Memorandum submitted by the Committee
on Climate Change
1. In our recommendations to Government,
we have indicated that an Emissions Performance Standard (EPS)
is one option, among others, that could help to achieve the decarbonisation
of electricity supply in the UK.
2. It is important to clarify that the term
EPS can be used to mean different things, ie a limit on the emissions
(per MWh or per MW per year) of a new-build plant, or those of
each plant on the system (including existing plant), or the average
emissions across all plant on the system, or across the plants
owned by a particular company.
3. We have highlighted the potential role
for a plant-level EPS on new capacity in two contexts:
4. Coal: In our inaugural report
in 2008, we highlighted the need to send a strong signal to investors
regarding the future unabated operation of any new coal-fired
capacity—possibly an EPS severely limiting operating hours
or requiring retrofit—given that our analysis showed that
unabated coal operation beyond the early 2020s was inconsistent
with climate objectives. DECC's response set out an expectation
of full CCS retrofit to any new coal-fired plant by 2025 and a
requirement to demonstrate CCS on part of its capacity from the
start. The new Government has committed to the introduction of
a plant-level EPS for new-build coal capacity.
5. Gas: Our recent letter to the
Secretary of State outlined the merits of demonstrating CCS on
gas-fired plant. It also highlighted the need to signal that beyond
a certain point in time (eg 2020) the building of new unabated
gas plant to run at high load factors would be inconsistent with
the need for radical decarbonisation of the power system during
the period to 2030 (although some gas plant may continue to operate
unabated at low load factors). We therefore suggested that extending
an EPS for new-build capacity to gas-fired plant—effectively
requiring investment either in gas plant with CCS or another low-carbon
option—should be considered as part of a coherent approach
to fossil fuel generation.
6. Introduction of an EPS without wider
reform of electricity market arrangements may risk under-investment
in capacity that may have implications for security of electricity
supplies. This may also risk higher emissions, given that possible
responses to the imposition of an EPS for new-build plant commissioned
from a certain date include:
(i) a rush to build unabated gas-fired capacity
before this deadline; and/or
(ii) life-extensions to old, inefficient, unabated
fossil plants.
7. Only by putting in place a framework
to pull through low-carbon capacity can we mitigate these risks.
Therefore, any EPS should not be considered in isolation, but
rather in the context of wider reforms to the electricity market
arrangements to incentivise build of low-carbon capacity. An EPS
in this context may have a useful role alongside this framework
as a means of underpinning and signalling directly the overall
decarbonisation path for the sector.
8. In further work for our recommendations
on the 4th carbon budget and review of the renewable energy target,
we will:
— consider possible mixes of new low-carbon
(ie renewable, nuclear and CCS) capacity that could be added during
the 2020s, and the extent of electrification of heat and transport
that might be feasible and desirable in this period;
— analyse the extent to which low-carbon
options for providing flexibility on the power system (eg interconnection
and demand-side response) could mitigate the need for unabated
gas-fired plant to operate flexibly; and
— draw out implications for market reform,
including an EPS and positive incentives to encourage investment
in low-carbon generating capacity.
9. Two Annexes are included containing our
letter to the Secretary of State in June 2010, and relevant extracts
from CCC reports over the last two years.
September 2010
Annex 1
Letter to Rt Hon Chris Huhne, Secretary
of State for Energy and Climate Change
17 June 2010
Dear Chris,
CCC advice on the approach to investment in fossil
fuel power generation
The path to meeting the UK's 2050 target to
reduce emissions by 80% requires that the power sector is largely
decarbonised in the period to 2030 (eg average emissions should
be around 100 g/kWh in 2030 compared to around 500 g/kWh currently).
This will require a coherent approach to phasing
out of conventional fossil fuel (ie coal and gas) generation.
Currently the Government has proposed an approach to phasing out
of conventional coal power generation and replacement with coal
Carbon Capture and Storage (CCS), but there is no proposal for
phasing out of conventional gas fired generation and replacement
with gas CCS.
