Examination of Witnesses (Questions 39-65)
NICK MOLHO, SIMON SKILLINGS AND CHRIS LITTLECOTT
12 OCTOBER 2010
Q39 Chair:
Good morning and welcome. You probably heard the previous evidence.
Would you like to introduce yourselves as this is the first time
you have been to this Committee, at least under my chairmanship
anyway?
Nick Molho: I am
Nick Molho, WWF's UK Head of Energy Policy.
Simon Skillings:
I am Simon Skillings, Senior Associate at E3G. For those you
of you who are not familiar with E3G, it is a small NGO working
in the public interest on sustainability issues.
Chris Littlecott:
I am Chris Littlecott, Senior Policy Advisor at Green Alliance,
the independent think-tank.
Q40 Chair: Would
you like to say whether you think that the Government's aims for
an EPS are appropriate and adequate given the context in which
they have been put forward?
Simon Skillings:
Shall I kick off on that? I think, as we heard in the last
session, that the scale of the challenge is to do with decarbonising,
or nearly decarbonising, the power sector by around 2030, which
is a huge challenge. The EPS is one important—but
just one—tool in the toolbox to achieve that. Therefore,
if we are looking at the objectives in the round, EPS is insufficient—it
is part of the overall kit that we have to use.
Nick Molho: If
I may just add to this, I think the advantage of an
EPS, especially an EPS that is focused on a plantbyplant
basis, is that it gives you a clear longterm physical
certainty as to what type of plants can and cannot get built as
part of a decarbonised power sector, so that gives you that
longterm market signal. However, when you are dealing with
new forms of technology that need to go from the demonstration
stage to a substantial deployment level, such as CCS, offshore
wind and other forms of marine renewable energy, an EPS does need
to be complemented with appropriate levels of financial incentives,
whether they be renewable energy financial incentives or the incentives
that could be provided for the CCS demonstration programme.
Chris Littlecott:
I think the one particular comment which needs to be made
about the coalition agreement language on EPS is that it is rather
a selfreferential statement just about coal in that
"we will set an EPS so that our coal plants meet the EPS".
That really needs to be fleshed out into a viable, credible
market signal and, as we heard in the first session this morning,
we would argue that that also needs to encompass gas within its
scope. Whether that is across the same time frame is something
which could be considered.
Q41 Chair:
If we had a floor price of carbon, however, and if we combined
that with the other targets we have got reducing emissions, would
that be sufficient to drive CCS technology and other low-carbon
technology? Could that mean that an EPS would actually not be
needed?
Simon Skillings:
Clearly we are operating in the world of the subjective here.
There is a big, big difference between an EPS and a price
signal. What an EPS does is it creates a secure future volume
opportunity for low-carbon technologies. What it does, if you
like, is it triggers that fundamental competitive process. There
is a bunch of customers out there. I can't be competed away
by high-carbon stuff that might be cheaper. There is something
worth going for here. That works right back through beyond the
utilities back into the supply chain. It is why it is critical
that we begin to look at an EPS that is setting aspirations out
over 20 years because where it really matters is in driving that
supply chain investment. There is a volume out there that
they are heading for. With a price signal, you have got
something very different. In business, people are used to prices
being the consequence of competition and are clearly very worried
about prices that are set by policy and by regulators but, more
importantly, I think what you have with a price signal is
you have an optout. You have an optout which is incurring
that cost and passing it through to your customers, which an EPS
does not give you. So I think one of the key objectives
of the market reform process is to create the secure future volume
for low-carbon technologies and, I think to our mind, EPS is an
altogether more effective way of doing that than purely pricing.
Nick Molho: If
I could just add to this, I think one of our concerns with
a floor price EU ETS is that you have issues with respect
to exactly how you set the minimum price. It is not very clear
at the moment, for example, at what level you should set the minimum
carbon price to make CCS financially attractive to invest in,
for example.
Equally, from an implementation point of view, if
we were to have a floor carbon price for the UK only, given
that we are operating within an EU emissions trading scheme, there
could be various implementation issues that could make that quite
complicated. In contrast, a plant-based EPS just tells you, technically
speaking, exactly the type of plants that can or cannot get built
as part of a decarbonised power sector and the level is fixed
by reference to particular dates, so it gives you a really clear
pathway for investors.
Chris Littlecott:
I think the complementary point on this is that the value
of the ETS comes in assisting the industry and power sector decision
makers to trade off between relevant competing technologies, so
at the moment the ETS carbon price has helped the shift from coal
to gas. What it is not good at is tackling the other barriers
to new technology development or nonprice barriers. You
would expect that with a carbon price we would all be doing
energy efficiency, but there are so many nonprice barriers
to that, and what we are looking at, in terms of CCS and other
new technologies, is that you need other mechanisms to tackle
those market failures that are not tackled by the carbon price
alone. That is why we have always been clear in talking about
the need for an EPS as part of a package alongside the financing
support for CCS demonstration, which I am actually very worried
about at the moment, and the broader market reform. As a package,
we see that as a deliverable that could actually catalyse
the UK CCS industry.
