House of Commons - Energy and Climate Change

Emissions Performance Standards - Energy and Climate Change Contents

Memorandum submitted by WWF-UK and Greenpeace UK

SUMMARY

1. In order to meet the 2050 greenhouse gas reduction target enshrined in the Climate Change Act 2008 the Committee on Climate Change (CCC) has repeatedly recommended that the power sector should be close to decarbonised by 2030.[21] Securing this transition from a high carbon to a sustainable low carbon power sector in the next two decades will to a great extent be determined by the decisions on new generation capacity build taken over the next few years. However, current Government policy is not sufficiently robust to deter investment in unabated fossil power plant and drive the rapid investment in sustainable low-carbon alternatives needed. To help address this, WWF-UK and Greenpeace-UK strongly recommend that combustion plants be required to meet a robust CO2 emissions performance standard (EPS) and welcome the opportunity to respond to ECC's inquiry on this issue.

2. In summary, we consider:

— An EPS should be set at such a level that prevents lock in to new high carbon power plant now, and provides a means of driving the required emission reductions from existing power plants in the 2020s which is at least in line with the recommendations of the CCC. As such we propose that this should take the form of a plant-based EPS set at a level of 300gCO2/kWh for all new generating plant from now on, tightening to less than 100gCO2/kWh in 2025 (from which point it should also apply to existing plant).

— In the context of delivering a close to decarbonised power sector by 2030, as repeatedly called for by the CCC, it is clear that emissions from gas power stations will need to be addressed. Hence, we strongly recommend that an EPS covers gas as well as coal plant and that consideration be given to including at least one gas plant as part of the proposed programme of four carbon capture and storage (CCS) demonstrations as recommended by the CCC.

— An EPS, which establishes a limit on CO2 from combustion plants now and sends a clear indication about the level that will be required in the 2020s, would create regulatory certainty against which investment decisions can be made. With specific regards to CCS, an EPS could create greater confidence that there would be a market demand for these technologies beyond the demonstration phase, potentially acting as a pull which drives investment and innovation.

— A robust EPS should be a pre-requisite of any CCS consumer levy to support demonstration (the proposed levy could be worth an estimated £10 billion over 15 years) in order to improve the public acceptability of funding wealthy energy companies by providing greater confidence that emission reductions from these projects would be delivered from day one.

— Combined with the CCS levy, an EPS would also provide incentives for appropriate sizing and operational reliability of any new plant that are part of the demonstration programme.

— The adoption of a robust EPS for UK power plants would also be an important demonstration of the UK's international leadership on climate change, in addition to the efforts embodied in its strong diplomatic outreach around the global climate negotiations.

3. We appreciate that the Government is about to initiate a consultation on wider electricity market reform which may consider the detail of the EPS and that this is expected to conclude in Spring 2011 with the publication of a White Paper. However, market reform will take time to design and deliver. In the meantime, the Government is intending to launch the process for selection of further CCS demonstration projects by the end of the year, and there are live applications for 3.4GW of largely unabated coal and 11.6GW of unabated gas in the planning systems.

4. In light of this, we are strongly of the view that the forthcoming Energy Security and Green Economy Bill should include provisions which enable and oblige the Government to introduce a plant based EPS within a definite timeframe. This would leave scope for the detail to be established via the electricity market reform process but it would send a clear signal to investors that the Government was serious about bringing forward this policy in a timely manner, raising the bar to unabated fossil fuel power plant investment while helping to pull through cleaner alternatives.

RESPONSES TO INQUIRY QUESTIONS

1. 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?

