Memorandum submitted by the Combined Heat
and Power Association
SUMMARY AND
INTRODUCTION
1. The Combined Heat and Power Association
welcomes the opportunity to respond to the Energy and Climate
Change Committee's call for evidence on an emissions performance
standard (EPS).
2. The Combined Heat and Power Association
(CHPA) is the leading advocate of an integrated approach to delivering
energy services using combined heat and power and district heating.
With around 100 members active across a range of technologies
and markets the CHPA is widely recognised as one of the leading
industry bodies in the sustainable energy sector. The CHPA works
to promote a greater awareness and understanding of CHP and district
heating and to create a strong, dynamic and sustainable environment
for its members and the communities, businesses and households
they serve. In the UK, CHP represents about 7% of electricity
generation and, therefore, an important and growing part of the
UK electricity mix.
3. The CHPA remains to be persuaded of the
case for an EPS in achieving the Government's carbon emissions
targets but recognises that it could provide a policy backstop
for emissions reduction, provided that it is correctly implemented.
This response to the call for evidence sets out some key considerations
that are vital be should an EPS be adopted,
SUMMARY OF
RESPONSE
4. The CHPA has identified the following
key issues for the design and implementation of an EPS:
An EPS must take into account the emissions
saved in the supply of useful heat from a generation station (CHP
plant) to ensure that it rewards optimal resource use and emissions
savings.
An EPS should form part of a wider suite
of fiscal and regulatory measures to ensure that the market delivers
the Government's energy ambitions.
An EPS should be applied to individual
plant NOT to a portfolio of plant to ensure that incentives are
equivalent to all actors in the market. Furthermore, application
to a portfolio will deliver little or no policy additionality.
An EPS should not apply only to coal
but also to gas.
An EPS must take into account the emissions saved
in the supply of useful heat from a generation station (CHP plant)
to ensure that it rewards optimal resource use and emissions savings
5. As an EPS is designed to control emissions
from electricity generation stations, the emissions limit is generally
based on the CO2 per unit of electricity. A CHP plant
delivers both useful heat and power in which some power may be
sacrificed to generate a large amount of heat (for every one unit
of power lost between three and 10 units of heat will be generated
dependant on the grade of heat supplied). In any circumstance,
a CHP plant which meets the EU's qualifying conditions is more
efficient than separate heat and power generation. High efficiency
CHP saves at least 10% of the input fuel compared to separate
generation, although in reality this figure is often significantly
greater. An EPS based purely on electrical output would, therefore,
penalise a CHP plant compared to a power-only plant which exhausts
its heat to the atmosphere. CHP plants burning either renewable
or fossil fuels represent the optimal use of the fuel thereby
contributing to energy security, affordability, emissions reductions
and, where renewable, renewables targets. If an EPS failed to
account for the delivery of useful heat, the EPS would penalise
efficiency and emissions reductions and be a disincentive for
CHP development. It is vital that the heat from CHP is adequately
accounted for in any EPS.
6. The best methodology for determining
an EPS would be to account for overall efficiency of useful energy
conversion. For a power only generating station, this is simply
the mean electrical efficiency. For a CHP plant, this would be
the electrical conversion efficiency PLUS the heat efficiency.
The Cogeneration Directive requires high efficiency CHP to have
an overall efficiency of 70%[87]
(Net Calorific Value {NCV}); Accounting for overall efficiency
is an effective and simple way of ensuring that an EPS does not
penalise efficient plant operation.
An EPS should form part of a wider suite of fiscal
and regulatory measures to ensure that the market delivers the
Government's energy ambitions
7. An EPS is one of a range of fiscal and
regulatory tools available to Government for delivering the low
carbon electricity grid and wider energy system. An EPS either
prevents or permits the construction of a given plantin
this respect, it is effectively an extension of the consenting
process. Just because a proposed development would comply with
the EPS does not guarantee its construction or continuing operation.[88]
8. Crucially, any development of an EPS
must occur within the context of wider policy in relation to the
viability of developing and operating new plant. With particular
regard to CHP, current uncertainty over the climate change levy
exemption for CHP and accreditation timelines under grandfathering
for biomass under the RO are creating significant risks that relevant
plant will not pass the second or third tests set out above.
9. With a wider debate over the energy market
a capacity guarantee and reform of the CCL, any EPS needs to be
developed in the context of these other policy variables to ensure
that there are no unintended consequences and that support in
one area is not undermined by policy decisions in another. In
this context, a capacity guarantee, if poorly developed, could
run directly contrary to an EPS as it could drive least cost (and
higher emission plant) to be built. The CHPA is developing proposals
for how a capacity guarantee could operate to ensure that it does
not run contrary to an EPS and would be very willing to share
these with the Committee.
