Memorandum submitted by E3G
SUMMARY
1. E3G welcomes the Energy and Climate Change
Committee inquiry on Emissions Performance Standards (EPS) for
power generation. We believe that there is scope for the Committee
to add value to the EPS debate by helping to clarify the specific
objectives that an EPS will need to achieve, and by helping to
identify the key criteria for evaluating policy design choices.
2. This submission makes three main points.
First, we suggest that there is potential for an EPS to help to
lower the long-term costs of decarbonisation, primarily by providing
greater certainty to investors about future markets. Second, we
evaluate EPS proposals in the context of European policy developments,
and identify the strategic advantage to the UK of becoming an
early mover. We address the specific question of how electricity
imports should be treated under a UK EPS, and suggest that the
EPS should be designed in a way that does not damage the wider
goals of European power market integration. Finally, we briefly
comment on the potential for adoption of an EPS to influence international
climate negotiations.
3. E3G is an independent, not-for-profit
European organisation committed to working in the public interest
to accelerate the global transition to sustainable development.
WHAT IS
AN EPS AND
WHAT IS
IT FOR?
4. The UK power sector faces an unprecedented
challenge, with a need to largely decarbonise electricity supplies
by 2030 while supporting the electrification of heat and transport—and
continuing to guarantee security of supply, provide best value
to consumers and address fuel poverty concerns. Delivering on
these aims will require considerable investment in both power
generation and power networks. Most published low carbon scenarios
suggest that power sector investment of at least £8-£12
billion per year will be needed.[7]
As recognised by recent reviews by HM Treasury, OFGEM and the
Committee on Climate Change (CCC), current power market arrangements
are likely to be inadequate for delivering the necessary investment.
Substantial reform is required to ensure that UK power markets
remain fit for purpose during the low carbon transition.
5. An Emissions Performance Standard is
one measure that could be introduced as part of a broader process
of power market reform. It is a policy instrument with potential
to deliver specific outcomes, which could include preventing the
construction of new unabated high-carbon fossil fuel generation
and setting a clear timeline for the retirement or retrofitting
of existing high-carbon plant.
6. It is important to be clear, however,
that an EPS is not a catch-all solution that can deliver a low
carbon power sector for the UK on its own. An EPS can provide
certainty about disinvestment in certain forms of power generation.
It will not be sufficient on its own to guarantee new investment
in low carbon generation technologies, as this will depend on
the wider design and operation of electricity markets and incentive
schemes. We therefore urge the Committee to consider the debate
on Emissions Performance Standards within the context of the need
for broader power sector market reform.
7. With these considerations in mind, an
EPS could play a useful role within a package of market reform
measures by contributing to lowering the long-term costs of decarbonisation.
An EPS could enable this in two ways: by providing greater certainty
to investors on the long term market for CCS and other low carbon
power generation technologies, and through avoiding lock-in to
high carbon technology.
Reducing uncertainty for investors and suppliers
8. An EPS increases the certainty of the
future market opportunity for low carbon generation and CCS in
particular, by ensuring low carbon options are not undercut by
high carbon generation. This will ensure that providers of CCS
equipment begin investing in the technology development and supply
chain capacity now that is necessary in order to begin deployment
in 10-20 years time.
9. The UK has agreed to develop four CCS
demonstration projects, and up to 12 further projects across Europe
could receive funding from the set aside from earmarked allowances
from the EU ETS New Entrants Reserve. However there is currently
no credible strategy for managing the transition from the demonstration
phase to commercial deployment of CCS. In the absence of forward
visibility of a market for CCS technologies, competitive supply
chains for CCS components are unlikely to be developed, and there
will be no incentive for suppliers beyond those involved in the
demonstrations projects to invest in technology development. If
an EPS is not implemented until CCS is "proven", the
supply chain capacity will not be there and costs will be correspondingly
higher.
10. There is no evidence that the carbon
price through the European Union Emissions Trading Scheme (EU
ETS) provides the same level of incentive to invest in supply
chains for low carbon generation. Future carbon prices are often
implicitly discounted in decisions on power generation. As the
EU ETS is fundamentally a policy-led market, the carbon price
is subject to political risk, and there is low confidence that
politicians would allow the carbon price to rise to very high
levels without intervention. An overallocation of permits in the
current phase of the EU ETS, combined with ease of access to cheap
credits through the Clean Development Mechanism, creates an expectation
of continuing low carbon prices in future.[8]
The structural link between the EU ETS price and macroeconomic
conditions further contributes to low levels of forward price
visibility. Power generation decisions are also subject to a wide
range of uncertainties beyond carbon pricing alone. An EPS, in
this context, should be seen as a corrective to a specific market
failure rather than as an anti-market measure.
