Memorandum submitted by Scottish and Southern
(1) An Emissions Performance Standard (EPS)
imposes a limit on the amount of CO2 emitted from power
stations. The UK Government has committed to imposing this Standard,
and is currently considering the details as part of its wider
review into reforming the energy market.
(2) Whilst sharing the Government's commitment
to reducing CO2 emissions and to preventing new unabated
coal plants from being built, SSE is concerned about the unintended
and potentially damaging consequences that seeking to deal with
these issues through the introduction of an EPS could have. All
of the main EPS models have serious flaws and create a number
of problems for both the UK energy market and UK energy policyfor
example they could jeopardise security of supply by forcing existing
stations to close and prevent investment in new gas plant, and
unnecessarily increase costs for consumers.
(3) As such SSE would encourage Government
to look at alternative options to an EPS, as introducing measures
in primary legislation when the same ends can be achieved through
other means does not fit with the principle of introducing fewer,
but more effective, regulations outlined by the new Government.
Enhancing existing policies and targetsnew coal could be
ruled out through changes to the planning system, and decarbonisation
targets could be met through a strong carbon pricemight
achieve Government aims without creating the same difficulties.
(4) However SSE is aware that this might
be unacceptable politically. If this is the case and Government
feels that an EPS has to be introduced for political reasons then
it should be done in a way that has as little negative impact
as possible on the UK, whilst achieving Government objectives.
SSE believes that the best option would be:
A Portfolio EPS covering a generator's
entire fleet of generations assets (coal, gas, nuclear, renewables).
(5) However, if Government is determined
to introduce a plant level EPSeither a Per kWh or an Annual
Emissions Bubblethen it would have to follow these two
It should only apply to new plant; and
Any plant built when a particular EPS
was in place would have this grandfathered if the level was subsequently
(6) SSE believes that of the two plant-level
EPSs available the Bubble is the better option. This is because
it allows generators to build cheaper plants which would have
low running hours, will be able to meet peaks in demand, and act
as a back-up for renewables.
(1) The Government's proposal to introduce
an EPS into the energy market imposes a limit on the CO2
emissions from power stations in GB.
(2) Any intervention by Government of this
type into any market has the potential to create inflexibilities
and stifle investment and therefore should only be made if it
is able to achieve Government aims without adversely affecting
wider policy objectives, such as security of supply. It is obviously
counter-productive to introduce measures that have significant
adverse affects on other policies, and are unnecessary to achieve
a desired result.
(3) Whilst it is unknown as to exactly what
Government would want an EPS to achieve, it appears likely that
it would be for one of two reasons:
To rule out new unabated coal plant (a
move SSE fully supports).
To use an EPS as part of a suite of measures
to enable it to meet its 2030 decarbonisation ambitions.
(4) [N.B. These ambitions (set by the Government's
own Committee on Climate Change (CCC)) are for the UK to emit,
on average, 100gCO2 for every unit of electricity produced
by 2030. In 2008 the average was 482gCO2.]
(5) As such this submission examines each
of the main three EPS models, and some of their different variants,
in terms of:
whether they can achieve either of the
Government's potential objectives; and
their potential affects, both positive
and negative, on UK energy policy.
(6) It then offers SSE's view on what the
best way forward would be, taking into account whether an EPS
would be necessary to achieve objectives. It may be that these
aims can be achieved just as comprehensively through alternative
methodseg a sufficiently high carbon price could ensure
that the UK met its 2030 ambitionswithout the need for
an EPS. Given the potentially negative effects that an EPS could
have in the UK (detail below) SSE would encourage Government to
consider suitable alternative approaches.
(7) In addition the introduction of an EPS
may be inconsistent with European legislation (Article 9(1) and
Recital 9 of the Industrial Emissions Directive) and therefore
open to legal challenge, a fact which must be given careful consideration.
3. A "PER
(1) A Per "unit" (kWhr) of electricity
generated EPS is generally perceived as the standard EPS model,
and is currently used in California. It places a limit on the
emissions that can be produced by each unit of electricity produced
ie for each kilowatt hour (kWh) a certain number of grams of carbon
dioxide (gCO2) can be emitted. Currently an unabated
coal station has an emissions level of around 850gCO2/kWh,
a modern gas plant is around 380gCO2/kWh, and nuclear
(2) A Per Unit EPS would be set at a certain
leveleg 450gCO2/kWh which would rule out a modern
unabated coal plantand then be reduced to meet the 2030
ambitions. This reduction would mean that other types of carbon
generation would gradually be ruled out.
