Memorandum submitted by the Department
of Energy and Climate Change
1. SUMMARY
1.1 The Department welcomes this opportunity
to provide evidence to the Committee's inquiry into the Emissions
Performance Standard (EPS).
1.2 In the Coalition's Programme for Government,
it was stated that an EPS would be established that would prevent
coal-fired power stations being built unless they are equipped
with sufficient carbon capture and storage to meet the emissions
performance standard.
1.3 The Government has, in its first Annual
Energy Statement, stated its intention to consult on an EPS as
part of a wider consultation in the autumn on electricity market
reform, with the outcome to be published in a spring 2011 White
Paper.
1.4 The Government considers that an EPS
should provide longer term certainty to investors over future
regulatory measures, closely linked to development of CCS technology.
The Government also believes that an EPS should contribute to
reducing emissions in the UK electricity sector and complement
other market instruments. We will be assessing this as part of
the consultation and will look for views on the role the mechanism
could play.
1.5 The following document outlines some
of our other key considerations as we move to consultation. Given
the fact that we plan to do further detailed analysis on the EPS
as part of the Electricity Market Reform project, the Government
would welcome the opportunity to provide further evidence in due
course.
1.6 This document addresses the Committee's
questions in turn, and covers the Government's considerations
including the type of EPS, its level and its application. It also
addresses some of the considerations in the context of the CCS
demonstration programme and outlines current arrangements under
the EU Emissions Trading System.
2. INTRODUCTION
2.1 As outlined in the 2010 Annual Energy
Statement,[1]
the UK economy is reliant on fossil fuels, and is likely to be
so for some time to come. Most of our power stations are fuelled
by coal and gas, and in 2009 over 70% of net electricity supplied
was from fossil fuels.[2]
2.2 The 2050 Pathways Analysis shows that
under some scenarios, in the context of an overall 80% CO2 reduction,
electricity generation would need to be virtually emission-free,
given that we would expect some emissions from industrial and
agricultural processes, transport and waste to persist.
2.3 Furthermore, most of the 2050 pathways
show that demand for electricity will double by 2050, as a result
of the need to electrify large parts of the heat and transport
sectors.[3]
For this to have the required impact on emissions, the electricity
being consumed will need to be almost exclusively from low carbon
sources. In addition, the Committee on Climate Change has recommended
that electricity supply should be almost entirely decarbonised
by 2030.[4]
2.4 The Government's overriding imperative
is to enable low carbon generation to take over the sector, without
undermining the reliability, security and cost of supply.
2.5 Coal plays a vital role in today's energy
mix. In 2009 it supplied 28% (net) of electricity, and 31% in
2008.[5]
It is a reliable fuel, providing diversity and security to electricity
supply. There are abundant remaining global reserves, and countries
across the world are set to use increasing quantities. However,
it is also the most polluting fuel, having the highest carbon
emissions.
2.6 In 2009, the estimated carbon intensity
of the UK's coal electricity supply was 915 g/kWh, compared to
405 g/kWh for gas and 452 g/kWh across all generation.[6]
2.7 It is vital that we find ways to reduce
substantially the emissions from coal if it is to play a part
in our energy supply in the long-term, which is why the development
of CCS is so important.
2.8 CCS has the potential to reduce carbon
emissions from fossil fuel power stations by around 90%, enabling
coal and gas to continue to provide secure base load and flexible
generation without jeopardising emission reduction goals and helping
to maintain our energy security.
2.9 Whilst the discrete items that make
up the technology underpinning CCS are understood, they have not
yet been demonstrated anywhere in the world at commercial scale
in a fully integrated manner for electricity production. As such,
there remains considerable uncertainty over the cost of demonstrating
CCS successfully at commercial scale. These uncertainties mean
the private sector is unwilling to shoulder the financial risk
of demonstration projects until the technology is further developed.
It is for this reason that the Government has committed to continuing
public sector investment in CCS for four power stations. As well
as demonstrating the global potential of CCS as a technology,
work on these projects should give the UK a leading role in an
industry with a potentially large worldwide market.