Avoiding lock in
11. Under current market conditions, it
is highly unlikely that new unabated coal-fired power stations
will be built: the risks relating to regulatory change, capital
costs, future demand, carbon prices and relative fuel prices are
simply too large. An Emissions Performance Standard would guarantee
that new unabated coal generation would not be built even if market
conditions change. Avoiding new unabated coal generation—whether
explicitly through legislation or implicitly through unfavourable
market conditions—is essential for avoiding lock in to generation
infrastructure that is incompatible with the imperative of decarbonising
the power sector by the mid-2030s. If UK carbon reduction obligations
under the Climate Change Act are to be met, new unabated fossil
plant would either need to be forcibly retired before the end
of their operational life or would be pushed off the system through
an unfeasibly high carbon price. Neither option is economically
desirable; both would raise overall costs for consumers.
DESIGN CRITERIA
12. Careful policy design decisions on the
level, timing and structure of an EPS will be needed based on
the precise outcomes sought. A poorly-designed EPS may risk unintended
consequences such as extending the life of the oldest and least
efficient power stations or preventing implementation of supply-side
energy efficiency measures.
13. A key design choice for the EPS relates
to the future for gas and unabated Combined Cycle Gas Turbines
(CCGTs). It is likely that an EPS will fail to deliver the incentives
to invest in low carbon generation if the limits can be met by
unabated gas—as CCGTs would become the obvious investment
choice. Similarly, a coal-only EPS would have little effect other
than intensifying current trends towards gas-fired generation.
The time horizon for the EPS must therefore clearly signal the
point at which high load factor CCGTs will need to be fitted with
CCS.
14. For reasons of security of supply and
balancing power from renewable sources, the EPS will need to be
designed in a manner that does not prevent the operation of power
generation plant at very low load factors. There are a number
of options for doing this—for example, similar flexibility
mechanisms have been included in the EU Industrial Emissions Directive
(IED). Careful policy design will be needed to avoid gaming or
perverse incentives.
EPS IN THE
EUROPEAN CONTEXT
15. There has been considerable interest
and debate at a European level on Emissions Performance Standards
for power generation. In 2008, the European Parliament Environment
Committee voted to support an EU-wide Emissions Performance Standard
from 2015 onwards as part of the EU Climate Package, although
the EPS was not included in the final agreement. The potential
for an EU-wide EPS was also debated in relation to the Industrial
Emissions Directive earlier this year.
16. The European Commission has now signalled
that EU-wide EPS proposals will be revisited in its planned review
of the CCS Directive in 2015.[9]
A recent amendment to the Industrial Emissions Directive also
clarifies that member states are free to implement their own standards
for carbon emissions.[10]
17. It is in the UK's strategic interest
to push for an EU-wide EPS. Harmonised standards would widen the
market for low carbon technologies, and a single EPS for Europe
would contribute towards the aim of achieving an integrated and
more competitive European power market.
18. Moreover, a number of circumstances
specific to the UK create the possibility that the UK could become
a centre for CCS technology development. The UK's geological CO2
storage opportunities are extensive and well-understood; UK industry's
experience of North Sea oil and gas has led to a strong skills
base; and the UK will need to replace its power generation capacity
earlier than other countries. This provides a strong case for
early adoption of CCS technologies in the UK context.
19. Until an EU-wide EPS can be agreed,
there is value in the UK proceeding with an EPS of its own. By
moving ahead of Europe, we provide strong signals for industrial
development to be UK based, and may generate significant commercial
opportunity for UK firms. Developing practical experience of an
EPS in the UK would also make it more likely that an EPS would
be adopted by other countries or at an EU level.
EPS AND ELECTRICITY
IMPORTS
20. Concerns have been expressed that an
EPS in a single member state such as the UK could lead to "carbon
leakage" through providing an incentive for higher-carbon
generation to locate in neighbouring countries and export electricity
back to the UK. It is worth considering this issue in detail.
21. At an EU level, this is evidence of
carbon leakage occurring in response to the EU ETS: coal-fired
power stations are under development in Albania and Ukraine with
a view to exporting power into the EU. In designing an EU-wide
EPS, addressing this risk of carbon leakage may be a key concern.
22. In the UK context, carbon leakage from
neighbouring markets is likely to be relatively small in the short-
to medium-term, due to limited capacity for electricity imports.
The GB power market has the lowest level of interconnection with
its neighbours of any major European power market. There are currently
2.5GW of interconnection capacity to France and Northern Ireland,
and new links to the Netherlands and Ireland should increase total
interconnection capacity to 4GW by 2012.[11]
This compares to a total UK generation capacity of 80GW (expected
to rise to 110GW in 2020).
23. Increasing interconnection with other
markets is an increasingly important strategic priority for the
UK power sector. Market integration can be expected to increase
competition and lower prices. Interconnection is also essential
for the integration of power from variable-output renewable sources,
to allow access to markets at a time of high output and to ensure
security of supply at times of low output. It will therefore be
imperative to structure a UK EPS in a manner that does not unnecessarily
limit cross-border trade and the development of interconnection
capacity.
