House of Commons - Emissions Performance Standards

Emissions Performance Standards - Energy and Climate Change Contents

3 The role for an emissions performance standard

19. An emissions performance standard (EPS) is in essence a measure to limit the amount of carbon dioxide (CO₂) that can be emitted from electricity generating power stations. In this section we examine the use of EPSs in California and other American states before investigating the contribution an EPS could make to reducing emissions in a UK context.

UK Electricity market reform and the European energy market

20. The Government is conducting a review of a number of reforms to the electricity market, including the full establishment of feed in tariffs (which would be an alternative to the existing Renewables Obligation with a system of minimum payments for electricity generated from renewable sources), carbon price support (which would ensure the carbon price did not fall below a certain level) and capacity mechanisms (which would reward available capacity, rather than developers receiving all their revenues from electricity sales). It will consider an emissions performance standard (EPS) alongside these market reforms. The intention is to consider the reforms as a package so that any potential interactions and overlaps between measures can be properly analysed.[22] We heard from several organisations that supported this kind of holistic thinking and raised concerns that a piecemeal approach risked introducing multiple instruments that may work against each other.[23] The Sussex Energy Group told us that:

21. An EPS would also overlap with the EU ETS because the power sector falls within the EU ETS cap. This means that any increased emission abatement in the UK as a result of an EPS could be offset by less abatement elsewhere in the trading scheme.[25] This is discussed in more detail below.

22. We welcome the Government's decision to consider an EPS alongside a wider package of market reforms, rather than in isolation. However, we are concerned that interactions and overlaps with existing policies as well as proposed new market reforms are insufficiently understood. We therefore recommend that the Government commissions an independent review of regulations and market reforms in the electricity sector. The review should investigate the combined impact of new and proposed policy measures on energy costs, greenhouse gas emissions, energy security and the cost of compliance and should be conducted alongside the Government's own consultation.

Emissions performance standards in the USA

23. The first EPS for CO₂ was introduced by the State of California in 2007. The standard puts a limit on the amount of CO₂ new power stations can emit per kWh of electricity generated. The motivation for introducing the standard was threefold:

To encourage innovation and investments in sustainable energy and energy efficiency.
To seek to protect consumers from large future increases in domestic energy prices should a cap-and-trade scheme be introduced, by preventing investment in high-carbon infrastructure that would then be subject to expensive retrofits or emissions permits in order to be able to continue operating under a cap-and-trade scheme.[26]
The EPS was applied to electricity imported from outside the state as well as that generated within the state. This was to stop utility companies from renewing long-term contracts for coal-fired electricity from outside the state that would negate the effects of the proposed state-wide cap-and-trade scheme.[27]

24. The Californian EPS requires that the performance level of any new power station (or renewed contract of longer than 5 years) must be no higher than the emissions rate of a combined-cycle gas turbine plant (CCGT), which was subsequently determined to be 1,100 lbs CO₂/MWh (equivalent to approximately 500 gCO₂/kWh). The EPS applies only to baseload plant; plant that provides peaking or load following capacity is exempt.[28] However, it should be noted that since emissions from gas-fired power stations fall below the 500 gCO₂/kWh threshold, gas-fired plant that provides baseload capacity is still permitted.

25. The impact of the EPS has been to effectively rule out building any new unabated coal plant, although most of California's electricity already comes from natural gas, nuclear, hydro and other renewables.

26. A number of other states, including Illinois, Montana, Washington, Oregon and New Mexico, have followed California's lead and introduced their own EPSs. The scheme in Montana has a different design and requires coal-fired power stations to capture 50% of their CO₂ emissions. The Illinois scheme also makes the use of CCS mandatory.[29]

What could an EPS achieve in the UK context?

27. The Coalition Agreement promises to "establish an emissions performance standard that will prevent coal-fired power stations being built unless they are equipped with sufficient carbon capture and storage to meet the emissions performance standard".[30] In its written submission, DECC elaborated on the purpose of an EPS, saying that it considered that "an EPS should provide longer term certainty to investors over future regulatory measures, closely linked to development of CCS technology [and] that an EPS should contribute to reducing emissions in the UK electricity sector and complement other market instruments."[31]

28. The evidence we received for this inquiry revealed a wide range of potential objectives for an EPS, beyond those set out by the Government. The rest of this section outlines the possible aims for an EPS and sets out the likely effectiveness in each case.

COULD AN EPS ACHIEVE CARBON EMISSION REDUCTIONS?