This letter recommends a more balanced approach
(ie covering coal and gas) to required power sector decarbonisation.
Specifically, we recommend that:
— Given new evidence on the potential competitiveness
of gas CCS with other forms of low carbon generation, and the
very limited international effort to develop this technology,
serious consideration should be given to funding at least one
gas CCS demonstration project as part of the four CCS demonstration
projects committed to in the Coalition Agreement.
— 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.
— We are not proposing that an Emissions
Performance standard should cover retrofit of plant added to the
system in the period to 2020, given uncertainties over the economics
of retrofit and the need for investment in conventional gas fired
generation over the next 10 years to maintain security of supply.
I am writing to you now in order to inform your
thinking on design of the second competition for CCS demonstration,
and design of an Emissions Performance Standard for possible inclusion
in the recently announced new energy legislation.
Gas CCS demonstration
Although the Energy Act 2010 allows for the
possibility of financing gas CCS demonstration projects, the current
plan is that the four demonstration projects committed to by the
new Government will all be based on coal generation technologies.
The argument behind this has been that demonstration
of coal CCS technology is crucial, both in UK and global contexts,
and particularly for countries where in the absence of CCS there
would be significant investment in conventional coal-fired generation.
UK support for coal CCS demonstration will, together with efforts
in other countries (eg Australia, Canada, China, US and EU Member
States) facilitate possible early roll out of this technology
both in the UK and globally.
However, our analysis suggests that there is
also likely to be a very important role for natural gas CCS, which
could be competitive with coal CCS on a £/MWh generated basis,
particularly when operating flexibly and in a low gas price world
(also see attachment).
Key considerations are that:
— There is a very limited scope for new
conventional gas fired generation beyond 2020 if we are to achieve
the decarbonisation needed to meet carbon budgets on the path
to the UK's 2050 emissions reduction target (ie 80% on 1990 levels).
— At least 25 GW of gas fired plant on
the UK system by 2020 will be suitable for retrofit with CCS.
— Even at high load factors and with a
reasonably high gas price scenario, gas CCS is competitive with
coal CCS (eg our analysis suggests that gas CCS could be around
£10/MWh cheaper than coal CCS at a gas price of 75 pence/therm
as in DECC's central scenario for 2030).
— The cost advantage of gas CCS increases
at lower load factors, given that it has relatively low capital
costs (eg our analysis suggests that gas CCS could have a £35/MWh
advantage over coal CCS operating at a 50% load factor in DECC's
central gas price scenario). Flexible (ie low load factor) low-carbon
generation plant will be required in the UK and other countries,
particularly to support seasonal demand for electric heating from
the 2020s.
— At both high and low load factors, the
cost advantage relative to coal CCS increases if gas prices are
lower (eg at today's gas price of 40 pence/ therm, gas CCS could
have a £30/MWh advantage over coal CCS operating at high
load factors, and significantly more when operating flexibly).
The IEA estimates that the cost of shale gas could be in the range
30-50 pence/ therm, although we note that there are significant
uncertainties and outstanding environmental questions here.
Therefore whilst much of the current global
effort on CCS demonstration relates to post-combustion coal and
coal gasification (Integrated Gasification Combined Cycle, IGCC),
demonstration of natural gas post-combustion CCS would provide
an additional and potentially valuable option for required power
sector decarbonisation.
UK demonstration would facilitate possible deployment
here in the early 2020s. It would fill a current gap as regards
development of gas CCS technology, where planned demonstration
projects in Norway have been delayed, and where we are not aware
of any current or planned demonstration projects in other countries.
Given its potential importance in supporting required power sector
decarbonisation in the UK, we recommend that you should seriously
consider inviting bids for gas CCS demonstration projects, with
at least one of the four demonstration projects being for gas
CCS, and possibly more depending on bids received.