We consider the following factors should be considered in setting the level of a plant based EPS:

5. The need to rapidly decarbonise the UK's electricity generation capacity: The UK's CCC have repeatedly recommended that the UK power sector needs to be close to decarbonised by 2030 (from 540gCO2/kWh today to around 70gCO2/kWh).[22] In line with this the CCC also made it clear in their inaugural 2008 report that unabated coal plants should not be allowed to generate unabated beyond the early 2020s.[23] More recently it has also stated that there is very limited scope for investment in conventional gas generation beyond 2020 and that a coherent approach is required for phasing out unabated fossil fuel power generation.[24]

6. The extent of public opposition to new big largely unabated coal plants: Broad public opposition to E.On's proposal to build a new 1.6GW coal fired power station at Kingsnorth has been widely reported in the media over the last few years. This opposition remains despite the adoption of a Government policy which requires any new coal plant to capture CO2 emissions from 300MW of power station output. In the case of the proposed Kingsnorth plant this could equate to only around 20% of the emissions being captured and a net increase in emissions from the power sector.[25] The more recent proposal by Ayrshire Power to build a 1.8GW coal plant at Hunterston in Scotland could result in the capture of a meagre 17%. Earlier this year the Scottish Parliament passed a motion calling on the Government to reject plans to build this plant and over 14,000 people have since written asking them to reject the application.[26]

7. WWF Scotland with Friends of the Earth Scotland and RSPB Scotland recently commissioned Element Energy to assess the possible carbon intensity and CO2 emissions from a new plant comparable to the proposed Hunterston coal plant. This analysis estimated that the carbon intensity of the plant with demonstration CCS would deliver a carbon intensity of around 650gCO2/kWh[27]. In other words an EPS must not merely be set at the level of CO2 intensity of any new plant implied by the current Government requirements for CCS demonstration. An EPS of this kind would act solely as a mechanism to operationalize the CCS requirement rather than as a mechanism that drives the decarbonisation of the UK power sector in line with the recommendations of the CCC. In this guise it would not provide climate, public or indeed investor confidence in the Government's intention to deliver this transition on time.

8. Providing climate and investor confidence by sending a clear signal to investors and operators of combustion plants about what is required now and in the 2020s: A plant-based EPS which establishes a limit on emissions from coal and gas plant now and sends a clear indication about the level that will be required in the 2020s would create regulatory certainty against which long-term investment decisions can be made[28] (in particular with respect to the development of CCS infrastructure and associated supply chains) and ensure the CCC recommendations were treated seriously. Setting signals early will enable the market to respond to any potential capacity shortages in the knowledge of what is to come.

9. As it is currently defined in the Coalition agreement however, the proposed EPS is worryingly narrow in scope and would only apply to new coal plant. However, the CCC made it clear in its latest report that as part of the arrangements needed to give confidence to investors in low-carbon technologies, it was important that an EPS be introduced for new gas plants, as well as coal plants.[29] Indeed given that the only new coal plant that get built in the UK now will be those that receive funding for CCS demonstration[30] such a standard would only apply to a maximum of four plant and would hardly provide the strong signal needed regarding power sector decarbonisation in the 2020s.

10. The need to ensure appropriate sizing and operation of any carbon capture and storage demonstrations and for these to deliver climate value for (electricity consumer) money: The Energy Act 2010 included a framework for a financial mechanism to support CCS demonstrations via a consumer levy on electricity bills. A robust EPS which operated in parallel to this would improve public confidence that demonstration plant would be required to run within strict emission limits. Given the potential level of consumer funding involved (estimated at £10 billion over 15 years) particularly at a time of economic constraint, it would be dangerously counterproductive to not provide this signal to the public that there is clear climate value associated with the projects from day one.

11. The appropriate level and timing for a UK EPS: We consider that a UK standard should initially be set at 300gCO2/kWh or less for each new combustion plant,[31] averaged over a one-year period.[32] This level has been deliberately chosen. Not only would this help ensure appropriate sizing and operation of any CCS demonstrations on new coal plant, it would also deliver more efficient use of gas[33] by requiring some level of heat recovery on new plant and hence more strategic and appropriate sighting of power plant closer to heat demand centres.

