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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