Memorandum submitted by ScottishPower
INTRODUCTION
1. ScottishPower is one of the "big
6" UK energy utilities. We provide electricity transmission
and distribution services to more than three million customers
and supply over 5.2 million electricity and gas services to homes
and businesses across Great Britain. We operate some 6GW of power
stations as well as gas storage facilities and energy management
activities.
2. We are at the forefront of research into
and investment in Carbon Capture and Storage (CCS) and we are
among the final two applicants in the Government's Competition
for funding to demonstrate CCS. Our proposal is based on retro-fitting
a 300 MW post combustion CCS plant to our existing power station
at Longannet.
3. We are part of Iberdrola, one of the
world's leading utilities. The group also has major interests
in UK renewable energy and is working with GDF Suez and Scottish
& Southern Energy on a proposed new nuclear power station
adjacent to the existing nuclear complex at Sellafield.
SUMMARY
4. An Emissions Performance Standard (EPS)
for generation could play a role as part of the suite of energy
policies designed to reduce emissions, but it will be important
that its impacts are fully understood and that it is carefully
structured and timed to deliver the intended objectives. A poorly
designed EPS could have the potential to create unintended consequences
or impacts on security of supply.
5. As far as new plants are concerned, the
function of the EPS is already being undertaken by the previous
Government's policy on new coal consents. We believe that an EPS
applicable to new plant could potentially provide a clearer and
more transparent approach than planning restrictions. However,
it must be recognised that restrictions on new plants, of whatever
sort, are less likely to foster CCS development than they are
to divert investment into other types of generation.
6. If the effect of the EPS is essentially
to maintain in a more transparent framework the previous Government's
de facto moratorium on new coal, we would judge there to
be few negative effects in the short term since we do not consider
new coal generation to be economic at the current time.
7. We think that extending an EPS to existing
plant could have significant adverse effects on security of supply
as it would be likely to force the closure of the great majority
of the remaining coal generation fleet, which remains a very important
element of supply security in GB.
8. The principal direct effect of restrictions
on coal generation in the UK would be to reduce the price of carbon
in the EU ETS, rather than to achieve any net reduction in emissions.
A net change in emissions would only occur if the EU ETS cap was
set at a lower level as a result of the restrictions or if the
EPS acted as a spur to wider carbon reduction activities outside
the EU traded sector. The combination of lower EU ETS prices plus
more expensive substitute generation could have negative impacts
on UK competitiveness and investment.
9. Finally, if an EPS is applied prematurely
to gas plant, effectively requiring CCS, it could again risk security
of supply if the technology is unproven or not competitive.
10. We would therefore ask that the Committee
encourages Government to consider the following:
— If an EPS is applied, it should only
be applied to new coal fired electricity generation in the first
stage.
— Any extension to new gas-fired power
stations should only be considered as and when where the commercial
and technological case is proven. Furthermore, it would be essential
that a ready infrastructure for transportation, storage and supply
chain for implementing gas CCS is in place. This is not expected
until at least 2025 on current estimates.
— Government must be clear on the connection
between policies designed to oversee point source CO2
emissions within the power sector. There is a risk that the policy
may not be aligned between the EPS, the Emissions Trading Scheme
(ETS) and any future carbon price floor mechanisms and that multiple
instruments may work against each other or against UK competitiveness.
RESPONSE TO
INQUIRY QUESTIONS
What are the factors that ought to be considered
in setting the level for an Emissions Performance Standard (EPS)
and what would an appropriate level be for the UK? Should the
level be changed over time?
11. In designing an EPS, Government needs
to consider the impact on security of supply and the potential
impact on consumer prices. Different EPS designs and levels can
have various effects upon generation investment strategies taken
by market participants and these, in turn, will impact the overall
plant margin for the UK as a whole. Investment costs and plant
margin levels will also have a potential impact on market prices.
12. For new plant, setting the precise level
of an EPS must also consider practical factors. For example, in
some circumstances the implementation of a tight EPS would rely
upon the availability of proven techniques for CCS and the availability
of functioning transportation and storage infrastructure for CO2.
At this time CCS is not mature and is some way from being regarded
as a Best Available Technique reference standard. It is unlikely
to become so until such times as it has been successfully demonstrated
and made cost effective. Demonstration should therefore remain
the priority, but also with the realistic expectation that developments
and refinements in CCS will hopefully be produced, providing the
opportunity to reflect that knowledge and experience in the setting
of more appropriate EPS levels over time.
13. For existing plant, we are not persuaded
that EPS standards should be applicable because of the potential
impacts on security of supply.
What benefits would an EPS bring beyond the emission
reductions already set to take place under the ETS?
14. It does not appear to us that an EPS
will directly contribute to any overall reduction in emissions,
as any such reductions are likely to be offset by increases elsewhere
within the traded sector cap. Indeed, any changes in the pattern
of generation arising from an EPS are more likely to lead to a
reduction in the price of carbon than a reduction in emissions.
An EPS will only reduce emissions overall if:
(a) The level of the EU ETS cap is set lower
as a result (and the displaced coal is not burnt elsewhere in
the world); or
(b) The EPS acts as a spur for other carbon reductions
outside the EU ETS traded sector.