An EPS should be applied to individual plant NOT
to a portfolio of plant
10. An EPS could be designed to apply to the
portfolio of plants operated by a company rather than individual
plant. Whilst this could operate well for the major portfolio
operators, it would harm independent generators as these often
only have a one, or a small number, of plant. For portfolio generators,
such a system could permit the development of new, high emission
plant, which could be offset by other existing low carbon plant
defeating the objective of an EPS. Furthermore, for companies
owning only one plant, compliance would have to be ensured by
a form of carbon trading, directly replicating the EU emissions
trading scheme which would be an unnecessary complication to an
already highly complex market. In addition, independent generators,
provide valuable market services such as a disproportionately
high level of liquidity. Such services would be undermined by
a portfolio EPS.
11. From a deregulation perspective, it
is apparent that, if an EPS were implemented on a portfolio-wide
EPS, the consequent effect would be the replication of an emissions
trading scheme. The EPS would thus provide little or no additionality
in terms of policy outcomes. On this basis an EPS could only add
value on an individual plant basis.
An EPS should not apply only to coal but also
to gas
12. The Committee on Climate Change has
recommended that the Government provides support for CCS gas plant
as well as CCS coal.[89]
The CHPA believes that there is substantial value in pursuing
CCS for both gas and coal. In addition, to ensure that fossil
resources are used optimally, the application of CCS should be
incentivised to operate in combination with CHP wherever possible.
CCS reduces plant efficiency but, by combining CCS with CHP, much
of the heat that would otherwise be wasted can be captured and
supplied to meet new or existing heat demand, significantly improving
overall plant efficiency. By supplying heat from CCS plant for
industrial, commercial and domestic use, CCS plants could help
to decarbonise heat supply in a very effective and efficient manner.
This is particularly important in the industrial sector where
options for decarbonising heat are particularly limited and challenging.
13. Given the extent of decarbonisation
that will be required from the power sector in the period to 2050,
the Association recognises that CCS may ultimately be required
in gas-fired plant as well as coal. The extent and timing of this
requirement will be highly dependent upon progress in respect
of decarbonisation of the wider economy and the evolution of the
generation mix.
14. For any input fuel the introduction
of any EPS will need to be timed to reflect the commercial viability
of CCS technologies, cost implications and impacts upon security
of electricity supply. Application of too tight a standard may
introduce costs or risks that may be excessive in respect to the
requirement for carbon abatement. An understanding of these trade-offs
and technological maturity will be critical in setting the levels
of any standard, and the timing of its introduction.
15. It should also be recognised that different
plant configurations may provide a degree of flexibility in setting
standards, particularly in respect of gas-fired plant. Where the
value of heat recovery is recognised in the assessment emissions
factor, an unabated gas-fired CHP plant may be capable of meeting
an emissions factor of 300g/kWh, whilst the equivalent power-only
plant would not. Under appropriate conditions utilisation of CHP
might therefore assist in providing safeguards over security of
supply, whilst maintaining downward pressure on emissions from
the wider generation fleet.
In any circumstances, incentives to operate must
be maintained
16. The application of an EPS will need
to be timed to reflect the development of CCS technology. If an
EPS were to be introduced, therefore, it could apply to both gasand
coalfired plant. This will have the practical effect of
ensuring that all new-build plant is likely to meet minimum standards
of emissions performance in operation. It is important to note,
however, that the EPS is only part of the picture. Since the EPS
will act as a constraint on development, the Government must ensure
that the commercial incentives for construction and operation
of this plant will persist over the long term.
17. In setting EPS standards, it will be
important to consider the option for setting levels that vary
based on input fuel. It may be appropriate to set the EPS at a
different level for coal than for gas.
MAINTAINING SECURITY
OF SUPPLY
18. In setting an EPS, it is vital that
security of electricity supplies are not compromised. The timing
of the application of the EPS is critical. Imposing an EPS before
the technology is available to deliver the standard set would
stall developments and may compromise security of electricity
supplies. Alongside an EPS, incentives to invest in, and operate,
new plant will need to be maintained in order to guarantee operation
(and carbon savings) whilst, EPS-constrained plant is required
to compete with existing, written-down plant. The risks associated
with an EPS can be managed by providing sufficient flexibility
to investors to adopt alternative approaches, including the application
of low-carbon technologies that are proven and available today.
Through operating a gas-fired power station as a CHP plant is
a proven means of reducing carbon emissions without constraining
gas-fired generation per se: It is possible to set an EPS
at a level that provides CHP operation as a compliance option
alongside CCS. Such a choice may be a valuable mechanism for ensuring
security of supply whilst still reducing carbon emissions
CHPA RESPONSES TO
SPECIFIC QUESTIONS
ASKED BY
THE COMMITTEE
19. 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?
The key factors to consider when setting an
EPS are:
The commercial availability of CCS technology.
The cost of applying CCS to plant.
The availability of wider compliance
options.
Crucially, the wider electricity grid
emissions trajectory.
Any potential impacts on security of
energy supply.
20. The Association notes that CHP could
provide an appropriate compliance option both initially and into
the future as emissions levels become more constrained (ie CCS
CHP as a measure for continued emissions reductions).
21. Consideration also will need to be given
to application of any EPS to plant when operating flexibly to
meet grid requirements, including low load and transient operation.
