Memorandum submitted by EDF Energy
SUMMARY POINTS
— We agree with the Government that an
Emissions Performance Standard (EPS) will not on its own achieve
decarbonisation. Nevertheless, we believe that EPS will ultimately
have a role to play, alongside electricity market reform.
— The primary objective of the proposed
EPS would be to prevent new coal-fired power stations from being
built unless they are equipped with sufficient carbon capture
and storage (CCS) facilities. However, the proposal for an EPS
raises the question of its potential extension in two respects,
firstly to encompass other new fossil fired power stations and
secondly to encompass existing fossil fuelled power stations.
— Applying an EPS to new coal plant alone
implies the acceptability of new unabated gas plant. We believe
that further investment in Combined Cycle Gas Turbine (CCGT) plant,
beyond the minimum that is required to bridge the gap to transition
to low carbon technologies, will reduce the medium term potential
for decarbonising the electricity sector and increase the risk
that the long term emissions reduction targets will not be met,
as the carbon emissions from these new assets will be "locked
in". As well as increasing the country's exposure to gas
price risk, there would be little immediate contingency if CCS
were delayed or demonstrated to be too expensive.
— We believe that the arguments are finely
balanced in respect of the adoption at this stage of the proposal
by the Climate Change Committee (CCC) that no new gas-fired power
stations, except perhaps for peaking purposes, should be constructed
after 2020 unless equipped with CCS. While the direction indicated
by this proposal is undoubtedly correct, there is a risk that
this approach may create perverse incentives leading to an unnecessary
"dash for gas" ahead of the 2020 deadline. Nevertheless,
we agree with the CCC that there would be merit in including a
gasfired plant in the four CCS demonstration plants to which
the Government is committed.
— CCS is still at an early stage of development,
and, on the Government's current best estimate, it is only likely
to become technically and economically viable for new plant after
2020 at the earliest. The technical and economic challenges of
retrofitting CCS to existing plant will be even greater than for
new plant. Until CCS has been proven technically and economically
or the UK has made sufficient progress in constructing new low
carbon generation capacity, we believe that it will be difficult
to specify the detail of any EPS measures to restrict the operation
of existing fossil fuelled plant and ultimately to force their
closure. Such measures would need to be carefully calibrated in
order to deliver emissions reductions in a cost-effective manner
without jeopardising security of supply by forcing the premature
closure of existing plants.
— Therefore, while we believe that it is
useful for Government to signal the intention to phase out fossil
fuelled generation, other than potentially for peaking purposes,
on a timescale consistent with the CCC's recommendations that
electricity generation should be largely decarbonised by 2030,
we believe that it is too early to specify the detailed rules
for implementation of an EPS for this purpose. At this stage,
the immediate priorities for Government should be the implementation
of a carbon price floor to strengthen the incentive for investment
in all low carbon technologies, and the reform of the electricity
market to ensure the right capacity mix is built for economic
delivery of decarbonisation and security of supply.
INTRODUCTION
1. EDF Energy is one of the UK's largest
energy companies with activities throughout the energy chain.
Our interests include nuclear, renewables, coal and gas-fired
electricity generation, combined heat and power, electricity networks
and energy supply to end users. We have over five million electricity
and gas customer accounts in the UK, including both residential
and business users.
2. EDF Energy believes that, as well as
concerted efforts to improve energy efficiency, large scale investment
in electricity infrastructure is urgently required to replace
existing plants and meet the UK's climate change targets. It is
important that the transition to a low carbon economy is progressed
efficiently to ensure that the competitiveness of UK energy supplies
is maintained while also ensuring the stability and affordability
of energy prices. It is essential that the right decisions are
made now to secure investment in large-scale low-carbon electricity
generation and to promote the transition to a low carbon economy.
There will need to be a diverse energy mix, including nuclear,
renewables and CCS technologies that can be applied to fossil
fired generation plant subject to their successful demonstration.
3. We must recognise the scale of the challenge
that this represents for the electricity sector and the importance
of the need to take action now. The current markets have served
us well up until now, but these need to be modified to deliver
the UK's current energy policy objectives. We welcome the planned
consultation by DECC on market reform in the autumn, as well as
the work that is being taken forward by HM Treasury to underpin
the carbon price this year to ensure that we get a robust signal
on the future carbon price. Together these elements should provide
sufficient clarity to continue with our plans to invest in low
carbon electricity generation.
RESPONSE TO
SPECIFIC QUESTIONS
What are the factors that ought to be considered
in setting the level for an Emission Performance Standard (EPS)
and what would be an appropriate level for the UK? Should the
level be changed over time?
4. EDF Energy believes that energy policy
must address the three general overarching issues of security
of supply, decarbonisation of the economy, and affordability.