3.1 Potential Effects of a Per Unit EPS
(1) SSE believes that a Per Unit EPS is
fundamentally incompatible with wider policy goals, particularly
regarding security of supply. It also offers few long-term benefits,
as it does nothing to reduce overall emissions, and does not encourage
CCS; all it does is stop new plant from being built.
Security of Supply:
(2) There is a need to build new generation
capacity to replace old plant, predominantly coal and nuclear,
that is coming offline before 2020. Without this replacement capacity
there is a risk of an "energy gap" where the UK would
not have the ability to meet demands for electricity, potentially
resulting in scenarios such as enforced black-outs. No new coal
with CCS, or nuclear, will be available until 2020 at the earliest
and therefore the UK will have to fill the potential energy gap
with new gas plantthis will be done through efficient CCGT
(3) In addition the UK will need to build
a number of plants to provide back-up for increased renewable
capacity and to meet system peaks. The inherent intermittency
of most renewables means that a substantial proportion of renewable
capacity will need to be backed up by either biomass, pumped storage,
coal, or gas so that the UK can cope with scenarios when demand
is very high and renewable output is very low. Whilst this plant
is unlikely to run all of the time (see below) it is still key
for the UK's security of supplycurrently there is no new
coal capacity with planning consent or in construction and therefore
the only option for back-up plant over the next decade will be
gas. This will need to include less efficient OCGT plant which
is cheaper to build but has low running hours.
(4) However a Per Unit EPS could prevent
this investment in new gas. Whilst initially it would be set below
the level of a new coal plant, it could eventually reduce to below
the level of a new gas plantthis would either force a)
existing plant to close; or b) the retrofit of CCS technology.
Given that CCS is as yet still unproven and uncosted it would
probably force plant to close.
(5) Therefore if an EPS of this type was
introduced now then it would create a huge amount of policy and
regulatory risk for investors in gas plantthey would be
unsure as to when the level of the EPS might change and whether
this might render their investment obsolete, or force them to
retrofit CCS. Whilst reassurances from Government about EPS levels
and timescales are helpful investment decisions are taken over
decades, not five year Parliaments, and therefore risk still remains.
(6) As such an EPS could a) force existing
stations to close before they are due to, thereby reducing the
UK's overall generating capacity; and b) prevent investment in
gas power stations. This would happen at a time when the UK needs
these plants to ensure its energy security through to 2020 and
beyond, and to provide back-up for renewables.
(7) One general point regarding affordability
that is worth noting is that any piece of regulation that restricts
certain types of plant will inevitably lead to less flexibility
when attempting to meet low carbon and security of supply goals.
This lack of flexibility means that the most cost effective routes
are often ruled out.
(8) The increased costs specifically associated
with a Per Unit EPS are dependent on the level at which it is
set. If it is set at a level that rules out new gas plant, or
forces new gas plant to have some heat recovery (CHP), as advocated
by some environmental groups, then this will significantly increase
the costs of security of supply. This is because investors will
either not build new gas necessary to meet the potential gap thereby
forcing Government to intervene and incentivise developers to
build expensive low-carbon baseload plant which would be paid
for by the consumer.
(9) Even if the level was set at a level
above a modern gas plant (but below a new coal plant) the risk
and uncertainty associated with an EPS would make investors unsure
about the safety of their returns thereby driving up the cost
of capital for these investments. This would inevitably be reflected
in higher electricity bills for consumers.
(10) It is very important to remember that
an EPS only tackles the carbon intensity of electricity generation;
it does not tackle the volume of CO2 emissions produced
by the UK power sector, which is already constrained by the EU
ETS. Additional measures that reduce emissions from power generation
simply mean that other carbon intensive industries covered by
the EU ETS, both in the UK and the EU, can emit more. SSE believes
that Government should focus on those industries not covered by
the EU ETS, as measures to decarbonise these will actually reduce
(11) As such an EPS would not limit the
volume of CO2 emissions from the UK power sectorit
would just rule out certain types of power stations, or limit
their running hours, which some groups have argued could help
to prevent high carbon "lock-in".
