House of Commons - Emissions Performance Standards

Emissions Performance Standards - Energy and Climate Change Contents

4 EPS design

56. Although the Californian EPS of 500 gCO₂/kWh is often given as an example, there are many different ways in which an EPS could be configured. The exact design of an EPS will depend in part upon the objectives it is meant to achieve as well as ensuring that unintended outcomes are avoided. The Government told us that they are considering a range of different design options as they develop plans for an EPS.[63]

57. In this section, we set out the range of various design options that are available before considering their potential impacts on energy security, energy prices and carbon emissions.

Design options

EXPRESSING THE LIMIT

58. An EPS could be expressed in a number of different forms. One option is to set a limit on the amount of CO₂ that can be emitted per unit of energy produced by the power station (this would be likely to be expressed in gCO₂/kWh). This is the form used in the Californian EPS and it means that power stations with a carbon intensity above the threshold would effectively be banned from operating.

59. A second option is to specify that a certain proportion of the CO₂ generated must be captured and stored (expressed as a percentage of CO₂ captured and stored per MW), which would effectively mandate the use of CCS technology. This is the form of EPS used in Montana.

60. Finally, an EPS could set a limit on the total amount of CO₂ that can be emitted over a set time period, for example, over the course of a year (expressed as tonnes of CO₂/MW/year). This option would allow high carbon intensity plant to operate for a fixed number of hours each year, while renewable plant could run indefinitely. This would mean that peaking plant could continue to operate without retrofitting CCS equipment. This style of EPS would not close the door to new unabated fossil-fuel plants being built, although they would only be likely to be used for a small number of hours each year.

APPLYING THE EPS

61. A key factor in designing an EPS will be deciding to which facilities it applies. For example, it could apply to some fuel types (such as coal) and not to others (such as gas). In addition, the level could be set at one level for all, or could be differentiated by fuel type.[64] If an EPS applied only to coal-fired plant, it would risk encouraging a dash to unabated gas-fired plant because unabated-gas plants would be much cheaper to build and operate than coal with CCS.[65]

62. Another consideration is whether an EPS would apply to individual power stations or to entire electricity generating companies, in which case they would be obliged to meet the standard across their portfolio of generating capacity, which might include a mixture of fossil-, nuclear- and/or renewable-plant.[66] A portfolio standard would have the advantage that it would give large operators more flexibility in how they meet the standard.[67] On the other hand, generators that only own one or a small number of plants would be penalised by such a design because they would not be able to average out emissions in the same way.[68] Scottish and Southern Energy explained that companies like Drax, which owns a single, but very large coal- and biomass-fired plant, might end up being forced to merge with a renewables company in order to meet a portfolio standard.[69]

63. One way to avoid this problem would be to allow trading of permits between companies. This would allow participants like Drax to pay other facilities to decarbonise instead.[70] However, this would in effect establish a new emissions trading scheme within the UK, which would raise concerns about duplication of the EU ETS.[71]

64. Finally, an EPS could apply either only to new plant or to both new existing plant. Applying the standard to all plant might force high emission power stations to close sooner than expected.[72] Alternatively, an EPS could initially apply only to new plant and then be extended to cover all plant at a point in the future. This option is discussed further below.

TIMING THE INTRODUCTION OF AN EPS

65. It is also important to consider when an EPS might come into force. The main argument in favour of an early introduction is that if the aim of an EPS is to stimulate new low-carbon technology, then it should set realistic yet stretching targets ahead of the technology becoming available. An early introduction could also stimulate the development of the necessary supply chain industries.[73] WWF and Greenpeace have called for enabling provisions to be included in the forthcoming Energy Security and Green Economy Bill with a view to introducing an EPS within a definite timeline.[74]

66. The argument against early introduction is that CCS has not yet been demonstrated at commercial scale. Many of the energy companies were concerned that setting an EPS before the technological performance and costs of CCS were known could leave them exposed in the event that it did not prove practicable or cost effective to comply with the standard.[75]

MAKING THE EPS MORE STRINGENT OVER TIME

67. An EPS could be introduced as a static level, or it could be tightened over time. If the EPS were to change over time, there are a number of ways in which this could be done:

The standard could apply initially to only some types of plant (for example, it could apply only to coal-fired plant, or only to new plant). It could then be extended to cover other types of plant at some point in the future (for example, it could be extended to cover gas plant, or existing plant).[76]
The standard could be set at a relatively relaxed level in the first instance, which would then be gradually tightened over time. This could be set in accordance with the CCC's recommended decarbonisation pathway for the power sector or in line with the UK's carbon budgets.
The level could be reviewed on a regular basis and kept in line with the best available technology.[77]

68. While changing the level or scope of an EPS over time may provide flexibility, there is a tension between this and the need to provide certainty to investors that changes to the EPS will not be made in future that could affect their investment decisions today.

