Emissions Performance Standards - Energy and Climate Change Contents

Conclusions and recommendations

The UK power sector: trends and targets

1.  We believe that the policy framework as it currently stands is grossly inadequate and will not deliver adequate investment in new low-carbon generating capacity for the 2020s and 2030s. The Government has acknowledged this fact and plans to consult shortly on a number of reforms to the electricity market. Reforms to the electricity market are required urgently in order to ensure sufficient investment is made now to deliver infrastructure for the 2020s. The Government must not delay in conducting its consultation and delivering a White Paper in Spring 2011. Any slippage of the timetable will jeopardise climate change and energy security objectives. (Paragraph 18)

The role for an emissions performance standard

2.  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. (Paragraph 22)

3.  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. (Paragraph 32)

4.  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. (Paragraph 33)

5.  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. (Paragraph 36)

6.  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. (Paragraph 37)

7.  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. (Paragraph 40)

8.  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. (Paragraph 50)

9.  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. (Paragraph 53)

10.  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.(Paragraph 54)

11.  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. (Paragraph 55)

EPS design

12.  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. (Paragraph 89)

13.  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. (Paragraph 90)

14.  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. (Paragraph 91)

Increasing the UK's international influence

15.  The UK is an influential member of the EU and action taken by the UK in reducing its carbon emissions could provide an example for others. Several other Member States have expressed an interest in introducing their own EPSs and a UK EPS could provide a model for others to emulate. This is a valuable opportunity for the UK to shape the EU's approach to an important area of policy and we recommend that the Government must seize it. Equally, there may be lessons for the UK to learn from others. The Government must engage more closely with other Member States that are considering EPSs in order to share best practice and learning on EPS design and implementation (Paragraph 99)

16.  We conclude that the risk that the introduction of a UK-based EPS could undermine the reputation of the EU ETS is easily outweighed by the positive leadership it would demonstrate. There is already a widespread acknowledgement that the EU ETS is not by itself delivering low-carbon investment, so any reputational damage caused would be minimal. (Paragraph 104)

17.  It is not clear whether a UK-based EPS would be permitted under the EU Industrial Emissions Directive. Article 9 of the Directive prohibits the use of emission limit values for greenhouse gases and although the preamble states that Member States may introduce more stringent measures, it is not clear whether an EPS might in fact be considered an additional measure. There is therefore a risk that the introduction of an EPS may result in a legal challenge. We call on Government to clarify the legality or otherwise of an EPS in its response to this report. (Paragraph 106)

18.  Even though the introduction of an EPS may not be as influential at the international level as a successful demonstration of CCS technology, we nevertheless believe that it could bring significant benefits. We call on the Government to work with other countries to share best practice on EPS in order to facilitate global emissions reductions from the power sector. (Paragraph 112)

19.  The introduction of a UK-based EPS would bring a number of benefits at the international level. Within Europe, it would provide a template for other Member States to follow. Other Member States are considering EPSs of their own and leadership from the UK could help to encourage the uptake of EPSs elsewhere in Europe, particularly since the UK is viewed as a leader on climate change within the EU. At the international level, the introduction of a UK EPS would demonstrate commitment to tackling climate change. Providing a model for other countries to emulate could help bring forward sectoral agreements and help to achieve global emission reductions from the power sector. (Paragraph 113)

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