Q42 Chair:
Would one alternative be, in relation to new power stations, to
use the planning system to say you cannot build a new coal-fired—or
perhaps even in due course a new gas-fired—power station
without some sort of abatement technology? Would that eliminate
the need for an EPS?
Simon Skillings:
There are clearly a number of ways you can achieve the
objective. There is always a danger in starting the discussion
around detailed mechanisms rather than around the objectives you
are trying to fulfil. To my mind, the clear objective that we
are aiming to achieve here is to create that secure volume for
low-carbon generation. And, yes, there are many ways that that
can be done there. Ways other than the EPS tend to look increasingly
centralist, which may be good or may be bad, depending on your
views. With EPS, we have a clear option that is on the table.
We have an option that has been tried extensively around the
world and, in an analogous form—through the large combustion
plant directive—has been demonstrated to be very effective
in driving disinvestment and therefore investment decisions.
Q43 John Robertson:
WWF and Greenpeace have proposed a very specific EPS design of
300 gCO2/kWh for all new generating plants from now
on and then tightening it to 100 by 2025.
Nick Molho: That
is correct.
Q44 John Robertson:
Could you explain why you support this design and whether you
have identified any other possible weaknesses within it?
Nick Molho: Our
proposal first of all would be to introduce enabling powers for
an EPS as soon as possible, because that would send a clear market
signal that the Government are serious about introducing an EPS
and then in followup legislation having the clear levels
set out. Our suggestion to introduce a carbon intensity level
for an EPS at 300 gCO2/kWh averaged over a one-year
period for new plants was chosen deliberately for two reasons.
First of all—and this point was discussed in
the previous session—it does incentivise the efficient use
of gas. So essentially what it would encourage is to build gasfired
CHP-type plants for that initial period. What is important when
you are dealing with gas-fired CHPtype plants is to look
at not just the carbon intensity of the electricity generation,
but the heat generation that it displaces. If you look at both
components, that takes it below 300 gCO2/kWh.
The other point to make is with respect to CCS.
Under the current CCS policy framework, the demonstration of CCS
is limited to 300 MW of a plant's capacity. If I could
give you the example of the proposed plant at Hunterston in Scotland,
which is a 1.8 GW coal plant, if you did not have an EPS limiting
those CO2 emissions at 300 gCO2/kWh, you
would end up with this 1.8 GW coal plant that would have CCS that
would capture only 17% of the emissions of that coal plant. So
the other 83% of the emissions from that coal plant would remain
unabated and would actually result in the plant having an average
overall carbon intensity of 650 gCO2/kWh, which is
more than the current average carbon intensity of the UK power
sector.
Q45 John Robertson:
Given that the CCS technology is not there, do you think that
this is a time to be introducing EPS? Particularly when
we talk about coal, should we not be waiting until we actually
have the technology in and working?
Nick Molho: Ultimately,
I think the key thing about the EPS is that it is about the appropriate
sizing of CCS demonstration plants. This might be something that
Chris wants to say a bit more about, but the key point we are
making is that you should avoid building enormous unabated fossil-fuel
plants where you are just demonstrating CCS on a tiny fraction
of the capacity of the plant. You are much better off building
smaller plants that can comply both with the emissions performance
standard while demonstrating CCS. That actually really helps.
Given the fact that the value of the public levy for CCS under
the Energy Act could amount to up to £10 billion over 15
years, it is really important, especially in the current climate,
for the public to know that they are getting 'climate value for
money' out of projects. Having a stringent EPS to start with
of 300 grams gives you that certainty that you are investing in
something that will result in emission reductions from day one
and that also you are investing in a technology that aims
to comply with a binding emissions performance standard in
the long run, which we suggest should reduce to 100 grams by 2025.
Q46 John Robertson: To
be fair to any kind of research and development, you never expect
to reach your target at the beginning. As you develop, you will
lower your target and reach where you want to go. If we set a target
such as you are talking about at too high a level, there
may be a disincentive for anybody actually to try and achieve
the future targets that are going to be there simply because they
cannot meet that initial target. Do you not put yourself in a position
of where, by setting these targets, you actually are counter-productive
to what might be the needs of the nation in the long term?
Chris Littlecott:
Shall I come in on that just to make it clear? As Green
Alliance, we have played a convening role over the last couple
of years working very extensively with industry and the power
sector as well as the NGOs. We do not have our own set position
on what we think an EPS would be, but we have worked very closely
to try and find ideas which would work for all concerned.
I think there are two important things here.