2.10 An EPS is one of a range of possible
measures which can be used to reform the way the electricity market
functions in order to address challenges we face in delivering
investment in the low carbon, secure energy mix that the UK needs
to develop over the coming decades. Consultation in the autumn
will allow us to consider properly the major reforms in the round,
and how an EPS would interact with other measures being considered,
including the full establishment of Feed in Tariffs, Carbon Price
Support and capacity mechanisms. It is crucial that these reforms
are considered as a package, rather than approaching them piecemeal.
2.11 While the details of an EPS are still
being finalised, we are clear that without CCS it would be impossible
for new coal power stations to meet such a standard.
3. RESPONSE TO
QUESTIONS
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?
3.1 There are a number of factors that need
to be considered for an EPS. Whilst the level it is set at is
one of those considerations, there are a number of others which
could play a key role in the mechanism's effectiveness. We are
still considering these issues and how they interact with each
other, and how, overall, an EPS would fit with wider reform of
the electricity market. The following highlights some of the issues
we are considering, but given the early stages and complexities,
these are only an indication and are subject to the autumn consultation.
3.2 Demonstration of CCS is critical, with
the IEA identifying that it can deliver 20% of the least cost
path to halving global emissions by 2050. One of the key factors
we are considering is how to design the mechanism at a level compatible
with commercial scale demonstration and with suitable flexibility
to enable investment in plant equipped with CCS, particularly
during the demonstration stage where CCS may only be fitted to
part of the plant's capacity. Setting it at a level, in a form
and from a point in time which does not allow flexible operation
of the power station hosting CCS could deter investment, and as
such hinder the development of the technology.
3.3 The Committee on Climate Change has
recently recommended that serious consideration should be given
to extending an EPS to cover gas generation. In their letter to
the Secretary of State in June this year, they stated:
"Given the need to decarbonise the power sector
in the period to 2030, and therefore the very limited scope for
investment in conventional gas generation beyond 2020, an Emissions
Performance Standard that would effectively require any new gas
plant beyond 2020 to be fitted with CCS should be seriously considered."
3.4 Given this recommendation, the Government
will be considering whether an EPS could be applied in this way,
whilst also ensuring the UK's electricity supply remains reliable,
affordable and secure. There are a number of considerations to
take into account, which include the role of gas in the energy
mix from the 2020s, the status of CCS technology and requirements
for peaking plant to balance out intermittent renewables.
3.5 The Committee made it clear, in the
same letter, that they do not propose an EPS that would require
retrofit of CCS to plant added to the system before 2020. We will
be considering this in our analysis, including how it could influence
investment in gas-fired plant in the run up to 2020.
3.6 We are also considering how an EPS might
be applied. There are a number of options, which include, for
example, applying to individual plant or to a suite of plant.
It has also been suggested that an EPS should be applied to electricity
suppliers, to limit wholesale purchase of electricity from certain
plant.
3.7 There are advantages and disadvantages
to all the options. We need to consider how to provide a clear
approach that provides enough regulatory certainty, whilst also
building in the flexibility needed whilst CCS is a demonstration
technology, in order to secure the investment in new capacity.
3.8 There are a number of options on how
to set the level of an EPS. Whilst it could be set at one level
universally, it is possible to set different levels for different
fuels, and for different type of plant.
3.9 The Government will also be considering
when an EPS should be effective from, and when and how to enforce
it. Both of these factors could play an important role in helping
an EPS achieve the objectives set out for it. We will also be
considering whether a static EPS should be set or whether, over
time—possibly subject to certain conditions being met—it
should be decreased.
3.10 A further issue that is important when
considering an EPS level is the form in which it should be expressed.
Expressing an EPS per unit of electricity (eg g/kWh) is a commonly
understood expression, which contains a degree of technology specificity—the
EPS could only be met with CCS, greater efficiency (including
CHP), or co-firing with biomass. However, the alternative of an
annual limit on total emissions could provide more flexibility.