15. It is also unclear how the EPS will
work with the ETS and the forthcoming carbon price floor, where
there is the potential for over complication of the policy landscape
resulting in multiple regulation of CO2 emissions.
16. In principle, we believe that delivering
climate change policy objectives, at least cost, would be best
achieved via by a properly functioning, robust EU Emissions Trading
Scheme and that a real alternative to any EPS would be to look
to secure a long-term ETS framework that is appropriately aligned
to the lifespan of low carbon technologies, to provide investor
confidence. Such an ETS would ensure that unabated coal would
be restricted both by the cap on emissions and the corresponding
price signal, as well as channel the market towards the most efficient
carbon reduction options whilst remaining technology neutral.
17. However, an EPS may be attractive as
a legally binding measure that would contribute to the accelerated
decarbonisation of the UK power sector and provide a degree of
certainty to the energy sector and investors over the regulatory
requirements for clean thermal generation. It will be important
that the costs of obtaining these benefits are well understood
as there may not be any direct carbon savings to balance them.
18. Careful consideration must be given
to the need to minimise any distortion or unintended consequences
from an EPS. Any EPS must be properly aligned with other emission
reduction measures and initiatives. It will also be vital for
the future role of the ETS to be clarified in the context of the
implementation of an EPS so that investors could understand the
new regulatory landscape more clearly. Among the issues that could
be considered in any design work would be how to deal with plant
operating at low load factors and whether a more flexible portfolio
approach to EPS might work more efficiently.
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?
19. An EPS is unlikely to be effective in
driving forward the development of CCS because the impact is more
likely to be to cause investors to switch to other generation
options or indeed to other investment options outside the UK generation
sector. If the Government were to set an EPS such that all fossil
generation required CCS, then the result could be highly negative
for security of supply given the current maturity of the technology
and related infrastructure. We think that it would not be prudent
to set a fixed date for restrictions that may not prove practicable,
or cost effective, to comply with.
20. We believe that the demonstration of
CCS on gas-fired generation is a sensible and logical step, particularly
allowing for the current policy requirement that new gas-fired
stations have to be Carbon Capture Ready (CCR) and the ultimate
need to decarbonise the power sector that must inevitably include
such generation.
21. However, including gas-fired generation
within the wider UK Demonstration programme for CCS should not
be to the detriment of the current Competition or dilute the commitment
to it. The most pressing priority remains the need to have successful
initial demonstration on which further policy based around CCS
as a proven technology can then be built.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
22. The future role for coal—and other
fossil fuel generation—in the energy mix must also be taken
into account as well as wider electricity market structure and
reform. We hold firmly to the view that coal and gas have a vital
role in the overall energy strategy, contributing to security
of supply and fuel mix diversity while economically supporting
and complementing intermittent renewables by providing system
flexibility.
23. In this context, if not properly structured
or configured, or if implemented prematurely, an EPS could deter
investment in new gas generation and would most likely take coal
off the investment agenda altogether. This has the potential to
impact energy security. A poorly timed EPS may also adversely
impact investment in carbon abatement technology at an important
time. If standards are set too tightly and too soon, an EPS has
the potential to prohibit investment in technology classes rather
than encourage continuous technology improvement. This could set
back rather than accelerate the long term development of a CCS
industry in the UK that can serve future EU energy needs.
What is the likely impact on domestic energy prices?
24. The price impacts of an EPS will depend
on its design and whether it causes generators to change behaviour.
If its impact is principally to prevent the construction of new
unabated coal plants, this will have no material impact on prices
in the short term as we judge such construction to be uneconomic
at present in the UK. At the other extreme, if it forced CCS to
be fitted to all new generation, the costs would be very large
and difficult to quantify.
25. All the revenue needed to operate the
power industry and remunerate its investments must ultimately
come from consumers or possibly taxpayers. On the assumption that
Government money is not available, the costs arising from any
EPS policy will therefore inevitably end up in consumer bills.
Are any other European countries considering an
EPS? If so, should the standards be harmonised?
29. At present we are unaware of any other
European countries where the consideration of an EPS is as advanced
as it is in the UK. However this does raise the concerns that
we have expressed elsewhere that the absence of wider EU initiatives
or common provisions may lead to investment being diverted elsewhere.
Such harmonisation may eventually be achieved if and when CCS
is recognised as Best Available Technology (BAT) although that
designation may be some way off.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate change negotiations in
Cancun in November 2010?
30. The forthcoming Cancun negotiations
are likely to focus on areas of policy such as securing deals
for the provision of finance, agreement on the architecture of
future deals, the formation of individual country commitments
and encouraging the commitment to remove fossil fuel subsidies.
Against this background, a decision by the UK to implement an
EPS seems to us to be unlikely to be material.
Can greater use of Emissions Performance Standards
internationally help promote agreement on global efforts to address
climate change?
31. The use of EPS internationally could
be beneficial, once CCS development and demonstration has moved
further ahead, as part of sectoral agreements to tackle the wider
global issue on a more concerted basis. It would also help in
the creation of energy benchmarks between developed and developing
countries.
September 2010
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