One is that the debate on EPS has shifted from something that
started off as just tackling unabated coal to being this broader
thing about how we decarbonise the power sector. Along with that,
you've seen an initial industry reaction of, "Oh no, we might
be being forced to do something we don't want to do," to
actually very constructive engagement from industry—from
the power sector but particularly equipment suppliers and manufacturers—about,
"Well, what could work? How could an EPS build the market
for CCS, build the market for low-carbon technology, and what
might be a framework which makes that happen?" There are
actually some interesting industry ideas that are not so dissimilar
to the WWF perspective.
Q47 John Robertson:
So would I be right in thinking that perhaps, unlike your colleague
at the end, you have a more flexible way of looking at it
in that you drive in hard targets to begin with but you would
be more flexible in driving towards, in effect, by the time we
get to 2030 or 2040, hard targets then?
Chris Littlecott:
I think the ideas that are coming out of industry actually end
up looking quite similar in shape to some of these ideas, which
is giving the flexibility you are talking about to those first
plants. You could do that by saying, "We recognise that
CCS plants will have some downtime and they will need to be testing
their technology." Perhaps we apply the EPS but give them
a percentage of wriggle room so that they are not disincentivised
from actually building CCS. That could certainly be incorporated
into a model, but ending up at a low-carbon outcome,
which is the same as the WWF wants.
Q48 John Robertson:
Some people have been suggesting that we should allow the generators
an average of emissions across all their fleet of power stations
rather than the individual power stations themselves. Would that
be acceptable? Would it be more flexible?
Simon Skillings:
Shall I pick up on that? You can clearly design EPS in
many, many ways. Those different designs will have impacts on
potentially nearterm emissions. They will have, potentially,
impacts on investment and disinvestment decisions. They will potentially
have impacts on market structure incentives around the risk and
risk allocation in the market.
Now, EPS applied to a portfolio is really quite
a flexible mechanism—a bit like a broadbrush
price signal—and, if you like, comes a little way away
from price towards volume but does not go the complete way. It
allows larger companies to manage their risk more effectively—presumably
more effectively than smaller companies unless there is some secondary
market that enables them to do it. I guess what I would
say is, as with all energy market mechanisms, "Be careful
about market structure implications and outcomes; are they what
you want?"
Q49 Dr Lee:
Mr Skillings, E3G recommended that EPS should not be applied
to imported electricity because it might jeopardise the building
of European interconnectors. Would not importing high-carbon
electricity be a risk to the UK's low-carbon ambitions?
Simon Skillings:
One of the great challenges that we have in the UK and across
Europe is that our traditional approach to energy policy is highly
nationalistic, and there is a good chance that we could carry
on doing that for the next decade or two. But if you start looking
out over 20, 30 or 40 years—out to 2050—we can't.
Realistically, the lowest cost and most secure solution to our
energy future is an international solution where there is a sharing
of resources between countries. One of the big challenges we
therefore have is how we deliver our shorter-term ambitions nationally
while keeping an eye on the fact that we need to support and drive
European integration going forward?
I would say we are relatively fortunate in the
UK at the moment in terms of solving that problem because we have
relatively little interconnection. I guess our view would be
that we must put a lot of political force behind the single market
agenda, which involves harmonisation of subsidy mechanisms and
regulations. So it must be a key part of any EPS discussion
that we are looking towards a European EPS rather than purely
a UK EPS. We can take that decision earlier in the UK because
we are not significantly at risk for a while to the issues
you describe. However, if the situation has not moved in 20 years'
time, there will be a significant potential risk there.
But we believe there are great advantages in moving early in the
UK, particularly around CCS and making the UK an attractive place
for those industries that know their long-term future has to be
CCS. If we can actually move and drive forward a CCS agenda
in the UK, we have the potential actually to trigger some green
growth around carbon capture and storage, but there is clearly
a longterm risk and we must drive forward on the European
stage.
Q50 Dr Lee:
In summary: interconnect first, carbon second—try to get
to a point where we are interconnected and then start trying
to bear down on the emissions of carbon.
Simon Skillings:
No. I would have said it is in tandem, actually, but I recognise
the incredible political difficulty we have in Europe. We basically
have a whole series of different parts of Europe running
different agendas at the moment. You've got the UK and Iberian
peninsula trying to work out investment problems. You've got
the middle bit of Europe trying to work out how it needs to change
its markets so that it can interact and share balancing services
to absorb wind, and you've got the eastern part of Europe doing
absolutely nothing—sitting on its hands waiting for the
cohesion fund to come along and solve its investment problems.
That is not an easy problem to solve; I don't for one minute
claim it is not. It is not something we can sort out immediately,
but it must be something we keep pressure on over the next five
or 10 years.
Q51 Dr Lee:
I would suggest that maybe it is somewhat idealistic. History
does not teach us that the Europeans work together terribly well.
