Memorandum submitted by the National Grid
INTRODUCTION
1. National Grid owns and operates the high
voltage electricity transmission system in England and Wales and,
as National Electricity Transmission System Operator (NETSO),
we operate the Scottish high voltage transmission system. National
Grid also owns and operates the gas transmission system throughout
Great Britain and through our low pressure gas distribution business
we distribute gas in the heart of England to approximately eleven
million offices, schools and homes. In addition National Grid
owns and operates significant electricity and gas assets in the
US, operating in the states of New England and New York.
2. In the UK, our primary duties under the
Electricity and Gas Acts are to develop and maintain efficient
networks and also facilitate competition in the generation and
supply of electricity and the supply of gas. Our activities include
the residual balancing in close to real time of the electricity
and gas markets.
3. Through our subsidiaries, National Grid
also own and maintain around 18 million domestic and commercial
meters, the electricity Interconnector between England and France,
and a Liquid Natural Gas importation terminal at the Isle of Grain.
We have also formed National Grid Carbon Limited which is a wholly
owned subsidiary advancing the transportation and storage elements
of the Carbon Capture and Storage (CCS) supply chain.
EXECUTIVE SUMMARY
4. National Grid welcomes the opportunity
to provide input into the Energy and Climate Change select committee's
hearing on Emissions Performance Standards (EPS). National Grid
analysis suggests that to meet Government's 2050 targets all coal-fired
generation would need to be CCS-equipped by 2030 with all fossil
fuel generation being abated by 2050. We support Government plans
to maintain a diverse energy mix while delivering emissions reductions.
5. Emissions reductions can be brought about
by either; i) Cap and Trade schemes; 2) environmental taxes; 3)
mandatory emissions standards; or 4) some combination of these.
National Grid believes that an Emissions Performance Standard
could play a future role as part of a full regulatory system.
However, in the first instance energy market reform as part of
a future Energy Bill should encourage low carbon investment, and
provide a platform for a future EPS. A better immediate strategy
would be to await definitive results from the CCS projects to
enable a clearer picture to inform EPS development. Setting the
level of EPS at too early a stage could have unintended outcomes,
applying it at one blanket level could force all coal stations
to implement CCS but allow Combined Cycle Gas Turbines (CCGT)
to continue to operate unabated. This has the potential to trigger
a dash for gas which would lead to volatile price changes and
reduced fuel diversity which in turn has potential implications
for energy security.
6. In summary National Grid believes there
may be a beneficial future role for Emissions Performance Standards,
but on balance the time is not yet right. We consider that in
the immediate term, the objectives of the select committee would
be better served by continuing/expediting the CCS demonstration
policy, expanding it to include at least one gas plant, clarifying
an acceptable regime for storage and providing incentives for
investment in CCS infrastructure with a view to the future wider
scale roll out of CCS when commercially and technically proven,
facilitating the potential introduction of an EPS once the infrastructure
exists to make it viable and sustainable.
What are the factors that ought to be considered
in setting the level for an Emissions Performance Standard (EPS)
and what would be an appropriate level for the UK? Should the
level be changed over time?
7. The goal of an Emissions Performance
Standard (EPS) should be to maintain a diverse energy mix while
delivering carbon reductions; it should be a realistic but challenging
target concentrating on absolute levels of emissions rather than
output per energy.
8. An EPS is likely to work best in the
presence of a funding mechanism to provide funds to substantially
cover the difference between the cost of low carbon generated
power and unabated power. Without this it is likely that while
generators will be forced to build CCS to meet the EPS target
they will operate it as little as possible because it is uneconomic
compared to the competing unabated fossil fuel generation. Funding
needs to make CCS competitive with unabated plant to ensure that
its operation is maximised. Our analysis suggests that to meet
2050 targets all coal would need to be CCS equipped by 2030 with
all fossil fuel generation being abated by 2050.
