Memorandum submitted by the Carbon Capture
and Storage Association
INTRODUCTION
1. The Carbon Capture and Storage Association
welcomes this opportunity to respond to the Committee's inquiry
into Emissions Performance Standards.
2. The CCSA was formally launched in March
2006, and brings together a wide range of specialist companies
across the spectrum of carbon capture and storage (CCS) technologies,
as well as a variety of support services to the energy sector.
The Association exists to represent the interests of its members
in promoting the business of CCS, raising awareness of the benefits
of CCS and to assist policy developments in the UK, EU and internationally
towards a long term regulatory framework for CCS, as a means of
abating carbon dioxide emissions.
3. We note the upcoming DECC consultation
on electricity market reform, which will include consideration
of an EPS policy. Meanwhile, the CCSA would like to offer the
following early comments in response to the Energy and Climate
Change Committee's Inquiry.
COMMENTS ON
THE EU EMISSIONS
TRADING SCHEME
4. The CCSA strongly supports the commitment
to the EU Emissions Trading Scheme (EU ETS) as the primary long-term
mechanism for delivering cuts in emissions across the EU and incentivising
low-carbon technologies such as CCS. However, should the UK Government
reach a decision to implement an Emissions Performance Standards
(EPS) policy, there are a variety of issues that must be considered,
and these are set out in this submission.
5. It should firstly be noted that a domestic
(EPS) policy in the UK may achieve lower emissions in the UK,
however these will be offset by higher emissions in the EU due
to the EU ETS cap, so there would be no net reduction in EU emissions.
In addition, an inappropriately designed UK EPS risks undermining
the EU ETS price, encouraging investment in less cost-effective
technologies, and thereby reducing investor confidence. A drop
in the EU ETS carbon price coupled with a UK EPS policy would
mean that UK industry and consumers would be faced with a disproportionate
share of EU's emissions reductions.
6. However, due to weak market prices and
uncertainty, the EU ETS does not currently incentivise investment
in low carbon generation. One possible solution to address the
ineffectiveness of the EU ETS would be to push for a tighter overall
emissions cap for Phase III (2012-20) and beyond.
COMMENTS ON
THE REFORM
OF THE
ELECTRICITY MARKET
7. As part of the government ambition for
a wide reform of the electricity market, a variety of regulatory
and financial measures are being considered—both to ensure
security of supply as well as to meet the UK's emissions reductions
targets. The application of EPS is one such regulatory measure,
alongside other measures such a carbon floor price, Feed-in Tariffs
and capacity mechanisms. An EPS policy will not be the main driver
to achieve a UK low-carbon economy and can only be considered
as part of the wider package of measures needed to reform the
electricity market to ensure the UK can achieve a low-carbon economy.
The CCSA therefore strongly supports the upcoming DECC consultation
on the reform of the electricity market, which will include consideration
of an EPS policy, and we look forward to further discussions with
government on whether and how an EPS policy can fit within the
wider electricity market reform.
SPECIFIC COMMENTS
ON EMISSIONS
PERFORMANCE STANDARDS
8. We would like to begin by emphasising
the need for development of an appropriate regulatory and financial
framework for CCS and congratulate the UK government in the significant
steps that have already been taken in this respect. An appropriate
regulatory and financial framework will need to be created both
for the long-term development of CCS, but more importantly in
the initial demonstration phase that we now find ourselves in.
It is imperative that regulation developed in this crucial stage
of demonstration will need to be as flexible as possible, to enable
these demonstration projects to go ahead, thereby ensuring important
learning as to how the longer-term regulation should be developed.
The balance of regulation and incentives will be vital in enabling
companies to invest in these early projects and only if the right
balance is struck, will we begin to see the development of a longer-term
CCS industry.
9. Whilst it is important to note that the
implementation of EPS policies elsewhere in the world (particularly
in California) have been introduced with positive outcomes for
CCS development, it should not be assumed that the same policies
will be appropriate for the UK. In particular, careful consideration
must be given to the introduction of such a policy in the UK,
to avoid unintended and unwelcome consequences. As mentioned above,
only the appropriate balance of a regulatory policy coupled with
financial incentives, will stimulate CCS investment. Investors
must have confidence that the cost of their investment can be
recovered, and the introduction of an EPS policy without appropriate
financial incentives will not encourage CCS development.