Often, previous disputes and wars have been over natural resources,
and perhaps there is a danger of that being the case in the
future. Therefore you need either to adopt an approach that we
try to work together now, or we look after our own back yard,
but I guess I will leave that hanging.
What potential do you think there is that an EPS might encourage large-scale switching to unabated biomass, moving on to something separate? Do you think there is a danger that an EPS could encourage large-scale switching to unabated biomass?
Simon Skillings:
There is a danger of all sorts of things if it is poorly designed.
I think, as was described in the first session, if we make
sure that the rules for biomass are equitable with the rules for
other forms of fuel, that will not happen. It just highlights
the detailed complexities that you will get into with EPS, but
they are surmountable—they are all surmountable.
Q52 Dr Lee:
In terms of biodiversity—the lack thereof—and food
security, if we are growing lots of—
Nick Molho: No.
Q53 Dr Lee:
Are these all in the mix, do you think? I am just conscious
that if it goes down that path, we will end up importing our food,
which has security implications and also carbon implications.
Nick Molho: No, you are right. These are things that we absolutely have to think about, and that's why we do need something. What we have been calling for in our responses is an introduction of some form of certification criteria for biomass, because one of the key things for biomass is that you have to understand the land-use change implications. There is a very, very simple example in the UK. If we are replacing 2% of forests with 2% of agricultural land on which we are going to be using biocrops, we are losing those carbon sinks, which in turn actually ends up having a negative impact on our overall emissions. So there is a real need to monitor that. I guess you can do that in two ways with respect to a plantbased EPS. You can either just look at the direct emissions on site, or you actually take a broader, more holistic view and try to look at the whole lifecycle of the greenhouse gas emissions of biomass, which would take into account the land-use changes as well as the direct emissions on the site. This is something we definitely need to work on, but it is precisely your point that it would be very helpful to look into during the electricity market reform.
Simon Skillings:
Can I just come back on the Europeanisation because I think
it is a very, very important issue? If we look forward into
the longer term, I think there are two important issues to
remember. One is that the decarbonisation of the economy as a whole
will be hugely more expensive if we all try and do it ourselves.
Now, that might be a price worth paying. From a UK
perspective, we are actually endowed with far greater potential
natural resources than elsewhere in Europe. So there is also
a serious export opportunity over the decades in the future.
I do not understand the details of geopolitical risk, and
a proper risk analysis would have to be done over those time horizons,
but it seems to me that they would have to be pretty severe risks
not to want to take those opportunities.
Nick Molho: If
I could add to this, I want to draw the Committee's attention
to the recent report that was prepared by the European Climate
Foundation: the Roadmap 2050 report. I would be very happy to
send a copy of the report to the Committee. That report
was put together by various consultants but also had really a lot
of interesting feedback from various players in the industry.
So it is a very compelling report. What it goes to show is that
it is actually technically feasible to envisage a future
EU energy system based on up to 100% renewable energy, with a certain
amount of backup generation, if we make the right interconnection
infrastructure decisions in the coming years to link up the different
European grids. So, after doing a very detailed technical
analysis, they found interconnection to be by far the cheapest
way of dealing with the intermittency of certain forms of renewable
energy generation. Unfortunately, we cannot put in place an interconnection
infrastructure unless we work together at EU level, so we really
think that that should be a priority in terms of our engagement
with the EU energy policy.
Chris Littlecott:
Perhaps I could just come back to the question of the relationship
between an EPS and the European scene. Given the pressure that
we have in the UK, both to invest in new plant and to decarbonise,
as the Committee was saying this morning, it is obvious that the
UK has to be making decisions over the next two or three years
about its future market structure and how we are going to roll
out that decarbonisation. The EPS could be a part of that,
and obviously in the longer term it would be great to have a similar
EU solution on that, but it is certainly not going to happen in
the short term. We have been involved in those conversations
at EU level. But it is conceivable that the UK could work with
other Governments who are interested, and there has actually been
interest in the Netherlands within Parliament, but also with their
broader stakeholders of industry and NGOs actually calling for
an emissions performance standard. Their CCS hub around Rotterdam
would be entirely happy with that outcome and that would be part
of a hub of UK-Netherlands interconnection.
But I think the other thing it comes back down to
is the question of how does the UK leverage its influence internationally?
Part of that is having CCS technology available and demonstrated
in the UK and a new market and a new industry coming here,
but it is also about how do we export the policy framework that
enables CCS to happen? I think, depending on the outcome
of the comprehensive spending review, that the UK is on the cusp
of having a very good policy framework that brings together
CCS demonstration financing and an emissions performance standard
and energy market reform that would enable CCS to happen. That
then is a model which can be picked up and taken elsewhere.
We have learned from the emissions performance standards in California
that they then had to add their CCS financing and other measures
to that afterwards. We are actually very close to that and that
is why I think that in the next few months, in terms of the
energy market reform consultation and the outcome on the levy,
we need to see that as a whole, and getting those things
working together is actually part of our international influence
as well as our domestic delivery.
