think gas is going to be fairly cheap, but that's not certain, so it would be very useful to have the option to build more coal plant. That option might be available if we had a gas CCS system. For example, it is a lot easier to go from a gas CCS system to a coal CCS system than it is to go from an unabated gas system to a coal system with CCS. So we could keep that option open.

In terms of keeping the lights on, I think CCS is quite a good back-up. It is actually potentially fairly flexible, although at a cost. It will fill in the gaps; it will come on. You can also, which is quite useful, as part of that flexibility, decide for periods of time not to operate with CCS provided you have that option. It does not matter; the climate will quite happily integrate CO2 emissions over years, so the fact that you are not operating with CCS for a short period is not an issue. So I think in terms of keeping the lights on in the short term, it's quite good. Provided we do some CCS, it's also quite good for energy security in terms of keeping a coal option realistically open.

Q36   Dr Lee: Do you see any problems with an EPS being applied only to new gas plants after 2020 as opposed to retrofitted? Is there a danger that if you say, "Oh, it's from 2020," we're going to have a sudden burst of gas power stations that then will not be compliant going forward with what we would like?"

Professor Gibbins: Yes.

Dr Kennedy: So if you said that beyond 2020 you cannot invest in unabated fossil fuels including gas, you would expect to see a new dash for gas in the period to 2020, which would give you a load of plant in the system that you don't really want there ideally. The way around that is to have your emissions performance standard in conjunction with the arrangements that pull through the low-carbon investments. So you will not invest in unabated fossil fuels, but there will be sufficient revenues to make your projects in low­carbon technologies viable and that would avoid the dash for gas.

Professor Gibbins: I would comment there, though, that at the moment we are building natural gas plants as capture-ready, and that capture-ready, in terms of a future retrofit of CCS—if it is exercised reasonably rigorously—actually does mean that you can retrofit CCS, and it is not a choice that you just have to make when you build the plant initially. So if people are building power plants before 2020—natural gas power plants—and they are capture-ready, then there is no reason why you cannot say, "Well, you said your plant was ready to retrofit capture. Go away and do it."

There have been some moves by industry, and I think even the Committee on Climate Change has seen this, to say, "Oh well, you either build it with CCS, but if you let us build it without CCS, we don't have to fit it for 10 or 20 years until the plant is refurbished." In other words, basically, "We've paid off our money. Go away and leave us alone."

I think we are in a situation now where if capture readiness is implemented sensibly, it is not a big deal—but it needs doing sensibly—and industry is made to realise that when they say their plant is capture-ready, they will have to retrofit CCS if required or take a financial penalty in terms of closing down. Then I think actually we are in quite good shape not to be left with a legacy of plants that can't be retrofitted.

Q37   Dr Lee: Is there a danger, though, that we may get to a point where we have seen coal off at the pass and we are left with a nuclear sector with which we're dependent upon the French and with gas where we are dependent upon the Norwegians and the Qataris; and that we are at the point where we are fulfilling our targets but actually our dependence on others and the diversity of our energy supply has made us actually more vulnerable if there is a geopolitical change? I'm not suggesting that we are going to go to war with the Norwegians tomorrow, but I just wonder whether we are putting ourselves in a more vulnerable position.

Professor Gibbins: You are quite right, but if, for example, we have demonstrated CCS at scale and we know that we can do CCS, and we have left particularly some coastal power plant sites available to build coal plants, then we can build coal plants as rapidly as the money is there to do it. If people are not prepared to pay for coal at a time when coal is more expensive than gas, clearly we cannot have it, but we can have the options. I think one of the valuable things in long­term energy planning is options, and an option is valuable even if you do not exercise it. It is a back­up, and you can guarantee that if you keep options open, you will be seen as backing losers, because not all of the options will be exercised, but, hey, you want more options than you need. You don't want to have just no choice. I think we can see CCS on gas as also a way of keeping an option open for coal even if we don't do coal CCS.

Q38   Dr Lee: But in terms of preventing the diversification of energy sourcing—let's say marine sources or whatever—is there a danger with CCS, in being so successful at managing CO2 emissions from gas and from coal, that wave technology, the Severn barrage and all those other things that have costs attached to them will be less likely to happen as a consequence of the success of CCS and therefore we will be less likely to be energy independent or as independent as perhaps we might have been? Dr Kennedy: If there was only a small investment needed through the 2020s, it could be dominated by CCS but, given the scale of what we are talking about, which is 40 GW and about 30 power plants over a ten­year period, that's going to need nuclear and gas CCS and coal CCS, onshore and offshore wind and probably marine as well, so we will have a very diversified mix.

Chair: Thank you very much. As ever, that was an extremely interesting and useful exchange. I am sure we look forward to seeing you again before very long.

Lord Turner: Thank you.

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