An Emissions Performance Standard for gas-fired
generation
In the context of coal CCS demonstration, you
have proposed that there will be an Emissions Performance Standard
which would require retrofit of existing coal plant, and fitting
of all new plant with CCS. This is appropriate given the need
to decarbonise the power sector through the 2020s, and given the
very limited role for conventional coal-fired generation beyond
the early 2020s.
There is also a question of whether the Emissions
Performance Standard should be extended to cover gas generation;
this would potentially provide a coherent approach to fossil fuel
(coal and gas) generation and therefore drive down power sector
emissions.
Whereas it is clear that the role for existing
conventional coal will be very limited in the 2020s, and therefore
that conventional coal plant added to the system before 2020 should
be retrofitted with CCS in the 2020s, it is less clear when existing
gas generation in the period before 2020 should be retrofitted.
For example, the economics of gas retrofit will depend on the
pace at which the market for electric vehicles develops, and the
rate at which the carbon price increases, both of which are highly
uncertain. In addition, setting a standard for gas retrofit now
could undermine investment in conventional gas fired plant required
over the next 10 years in order to maintain security of supply.
In contrast, significant investment in unabated
gas generation through the 2020s would conflict with the objective
to decarbonise the power sector in this period. The implication
is that the appropriate strategy for investment in the 2020s should
include possible investment in gas CCS along with investment in
other low-carbon technologies, but not investment in conventional
gas generation except to the extent this is required for balancing
increasing amounts of intermittent renewable generation or to
replace retiring peaking plant.
Therefore we recommend that you seriously consider
an Emissions Performance Standard for gas-fired generation that
would effectively require new gas plant from 2020 to be fitted
with CCS, with possible limited exceptions (eg for very low load
factor plant). This would provide a strong signal about required
power sector decarbonisation in the 2020s, and would complement
broader electricity market reforms to deliver low-carbon investment
from secure generation sources at affordable cost.
We will set out our analysis of gas CCS in full
as part of our advice on the fourth carbon budget, to be published
before the end of the year. In the meantime, I would be happy
to discuss further with you and share the detailed analysis underpinning
this letter.
Yours ever,
Adair Turner, Chair
Committee on Climate Change
Annex 2
Relevant extracts from CCC reports
Building a low-carbon economy, December 2008
[Executive Summary, pp xxiv]
"Conventional coal-fired power generation
should only be built on the expectation that it will be retrofitted
with CCS equipment by the early 2020s. Given reasonable estimates
of likely carbon prices in the 2020s, it is unlikely that conventional
coal-fired generation will be economic even if no other policy
levers are in place. But there is a danger that uncertainties
about future carbon prices could result in investments that lock
the UK in to carbon intense generating plant. There is therefore
a strong case for buttressing the carbon price lever by establishing
a clear and publicly stated expectation that coal-fired power
stations will not be able to generate unabated beyond the early
2020s.
One way to achieve this would be to establish
a requirement that coal-fired power stations cannot be built beyond
a certain date without CCS (say 2020), that those built before
that date will be given a deadline for retrofitting CCS (say in
the period 2020-25), or that plants which choose not to retrofit
should be allowed to generate for a very limited number of hours.
Alternatives could be (i) to set emissions standards (ie company
specific ceilings on the g/kWh emissions from power generation)
implying the need for CCS retrofit in the 2020s to any conventional
plant added over the next 10 years, and ensuring that overall
progress towards decarbonisation of electricity was in line with
the required path to 2030 and beyond, and (ii) to establish a
floor price within the EU ETS. These and other possible options
warrant further consideration."
[pp 108-9]
"[It is] possible that proposals for coal-fired
power stations will be brought forward, particularly if electricity
generators have a preference in principle for a portfolio of different
technologies in order to diversify risks of supply interruption
and price volatility.
An important issue is therefore whether the
only policy instrument influencing decisions on new conventional
coal investments should be the carbon price, or whether other
policies are required.
Provided that expectations of carbon prices
in the 2020s and 2030s are consistent with the vision of radical
decarbonisation, those expectations should themselves ensure that
conventional coal stations are only built with the expectation
and intention of retrofitting CCS, since conventional coal-fired
generation will be in danger of becoming uneconomic in the face
of those carbon prices.