Nick Molho: Can
I come in there on a tiny point? I obviously endorse what you
have just said but also it is just worth remembering—because
it's very easy when we're talking about the EPS to end up getting
bogged down just looking at the CCS element of it—that obviously
while EPS has a really positive role to play in helping to bring
CCS forward, ultimately an EPS is also there to help the deployment
of low-carbon technology such as the wide range of renewables
that an island like Great Britain can actually really help to
push forward. So, when looking at the different levels at which
we could set an EPS and the various implications, it's also worth
remembering that we have an enormous potential in our seas as
well.
Just to give you a very quick example, the Offshore
Valuation Report that was put together by Government and by various
industry players back in July found that by just using 29% of
our practical offshore resource—the resource offshore that
can actually be used for renewable energy deployment—the
UK could become a net electricity exporter by 2050 and create
around 145,000 jobs within a UK offshore renewable energy
industry. It is interesting that that report is based on a scenario
of very high electricity demand. It imagines that electricity
demand goes up by 74% from 2010 levels to 2050, which we think,
through energy efficiency measures that the Government could put
forward, we could even lower. So it is these sorts of findings
that show the abilities that our seas can give us in terms of
renewable energy and what they can do for employment in the UK
that are really worth considering.
Q54 Chair:
The design of the EPS obviously has an impact on whether it drives
investment in other forms of low-carbon technology. Do you have
a view about whether, looking across companies that deploy
a variety of technologies to generate electricity, it is
desirable, therefore, to set them a companywide target
so that they can then direct their investment over a period
of time towards low-carbon technologies or the ones that they
would choose for themselves?
Nick Molho: From
WWF's perspective, we have looked into the different designs in
quite a bit of detail, so between the bubble approach, the portfolio
approach that you are describing and the plantbased approach.
The problem with the portfolio approach is that it does give rise
to a bit more investment uncertainty in the sense that with
a plantbased EPS you know exactly technically what
can or can't be built—there's no ambivalence about that—whereas
with a portfolio approach, actually, you're still leaving the
door open to a certain amount of unabated fossil fuel plants being
built because as long as you have sufficient renewables in your
portfolio to offset that, you can still build these sorts of plants.
So it does not send the same clarity in terms of a market signal.
But from a market point of view, you also create, potentially,
certain barriers to new market entrants because if you are a new
market entrant and you do not have a high level of renewables
in your portfolio because you're new to the UK market, compared
to other competitors that have a much wider portfolio plant,
you could end up having to build power plants that are far less
carbon intensive than what some of your rivals have to do because
they have a wider portfolio. So we do think that one of
the risks with a portfolio approach is that you could have barriers
to new entrants which a plant-based EPS does not because it doesn't
pick any winners from the outset. Everyone who wants to build
a new power plant in the UK has to comply with the same requirement.
Simon Skillings:
I would make two quick points. Any system where the value
of an asset depends on corporate structures seems to me inherently
unstable because corporate structures can be changed. They can
be redesigned to maximise the value of the asset and you would
really need to think through very carefully what incentives you
are putting on corporates and the way they structure their assets.
The second point is that I think it is a mistake
to think of the EPS primarily in terms of the signals it gives
to energy utilities. The key industries that we are looking to
give signals to here are the providers of the low-carbon technologies.
They are the Alstoms, the Siemens, the GEs. These are the people
who are really going to be incentivised by EPS, and interestingly,
of course, these are all the companies that are strongly in favour
of an EPS because it helps them so much with their internal business
cases in investing in the development of these new technologies.
Q55 Chair:
So in terms of the direct impact, an EPS may act as a deterrent
to people not to build unabated fossil fuel plants. It doesn't
provide a direct incentive in favour of CCS or, indeed, anything
else.
Simon Skillings:
No, and I think that is right. I think an investment decision
is always based on a combination of expectations of volume
and price. Clearly, when you are working in the supply chain,
price is an altogether more nebulous concept and you do actually
have to work much more off future market volume expectations than
price expectation. But, no, I am absolutely clear that EPS is
about creating a volume opportunity. In parallel, it requires
a system of incentive mechanisms that go way and beyond the
current system, and, I think, as we heard very well explained
this morning, a system that depends upon continuing to have
fossil fuel plant operating at the margin is really quite bizarre
given the world we want to move into, and we need a new way
of incentivising investment, which is probably going to be around
some form of longterm contracting or feedin tariff
system to create the incentives. It is difficult to think how
we can avoid that ultimately.
Q56 Chair:
So reforming the electricity markets is at least as important
as an EPS in terms of achieving that objective.
Simon Skillings:
There are many other important changes that need to be made, absolutely.
Q57 Chair:
We are going to have an Energy Bill later in this Session. Is
that too early to introduce EPS?