(12) It is extremely unlikely that a Per
Unit EPS will encourage the development of new technologies such
as CCS. An EPS will force generators to invest in low carbon technology,
but nuclear and renewables, both of which are proven technologies,
will appear far more appealing than a high risk CCS project for
any developer. Alternatively investors, many of whom have the
option to invest outside of the UK, will delay or scrap UK investments
and/or invest elsewhere.
(13) As such an EPS will not on its own
deliver CCS. Therefore, policymakers must focus on a separate
mechanism for developing CCS as a technology option for deployment.
The main mechanism chosen to do this is the CCS Demonstration
Competition. The CCC has advised Government to consider including
at least one gas plant in the demonstration, which is allowed
under the Energy Act 2010.
(14) SSE supports this recommendation as
it believes that gas with CCS will have a role to play post-2020.
In a world of cheap prices gas CCS (running at baseload, as back-up,
or both) could be economically competitive with other low-carbon
technologies such as nuclear and renewablesdevelopers would
therefore want to build it, and it might be preferable politically
to nuclear. There is also potential for the technology and learning
regarding gas CCS to be exported, particularly given the predicted
transfer of many countries from coal to gas generation. As such
it would seem logical to include gas in the demonstration as it
is a technology that the UK will need and/or want in the future.
High Carbon Lock In
(15) There is a fear that by not introducing
a Per kWh EPS, or by introducing an EPS which is not stringent
enough, the UK will build high carbon plant before 2020, namely
gas and coal, and therefore be "locked in" to a high
carbon future with plants that will run into the 2040's. The result
will be that the UK's ambitions for decarbonising most of the
power sector by 2030 will not be realised, thereby jeopardising
its emissions reduction target of 80% by 2050.
(16) The CCC has recognised this concern
in its recent letter to the Secretary of State Chris Huhne, in
which it recommended that all new gas plants built post 2020 should
have CCS fitted to ensure that a) high carbon lock-in does not
occur; and b) that the UK is able to meet its 2030 decarbonisation
ambitions. However it does not believe that a Per kWh EPS on gas
needs to be introduced before 2020 to ensure this.
(17) Although many of the gas plants which
are set to be built pre-2020 will initially run continuously in
order to meet baseload demand (the minimum level of demand that
the UK always requires), in the future they will run less and
less; instead of trying to generate income from running at baseload
they will run at times when demand, and therefore price, is high
but output from other sources of electricity (eg renewables) is
low. Therefore they will produce fewer and fewer emissions over
(18) The reason for this choice to run less
is based on the modelling that investors do to calculate potential
returns before they take the decision to build a plantsuch
modelling includes the possibility of a high carbon price going
forward. Given that the carbon price looks set to rise over the
coming decades it makes sense to try and generate greater quantities
of income in short bursts when the electricity price is high,
rather then running the plant continuously which would incur large
carbon costs and consequently significantly lower returns.
(19) As such, whilst SSE understands the
concerns of environmental groups about new gas plant being built
pre-2020 it feels that decarbonisation targets can still be met
without a Per kWh EPS being introduced now.
(20) Regarding coal SSE does not believe
that an EPS is necessary to prevent high-carbon lock-in. Chris
Huhne recently stated that the Government will not allow new coal
plants to be built unless they have a portion of the plant covered
by CCS from day onegiven that CCS is unproven and uncosted
building new coal currently presents too much of a risk for developers
and is therefore extremely unlikely to happen. However, to guarantee
this Government could rule out new coal without 100% CCS from
day one through changes to the planning system, a move SSE would
3.2 SSE's View on a Per Unit EPS
(1) A Per Unit EPS could achieve both of
the Government's potential aims of preventing new unabated coal;
or being used to help meet the 2030 decarbonisation ambitions.
However, SSE believes that a Per Unit EPS is fundamentally incompatible
with wider policy goals as:
(2) It could jeopardise security of supply
by preventing new plant being built pre-2020 to replace old plant
which is shutting down, and/or to act as back-up plant for renewables/peaking
It could increase the costs of security
of supply significantly for consumers.