24. There are two main options for addressing
carbon leakage within a UK EPS, but both have substantial limitations:
Procurement standards
25. In California, legislation to establish
an Emissions Performance Standard does not regulate individual
plants directly. Instead, it places an obligation on public utilities
not to procure electricity from power stations that fail the standard,
whether in-state or out-of-state. It thus avoids the problem of
carbon leakage. However, market structures in the UK are considerably
different than in California, with less trade through long-term
contracts. Careful consideration would be needed of how this requirement
could be implemented without damaging the liquidity of power markets.
This model also introduces risk of emissions displacement: it
is likely that high-carbon generation would continue to operate
and simply supply other markets that do not apply an EPS.
Average intensity
26. A second option would be to apply the
Emissions Performance Standard to the average CO2 intensity of
electricity from supplier countries. This would avoid carbon leakage
and may encourage EPS adoption in other states. In practice, this
approach would only apply to France, Ireland and the Netherlands
(and potentially Norway and Belgium if proposed interconnectors
are built). Due to high levels of nuclear and hydro power, the
carbon intensity of electricity generated in France (90g/kWh),
Norway (7g/kWh) is relatively low, and electricity imports from
these countries are unlikely to be affected by an EPS.[12]
Ireland (544g/kWh), the Netherlands (395g/kWh) and Belgium (261g/kWh)
have higher levels of carbon intensity, and—depending on
the level of the EPS—could be precluded from electricity
trade with the UK under this approach. This would have negative
implications for the integration of wind power as well as energy
security.
27. In this context, it may be preferable
initially to implement a UK Emissions Performance Standard with
no restrictions on the carbon emissions associated with imported
electricity—while actively monitoring risks of carbon leakage
over time.
EPS IN THE
INTERNATIONAL CONTEXT
28. The Committee call for evidence asks
whether "unilateral action by the UK to introduce an EPS
contribute towards global climate negotiations in Cancun in November
2010" and whether "greater use of Emissions Performances
Standards internationally help promote agreement on global efforts
to address climate change". A degree of political realism
is required here. There are deep and increasingly entrenched divides
between the main players in the international climate negotiations,
and levels of trust remain low after last year's failure in Copenhagen.
Political timelines also suggest that it will not be possible
for a UK EPS to be enacted before the Cancun climate conference.
It is therefore unlikely that an EPS for the UK power sector will
contribute substantially to the negotiations unless it is accompanied
by further reaching proposals—such as a commitment to raising
the EU 2020 carbon reduction target from 20% to 30% or a breakthrough
on climate finance. Nevertheless, introduction of an Emissions
Performance Standard in the UK could be interpreted as a signal
of intent that demonstrates that the UK takes its existing climate
commitments seriously, and in this respect it is to be welcomed.
29. Finally, a UK EPS would establish an
important model that could play a useful role in the development
of sectoral crediting and trading mechanisms in key developing
countries. The EU is proactively seeking to develop new international
mechanisms to ensure comprehensive low-carbon development, beyond
the current fragmented project approach under the Clean Development
Mechanism (CDM). Including an EPS within an international finance
mechanism would have three positive impacts:
— Providing a crediting baseline for the
power sector: An EPS would establish a robust baseline that removes
the need for subjective and costly production of project-by-project
baselines that have caused many problems with the current operation
of the CDM.
— Widening the impact of climate finance:
Currently, the CDM rewards low carbon investments such as solar
and wind but does not prevent investments in high carbon fossil
fuel power generation capacity, which has continued to increase
in most countries in receipt of CDM finance. An EPS would ensure
that the power sector as a whole moves to a low carbon trajectory.
— Attracting private sector finance: As
with a UK EPS, use of an Emissions Performance Standard as part
of an international climate finance mechanism would remove some
of the policy risk associated with low carbon technology solutions,
and could thereby help mobilise private finance alongside public
funding.
September 2010
7 E3G (2009) Investment momentum for decarbonising
the EU power sector: Evidence review on current investment and
future scenarios. www.e3g.org. Back
8
The IEA notes that overallocation of permits due to the recession
combined with use of CDM credits creates an overall surplus of
credits of 0.5 gigatonnes by 2013. Banking these permits enables
them to be used in Phase III of the EUETS-which means by 2020
domestic EU emissions could be similar to today's level while
still complying with the EU ETS cap. IEA (2009) World Energy Outlook
2009: Post-2012 Climate Policy Framework. OECD/IEA: Paris. p 182. Back
9
European Commission (2008) Questions and Answers on the directive
on the geological storage of carbon dioxide. http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/798&format=HTML&aged=0&language=EN&guiLanguage=en Back
10
Recital 9a to the Industrial Emissions Directive reads: "In
accordance with Article 193 of the Treaty on the Functioning of
the European Union, nothing in this Directive prevents Member
States from maintaining or introducing more stringent protective
measures, for example greenhouse gas emission requirements, provided
that such measures are compatible with the Treaties and the Commission
has been notified." Back
11
OFGEM (2010) Electricity Interconnector Policy consultation. Back
12
IEA (2009) CO2 Emissions from fuel combustion: highlights. http://www.iea.org/co2highlights/CO2highlights.pdf Back
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