3.11 An EPS must be considered alongside
other decarbonisation measures. It will be critical that all action
taken over the next decade and beyond is closely aligned, and
that impacts that an EPS, alongside other mechanisms, may have
on the market are properly understood. Through this process, the
Government is looking to ensure that the most appropriate outcome
is delivered through the implementation of an EPS. This is the
primary reason for consulting on an it as part of the package
of measures in the autumn.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
3.12 Emissions from large electricity producers
in the UK are covered by the EU Emissions Trading System (EU ETS).
The EU ETS works on a "cap and trade" basis to deliver
a set amount of emission reductions against a verified emissions
baseline. At the end of each year, installations must submit verified
emissions data and retire an equivalent number of allowances to
ensure compliance. Entities covered by the EU ETS can trade the
right to emit with each other, creating a carbon price and enabling
emission cuts to be made where they are cheapest.
3.13 Phase III of the EU ETS runs from 1
January 2013 until 31 December 2020. In Phase III, there will
be a tighter, annually declining, EU wide cap. In recognition
that the power sector is able to pass on the full costs of carbon
to consumers, there will be no free allocation to electricity
generation in the UK. This means that power generators will need
to buy all the allowances required to cover their emissions. Allowances
can either be bought from auctions or on the secondary market.
3.14 Although the EU ETS is delivering emissions
reductions across the UK and Europe, it cannot guarantee the decarbonisation
of UK energy supplies over the coming decades. UK power generators
could opt to purchase emissions allowances from emitters in other
EU member states rather than pursuing further decarbonisation
if it were economic to do so. Were Government to introduce a stringent
UK EPS, UK power generators would only have the option to lower
emissions to meet this standard, rather than also having the option
to buy EU ETS emissions allowances. This, therefore, provides
greater certainty about emissions reductions in the UK power sector,
even if it does not necessarily ensure that the cap is met at
lowest cost and could involve some additional costs being passed
through to household and business customers.
3.15 The exact impact of an EPS will depend
on its level and scope and, whilst introducing a stringent EPS
could prevent the EU ETS cap being met at least cost, analysis
by the Committee on Climate Change indicates that reductions in
emissions from electricity generation are possible at relatively
low cost when compared with other sectors in the UK, and that
radical reductions in emissions in electricity generation are
essential if long term overall UK greenhouse gas targets are to
be achieved.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
3.16 With regard to energy security, it
is imperative that an EPS does not curtail the development needed
in energy infrastructure in the run up to 2020 and beyond. Whilst
an EPS has the ability to prevent unabated fossil fuel plant being
built, it is only part of the package necessary to deliver investment
in low carbon sources. It is critical, therefore, that we look
at this as part of the wider incentive mechanisms.
3.17 It would be very easy to devise an
EPS which simply resulted in no new fossil fuel plant being constructed
(as has happened with coal in California), but this would have
an adverse effect on security of supply. It would also mean that
the UK would be deprived of the opportunity to demonstrate CCS
technology on either modern pulverised coal power stations or
gas power stations, and would therefore lose the opportunity for
global leadership in this area.
3.18 An EPS is not being considered with
a view to reducing emissions at EU-level, as the primary means
of achieving this is through the EU ETS. Aside from providing
regulatory certainty, the focus of an EPS would be on supporting
the delivery of a low carbon electricity sector in the UK.
How effective is an EPS likely to be in driving
forward the development of CCS technology?
3.19 An EPS is only one tool in the package
of measures that may be necessary to decarbonise the electricity
sector and it will not, in itself, drive forward the development
of CCS. In particular, given the costs and risks involved, commercial
CCS will only develop with Government funding.
3.20 An EPS would only contribute to wider
deployment of CCS once the technology is successfully demonstrated
and the combination of market factors, regulatory requirements
and policy interventions are such that there is an economic case
for CCS. Therefore, design of the whole framework is critical
to ensure secure, low-carbon electricity.
3.21 We consider that an EPS could provide
a means of giving some regulatory certainty on future expectations,
and this will need to be balanced with the status of the technology
both now and in the future. As discussed above, CCS has not yet
been demonstrated at commercial scale for electricity production.
An increase in regulatory certainty will only support the development
of CCS once there is confidence in its commercial and technical
feasibility at this scale. This will be one of our key considerations
when designing the mechanism.
Should the UK's CCS demonstration programme cover
gas-fired as well as coal-fired power stations?
