Emissions Performance Standards - Energy and Climate Change Contents

Examination of Witnesses (Questions 39-65)


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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