3 The role for an emissions performance
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.
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. The Sussex
Energy Group told us that:
An EPS may have significant overlaps and interactions
with the intended carbon price floor and the envisaged reform
of the electricity market. The interactions will need to be analysed
carefully [...] Previous climate policy research shows that such
interactions can be complex - and can lead to conflicting or overlapping
incentives if not thought through.
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.
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
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
- 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.
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.
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.
What could an EPS achieve in the
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".
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."
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
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).
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,
although Ofgem pointed out that the legality of this option would
need to be investigated.
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.
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.
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.
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.
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
- 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.
- 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).
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.
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.
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.
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."
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
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".
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
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.
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.
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.
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".
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:
An EPS could deter investment in new gas generation
and would most likely take coal off the investment agenda altogether
[...] if standards are set too tightly and too soon, an EPS has
the potential to prohibit investment in technology classes rather
than encourage continuous technology improvement.
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.
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".
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.
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".
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."
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
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.
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:
The demonstration and deployment of CCS technology
will require a combination of: 1, public financing for demonstration;
2, ongoing incentives via the ETS and electricity market reform;
and 3, a regulatory framework that makes clear the need for emissions
reductions, thereby providing a market structure for competition
between low-carbon technologies via the phasing out of high-carbon
generating capacity. An EPS would provide these last aspects of
the policy package.
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.
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.
However, others argued that once CCS had been established as the
best available technology, generators would use it as a matter
of course. 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
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 frameworkand in particular the carbon pricedoes
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.
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
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
Q 75 (McElroy), Q 102 (Farrow) and Ev w51 (ScottishPower) Back
Ev w54 (Sussex Energy Group) Back
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
Ev w1 (Macrory) Back
Ev 51 (Gibbins and Chalmers) Back
Ev w1 (Macrory) Back
Ev w1 (Macrory) Back
HM Government, The Coalition: our programme for government,
May 2010, p 16 Back
Ev 39 (DECC) Back
Ev 58 (CCSA), Ev w1 (Macrory), Ev w28 (RWE npower), Ev w42 (Ofgem)
and Ev w49 (Shell) Back
Ev 73 (Green Alliance), Ev w42 (Ofgem) Back
Ev w42 (Ofgem) Back
Ev 73 (Green Alliance), Ev w1 (Macrory), Ev w9 (ImechE) and Ev
w42 (Ofgem) Back
Q 106 (Farrow), Ev w31 (EURELECTRIC), Ev 58 (CCSA), Ev 68 (CBI),
Ev 70 (AEP), Ev w32 (Statoil), Ev w37 (E.ON), Ev w46 (Centrica),
Ev w48 (Drax), Ev w49 (Shell), Ev w51 (ScottishPower), Ev w64
(IPR) and Ev w66 (GE) Back
Ev 61 (WWF-UK and Greenpeace-UK) Back
Ev 43 (E3G), Ev 79 (ClientEarth), Ev w15 (SSE), Ev w42 (Ofgem),
Ev w69 (CHPA) and Ev 73 (Green Alliance) Back
Ev 61 (WWF-UK and Greenpeace-UK) Back
Ev w54 (Sussex Energy Group) Back
Q 66 (Farrow; Chapman), Q 67 (McElroy), Ev 58 (CCSA), Ev 68 (CBI),
Ev 70 (AEP), Ev w15 (SSE), Ev w28 (RWE npower), Ev w33 (EDF),
Ev w46 (Centrica) and Ev w48 (Drax) Back
Ev w15 (SSE), Ev w28 (RWE npower), Ev w33 (EDF) and Ev w48 (Drax) Back
Q 7 (Kennedy), Q 8 (Turner), Q 41 (Molho), Ev 46 (CCC), Ev 73
(Green Alliance), Ev w7 (CoalPro), Ev w12 (National Grid), Ev
w23 (Prospect), Ev w24 (UKCCSC and UKERC) and Ev w51 (ScottishPower)
Ev 43 (E3G) Back
Ev w12 (National Grid) Back
Ev 73 (Green Alliance) Back
Q 41 (Skillings) Back
Q 59 (Molho), Ev 61 (WWF-UK and Greenpeace-UK) and Edward Rubin,
A Performance Standards Approach to Reducing CO2 Emissions
from Electric Power Plants, Pew Center on Global Climate Change
(Arlington, 2009) Back
Ev w24 (IKCCSC) Back
Ev w51 (ScottishPower) Back
Q 109 (McElroy), Ev 68 (CBI), Ev 70 (AEP), Ev w12 (National Grid),
Ev w46 (Centrica), Ev w66 (GE) and Ev w64 (IPR) Back
Ev w37 (E.ON) Back
Ev w46 (Centrica) Back
Q 102 (Farrow) Back
Ev w42 (Ofgem) Back
Q 66 (McElroy), Q 69 (McElroy), Ev 70 (AEP), Ev w15 (SSE), Ev
w28 (RWE npower), Ev w33 (EDF), Ev w46 (Centrica), Ev w51 (ScottishPower)
and Ev w69 (CHPA) Back
Q7 (Turner; Kennedy), Q 40 (Molho), Q 41 (Littlecott), Ev 43 (E3G),
Ev 61 (WWF-UK and Greenpeace-UK) and Ev 73 (Green Alliance) Back
Ev 73 (Green Alliance) Back
Q 72 (McElroy), Q 73 (McElroy), Ev 58 (CCSA), Ev w9 (IMechE),
Ev w12 (National Grid), Ev w23 (Prospect), Ev w48 (Drax), Ev w51
(ScottishPower) and Ev w66 (GE) Back
Q 66 (Chapman), Q 67 (McElroy), Ev w28 (RWE npower), Ev w33 (EDF),
Ev w48 (Drax) and Ev w66 (GE) Back
Ev 68 (CBI), Ev w46 (Centrica) and Ev w64 (IPR) Back
Ev 68 (CBI) Back