Nick Molho: From
the WWF's perspective, we think that it certainly would not be
too early to introduce enabling powers for an EPS in the Energy
Bill. We appreciate that the levels at which you need to set
an EPS need to be looked at in more detail and we think that is
certainly where the electricity market reform comes in handy so
that we can make sure we take a properly well-informed decision
as to the right level at which to set the EPS that takes us to
a decarbonisation of the power sector by 2030. By introducing
enabling powers in the Energy Bill, it would already show to the
markets and the industry as a whole that the Government are
clear about ultimately introducing a binding EPS, and we
think that would be a move in the right direction. Inserting
an enabling power is a very sort of simple amendment to make.
We are not yet looking at the details of it—that is for
the electricity market reform—but it would be a very
good thing to do.
Simon Skillings:
It seems to me that the ultimate complete energy policy package
is clear about what are the things we want to be delivered, what
are the things that really matter to us and who is responsible
for doing it. Within that context, I think an EPS can be
introduced and can be introduced early.
Q58 Sir Robert Smith:
Can I just pursue one of the arguments that the EPS could
have a perverse effect on the potential for CCS because developers
might think, "Well, if the CCS isn't going to come off, I'd
better not build my carbon plant. Because of the EPS, I will
be better off building renewables or nuclear," and therefore
if there is not new carbon plant, there will not be CCS.
Nick Molho: Ultimately—and
Chris might want to complement this—the whole point with
the EPS is that it has to be accompanied by the right amount of
financial incentives to take it through what is known as the 'valley
of death'—from the demonstration stage of the technology
to substantial deployment. So, yes, in order for CCS to happen,
you are right that, in parallel with EPS, we do need financial
incentives that allow investors to invest in the CCS demonstration
programme with the right sort of back-up so that we can get to
the stage where the Government assist the technology to be proven
before it goes ahead. Chris, you might want to add to that.
Chris Littlecott:
I think there are two things that relate to the demonstration
of CCS and the role of new investment. One is how severe you
make an EPS when you are applying it to demonstration CCS plants.
I think there would be a very good case to allow additional
flexibilities for the first wave of plants, but then you need
to accompany that with either a progressive tightening or
a future signal to the level of performance that will be
required across the industry as a whole during the 2020s,
which was what was being discussed in the first session this morning.
What we have to avoid is a situation where we
may currently be at the moment where people building CCS demonstration
plants believe that they will be continuing to compete against
unabated gas in the 2020s and into the 2030s, so this is what
Simon says about creating the scale of the market opportunity
and looking at the competitive basis. Giving a future signal
to an EPS for the 2020s is actually a good way of incentivising
people to do CCS earlier, because they believe that they will
then be well positioned ahead of that time.
Simon Skillings:
I think we need to be clear. The problem you describe is indeed
a problem, but it is a problem derived from decarbonisation—the
problem that you build a fossil fuel plant in the expectation
that CCS will work, it doesn't, and you are left with a stranded
asset. That is nothing to do with EPS; that is a function of
decarbonisation. It can be caused by a high carbon price; it
can be caused by whatever instruments are used to decarbonise.
So that is a key issue that needs to be addressed through
a welldesigned demonstration programme that seeks to
minimise the costs to society of those inherent risks.
Nick Molho: Just
to build on that, ultimately it goes back to the fact that that
is precisely why we need to avoid locking ourselves into a high-carbon
pathway and why, as much as possible, we need to focus investment
on the cleanest forms of renewable energy, if we want to avoid
that sort of situation.
Q59 Sir Robert Smith:
Can you think of some examples where setting a standard like
EPS has been effective in stimulating technology?
Nick Molho: Absolutely.
I would like to refer you to a report, which I am happy to provide
the Committee with afterwards, that was prepared by the Pew Center
last June as part of its series of coal initiative reports. It
looked at the impact that introducing binding standards to monitor
sulphur dioxide emissions and nitrous oxide emissions had on the
potential of developing technologies to capture these gases.
What it found in the case of sulphur dioxide emissions was that,
in the various countries where binding plant standards were introduced,
introducing a plant standard actually helped to reduce the
cost of flue gas desulphurisation—FGD—which is what
helps to capture sulphur dioxide emissions. Exactly the same happened
in Japan and Germany in the 1970s and 1980s when plant-based standards
were introduced to limit the nitrous oxide emissions from those
plants, and that in turn helped to reduce the cost and improve
the cost-effectiveness of selective catalytic reduction technology—SCR—which
is what allows you to capture nitrous oxide. So it has been proven
to be very effective.
Simon Skillings:
Personally I think we need to separate in our minds this idea
of EPS being about driving innovation. They are separate things.
EPS is about creating a market for low carbon technologies—there
are lots of those that work. We need separate and clear innovation
policies that are targeted on pulling through technologies that
are immature and in need of help. You are not going to do the
two things with one instrument.