One possibility would be for an EPS to be determined on the basis
of average annual operational emissions accounting for increased
emissions when operating as spinning reserve or during start up/shut
down processes. A second option to account for operational flexibility
would be to permit all affected plant to be allowed a maximum
total number of operating hours which can be excluded from the
calculation of the average emissions factor for EPS compliance.
Should the level be changed over time?
22. In theory, the level of an EPS should
decline over time for new generation plant only. The EPS should
be set to drive cost effective emissions reductions and maximise
plant efficiency (for both heat and power generation). If adopted,
the ultimate aim should be to ensure that an EPS along with other
government policies, facilitate the development of CCS CHP plant
which will provide the lowest possible emissions from coal, gas
and bioenergy plant whilst maximising the useful energy output.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
23. If the EUETS operates successfully under
phase 3, it is unlikely that an EPS will bring additional emissions
savings. It could, however, prevent new unabated coal plant from
being constructed and drive more efficient use of fossil fuels.
As such the EPS provides a policy backstop for emissions reduction.
In so doing it is vital however, that the net effect of the wider
incentive and market framework is to deliver both investment and
operation of qualifying plant.
How effective is an EPS likely to be in driving
forward the development of CCS technology?
24. On its own, an EPS will not drive the
development of any new technology; it will merely prevent the
development of generation stations with emissions over that set
by the EPS. It is vital, therefore, that to promote, CCS and CCS
CHP, the Government will need to ensure that the economics are
attractive enough for developers to invest in these over and above
other technology options. It is for this reason that an EPS should
apply to gas generation as well as coal as, if applied only to
new coal stations, it will simply drive new, unabated gas power
plant not CCS.
Should the UK's CCS demonstration programme cover
gas-fired as well as coal-fired power stations?
25. Yes, gas will continue to be an important
fossil fuel in the future and a failure to include gas within
the CCS demonstration programme is an unnecessary limitation.
Should an EPS be applied to gas, the option to operate as gas
CHP should be available as a compliance option to drive down emissions
whilst preserving security of UK energy supplies.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
26. If an EPS failed to account for heat
off-take this could limit the ability of industry to decarbonise
and could have the perverse effect of driving an increase in emissions
in some sectors.
27. CCS will have to be made to be profitable
for investment in any new thermal power plant to take place at
all. Application of EPS unilaterally by the UK may discourage
investment by international players if other power markets more
profitable.
What is the likely impact of an EPS on domestic
energy prices?
28. The decarbonisation of energy in the
UK is likely to have direct and indirect impacts on consumers
through the cost of energy directly and in consumer goods. The
EPS in itself does not add direct costs to consumers unlike other
Government support mechanisms, it simply prevents certain developments.
Developers will, therefore, select options which are permitted
and give the best returns on investments be that through Government
support (eg feed in tariff and renewables obligation) or through
natural market conditions. The fitting of CCS technology will
add a significant cost to development that will be reflected in
electricity prices. CCS processes use a material amount of power
that reduces the overall efficiency of the power plant requiring
more plants to be built. Gas CCS is at least 7% less efficient
compared with unabated CCGTs. By operating as CHP, CCS plant can
operate at far greater overall efficiency contributing to both
emissions reductions and security of supply. As such efficiency
losses (and associated costs) can be mitigated by operating CCS
plant as CHP.
Are any other European countries considering an
EPS? If so, should the standards be harmonised?
29. The CHPA supports harmonisation of standards
across member states but this should only be done if the key issues
highlighted earlier (accounting for heat, application to coal
and gas) are incorporated. It may be that the varying energy markets
across the EU could prevent an EPS being optimal for the UK energy
market.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
30. The CHPA does not propose to answer
this question.
Can greater use of Emissions Performances Standards
internationally help promote agreement on global efforts to address
climate change?
31. The CHPA does not propose to answer
this question.
September 2010
87 The Cogeneration Directive: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0008:EN:HTML Back
88
There are at least three major tests that must be met for a plant
to be built and operate: 1. Can the plant be built-is
the plant under consideration legally acceptable within the UK.
This is the only test only that would be affected by an EPS. If
legally acceptable, the project can proceed to the second test.
2. Project financials-does the financial modelling provide
a predicted rate of return (or other measure) that is sufficient
and competitive compared to other options available to the developer.
This test includes returns from Government policies such as the
renewables obligation and climate change levy exemption. The tests
will include the regulatory risk of these policies changing or
being withdrawn during the lifetime of the plant 3. Ongoing
operation: If the second test is met the plant is likely to be
built. Ongoing operation (and therefore contribution to emissions
reductions) will be dependent on a combination of market conditions
and government support. Changes in government support could cause
a plant to reduce or cease operations. Back
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Letter from Lord Adair Turner to Rt. Hon Chris Huhne, Secretary
of State for Energy and Climate Change concerning CCS 17 June
2010 http://hmccc.s3.amazonaws.com/gas%20CCS%20letter%20-%20final.pdf Back
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