29. An EPS could be used to force the UK power sector to reduce its carbon emissions at a faster rate than would otherwise occur under the EU ETS. However, as we have already noted, this would not necessarily lead to any overall savings at the global level as any reductions achieved in the UK could be offset by higher emissions elsewhere in the EU within the overall EU ETS cap. Additional effort within the UK power sector, driven by an EPS, would also have the effect of reducing the price of EU allowances (because there would be additional allowances on the market from those companies that had reduced emissions under the EPS).[32] This may in turn lead to reduced efforts to cut emissions elsewhere in Europe. One way to avoid this problem would be for the Government to retire an equivalent number of allowances from the EU ETS,[33] although Ofgem pointed out that the legality of this option would need to be investigated.[34] In the longer term, the introduction of an EPS could lead to a tighter cap being set for future phases of the EU ETS than would otherwise have been the case. This would then bring about real reductions in carbon emissions.[35]

30. We did not receive any submissions suggesting that an EPS should be used solely to reduce emissions from the power sector. Nevertheless, we did receive a large number of responses, mainly from energy companies, that stated a clear preference for using the EU ETS as a mechanism to reduce emissions from power stations rather than introducing an EPS.[36]

31. We note that the current and third phases of the EU ETS are unlikely to produce significant reductions in emissions, since the recession has resulted in a large number of unused allowances that will be carried forward to phase three.[37] If the EU ETS is to be used to drive emissions reductions from the power sector, then the cap will need to be tightened significantly from its current level. However, it is very unlikely that agreement to this change would be forthcoming from all Member States.

32. We conclude that it would not be sensible to introduce an EPS if its sole aim is to drive immediate emissions reductions from the power sector since the EU ETS already exists to do this. However, we also note that the EU ETS cap needs to be significantly tighter than its current and planned future level if it is to be effective in achieving reductions.

33. An EPS will not result in any additional global savings to carbon emissions if they are offset by other participants in the EU ETS. It may also lead to a reduction in the price of carbon. In order to avoid these outcomes, the Government should consider retiring an equivalent number of EU allowances to those saved through the EPS. We recognise that there is some uncertainty about the legality of this option and the Government should seek to clarify this situation.

COULD AN EPS HELP AVOID "LOCK-IN" TO HIGH CARBON INFRASTRUCTURE?

34. Once built, most power stations run for many decades before they are retired. A new fleet of unabated fossil fuel plants built now that continues to operate in the 2030s and 2040s could therefore make achievement of Britain's long-term climate targets difficult and expensive. An EPS could however prevent new high-carbon power plants build built.[38] This would currently be likely to cover unabated coal and could be extended in the future to cover unabated gas and biomass. The benefits of avoiding "lock-in" to high-carbon infrastructure include:

Avoiding the risk of "stranded assets" if the future price of carbon makes them uneconomic to operate and therefore very expensive for electricity consumers.
Reducing the temptation to renege on carbon targets in the future once high-carbon power plants are up and running.[39]
Sending a clear signal about the UK's commitment to a low-carbon transition by ensuring that no new unabated coal-fired power stations are built (and in the medium-term, that no new unabated gas-fired plants are built).[40]

35. New coal-fired capacity is already required to have at least 300 MW fitted with CCS as a condition of planning consent. It is possible that the planning system could be used to make mandatory the use of full CCS on new coal-fired plant and potentially other types of plant too.[41] If this were to happen, an EPS targeted at preventing high-carbon lock-in would be redundant. Many of the energy companies that responded to our inquiry favoured the use of the planning system over an EPS to achieve this goal though it is not clear why they believe this offers a more effective guarantee that unabated coal and gas fired power stations will not be built than an EPS.[42]

36. We note that at this stage, CCS has not yet been proven to work at scale. Even if it is proved to work technically, there are still questions about how much it will cost and whether it would be economically viable to build and operate in the future. An EPS could help ensure that the UK does not become reliant on high carbon electricity in the event that CCS does not work at scale or proves too costly.

37. We conclude that an EPS offers a more certain and predictable way to prevent lock-in to high carbon infrastructure than other means. This goal itself provides adequate justification for implementing an EPS.

COULD AN EPS PROVIDE CLARITY ABOUT POWER SECTOR EMISSION REDUCTIONS?