Q60 Sir Robert Smith:
Turning back to the European interaction, what sort of signal
does the fact that we are having to go down the EPS route send
to our European colleagues about our faith in the ETS?
Simon Skillings:
I have always been amazed when I am over in Brussels
at quite how interested everyone else is in what happens in the
UK. They are very, very interested in what we are doing with
our power system. We do remain a thought leader in Europe,
but I think now the key difference between where we are and where
most of the rest of Europe is that we have reached that point
where investment is needed. That point has not been arrived in
most of western Europe—and, as I say, in eastern Europe
the solution is being viewed elsewhere. In most of western Europe,
the problem is about integrating the renewables; it is not about
building new largescale capacity. So they are looking at
us, I think, in a very interested way as to how we are
tackling a problem that they are going to have to tackle
in a few years' time. I think the report that Nick
referred to by the European Climate Foundation flags up very,
very clearly that for all of Europe ETS is not sufficient and
requires complementary measures to drive investment.
Nick Molho: Just
to add to that about the impacts it could have on the perception
of how the ETS would work, back in May, the European Commission
issued a report looking into whether or not we should, at
EU level, increase the emissions reduction target from 20% to
30%. What the Commission found was that because of the impact
of the recession, we have a considerable amount of unused
allowances in Phase II of the scheme, which runs from 2008 to
2012. The scheme allows the carrying forward of those allowances
into the next phase from 2013 to 2020, which is the phase that
is supposed to help us reduce our emissions by 20% by 2020. I would
just like to read you a very short sentence that comes out of
that report from the Commission. It stated: "Between 2013
and 2020 and despite the linear reduction of the ETS gap, no absolute
emission reductions in the ETS need to take place due to the availability
of a large buffer of allowances from the period 2008-2012
and unused international credits." So this really shows
that the Commission itself is very aware that the system as currently
designed is really inadequate to take us to a longer-term
pathway.
Q61 Sir Robert Smith:
Do you see a European-wide EPS as a response, or reducing
the price—the cap—of the ETS?
Nick Molho: Sorry?
Do I see?
Sir Robert Smith: Would
it be a European-wide emission performance?
Nick Molho: Ultimately
I think that is what we should strive for, but I think we
will be more efficient in getting to that point if we take the
lead and provide the example. I think Lord Turner said this morning
that it is very interesting how the rest of Europe is always very
interested in what happens in the UK and likes to follow. We
put in place a very liberalised energy market that the EU
has now been trying to implement through a series of three
directives. I think, in a very similar way, we should
show the way forward with respect to introducing an EPS at EU
level but, ultimately, I think an EPS would be more powerful.
It is important to note that an EPS does not exclude an ETS.
You could have both, but I don't think the ETS alone can
give us what we want.
Q62 Dr Lee:
Moving on to international negotiations on climate change and
measures to mitigate it, could you explain the potential role
for sectoral approaches—and by "sectors" I mean
power and land use—to international agreements and how an
EPS could support this?
Nick Molho: I think,
from the international perspective, power sector emissions represent
a considerable amount of our emissions. I think for the
UK it is in the order of 45%[1].
It is the biggest polluting CO2 emitting sector in
our economy. So if the UK was to take a decisive step in
introducing an EPS ahead of other nations, it would put us in
a very strong position in international negotiations going
forward, because not only would we have been the first country
to introduce a Climate Change Act, for which there is no
equivalent at the moment anywhere else, but if we can also be
the first country to have introduced a clear emission performance
standard which shows that we are directly tackling emissions from
our largest CO2 emitting sector, it would put us in
a far more credible position than a lot of other developed
economies during the international negotiations.
Q63 Dr Lee:
Would it be better for us to demonstrate CCS on a large scale
in a practical sense rather than having a policy position
on EPS? Perhaps we do both, but I am just saying in terms of
the impact on the people who matter, which is basically the Chinese
and the Americans.
Nick Molho: I think
there are two aspects of it. On the one hand you have the technological
rollout side of things that you need to consider, so that
is where the CCS demonstration is helpful and it is where, for
example, if we are able to demonstrate CCS doing a post-combustion
demonstration on a sub-critical coal plant, it could be of
great use to the Chinese to have plenty of sub-critical coal plants.
So the CCS aspect is important in terms of the technological
rollout, but then you also have the actual political or
the international policy side of how do we get to the situation
where we can get a really challenging emission reduction
treaty at UN level. We saw in Copenhagen there was a complete
deadlock and we did not really manage to get very far. I think
one of the reasons for that is that we did not have a clear
set of countries that were clearly leading the way in not just
having a good vision, but actually implementing their vision.
Having the UK introduce an EPS alongside funding demonstration
programmes for CCS could allow us to do precisely that because
we are showing credible actions for the vision that we are promoting.