Without a holistic approach to the problem that considers how
the proposed policy interacts with existing frameworks of decarbonisation
measures, we believe that a mandatory and inflexible mechanism
to limit carbon emissions, like an EPS, may run the risk of unintended
consequences, with considerable potential for delay in vital low-carbon
infrastructure. For example, if the EPS is set too high then this
may simply encourage the development of unabated gas-fired plant
instead of low carbon. California has an EPS limit of 1,100lbs
CO2/MWh (~500kgCO2/MWh), which is often
used as a point of reference for proposed levels around the world,
and, while this prevents the construction of unabated coal-fired
plant, it still allows for the construction of modern CCGT plant,
which have direct emissions of around 350kgCO2/MWh.
Favouring one fossil fuel over another will not deliver the level
of decarbonisation required to meet the UK's climate change objectives,
and it will also pose a significant risk to the country's security
of supply due to a lack of diversity. We believe that further
investment in CCGTs, beyond the minimum that is required to bridge
the gap to transition to low carbon technologies, will not be
the right answer for the UK, because it will increase the risk
that the long term reduction targets will not be met as it will
lock in the higher carbon emissions from these new assets. As
well as increasing the country's exposure to gas price risk, there
would be little immediate contingency if CCS were delayed or demonstrated
to be too expensive.
5. While an EPS can be used to curtail emissions
from fossil fuel plant, it will do little to create a tangible
incentive for investment in new low carbon generation. It should
be seen therefore as only part of the solution. Furthermore, the
CO2 emissions from fossil fuel plant are dictated by
the carbon intensity of the input fuel and the efficiency of the
plant: both of these parameters are fixed in the design and construction
of the plant. The options therefore for changing the carbon footprint
of fossil generation are relatively limited.
6. CCS does provide a potential option for
keeping coal and gas in the generation mix by capturing and storing
CO2 emissions. However, CCS is still in an early stage
of development and, at the Government's current best estimate,
is only likely to become economically and technically viable after
2020. Setting an EPS before the CCS is first implemented at scale
could be premature, since it could risk the enforced closure of
fossil plant, which could jeopardise security of supply in advance
of other measures to bring forward investment in other low carbon
technologies.
7. Therefore, the introduction of an EPS
must be considered in the context of the successful development
and demonstration of CCS. Without CCS being demonstrated, it could
be premature to recommend the level at which the EPS should be
set. If a retrofit programme to install CCS were mandated at a
later stage, then the expectation would be that the level of the
EPS would decline over time, matching the timescales for completing
a CCS retrofit for existing fossil plant.
8. We therefore believe that once CCS has
been proved viable or the UK has made sufficient progress in constructing
new low carbon generation capacity, there would then be merit
in an EPS as either a form of a regulatory "backstop"
to ensure emissions from operational fossil plant are abated,
or as part of the longer-term solution in removing residual emissions.
9. At the same time, we do not believe that
EPS can be the primary driver that promotes the UK's transition
to a low-carbon economy. We believe that this can only be achieved
through a wider package of electricity market reform that produces
both a strong carbon price and a credible revenue stream for low
carbon generation from the market that is protected from the distortive
impacts of excessive subsidies for various technologies.
10. If the objective of the EPS is simply
to force a moratorium on new unabated fossil fired plants, this
can also be achieved in a more flexible manner through the National
Policy Statements (NPSs). The draft Overarching National Policy
Statement for Energy (EN-1) currently states that all applications
for new combustion plant should demonstrate that the plant is
"Carbon Capture Ready" (CCR) before the consent may
be given. We recommend that once CCS is demonstrated to be viable,
then this could be announced in the Annual Energy Statement. The
wording in the relevant NPSs could then simply be amended to reflect
the requirement of new combustion plants to have CCS. We believe
that such an approach will introduce an effective form of regulation
that is no longer based on arbitrary targets but is more process-orientated
in both nature and scope.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
11. An example can be taken from Germany's
experience with its aggressive centrepiece Renewable Energy Sources
Act (EEG), which came into force in advance of the establishment
of the EU ETS in 2005. A recent study by a German think tank[26]
cites academic analysis that finds that "that while the CO2
emissions in Germany's electricity sector are reduced substantially,
the emissions are hardly altered at the European scale by Germany's
EEG. This is due to the fact that Germany's electricity production
from renewable technologies mitigates the need for emission reductions
in other countries that participate in the ETS regime, thereby
significantly lowering CO2 certificate prices by 15%
relative to the situation without EEG" (p21). Due to this
substitution effect, it concludes that "since the establishment
of the ETS in 2005", the EEG's net climate effect has been
equal to zero and that the EEG "attains no additional emission
reductions beyond those achieved by ETS alone" (p6).