3.22 The Committee on Climate Change has
recently recommended that serious consideration should be given
to funding at least one gas CCS demonstration as part of the demonstration
programme.
3.23 Tackling emissions from coal continues
to be our priority as it is the fossil fuel with the highest carbon
emissions, but is reliable and provides security and diversity
of electricity supply in the UK.
3.24 We recognise that, in time, gas plant
will need to reduce their emissions. We are giving careful consideration
to whether a CCS demonstration project on gas would prove beneficial
and add value to the programme.
What is the likely impact of an EPS on domestic
energy prices?
3.25 An EPS could increase the price of
electricity to customers. In a scenario where the carbon price
was not high enough to provide an economic incentive to operators
to generate with CCS, an EPS requiring CCS on both new coal and
gas generation (discounting capacity supported under the UK demonstration
programme) and leading to greater emission reductions than those
incentivised by the ETS would lead to increased costs to the operator
and thereby increase the price of electricity beyond that which
the market conditions alone would drive. These costs would be
passed on to customers.
3.26 On the other hand if an EPS was set
so that it could be met by new unabated gas and by new coal only
if at least partially fitted with CCS before it is proven at commercial
scale, then prices may not be affected significantly, as the only
new coal generation likely to come forward would be part of the
demonstration programme.
3.27 If the EPS is set at a level that requires
a greater proportion of CCS on new coal than will be supported
through the demonstration programme, only gas generation is likely
to be built, which would reduce diversity of supply. Coal with
partial CCS is unlikely to generate electricity more cheaply than
unabated gas, and the economies of scale associated with CCS make
it unattractive to investors because it will be more expensive
to retrofit CCS to the balance of plant at a later date than to
fit CCS to the whole plant from the outset.
3.28 A key driver for the CCS demonstration
programme is to help bring down the costs of CCS and make it commercially
deployable in order to minimise the price impact of meeting an
EPS.
3.29 If the EPS is not designed in the right
way, adding to uncertainty and delays in investment, there is
a further risk that this could impact domestic energy prices and
the security of the UK's electricity supply.
Are any other European countries considering an
EPS? If so, should the standards be harmonized?
3.30 We are not aware of any European countries
formally considering an EPS. If this were to change, then we would
look to share best practice and assess the ways in which a harmonised
approach could play a role in emission reductions.
3.31 A number of states in the US have implemented
an EPS, including California, which is not covered by a carbon
trading scheme such as the EU ETS. This is set at around 500g/kWh.
Since its introduction, there has been no investment in new coal
plant in the state. It is important that we consider the approach
that has been taken in California and elsewhere, to ensure that
the EPS does not serve to prevent investment in CCS.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
3.32 The climate change negotiations centre
around the need for countries to agree legally binding targets
to reduce emissions, rather than necessarily to confirm how they
intend to meet those targets. The UK negotiates as part of the
EU, which advocates carbon markets as the best way to deliver
reduction at least cost. However there are discussions around
sectoral approaches to curbing emissions where the issue of EPS
may arise, although we would not expect it to be central to securing
a deal.
3.33 To enable countries to take on more
ambitious targets there are negotiations around the transfer of
finance and low-carbon technology to developing countries to help
them make the transition to a low carbon future—the UK's
position on these issues is more likely to contribute to progress
in the negotiations.
Can greater use of Emission Performance Standards
internationally help promote agreement on global efforts to address
climate change?
3.34 EPS is a means to an end but at the
moment global efforts to address climate change are focussed on
the need for every country to agree legally binding targets. Without
such targets there is less impetus for countries to deploy an
EPS. Deploying an EPS in the UK might demonstrate leadership and
commitment to meeting our declared targets, but might not be an
appropriate measure for all countries.
September 2010
1 Annual Energy Statement, Departmental Memorandum,
27 July 2010. Back
2
Digest of United Kingdom energy statistics (DUKES), 2010. Back
3
2050 Pathways Analysis, July 2010. Back
4
Building a low-carbon economy-the UK's contribution to tackling
climate change, December 2008. Back
5
DUKES, 2010. Back
6
DUKES, 2010. Back
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