But given the uncertainties of the political
processes which determine EU ETS caps, and given uncertain and
fluctuating carbon price expectations beyond the next few years,
conventional coal investments could possibly go ahead without
a clear acceptance of the need for future CCS installation.
There is therefore a strong case for buttressing
the carbon price lever by establishing a clear and publicly stated
expectation that coal-fired power stations will not be able to
generate unabated through the 2020s and beyond the early 2020s.
One way to achieve this would be to establish
a requirement that coal-fired power stations cannot be built beyond
a certain date without CCS (say 2020), that those built before
that date will be given a deadline for retrofitting CCS (say in
the period 2020-25), or that plants which choose not to retrofit
should be allowed to generate for a very limited number of hours.
Alternatives could be (i) to set emissions standards (ie company
specific ceilings on the g/kWh emissions from power generation)
implying the need for CCS retrofit in the 2020s to any conventional
plant added over the next 10 years, and ensuring that overall
progress towards decarbonisation of electricity was in line with
the required path to 2030 and beyond, and (ii) to establish a
floor price within the EU ETS, as already discussed in the subsection
on nuclear power above. These and other possible policy options
warrant further consideration.
Alongside these possible policy measures, however,
it is vital that planned demonstration projects of CCS technology
go ahead as rapidly as possible, ideally on a larger scale and
covering more variants of the technology than currently planned,
whether in the UK or wider EU contexts."
Meeting Carbon Budgets—the need for a step
change. First Annual Progress Report to Parliament, October 2009
[Executive Summary, pp 21]
"Given the need to decarbonise power to
meet longer-term emissions reduction goals, concerns over increasing
prices, and possible security of supply problems with increased
reliance on imported gas, the Committee recommends that a range
of options to reduce risks for investing in low-carbon generation
are considered:
— Measures to strengthen the carbon price
(eg extending to all low-carbon generation an exemption from the
Climate Change Levy, or a carbon price underpin/tax).
— Measures to provide certainty over the
price paid to low-carbon generation (eg feed-in tariffs for low-carbon
power generation, tendering for low-carbon capacity).
— Measures to ensure investment in low-carbon
generation (eg an emissions performance standard, a low-carbon
obligation).
The Committee recommends that these options
are considered in parallel with wider consideration of any implications
from Copenhagen for the carbon price, so that any changes to current
arrangements can be implemented in time to support decisions at
the beginning of the second budget period on the 25 GW of low-carbon
investments required in the 2020s."
[Executive Summary, pp 21]
"The Committee broadly welcomes the Government's
response to recommendations in our December 2008 report, namely
the draft framework—published in June 2009—to support
investment in CCS and phase out conventional coal generation.
[However, the] Committee's analysis shows that there is a very
limited role for conventional coal-fired plant beyond the early
2020s. The Government should provide a strong signal to investors
now that this is the case whether or not CCS is later proven—to
prevent investments proceeding on the misconception (based on
the lack of a clear carbon price signal) that conventional coal
will continue to operate (even at low load factors) over the next
decades."
[pp 103]
"Power market reform. The Committee had
previously raised the question whether investors could reasonably
be expected to invest in low-carbon technologies under current
market arrangements given multiple risks (eg over fossil fuel
prices, carbon prices, electricity prices, technology costs and
performance characteristics, etc).
Based on a detailed consideration of new analysis,
the Committee's view is that there are plausible scenarios where
risk-averse investors will revert to investment in gas fired power
generation rather than low carbon technologies. This is problematic
given the centrality of power sector decarbonisation to decarbonisation
in other sectors on the path to meeting the 2050 target.
The Committee therefore proposes that alternative
options to strengthen incentives for investment in low-carbon
technologies (eg carbon price underpin, low-carbon obligation,
emissions performance standard, etc) should be seriously considered.