9. However it is not clear that an EPS would
encourage CCS investment; in fact there is a risk that the introduction
of an EPS could have unintended consequences of prompting a dash
for unabated gas plant, thereby diverting potential investment
away from CCS. Instead National Grid considers that the stated
objectives of the select committee would be better achieved by:
— Clarification of an acceptable regime
for long term storage liabilities;
— Retaining existing policy that requires
CCS demonstration on any new coal plant and the consideration
of an extension of CCS demonstration requirement to new gas fired
plant;
— Expedite award decision for construction
of the first CCS demonstration project;
— Expedite process for selection of coal
CCS demonstration projects 2-4;
— Making an additional commitment to at
least one gas CCS demonstration project;
— Implement a floor price for carbon as
committed to in the Coalition government policy—this together
with ETS should be the primary policy instruments to drive investment
in low carbon technologies.
— Stimulate investment in storage characterisation;
and
— Stimulate investment in shared user CO2
transportation infrastructure where the economies of scale render
this a least regrets anticipatory approach to investment.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
10. The EU-ETS remains unproven as an effective
tool to drive reduction in emissions, the surplus of certificates
has led to low carbon prices. The potential advantage of an EPS
is that it could provide a glide path for the industry in terms
of volume of low carbon generation needed. An EPS would give the
UK unilateral ability to exceed EU Emissions Trading Scheme (EU-ETS)
targets if set accordingly.
11. Industry has considerable uncertainty
regarding the level of carbon prices into the future and so investment
decisions in low carbon technology are very difficult. An EPS
on the other hand 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. It is our view that if an EPS were to be introduced,
then there should be scope for companies to trade their EPS obligations
and this should 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.
12. However, it is not clear that an EPS
would bring any additional benefits; in fact it could bring unintended
detrimental consequences such as deterring investment in UK clean
coal technologies. Its disadvantage is that the volume will be
delivered regardless of cost (ie an EPS could drive the (successful)
delivery of emissions reductions but at great expense due to technology
not being sufficiently mature.) The stated objectives would be
better achieved by expediting/extending government commitment
to CCS demonstration projects to prove and refine the technology
and introduction of a carbon floor price.
How effective is an EPS likely to be in driving
forward the development of CCS technology? Should the UK's CCS
demonstration programme cover gas-fired as well as coal-fired
power stations?
13. National Grid does not think an EPS
would be effective in driving forward the development of CCS technology
at this time. However there may be a point in the future when
an EPS will provide a useful "line of sight" to the
industry regarding the roll out of a more mature technology. This
would then help with the development of large scale transport
and storage infrastructure to be delivered to meet the targets
in a timely and efficient manner.
14. We believe that the UK CCS demonstration
programme should be extended to cover gas fired as well as coal
fired power stations. Preferably this would be by the addition
of one or more gas fired demonstrations in addition to the four
coal fired demonstrations already mandated. If an EPS were to
be introduced consideration should be given to the introduction
of different EPS levels for coal and gas fired generation. In
this way both forms of fossil fuel generation might be equally
incentivised to adopt CCS in order to maintain a diverse energy
mix and avoid a dash for unabated gas.
15. Rather than focussing all policy measures
upon CO2 emitters (capture plant) there is merit in
considering complementary policy measures to stimulate investment
in CCS transport and storage infrastructure. At present we perceive
the lack of maturity of offshore storage site characterisation,
the lack of clarity over long term storage liabilities and the
consequent residual uncertainties to be significant barriers for
investment in the other parts of the value chain. The additional
costs of CCS (compared to unabated fossil fuel generation) also
pose a significant barrier to CCS market development. In this
regard we believe there are substantial economies to be realised
through multiple emitters in the same area sharing the same pipeline
transportation infrastructure. It therefore seems to us that the
objective of expediting CCS development could be served by complementary
policy initiatives to procure the early "investment grade"
characterisation of potential storage formations and the early
development of "cluster sized" pipeline networks. These
measures would significantly reduce barriers to entry for capture
investments at both power station and industrial premises and
pave the way for a fast roll out of CCS upon completion of the
demonstrations.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
16. An EPS for new plant may result in a
delay in new plant being built until CCS technology becomes proven
at a large scale commercial level. Coupled with the EU's Industrial
Emissions Directive (IED), which will tighten the rules on SO2
and NOx emissions from large combustion plant, this may result
in lower plant margins with no plant able to fill the gap relatively
quickly due to large scale plant being "new" technology—abated
gas and coal or nuclear. A decision will need to be taken whether
to retro-fit abatement equipment in order to comply with the new
legislation. The economics of this decision will be affected by
any need to retrofit CCS and may result in further plant closures,
lower plant margins and higher prices.