It does not encourage CCS development.
It does not reduce overall emissions.
It is not necessary to introduce one
now to meet the 2030 decarbonisation ambitions.
(3) However Government may feel that it
has to introduce a Per Unit EPS. If this is the case then it would
have to follow two principleswithout these the policy risk
for investors and developers would simply be unmanageable.
(i) The level set for the EPS would only be applied
to new plants (and could be set now at the level of a modern,
efficient gas plant380gCO2/kWh); and
(ii) Any plant built when a particular level
was in place would have this grandfathered if the level was subsequently
(4) If these two principles are followed
then Government would avoid some of the problems outlined above
regarding Per Unit EPS'sit would rule out new coal now;
new gas plant could be built between now and 2020 thereby helping
to ensure security of supply; and it would reduce the risk and
uncertainty regarding future investments associated with an EPS
and therefore the cost of capital.
(5) In addition if a trajectory for the
level to be reduced over time (known as a "glide path")
was put in place it could ensure that post 2020 new gas plant
would be required to fit CCS, and the average of 100gCO2/kWh
would be met in 2030, in line with the CCC's recommendations.
(6) However there are still fundamental
flaws with this model. The largest problem is that the level would
have to be set high enough to allow for OCGT's to operatethey
currently run at up to 575gCO2/kWhwhich may
be unacceptable politically. It could also result in a rush to
build plant before the level of the EPS reduces (eg 2020) resulting
in overbuilding, supply chain bottlenecks, and margins falling
as a result. This type of unstrategic approach could weaken the
generation market and seriously jeopardise future investment by
creating uncertainty and increasing risk.
4. A COMPANY-WIDE/PORTFOLIO
(1) Most companies operating in the electricity
generation sector in the UK has different generation assets eg
coal and gas plant, wind farms, hydro-electric projects, which
produce different quantities of CO2 each year.
(2) A Portfolio EPS is effectively a Per
Unit EPS but on a company's entire portfolio. Instead of restricting
the average emissions level per unit of electricity produced,
it restricts generators to a portfolio which had a set average
emissions level per unit of electricity producedeg 500gCO2/kWh.
This is then brought down over time.
4.1 Potential Affects of a Portfolio EPS
Security of Supply
(1) As a Portfolio EPS covers a generator's
entire portfolio of generation assets, rather than a single plant,
it allows high carbon plant such as unabated gas and coal to run
for limited periods. This allows for new gas to be built now to
secure supplies and/or act as back-up plant to renewables and
system peaks in the future. It also encourages companies to invest
in low carbon technologies, particularly renewables, which will
help to ensure security of supply in the long-term.
(2) A Portfolio EPS allows generators to
plan how and when they decarbonise their generation, which means
that it is done in the most cost-effective way possible. In addition
it would obviate the need to distinguish between new and existing
plant because the emissions from both would be coveredthis
would make the legislation simpler and reduce regulatory uncertainty
and consequently the cost of capital.
High Carbon Lock-In
(3) The Portfolio model does allow new unabated
coal to be built now, and new, unabated gas to be built post 2020.
Despite this SSE does not believe a Portfolio EPS would lead to
high-carbon lock-in. In fact it would be easier to meet the 2030
decarbonisation ambitions with this type of EPS because its glide
path (the amount the EPS level reduces by over time) could be
aligned with the CCC's desired glide path to 2030. This would
be very straightforward to do and would provide clarity for generators,
allowing them to plan investments strategically and at least cost.
(4) In addition, in order to rule out new
coal the Government could issue an additional statement which
required all new coal to have 100% CCS from day one of operation,
a move SSE would support.
(5) The major problem with the Portfolio
model is the unintended consequences it could produce. Given that
all companies would be starting from different positionssome
with very high average emissions and some with very lowit
could result in a number of unwanted mergers and acquisitions
in the market. Drax, which generates with a mixture of coal and
biomass, could be put in a position where it is forced to merge
with a wind developer to ensure that its average emissions met
the EPS; alternatively it would have to be acquired by a larger,
less carbon intensive generator.