10. The CCSA supports the Committee on Climate
Change's recommendation that the UK must have a largely decarbonised
power sector by 2030 in order to meet its 2050 target of reducing
emissions by 80%. If an EPS policy is introduced, it must be seen
in the context of a journey towards this 2030 timeline for near-decarbonisation
of the power sector and the long-term objective of ensuring CCS
can fulfil its role within this framework. It would be unreasonable
to expect that fossil fuel power plants would have absolutely
zero emissions. Therefore, to ensure that generators do not emit
above acceptable standards, some form of EPS regulation (or similar)
will likely be required in the longer term.
11. However, as we progress towards the
2030 timeline for near-zero emissions in the power sector, it
is important to consider whether applying intermediate levels
of EPS is a useful policy instrument on new coal-fired power stations.
It would be premature to introduce an EPS policy at this stage,
as emissions limits which reflect the end objective cannot be
implemented for fossil fuel power generation until technology
optimisation of CCS has been established. As we have yet to build
the first four CCS plants in the UK, the timeframe for introducing
EPS cannot yet be clear. Indeed, there is a strong argument not
to regulate by EPS until there is the experience to draw upon.
12. It is therefore very important that
we urgently proceed to demonstrate CCS on both coal and gas plants
in the UK, both to progress quickly to cost-effective emission
reductions and to showcase UK capability in world markets. These
projects will serve to inform future energy policy including consideration
of an EPS. The CCSA would like to emphasise that we support all
CCS development, and we are indifferent to the choice of fossil
fuels. We believe that all fossil fuels must be decarbonised,
if we are to reach a near-decarbonisation of the power sector
by 2030, and CCS represents a cost-effective means by which this
can be achieved. The UK urgently needs to move beyond the first
four CCS demonstration projects and set the path towards the longer
term development of CCS (on coal, gas and industrial sectors)
to ensure that we are able to meet our ambitious climate change
targets and achieve a near-decarbonisation of the power sector
by 2030. We will need to be planning and implementing the next
phase of CCS demonstration projects before the first demonstration
projects have been operating for a significant period of time.
In this respect, the CCSA supports the Committee on Climate Change's
recommendation that the government should consider demonstrating
CCS on a gas-fired power station. Ideally, the CCSA would like
to see the UK develop as many CCS projects as possible and certainly
more than four—on both coal and gas. However, we would not
want to see gas-CCS projects disadvantaged in any way at this
stage and we therefore recommend that gas-CCS projects should
be able to compete on a cost basis with coal-CCS projects in the
current CCS demonstration programme. We would like to point out
that the CCS industry has been operating under a UK CCS policy
that has been solely focussed on coal over a long period with
a commitment to four projects, and we would like to emphasise
that constant sudden changes in policy create significant confusion
and low investor confidence—not a conducive environment
to encourage investment in CCS.
13. The current UK policy for new coal is
that no new power station should be built without demonstrating
CCS on a proportion of its capacity (which is in effect, a de-facto
EPS policy with some flexibility). This is a workable coal-CCS
policy for the moment and in combination with the CCS Levy that
was introduced in the Energy Act 2010 (which was extended to cover
gas as well) to fund demonstration projects, the UK policy will
provide the necessary funding of the additional CCS costs to generators.
However, a UK energy policy must also consider how to incentivise
gas-CCS (and industrial CCS) in the long term, and there is currently
little incentive for gas power plants to demonstrate CCS. Should
an EPS policy be introduced to limit the emissions from coal-fired
power stations alone, the result is likely to be increased reliance
on unabated gas, which will not incentivise CCS demonstration
on either coal or gas. However, it must be noted that an EPS introduced
at the same level and timing across all fuels/technologies will
cause perverse outcomes and must be avoided.
14. The UK will need a mixed portfolio of
energy sources and low-carbon technologies to ensure diversity
and security of supply. Nuclear power will provide a stable base
load. Renewable sources must be accommodated in the mix but are
intermittently available. Demand side management through smart
metering and grids will likely help to reduce demand variation
but it will remain an inevitability that fossil generation (with
CCS) will continue to provide a large proportion of the mix (in
particular gas generation) as well as providing the flexibility
that will ensure continuity of supply.
15. There will also be the need for a diversity
of fuel sources in the future as we have now. Coal will be needed
as well as gas but there may be an increasing role for biomass
in the mix. New technologies will be developed appropriate to
each fuel source including CCS technologies as well as fundamental
changes to combustion and power generation. Consideration will
need to be given to tailoring any EPS to fuel and/or technology
so as not to inhibit development. As stated earlier, the possible
introduction of an EPS policy must be seen in the context of the
path towards near-decarbonisation of the power sector by 2030.