12. We consider that expectations regarding CO2 emissions in the 2020s from new plants consented today and existing combustion plants that are already on the system should be signalled now so as to provide climate and investor confidence. By 2025 at the latest therefore we consider the EPS should be tightened to require all generating capacity (new and existing) within the UK or supplying electricity to the UK to emit less than 100gCO2/kWh. This is in line with the CCC's policy recommendations regarding emissions from coal and would also ensure that investors in gas fired capacity take seriously the reality that they need to plan for CCS retrofits well within the plant's operating lifetime.

2. What benefit would an EPS bring beyond the emissions reductions already set to take place under the EU ETS?

13. From 2013 the declining cap for the sectors covered by the ETS should deliver an annual CO2 reduction of 1.74%. Under this trajectory, emissions will not reach zero until around 2070 (or in reality much later as access to significant levels of offset credits from outside the EU are not included in this projection). This is 40 years after the deadline for decarbonising the power sector recommended by the CCC.

14. The price of carbon in the scheme has fallen to around €14-15 per tonne of CO2 since the recession took hold (and the CCC have drastically reduced their estimates of the future carbon price from around €50 in 2020 to around €20).[34] Indeed, as a consequence of the recession and the impact this has had on industrial output, particularly in the manufacturing sector, it is likely that vast quantities of unused EU allowances and offsets will be carried forward from the second to the third phase of the scheme. This is noted under the Commission's baseline scenario[35] outlined in the staff working document (accompanying the paper regarding the analysis of options to move beyond a 20% EU greenhouse gas emission reduction target) which states that "Between 2013 and 2020 and despite the linear reduction of the ETS cap, no absolute emission reductions in the ETS need to take place due to the availability of a large buffer of allowances from the period 2008-12 and unused international credits."[36]

15. It could be argued from a short sighted point of view that any additional emission reductions which took place in the UK from the traded sectors as a consequence of the adoption of an EPS would be cancelled out by an increase in emissions elsewhere in the EU but this ignores some very important benefits:

16. The ETS was meant to incentivise low carbon investment. However, the power sector is currently influenced by short term operational action (eg fuel switching from coal to gas) that provide emission reductions which are easily reversed and are also inherently linked to fluctuations in fuel prices. The lack of impact of the ETS on investment decisions was acknowledged in DECC's Energy Market Assessment which stated "... at current levels and without further international agreement it [the ETS] is insufficient to alter fundamentally the relative economics of the different investments."[37]

17. As the ETS is currently not able to deliver on its main goal, it is clear that complementary policies and measures are urgently needed in order to prevent lock-in to high carbon investment and to deliver stable and significant longer term gains for the climate. Lord Stern and the CCC in particular have highlighted the need for such complimentary policies. We consider that a plant based EPS would help to do this by driving change on the ground now.

18. In addition, an EPS could help make the case for tighter ETS caps at the EU level which are more in line with the science (leading to a higher, longer term and more stable carbon price) by incentivising low carbon investment and making emission targets easier to reach. Conversely, allowing new unabated or largely unabated fossil plants to be built in the UK and other EU countries will inevitably lead to political pressure to keep future caps weak.

3. How effective is an EPS likely to be in driving forward the development of CCS technology? Should the UK's CCS demonstration programme cover gas-fired as well as coal-fired power stations?

19. The development of CCS: It is not envisaged that an EPS is implemented in isolation. The Government is proposing to bring forward a consumer levy on electricity which could fund the CCS demonstrations. To complement this, an EPS would provide clear guidance now and in the longer term regarding what was expected in terms of emissions from the companies involved in the demonstration programme (providing incentives for appropriate sizing of plant and operational reliability). The CCS demonstration programme could clearly be designed to comply with a robust EPS, whilst maintaining flexibility in terms of technologies and capture locations.[38]

20. The establishment of a clear limit on emissions from fossil fuel plants could also help create a certainty for investors that there will be a market demand for CCS beyond the funding proposed for the demonstration phase(s), potentially acting as a "technology pull" which drives investment and innovation.[39], [40], [41]