(6) This could potentially be dealt with
through setting a common level at a point in the future eg 2020
which all generator's portfolios would have to meet. However,
up to this point generators would be free to decarbonise as they
(7) Alternatively a trading schemewhereby
for example Drax paid another utility to decarbonise for itwould
have to be developed. This type of scheme would effectively be
a UK EU ETS, albeit on a tighter and more easily regulated market,
which could present difficulties for the UK Government.
4.2 SSE Views
(1) Although a Portfolio EPS would not on
its own rule out new coal this could be achieved through an additional
policy statement, a move SSE would support. It could also help
to achieve the 2030 decarbonisation ambitions by aligning its
glide path (the amount the EPS level reduces by over time) with
that of CCC's desired glide path.
(2) In addition a Portfolio EPS:
Is compatible with policy on security
of supply as it allows for new gas plant to be built; and
Allows for generators to decarbonise
cost effectively and strategically.
(3) However, the problems that could be
created through unwanted mergers and acquisitions and a cap and
trade system would need to be carefully examined.
5. A PLANT-BASED
(1) This proposal would limit a plant's
annual total operational emissions of CO2, essentially
creating a "bubble" that each plant is able to emit
within a yearthis model is already used in the EU's LCPD.
The level set would be determined by Government based on emissions
modelling and would limit the running hours of higher carbon plants,
whilst allowing renewable plant to run indefinitely. Regulations
would be in place to prevent a plant over-emitting and bursting
5.1 Potential effects of a Bubble EPS
(1) The potential effects of a Bubble EPS
depend on whether it is introduced with or without a glide path
to 2030. The reason for introducing a glide path would be to ensure
emissions from power stations came down over time. Without one
industry could in theory emit a large amount of emissions until
2030, before making a dramatic reduction to meet the required
(2) However it is extremely difficult to
set such a meaningful glide path at this stage as the viability
and costs of CCS are as yet unknown. This means that even if a
glide path is set now there will be uncertainty as to whether
it might be changed in the future once these costs are known.
In addition different glide paths would be needed for existing
and new plant, which adds further uncertainty into the model.
This uncertainty and increased risk could lead, as with the Per
Unit model, to new gas plant not being built.
(3) Therefore SSE would favour an emissions
bubble which was only set for new plant, and had its particular
limit grandfathered if the level was ever reduced. Government
could also set a signal that the level would be reduced in 2020,
and that in 2030 the level will be sufficiently reduced to meet
the CCC's decarbonisation ambitions target. The effects of such
an approach are detailed below:
High Carbon Lock-In
(4) SSE believes that this type of EPS would
be strong enough to rule out new unabated gas post 2020 running
at baseload. It would allow unabated gas to be built as back-up
plant but this would mean it would run very limited hours within
its bubble. In addition most of the plant built between now and
2020 will not be running at baseload in the 2020's because of
the carbon price, and the fact that older plant is less efficientas
such the danger of large amounts of CO2 being emitted
between now and 2030 is limited.
(5) However this approach does not completely
rule out new coal; a Bubble EPS could rule out new coal running
at baseload, but would not rule out new coal running as back-up/peaking
plant. An additional statement would therefore be required, and
SSE would support such a move.
Security of Supply
(6) As with the Portfolio model a Bubble
EPS on new plant does not jeopardise security of supply as it
allows unabated high carbon plant to run for limited hours within
their "bubbles". This would allow new gas plant to be
built now to meet the potential energy gap. Also, by only restricting
annual emissions rather than emissions per unit of electricity,
in the future it would allow older plant to stay open/incentivise
new plant to be built to act as back-up plant for renewables and
(7) Any policy that results in different
plants having different bubbles will not give best value for money
as it does not allow generators to decarbonise at least costrather
its options are
(8) limited by the size of a particular
plants bubble. In addition, as with the Per Unit model, a Bubble
could result in a rush to build plant before the level reduces
(eg 2020) resulting in supply chain bottlenecks and increased
cost and uncertainty as a result.
(9) Certain plants are better suited to
CCS than others due to locational and other factors. Therefore
setting a blanket limit on emissions from certain types of plant
will prevent the best locations being chosen for CCS projects,
thereby increasing costs and risk. The only way to overcome this
problem is to set different bubbles for different plants but given
the variables involved this is nearly impossible.