38. The CCC has recommended an emissions reduction pathway for the UK power sector between now and 2050, which would require significantly decarbonising the sector by around 2030. This target has not yet been officially adopted but introducing an EPS could provide greater clarity and greater certainty to the electricity industry about the level and rate of emissions reductions that it is required to achieve.[43]

39. It is also possible that an EPS could be applied progressively to existing plant. In its written evidence, E3G told us that an EPS could be used to set a "clear timeline for the retirement or retrofitting of existing high-carbon plant."[44]

40. We conclude that an EPS could play a role in providing a transparent framework for regulating carbon emissions from the electricity sector by making clear the Government's expectations in terms of emission reductions from this sector. This would be an additional justification for its introduction.

COULD AN EPS STIMULATE THE DEVELOPMENT OF CCS?

41. Performance standards can give a clear indication of what the future market for low-carbon electricity will look like. This in turn can give confidence to investors that there will be a viable market for "green" electricity in the future and help to attract investment in and accelerate the development of low-carbon technologies. National Grid told us "An EPS [...] can provide a clear volume signal setting out the future requirement. The price of carbon becomes only indirectly relevant because the EPS provides an absolute requirement to reduce emissions".[45] We received a number of submissions suggesting that an EPS could help to stimulate the development of CCS technology. These arguments are described below. However, we note that CCS has yet to be proven at scale and may yet be found not to work or to be prohibitively expensive.

42. As CCS and other low-carbon technologies mature, so their costs are likely to decrease. An EPS could help push new technologies down the cost curve at a faster rate than would otherwise have happened. Green Alliance highlighted the fact that CCS does not look like an attractive investment option under the current policy framework. It argued that an EPS could be one element of a reformed policy package, which would provide a more "bankable" end point for when CCS would be required.[46]

43. Simon Skillings of E3G explained that an EPS would provide a different kind of incentive to a carbon price: an EPS would create a secure future volume opportunity for low-carbon technologies, which would give investors the confidence to know that they would not be undersold by cheaper but higher-carbon options. A price signal, on the other hand, leaves open the option of incurring the cost of using high-carbon technologies and passing it on to customers. Unless the cost of producing low carbon electricity (regardless of the carbon price) fell significantly, this would mean that high-carbon options would still be able to compete on price with low-carbon alternatives in the future.[47]

44. Environmental regulations have been shown in the past to help accelerate the development and deployment of new technologies. For example, WWF told us about research from the USA, which indicated that emissions standards for sulphur dioxide had helped to bring forward the development and bring down the cost of flue gas desulphurisation technology.[48]

45. However, the UK Carbon Capture and Storage Community Network (UKCCSC) and UK Energy Research Centre (UKERC) were cautious about accepting this argument, suggesting that: "this type of technology forcing only appears to work where no real alternative to the target technology is available".[49] Since fossil-fuels with CCS are not the only form of low-carbon electricity generation, there is a risk that rather than encourage investment in the development of CCS, an EPS would simply result in investors switching to other more mature forms of low-carbon technology, which are already proven and known to work at scale (such as nuclear and wind). ScottishPower told us:

46. We heard from a number of organisations that argued that rather than increase investor confidence an EPS would actively undermine investment in the development of CCS.[51] Industry needs long-term certainty about the market and regulatory framework, but they claimed that an EPS might create greater uncertainty. This is for three reasons:

If the EPS level was expected to change over time, or was expected to apply retrospectively to existing plant, this could create policy risk for investors who would not be sure how the EPS might affect their assets in the future. E.ON told us: "Energy companies would want to be clear what future requirements will apply to proposed new plants before they take an investment decision. The EPS should not be changed for new plants after the investment has been committed, unless the investor can fully recover the related costs".[52] This problem could be overcome by setting out clearly in advance any planned changes in the EPS and the timescale for their introduction.
An EPS could also introduce political risk for investors. That is, the risk that future Governments might make changes to the EPS.[53] Mr Farrow told us: "If an EPS is there as an instrument which Ministers in the future can tweak and change fairly easily, there will be a concern among investors that will see [...] periodic changes to an EPS in the future which will actually make it harder to judge the value of investments".[54] It should be pointed out, however, that considerable risks would also exist if the planning system was relied on to prevent investment in high carbon generating capacity.
CCS has not yet been demonstrated at scale and so there is still some uncertainty about whether it will work and what the associated costs will be. This makes investing in new power plants now that would be forced to fit CCS in the future unattractive. Ofgem provided an example: "a developer may not invest in a new plant with CCS fitted if it believes that it will be left with a stranded asset in the eventuality that CCS does not work and the station cannot meet the required EPS."[55]