SHOULD ANY EXCEPTIONS BE PERMITTED?

69. It may be necessary to consider some exceptions to the standard. The evidence we received suggested several areas where it might be desirable to do this:

If the EPS applied to all plant, it may prove uneconomic for owners of old fossil fuel fired plant that is approaching the end of its operational life to install the CCS equipment necessary to meet the standard. In this case, an "opt out" clause could be offered, where these plants would either be allowed to emit a predetermined amount of CO2 over the course of a year or they would be permitted to operate for only a fixed number of hours each year until they were retired.[78]
Plant that is used only to meet peak demand (or, in future, to provide back up to intermittent wind power) may only operate for a relatively small number of hours each year. Again, it may prove too costly to fit CCS technology to this type of plant, so an opt out could be considered here too.[79]
In order to minimise the administrative burden on small companies, exemptions for plant below a certain size could be considered. Shell suggested to us that 300 MW capacity might be a suitable threshold.[80]
If an EPS were to be introduced in the near future, it might be necessary to consider the impact of an EPS on CCS demonstration plants. Green Alliance argued that greater flexibilities should be given for the demonstration period in order to take technology testing and inevitable teething problems into account.[81] However, WWF did not agree with this position and voiced a concern that it could result in an EPS level that followed technological capabilities rather than setting an aspirational target.[82]

OTHER CONSIDERATIONS

70. Under certain design options (for example, a portfolio standard), companies could be allowed to trade their EPS obligations, which could provide greater flexibility to meet the standard.[83] National Grid argued that this would also "ensure that those that can develop low carbon technology at the lowest cost will do so in order to earn revenues from selling the EPS certificates".[84] As noted above, this option could present some difficulties as a UK-based trading scheme would duplicate the EU ETS.

71. The timescale over which the emissions are measured in order to determine compliance must also be considered. The Californian EPS measures emissions of CO₂ on a half-hourly basis and this approach is also used under schemes to reduce emissions of other pollutants (for example, emissions of nitrous oxides and sulphur oxides under the Large Combustion Plant Directive).[85] Alternatively, there may be a case for measuring emissions on an annual base, which would match the current EU ETS reporting periods.[86]

72. There is also a decision to be made about how compliance is measured. One option would be to assess the minimum level of CO₂ output that a power station is capable of achieving. This is the approach taken in California, where the EPS is based on plant design information. The alternative would be to monitor actual emissions from plants covered by the scheme.[87]

Avoiding unintended outcomes

73. In its written submission to our inquiry, DECC stated that its "overriding imperative is to enable low carbon generation to take over the sector, without undermining the reliability, security and cost of supply".

74. We welcome this approach and strongly encourage the Government to apply this framework when considering proposals for an EPS. In the rest of this section, we set out some of the possible impacts of an EPS on energy security, energy prices and carbon emissions.

ENERGY SECURITY

75. There are many different factors that contribute to energy security, including whether there is sufficient generating capacity to "keep the lights on", the flexibility of generating capacity to deal with peak demand and unexpected drops in output, and the diversity of the fuel mix (to avoid over-reliance on imported energy or any one type of fuel). An EPS could potentially impact on all of these aspects.

76. Around 20 GW of existing generating capacity is expected to be retired over the next decade and this capacity will need to be replaced in order to maintain sufficient capacity to meet demand. It is likely that the majority of this new capacity will consist of offshore wind and gas-fired power stations as these technologies are economically viable and can be delivered within the required timescale. Additional capacity will also be required in order to deal with the intermittency of new wind capacity. One of the main concerns we heard was that a badly designed EPS could undermine investment in new gas-fired capacity that is needed between now and 2020. This could lead to a drop in generating capacity as existing nuclear and coal-fired power stations close down.[88] Matthew Farrow told us: "I think it would be extremely risky to prevent new-build gas being an option for the market given however quickly we are able to press ahead on new nuclear [...] or renewable roll-out [...] we're clearly going to need [...] some additional capacity beyond that."[89] The CCC has recommended that an EPS should not be applied to gas before 2020 in order to avoid this problem.[90]

77. In addition, an EPS that brought forward the closure of existing plant (for example because it was introduced before CCS technology was commercially available or because it proved too expensive or difficult for operators to retrofit CCS equipment) could also contribute towards a generation gap.[91]