If an EPS policy is introduced, an appropriate timeline must be
carefully considered, incorporating the needs of different technologies
and fuel sources (for example, EPS on coal would need to be implemented
on a different timeline than EPS on gas). This timeline must also
consider the necessary timeline for CCS deployment—again,
to enable CCS to contribute to the 2030 goal of near-decarbonisation
of the power sector.
16. Responding to variation in demand creates
challenges in terms of return on capital investment for essentially
low utilisation plant. In the extreme there are currently a small
number of old plants with capital written off many years ago that
clip peaks of demand. These will be required to close soon. To
build new plant fully equipped with CCS is a very expensive option
so for the limited time these plants run, it will likely be best
policy to replace these plant with open cycle gas turbines. If
an EPS policy is introduced, consideration would need to be given
to an EPS easement for peaking plant.
17. In the long run, when the power industry
is decarbonised, the additional cost of providing CCS will not
be an issue for fossil fuel power stations, as this will simply
be included in the cost of building and operating a fossil fuelled
power plant and producing low-carbon electricity. Even in the
mid-merit role high capital cost plant will suffer low utilisation
to compensate for intermittent generation elsewhere. In this context
electricity market reform will be essential to incentivise investment
in low- carbon capacity. An EPS policy should seek to be consistent
with best available technology (BAT) at the time of plant construction,
and it should be the priority of government that CCS becomes BAT
on fossil fuel power plant as soon as possible.
18. One of the factors that will encourage
long-term investment in CCS will be the existence of, or plans
for, local shared infrastructure in terms of transportation and
storage. In the value chain an EPS will only place an obligation
on a potential power plant developer to develop a full-chain CCS
project that sufficiently meets the EPS. Without there being additional
incentives to bring forward common transport and storage infrastructure
an EPS alone will not ensure efficient development of a long-term
CCS industry in the UK.
19. It has been suggested that one way to
introduce an EPS would be through a Portfolio Standard in which
the emissions are averaged over a generators total capacity—this
could incentivise CCS development. Although it could be a workable
instrument for generators with a balanced portfolio but for generators
without a spread of portfolio it may cause problems. Using mechanisms
to overcome this such as a tradable standard would entail a major
policy departure, require considerable administrative resource
and may conflict with the operation of the ETS. A Portfolio Standard
seems to offer no benefit over current policy so the CCSA recommends
that this mechanism is not considered further at this time.
20. If EPS requirements are brought to bear
now then there is a considerable risk of incurring unintended
consequences. There are major commercial risks associated with
investment in new fossil fuel power plant with CCS. Imposing limits
on emissions at a time when the operation of CCS-power is not
commercially proven may well inhibit investment in either coal
or gas or in fossil power altogether. At this stage combining
EPS with the existing financial incentive (the CCS levy) seems
to offer no additional policy benefit over the current policy
for coal that offers a targeted voluntary approach with financial
support. The CCSA therefore recommends that an EPS is kept under
review at least until the first CCS demonstration projects have
been built.
CONCLUSIONS
— In the long term it is to be expected
that all power plants should be able to comply with some form
of EPS. The question that must be asked is whether in the interim
an EPS will be of value in incentivising investment in new fossil
power plant with CCS.
— EPS should only be considered as part
of a suite of policies including transitional incentives for CCS,
electricity market reform and infrastructure policy. Taken in
isolation an EPS risks major unintended consequences.
— If introduced, the level and timing of
an EPS policy must be carefully considered, to take account of
differences in fuels and technology options, and should be considered
in the context of reaching a near-decarbonisation of the power
sector by 2030, incorporating the necessary timeline for CCS deployment.
— Current policy for new coal fired power
plant will ensure that CCS plant is built at commercial demonstration
scale. An EPS would not contribute to that situation at present.
— It is recommended that consideration
must be given to the longer-term need for gas-CCS and how this
will be introduced in the UK. However, it must be recognised that
requiring CCS on all fossil fuel power stations without careful
policy design could lead to lack of investment in new power stations
and resulting security of supply risks.
— The single most important issue at present
is to get the planned CCS demonstrations built as quickly as possible.
This will serve to inform technical policy development including
an EPS.
— Therefore the CCSA recommends that the
use of an EPS in power generation policy is kept under review
until more information is available arising from the CCS demonstration
programme.
The view expressed in this paper cannot be taken
to represent the views of all members of the CCSA. However, they
do reflect a general consensus within the Association.
September 2010
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