Simon Skillings:
It seems to me that the logic flows through from the carbon budgets
that the Committee for Climate Change is setting and they are
being set in the context of international discussions. EPS is
part of the toolbox to deliver those, and, in combination with
other instruments, the great value comes if we can demonstrate
not only that economies are robust to decarbonisation, but actually
if we can trigger the green growth in new jobs that are available.
That then is the real message for the rest of the world.
Q64 Dr Lee:
Is there a danger, though, that if an EPS led to no coal
plants being built here, the Chinese and the Americans would say,
"Well, we are not going to do that because we have got loads
of coal that we want to burn"? What I mean is that, if an
EPS leads to no new coal, is that not a negative in the eyes
of the Chinese and the Americans?
Chris Littlecott:
I think much depends on what package is put in
place in the UK. I could very easily imagine a situation
where you have an EPS and demo funding and you actually have perhaps
two or three new pre-combustion coal plants coming forward—perhaps
an oxy-fuel plant—demonstrating CCS on existing coal plant,
certainly, and potentially new post-combustion super-critical
plant in the future, if we really needed it. Actually I do
not think it is a risk that we would end up with no coal if we
get the package right. I think, as per what I was saying
earlier, that this is partly about having the technology but it
is also about demonstrating that we have put together a policy
package which makes that happen. My understanding of where British
climate diplomacy has been over the last few years is that efforts
have been going into not only thinking creatively about the UNFCCC
process, but how we build the conditions for other key actors
in the international framework to want to engage. CCS is one
of those potential key catalytic technologies that could help
do that. You could potentially envisage a separate agreement
among a key cluster of developed and leading developing countries
that they would implement CCS as a step measure for their
power sector without necessarily having the whole package. I think
there are some creative things that you could do around CCS and
the broader framework that would help to catalyse that international
perspective.
Q65 Chair:
Is there scope for EPSs on a national scale—to look
at a country's total electricity generation—and introduce
those into international negotiations? It is a less challenging
requirement for a developing country to accept a gradually
tightening EPS than an absolute cap on its emissions.
Simon Skillings:
It seems to me that energy policy would be an awful lot easier
if we were clear about the carbon emissions that would be acceptable
or unacceptable from the power sector going forward over the next
20 years. So I do not jump straight from that to an instrument.
Once you are clear about that as a high-level objective,
you can then look at the options that are available and take a view
as to the extent to which you are happy for the market to make
those choices because there are enough choices and the costs are
broadly comparable or that innovation is needed to drive through
new technologies. But it seems to me that we are not yet clear
on the question "Do carbon emissions matter over the next
decade?"—EPS could help in that regard, as could a carbon
underpin—and I do not know that we have got a clear
view on that. With regard to the rate of decarbonisation out
to 2030, are we looking for 70, 100, 200? These will matter massively
in terms of then what makes sense in terms of the policy instruments.
Chris Littlecott:
I just wanted to pick up something that was not mentioned in the
first session this morning: the question of the 2030 timetable
as advised by the Committee. It is very interesting to see how
stakeholders from industry, the power sector and elsewhere are
working on the assumption that that is Government policy, but
it isn't Government policy. The 2030 target range has never been
accepted by the previous Government or the current one as its
kind of end point for the power sector to be on that decarbonisation
trajectory. I think that is the key central point for all
these discussions around EPS or energy market form or any other
mechanism we want to bring in, which is, "What is the trajectory?
What is the speed? What is the level of investment that will
be required?" Last year we hosted a twoday facilitated
dialogue for over 40 stakeholders from officials, regulators,
industry and NGOs, to discuss how we accelerate the commercialisation
of CCS in the UK. The No. 1 thing that came out of that was that
everyone said, "We need clarity on the 2030 time frame".
Alongside that, people then said, "An EPS could then be
one of the means by which you make that visible and tangible for
decision makers, but it needs the financial package put in place
and it also needs more strategic attention to transport and storage
for CO2." But I think that is
the situation we are now in as we go into energy market reform
which will discuss the EPS, and as we also see what comes out
of the CSR and whether we still have the levy to play with or
not. It is the messages around 2030 that will be increasingly
important as to how the whole picture fits together.
Nick Molho: In
that sense, we see it as really important that the UK Government
follow what has happened in Scotland, where the 2030 decarbonisation
objective is now reflected as a clear objective. It is the
sense of direction it gives you that is extremely important for
then ensuring that you have the right package of measures that
delivers the objective that you have set yourself.
Chair: Right, okay.
In that case thank you very much. That is another useful session
for us.
1 Note from the witness: " the UK power
sector accounted for 180 million tonnes of CO2 emissions in 2007,
roughly a third of the UK's emissions that year. See Page 4 of
WWF Evading Capture Report (http://www.wwf.org.uk/filelibrary/pdf/evading_capture_brief.pdf)" Back
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