5.2 SSE's View
(1) The Bubble EPS can, with an additional
statement, rule our new, unabated coal. It could also ensure that
the average emissions from the UK power sector in 2030 are compatible
with the CCC's ambitions.
(2) In terms of compatibility with wider
policy a Bubble EPS does fit with security of supply goals. However
there is a risk that it will unnecessarily increase the cost of
decarbonisation, particularly CCS, and lead to supply chain pinch
points at times when the Bubble level is reduced.
(1) It is clear that no EPS model is perfect.
All three, whilst they might achieve Government's potential aims,
create a series of additional problems that must then be solved.
SSE's concern is that this could result in a situation where policies
are implemented to solve problems created by earlier policies.
This adds a great deal of complexity to an already complex area,
and is clearly not a sustainable model of Government. In addition
the introduction of an EPS may be inconsistent with European legislation
and therefore open to legal challenge,.
(2) As such SSE would urge Government to
consider whether it believes an EPS is necessary to achieve its
aims. If it is not, and these can be achieved through alternative
approaches which do not create these additional problems, then
SSE would suggest that these options should be implemented insteadintroducing
measures in primary legislation when the same ends can be achieved
through other means does fit with the principle of introducing
fewer but more effective regulations outlined by the new Government.
(3) For example if the aim of Government
is simply to rule out new coal then a change to the planning system,
or an announcement in the National Policy Statements requiring
new coal stations to have 100% CCS fitted from day one would be
sufficient; and a high enough carbon price could achieve the UK's
2030 ambitions. Ultimately Government should be focussing on implementing
policies which best achieve its aims, not vice versa.
(4) However SSE understands that this might
not be an acceptable position for Government and that it might
have to introduce an EPS for political reasons. Whilst this is
unfortunate SSE appreciates that it could be the political reality
and, based on the potential aims of the Government outlined above
it would recommend the following:
Potential Aim 1Government wishes
to introduce an EPS to rule out new unabated coal.
Best OptionNo EPS; use the planning
Best EPS OptionA Per Unit EPS which
specifically rules out new coal but not other plant, and does
not reduce over time.
This EPS would not have a glide path and it would
be enshrined in primary legislation that it only applied to new
coal. Without this assurance the policy risk would be unmanageable.
The level for this type of EPS should be set at the level of a
modern gas plant.
Potential Aim 2Government wishes
to introduce an EPS as part of a suite of measures designed to
ensure that it meets its 2030 decarbonisation ambitions.
Best Option: A high enough carbon price
could achieve these ambitions without the need for an EPS.
Best EPS Option: A Portfolio EPS with
cap and trade. Whilst this option could creates problems for the
Government SSE feels that this is the least harmful of all the
EPS options as:
It is compatible with the UK's security
of supply agenda.
It allows generators to decarbonise at
least cost, thereby keeping costs for consumers to a minimum.
Its glide path can easily be aligned
to fit with the CCC's trajectory to 2030.
It would be simpler than the other two
models to implement in legislative and regulatory terms as it
covers both existing and new plant.
The Government could use the existing
powers in the Climate Change Act 2008 to introduce a cap and trade
scheme in secondary legislation.
New coal could be ruled out through an
additional Government statement, thereby strengthening the EPS
The level should be set at the UK's current average
level of emissionsapproximately 482g CO2/kWhand
then brought down in line with the CCC's trajectory to meet the
100g CO2/kWh target in 2030.
Alternative Optionif the Government
wants to choose an alternative EPS model, despite the problems
that this would inevitably cause, then it would have to follow
these two principles:
(1) the level set for the EPS would only be applied
to new plants.
(2) Any plant built when this level was in place
would have this grandfathered if the level was subsequently reduced.
Given that OCGT plant has relatively high CO2
emissions per kWh of electricity produced, it would seem logical
that an annual emissions bubble should be introduced.
The limit for this bubble should be set to ensure
New efficient CCGT gas plants can run
100% of the time; but that
New OCGT's can run at low load factors
to provide back-up.
The level can then be reduced in 2020
to require all new gas plant running at baseload to fit CCS.
This option could rule out new coal, encourage
new plant was built until 2020 thereby ensuring security of supply,
and help the UK achieve its ambitions for decarbonisation in 2030.
21 DECC: Autumn Performance Report 2009 (Jan 2010)
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