A near term review of these options is required in order that
any new arrangements can be introduced on a schedule consistent
with the timing of investment decisions to be made early in the
second budget period."
[pp 142-3]
"Power sector decarbonisation by the early
2030s is central to cutting emissions more generally (eg through
the application of low-carbon electricity to cars and vans, etc).
Given the importance of moving to a low-carbon electricity system
at affordable cost, the Committee believes that we should not
accept the significant risks and costs associated with the current
market arrangements.
We therefore strongly recommend that a range
of options for power market intervention are seriously considered.
New arrangements would replace current interim support for selected
technologies. They should cover the full range of low-carbon generation
technologies for the 2020s, and be designed to increase confidence
about power sector decarbonisation, cut the costs of achieving
this, and address any concerns about security of supply.
The options which we believe could potentially
improve on the current market arrangements in delivering low-cost,
low-carbon generation investment include (Box 4.15):
— Measures to strengthen the carbon price
signal (eg underpinning the carbon price at the EU or UK level,
extending the Climate Change Levy exemption to all new low-carbon
sources).
— Measures to provide confidence over the
price received by low-carbon generation (eg feed-in tariffs for
low-carbon generation, tendering for low-carbon capacity).
— Measures to ensure investment in low-carbon
capacity (eg a low-carbon obligation, possibly as part of a wider
capacity obligation, or an emissions performance standard).
These options have not previously been assessed
in the UK. The Committee recommends that they should now be seriously
considered given the new context, in which the UK has committed
to cut emissions by 80% in 2050, and where decarbonisation of
the power sector in the period to 2030 is vital in achieving this
goal.
Our analysis shows that we require significant
investment in low-carbon generation from now over the next 20
years and beyond to 2050. We expect that this investment will
initially be mainly in wind generation (over 20 GW), with investment
in up to around 3 GW of new nuclear plant and 2 GW of CCS coal
by 2020, and around an additional 20 GW of low-carbon generation
capacity in the period 2020-30.
The risks that we have identified adversely
impact cost and viability of investment in nuclear and CCS, and
may increase the costs of wind investment required to meet EU
targets. In assessing the appropriate timing of possible interventions,
we have considered the timing of decisions to invest, the time
likely to be required to introduce any intervention, and the need
for near term investment in gas-fired generation:
— Working back from when investments should
ideally come on line, and given long project lead times, decisions
to proceed with investment in low-carbon generation for the 2020s
will have to be made in the relatively near term (eg during the
second carbon budget period).
— Detailed design of a market intervention
could require a lengthy process. We note that it took several
years each to move from the old power pool to the New Electricity
Trading Arrangements (NETA), and from NETA to the current British
Electricity Trading and Transmission Arrangements (BETTA).
— Our extensive discussions with a wide
range of industry stakeholders—energy companies, analysts,
academics—suggest a strong consensus that current arrangements
will not deliver a low-carbon power generation system through
the 2020s, and that changes to the current arrangements are both
required and inevitable. In these circumstances, a failure to
review current arrangements may be perceived as creating more
uncertainty by postponing introduction of inevitable change.
— A new global agreement to reduce emissions
and the EU response could have implications for the carbon price
which in turn could change the power sector investment climate
for the period to 2020 and beyond.
— There is a significant amount of gas-fired
generation currently in the pipeline that we expect to move forward
and replace coal-fired capacity that will come off the system
before 2016 and therefore maintain near-term system security (Table
4.2). These investments will be required whatever new mechanisms
are introduced, and should be provided with appropriate comfort
in the context of any review.
The Committee's judgement in balancing these
concerns is that a comprehensive review of the current market
arrangements should be carried out in the near term. This should
reflect any implications of Copenhagen for EU targets, the carbon
price and UK carbon budgets. It should be designed to address
adequately concerns for current investment in gas-fired generation.
Any delay in moving forward with a review as soon as is practical
following Copenhagen will jeopardise prospects for successfully
decarbonising the power sector in the 2020s."
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