17. The majority of the coal plant that
will still be open in 2020 will be 50 years old and coming to
the end of its planned lifespan. Consequently, forcing the retrofitting
of CCS, because of the EPS, would more than likely result in the
early closure of plant due to the economic viability of retrofitting
CCS to plant coming towards the end of its operational life.
What is the likely impact of an EPS on domestic
energy prices?
18. National Grid believes it should be
a Government objective that the transition to a low-carbon economy
is achieved at the lowest cost possible to UK tax payers. Low
carbon generation in general is likely to result in an increase
in end-user energy prices and the cost increase brought about
by an EPS may not be significantly greater than that arising from
high carbon prices in the EUETS. UK wholesale power prices are
currently closely related to underlying fuel and carbon costs,
in particular gas due to the amount of existing plant and the
plant currently under construction.
19. We believe that proposed Government
policies, such as the Green Deal, should be given time to ensure
consumers can maximise their energy efficiency in the first instance.
20. Additional CCS equipment will increase
the capital cost of new plant and reduce overall fuel efficiency,
thus increasing the breakeven price of new stations. Even with
carbon prices of €30/tonne, CCGT and unabated coal are likely
to be the lowest cost options for generation. An EPS would remove
these options from the marketplace and/or a higher carbon price
would make CCS abated plant more competitive—both are likely
to result in higher prices passed through to the end consumer.
Are any other European countries considering an
EPS? If so, should the standards be harmonized?
21. National Grid are unaware if any other
countries are considering an EPS however we believe that there
is merit in working with the EU to coordinate development as we
operate within a wider European market for energy.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
22. The UK has an important role to play
within the EU, therefore any action taken by the UK leading to
EU-wide positions would send out a strong signal ahead of the
climate negotiations in Cancun. However it is National Grid's
view that a better approach would be to continue with our current
CCS demonstration projects and clarify an acceptable regime for
long term storage liabilities.
Can greater use of Emissions Performances Standards
internationally help promote agreement on global efforts to address
climate change?
23. Emissions reductions can be brought
about by either; i) Cap and Trade schemes; 2) environmental taxes;
3) mandatory emissions standards; or 4) some combination of these.
Carbon dioxide emissions can in theory be regulated in the same
way as other atmospheric emissions such as sulphur dioxide where
absolute emissions limits have been set. In the US, the EPA mandate
sulphur emissions reductions and this leaves operators with decisions
to make on whether it is more cost effective to upgrade or close
existing plant (note that the US EPA has recently tightened sulphur
emission limits). The Large Combustion Plant Directive is having
the same effect in Europe. Both set standards for new plant.
24. An EPS would fulfil a similar function
and therefore, in principle, could be used as one of a basket
of measures to help with efforts to reduce global CO2
emissions. Using the precedent set for sulphur, negotiations around
the carbon equivalent might gain support. However, research would
need to be carried out to understand the costs and benefits of
such a strategy over other approaches such as cap and trade (although
they are not necessarily mutually exclusive). In particular, what
would energy prices, security and the energy mix be if such as
strategy was introduced? This would probably be different for
each country as each has a different proportion of coal generation
in their energy mix.
September 2010
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