47. The energy companies also claimed that an EPS could not be considered to be a direct incentive for developing new low-carbon technologies. This is because while an EPS would stop generators from using high-carbon technologies, it would not provide a positive reason to develop CCS or other low-carbon technologies. This is in contrast with policies such as the Renewables Obligation, which effectively provides a subsidy to renewable energy generators.[56]

48. This point was accepted by proponents of an EPS, all of whom argued that it should not be introduced in isolation but as part of a package of measures, which would include a financial framework for CCS.[57] This combination of measures, they believed, would provide the framework to encourage investment in CCS. Green Alliance outlined the three elements of a package that would be needed to provide a strong investment signal:

49. A number of other measures will also be required to support the development of CCS. These include the need to develop investment in local shared infrastructure, clarity in the planning framework and the establishment of an appropriate regulatory and legal framework, particularly around long-term liabilities.[59]

50. An EPS has the potential to provide certainty to investors that there will be a future market for low-carbon electricity. However, it is important to design an EPS which avoids the risk of undermining investor confidence by increasing policy and political uncertainty. We conclude that an EPS is more likely to be successful in encouraging the development of CCS technology and indeed other low carbon electricity generation, if it is introduced as part of a package of measures rather than in isolation. This should include some form of financing help in order to help reduce risk for investors. This could be an extension to the CCS levy, beyond the initial four demonstration plants, or some other mechanism.

COULD AN EPS ENSURE THE DEPLOYMENT OF CARBON CAPTURE AND STORAGE?

51. An EPS could be used to force generators to install and operate CCS technology on their power stations, once it has been successfully demonstrated.

52. Several of the energy companies told us that an EPS might be a viable tool for regulating electricity plant in the future, once CCS technology has been proven.[60] However, others argued that once CCS had been established as the best available technology, generators would use it as a matter of course.[61] The CBI told us "once technically and commercially proven, CCS will effectively become the Best Available Technology (BAT) for new coal power stations, and an EPS would therefore be an unnecessary additional measure."[62] This argument relies on the effectiveness of the rest of the fiscal and regulatory framework, and as we set out in section two, the current framework—and in particular the carbon price—does not look like it will deliver.

53. We are not convinced that generators will use CCS as a matter of course once the technology has been proven. This is because the current fiscal and regulatory framework does not currently provide a strong enough incentive to do this. In particular, the carbon price under the EU ETS is not high enough to make the roll out of CCS technology economically viable. We therefore believe that there is a role for an EPS in ensuring the deployment and operation of CCS in the future.

Conclusion

54. There is clearly some ambiguity about why the Government intends to introduce an EPS. The rationale must be made clear in the forthcoming consultation on electricity market reforms.

55. An EPS could be introduced for a number of different reasons, including: to reduce the UK's greenhouse gas emissions; to avoid "lock-in" to high carbon infrastructure; to provide greater clarity about the expected level of emission reductions from the power sector; to stimulate the development of CCS technology; and to ensure the deployment and use of CCS technology. We believe that an EPS would be most usefully employed in providing a transparent emission reduction framework for the power sector, in avoiding lock-in to high carbon infrastructure and in helping to stimulate the development and deployment of CCS and other low-carbon technologies. It is clear to us that an EPS by itself will not deliver CCS, but it could play a useful role as part of a package of wider measures that address the other barriers to its introduction.

22 HC Deb, 14 September 2010, col 955W Back

23 Q 75 (McElroy), Q 102 (Farrow) and Ev w51 (ScottishPower) Back

24 Ev w54 (Sussex Energy Group) Back

25 Ev 58 (CCSA), Ev 68 (CBI), Ev 70 (AEP), Ev w1 (Macrory), Ev w3 (UKC), Ev w7 (CoalPro), Ev w9 (IMechE), Ev w15 (SSE) Ev w28 (RWE npower), Ev w33 (EDF), Ev w37 (E.ON), Ev w42 (Ofgem), Ev w46 (Centrica), Ev w49 (Shell), Ev w51 (ScottishPower) and Ev w54 (Sussex Energy Group) Back

26 Ev w1 (Macrory) Back

27 Ev 51 (Gibbins and Chalmers) Back

28 Ev w1 (Macrory) Back

29 Ev w1 (Macrory) Back

30 HM Government, The Coalition: our programme for government, May 2010, p 16 Back

31 Ev 39 (DECC) Back

32 Ev 58 (CCSA), Ev w1 (Macrory), Ev w28 (RWE npower), Ev w42 (Ofgem) and Ev w49 (Shell) Back

33 Ev 73 (Green Alliance), Ev w42 (Ofgem) Back