12. This experience would suggest that specific
targeted policies can achieve specific outcomes even though they
could in practice undermine broader policy frameworks. However
in the case of the EU ETS it isn't clear if these specific interventions
are simply serving to disguise the shortcomings of the EU ETS
or if it is genuinely being undermined. We have already alluded
to the need for market reform and the need to underpin the carbon
price because we believe that while the EU ETS has been useful
in establishing a market price for carbon, it is failing to provide
a credible long term market signal to bring forward investment
in the low carbon generation that is required to deliver the UK's
emissions reduction targets.
13. It is therefore possible that the introduction
of an EPS could help sharpen the incentive to reduce CO2
emissions. However we must recognise that while the introduction
of an EPS would deter the construction of new unabated fossil
plant it is not an instrument that will create a tangible value
or additional revenue to incentivise low carbon generation. We
therefore believe a greater emphasis should be placed on strengthening
the carbon price by taking action to set a floor in the EU ETS
price paid by UK generators by using a topup tax that can
work along side the EU ETS and believe that this will ultimately
be more effective.
14. Accelerating the deployment of low carbon
technologies and/or the successful demonstration of CCS could
in turn provide policy makers in the EU greater reason and confidence
to set more stringent targets for the EU ETS.
How effective is an EPS likely to be in driving
forward the development of CCS technology? Should the UK's demonstration
programme cover gas-fired as well as coal-fired power stations?
15. For the reasons outlined above, we believe
that an EPS alone will not be a catalyst for CCS innovation, and
that it must only be considered as part of a robust and holistic
long-term policy framework. The economic and technical viability
of CCS should determine an EPS, and not the other way round. We
should also note the unintended consequences that could arise
from introducing a single EPS as in California where setting an
EPS simply led to investment in gasfired generation.
16. We agree with the recommendation of
the Committee on Climate Change (CCC) to fund at least one gas
CCS demonstration project as part of the demonstration programme
committed to by the Government. We believe that this would support
the UK's objective of securing the decarbonisation of the power
sector. One of the primary benefits described by the CCC of having
gas with CCS on the system is the better economics of the plant
when running at lower load factors, which will be an important
consideration if significant intermittent wind capacity comes
on to the system. We therefore believe that an explicit objective
of any gas with CCS demonstration project should be to prove that
this type of plant is technically capable of operating flexibly
in this way and is able to contribute to system balancing. However,
any subsidy to gas with CCS should be limited to the demonstration
programme and, after this, the pace of implementation of CCS across
all fossil generation should be driven by the carbon price and
the electricity market—just as it should be for the implementation
of all forms of low-carbon technology.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
17. While an EPS will curtail emissions
if CCS is available, it could lead to generation shortages brought
on by the early closure of fossil fired plant if CCS is uneconomic,
and without there being immediate adequate provision of a suitable
alternative. This is why we believe that the focus of energy policy
and the introduction of an EPS should be to provide a robust and
holistic long-term framework to develop and deliver low-carbon
technologies.
What is the likely impact of an EPS on domestic
energy prices?
18. At this stage, without having sight
of the level of the EPS (which is linked to CCS, the costs of
which are unknown) or its scope, it is difficult to speculate
on what the effect on domestic energy prices will be.
19. We believe that the Government should
be focussing on the facilitative actions that lead to a successful
CCS demonstration programme. Otherwise, there is a real risk that
the impact on annual domestic electricity bills will end up higher
than the Government's current forecast of £8 and £15
in 2015 and 2020 respectively,[27]
and that consumers will end paying more for no extra tangible
benefit.
Are any other European countries considering an
EPS? If so, should the standards be harmonized?
20. We are currently not aware of any other
European countries actively considering an EPS as a national policy
measure. While in theory the standards could be harmonised (presumably
along the lines of the EU Industrial Emissions Directive), agreeing
a common standard across the EU would be difficult given the very
wide range of carbon intensities that currently prevail across
all of the Member States and the differences that exist in individual
Member States' energy policies.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
21. It is unlikely that any action by the
UK to introduce an EPS will have sufficient time ahead of the
Cancun meeting to establish evidence that justifies its introduction.
Can greater use of Emissions Performance Standards
internationally help promote agreement on global efforts to address
climate change?
22. It may, but we believe it would be of
limited value. As outlined above, an EPS would only apply to fossil
fuel plant and so would not capture the full scope of decarbonisation
efforts. It would also do nothing to proactively make other forms
of low-carbon technology, like new nuclear build, attractive to
developers.
September 2010
26 Economic impacts from the promotion of renewable
energies: The German experience, Rheinisch-Westfälisches
Institut für Wirtschaftsforschung, October 2009 Back
27
Estimated impacts of energy and climate change policies on energy
prices and bills, DECC, July 2010 Back
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