78. A second concern was that the wrong type of EPS could reduce flexibility in the system, which could make it difficult to meet peak demand, or to cope with the large amounts of intermittent power that is anticipated to be on the system in the future. At the moment, most of this flexibility is provided by fossil fuel plants, which are easier and more cost effective to ramp up and down in response to demand. An EPS that resulted in fewer gas-fired and coal-fired plants being built or prevented power plants with very low load factors from operating could therefore make it more difficult to balance the system at times of high demand or low supply from renewables.[92]

79. Another option for dealing with increased intermittent capacity on the system is to increase the level of interconnection that the UK has with our European neighbours so that we can import and export electricity to help balance out supply and demand. The UK currently has a link with France and there is also a connection between Northern Ireland and Scotland. New connections to the Netherlands and Ireland are being built. E3G suggested that applying an EPS to imported electricity might jeopardise plans to build interconnectors with countries that have relatively high carbon intensity electricity, such as Ireland, the Netherlands and Belgium.[93] Mr Skillings suggested that it was more important to take a long term view, in which increased interconnection will play an important role in meeting future energy security needs, rather than focusing on the short term impacts of importing high carbon intensity electricity.[94] However, despite the advantages of greater interconnection, one consequence of not applying an EPS to imported electricity might be that generators choose to build new high-carbon power stations in countries without an EPS and then import the electricity to the UK, rather than building new low-carbon infrastructure in the UK.

80. A further option for dealing with intermittency is to develop and improve technologies for storing electricity. An EPS might help to provide an incentive to speed up the development of these technologies.

81. Finally, there was a fear that an EPS could favour gas over coal, which could lead to a renewed "dash for gas" .[95] This would result in a less diverse fuel mix and a greater reliance on imported gas, with associated risks to energy prices.[96] A "dash for gas" might happen if an EPS applied only to coal and not to gas, or if a blanket level was set that could be met by unabated gas but not by unabated coal (as is the case in the Californian example).

ENERGY PRICES

82. It is very difficult to say exactly what impacts an EPS might have on domestic energy prices because these depend on a large range of factors, including the design of the scheme, whether any additional incentives are provided and the price of carbon. In addition, an EPS will be only one of a range of policy instruments used to decarbonise the power sector and as such it will be difficult to disentangle the impact of an EPS from these other measures.[97]

83. Nevertheless, most of the evidence we received suggested that an EPS would be most likely to increase the price of electricity to consumers compared to the price paid today. Low-carbon electricity generation is generally more expensive than generation from unabated fossil fuels, so any action that increases the use of low-carbon technologies will tend also to increase the cost of electricity.[98] Dr Chapman told us: "Whichever way you do this, it is going to cost the consumer, and the consumer will be paying [...] for premium-grade electricity—that is, electricity without emissions".[99] Nuclear and renewables have much higher capital costs than fossil fuel plants, but their operating costs are lower because the fuels are much cheaper (or free, for renewables). In the case of CCS, it is both more expensive to build and to operate because CCS reduces the efficiency of the plant.

84. There are a number of other ways in which an EPS could lead to higher electricity prices. These include:

Increasing investor uncertainty: if an EPS were implemented in such a way that it increased uncertainty among investors, this would increase the cost of capital for new development projects, a cost which would ultimately be passed on to consumers. (However, it should be noted that an EPS could increase certainty and reduce the cost of capital - this is discussed in more detail below in paragraph 85.)[100]
Reducing diversity: if an EPS resulted in a less diverse fuel mix in the electricity system, the UK could be more vulnerable to commodity price volatility and supply constraints, which in turn would have a negative impact on energy bills.[101]
Reducing capacity: if an EPS led to delays in investment for new generating capacity, the resulting capacity shortfall could push up prices.
Encouraging generators to maximise returns: if an EPS was designed so that it placed a limit on the number of hours certain plants could run, then these generators would only want to use their running hours at times of peak energy use, when the electricity price is the highest and returns are greatest. If they were required to generate at times of lower demand, they would require a higher price in order to factor in the opportunity cost of not being able to use their stipulated hours when prices are higher. This would have a knock-on effect across all generators, resulting in a higher electricity price than would otherwise have been the case. This has been seen to happen under the Large Combustion Plant Directive.[102]

85. Electricity prices are very likely to increase regardless of whether an EPS is introduced. An EPS could lead to relatively lower electricity prices in the future. For example:

An EPS that prevented "lock-in" to high-carbon infrastructure would protect against the high costs of retrofitting CCS technology or paying a carbon price that could be very much higher in the future than it is today. This was one of the main arguments put forward in favour of an EPS in California.[103]
If an EPS helps to boost investor certainty, this will help to lower the cost of capital, making it cheaper to invest in low-carbon technology than would otherwise have been the case.[104]
If an EPS helps to speed up the development of CCS technology and to bring down the cost at a faster rate than would otherwise have happened, then the cost of meeting our climate change targets will be lower.[105]
The Institution of Mechanical Engineers told us that coal or gas plants fitted with CCS may be able to produce low-carbon electricity more cheaply than higher cost offshore wind sites. An EPS that resulted in a greater uptake of CCS, meaning that the use of high cost offshore wind could be avoided, would provide a cheaper route to meeting climate change obligations.[106]

CARBON EMISSIONS AND OTHER ENVIRONMENTAL IMPACTS

86. Although the aim of an EPS is clearly to help tackle climate change, there could be some circumstances in which a poorly designed EPS could lead to increased greenhouse gas emissions. If an EPS deterred investment in new plant, this might encourage generators to extend the life of older, less efficient fossil plants. This could then result in higher UK CO₂ emissions (although since this would occur within the EU ETS cap, there would not be any additional emissions overall);[107]and if an EPS encouraged large scale deployment of unabated natural gas plant, this could also pose a threat to the UK's long term climate change targets.[108] In his letter to the Secretary of State, Lord Turner stated that "significant investment in unabated gas generation through the 2020s would conflict with the objective to decarbonise the power sector in this period."[109]

87. Biomass used in power stations is considered to be carbon neutral (although non-CO₂ emissions are counted towards the UK's total greenhouse gas emissions). We heard some concerns that an EPS might encourage the use of unabated biomass as an alternative to installing CCS technology. Biomass can be used in a number of different ways: it can be burned in power stations to generate electricity, it can be used to produce heat, it can be used to produce gas and it can also be converted into liquid biofuel, which can be used as a substitute for petrol and diesel.[110] Dr Kennedy told us that given that the supply of biomass is constrained, it was important to consider where it would be best used and suggested that the electricity sector, which has a number of other low-carbon alternatives, might not be the best option.[111] Professor Gibbins argued that biomass with CCS would be an effective use of the fuel because it would, in effect, produce carbon negative electricity, which would allow more room for manoeuvre in sectors where emissions reductions are more challenging.[112]

88. We also heard some concerns about the wider sustainability impacts of biomass, including whether it is sourced sustainably (that is, ensuring that the biomass is not grown on land converted from forest or other biodiverse areas) and the lifecycle emissions associated with growing and transporting biomass.[113]

Conclusion

89. There are many design options for an EPS, some of which may be more beneficial than others. We welcome the fact that the Government is considering a range of options in designing the EPS. In its forthcoming consultation and review of electricity market reform, the Government must consider all the alternatives set out here and analyse the potential impacts of each option on energy security, energy prices and environmental sustainability in order to avoid unwanted outcomes.

90. To ensure that an EPS acts as an incentive to new investment in low carbon generating capacity and a disincentive to investment in high carbon generating capacity it is essential that the timescale for its introduction respects the investment cycle of the technology involved. It is also important that it is designed in a way which increases investor certainty and thereby reduces the cost of capital. An EPS must also protect the possibility that, as long as baseload generating capacity is low carbon, there may remain a role for high carbon power stations to operate for brief periods of exceptionally high demand.

91. We urge the Government to make every effort to minimise the impact of an EPS on energy prices, particularly for vulnerable groups and the fuel poor whose numbers may increase as a result. In particular, the Government must prioritise the delivery of domestic energy efficiency programmes in addition to other policies such as the Social Price Support Scheme to vulnerable groups and the fuel poor in order to keep their energy bills as low as possible.

63 Ev 39 (DECC) Back

64 Ev 51 (Gibbins and Chalmers), Ev w69 (CHPA) Back

65 Ev w7 (CoalPro) Back

66 Ev 51 (Gibbins and Chalmers) Back

67 Ev w15 (SSE), Ev w41 (EEF) and Ev w49 (Shell) Back

68 Ev w15 (SSE), Ev w69 (CHPA) Back

69 Ev w15 (SSE) Back

70 Ev w15 (SSE), Ev w69 (CHPA) Back

71 Ev 51 (Gibbins and Chalmers), Ev w24 (UKCCSC and UKERC) and Ev w69 (CHPA) Back

72 Ev w15 (SSE), Ev w64 (IPR) Back

73 Ev 43 (E3G), Ev 73 (Green Alliance) Back

74 Ev 61 (WWF-UK and Greenpeace-UK) Back