21. CCS demonstration on gas plant: Although burning gas to generate electricity is around half as carbon intensive as burning coal, it is clear that within the context of the 2030 power sector decarbonisation timeframe, CO2 emissions from gas plant will also need to be addressed. Since 2006, the Government has approved planning permission for 15GW of new gas fired power plant, and a further 11.6GW are awaiting consent.[42] We therefore agree with the recent CCC recommendation that "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".[43]

22. Furthermore, in a UK powered progressively by renewable energy, any fossil fuel plant on the system will increasingly be required to operate on a flexible basis at varying and low load factors.[44] In this respect, gas-fired power stations equipped with CCS may be more cut out to operate at lower load factors than new coal plants due to the lower capital costs of the former.[45] It is also worth noting that from a purely cost point of view, the CCC recently observed that the cost of demonstration on gas plants (in terms of £/MWh) will actually be cheaper than for CCS coal demonstrations.[46]

23. We would recommend that consideration be given to demonstrating both pre- and post-combustion on gas stations. Our preference would be for both of these demonstrations to be on existing plant.[47] Indeed Scottish and Southern Energy recently announced plans to demonstrate post combustion CCS at a commercial scale at their existing gas plant at Peterhead in Aberdeenshire.[48] With regards to pre-combustion it is perhaps worth noting that a recent interim report from MIT stated that "For pre-combustion capture, there are technical simplicities in starting with natural gas, since the conversion to synthesis gas is much simpler than for solid fuels."[49]

4. Could the introduction of an EPS pose any risks to the UK's long-term agendas on energy security and climate change?

24. As explained previously, an appropriately designed EPS could be one of the key policies that help to deliver a near-decarbonised power sector. Conversely an EPS set too high, too late, and/or too narrowly defined could lead to continued lock-in to highly polluting forms of fossil power generation at a time of increasing global fossil fuel prices, putting at risk not only the UK's climate goals but also its energy security.

25. However, during the transition up to 2030 it may be appropriate to consider cost effective solutions to ensure system-wide security and balancing. For example:

— For existing coal or gas combustion plants on the system today that are unable or unwilling to comply with an EPS in the 2020s (for example those plants that would be reluctant to incur the penalty on efficiency that results from installing CCS technology), from 2025 an "opt out" clause could be included in the standard. This could allow existing generators to continue operating at strictly limited running hours or on a very limited annual total volume of CO2 restriction up to 2030. The volume of running hours/annual limit on CO2 per plant should be determined within the framework of keeping power sector carbon intensity within a limit of 70gCO2/kWh. After this date those plants that opted out would be required to cease operating permanently.

5. What is the likely impact of an EPS on domestic energy prices?

26. It is clear that climate and energy policies will have an impact on energy prices. However, it is more appropriate here to consider the impact on final bills, as this is really what matters to consumers and will be influenced by the success or otherwise of efforts to improve the energy efficiency of our homes. For example, the previous Government's Renewable Energy Strategy (RES) 2009 states that implementation of the RES alone would increase household electricity bills by 15%, and gas bills by 23% in 2020 but that increase could be lowered to only an 8% increase overall in bills if energy efficiency policies are included.[52] Eg it is clear that energy saving measures will significantly reduce the costs of the transition to a low carbon future.

27. If higher fossil fuel prices than those used in the central scenario in the RES are taken into account there may even be a financial benefit of some energy and climate change policies. For example, a recent report from DECC states that "Sustained higher prices for fossil fuels reduce the cost of some energy and climate change policies, lowering the cost passed onto consumer bills. For example, at an oil price of around $150 per barrel in 2020 and gas price of around 120 pence per therm, climate change and energy policies would have the effect of reducing bills in 2020 by around 5% compared to a bill excluding these policies".[53] Ofgem's Project Discovery also found that under scenarios where environmental action was prioritized consumer bills were cheaper than the equivalent scenario where they were not. It is thus a canard to use consumer bills or fuel poverty as rationale for avoiding environmental action—the reverse is true in fact.[54]

28. With specific regards to the EPS we are not aware of any specific studies on the impact that such a policy mechanism might have on electricity prices or bills. This would clearly depend on the level, scope and timing of the mechanism but also on how investors and generators chose to comply with it. Beyond this however, it is also sensible to consider the other potential financial benefits that an EPS can provide electricity consumers:

29. As already mentioned, the Energy Act 2010 included a framework for a financial mechanism to support CCS demonstrations via a consumer levy on electricity bills. It also provided that this funding mechanism could, if deemed appropriate, be used to pay for the future retrofit of CCS to the full generating capacity of new demonstration plant (presumably, should the technologies be technically, but not economically, viable by around 2020). This presents a clear future financial risk to the public, which can perhaps best be illustrated by considering the proposed 1852MW coal plant at Hunterston. If this plant was consented and built under current Government coal policy which only requires 300MW of CCS from day one of operation, there is a risk that the public may end up footing the bill to pay for carbon capture to be fitted to the rest of this large plant in 2020-25 (some 1,400MW). We consider this level of risk to be unacceptable, particularly in the current economic climate.

30. The adoption of a robust plant-based EPS would ensure the appropriate sizing (and operation) of demonstrations now. In so doing it would reduce or eradicate the risk of the Government and public picking up the bill for a future potentially costly retrofit to any large new plant with only partial CCS fitted from day one.

6. Are any other European countries considering an EPS?

31. The Netherlands have been considering such a policy. In November 2009 the Dutch parliament adopted a resolution requesting that the Government encourage the EU to adopt an EPS for power plants set at a maximum of 350gCO2/kWh; and make plans to bring forward an EPS in the Netherlands. In response to this the Dutch Government (via the Minster of Economic Affairs) announced that they were "considering the option of an EPS for power plants on European and/or Dutch scale and/or the option of a CCS-obligation".

32. Following this in April 2010 the Government's advisory board (Taskforce CCS)[55] reported that the ETS did not provide sufficient incentives to decarbonise the power sector and therefore advised the Government to: prepare additional policy instruments (with a preference being stated for an EPS); develop in parallel a national CCS agreement (and obligation); and explore whether an EPS based approach could be implemented by a front runner group of EU member states (with a preference for Western European states that have a strong connected power market).

33. In May 2010 the Dutch parliament discussed a draft law which included a tax on coal emissions above a level of between 350-550gCO2/kWh. However due to the Dutch election in June the vote did not take place and we have yet to hear how or if the new Government plan to take this forward.

34. An EPS has also received and is receiving ongoing attention at the EU level (eg during both the negotiations around the CCS Directive, and more recently this year during the progress of the Industrial Emissions Directive).

7. Could unilateral action by the UK to introduce an EPS contribute towards global climate negotiations in Cancun in November 2010?

35. Yes. At the Copenhagen climate summit many countries spoke of the imperative of a transformation to low-carbon and low-emissions economies, but in the end, a number of key countries were at the time unwilling to make binding emissions reduction commitments without having greater confidence that such a transformation was indeed possible. Indeed, since Copenhagen, a number of countries, including China, although showing strong leadership in some areas themselves, have spoken of the need for positive examples to learn from in their own development.

36. An important part of moving the world towards emissions reductions of -80% on 1990 levels by 2050 is for countries to show leadership now on various policies, measures and initiatives, so that other countries can take positive examples, learn from their experiences, share knowledge and implement them in ways appropriate for their own national circumstances.

37. The establishment of a robust EPS for UK power plants would be an important way in which the UK could show leadership by doing, in addition to the efforts embodied in its strong diplomatic outreach.

38. While coal remains a significant part of the electricity fuel mix in Europe, it is even more significant in North American and particularly Asian countries where its use continues to increase. Commitments in the UK and Europe to go beyond climate policies based only on markets, targets and timetables to also embrace direct regulatory instruments will manifest results more quickly that in turn will encourage others to follow.

39. Power generation, particularly coal-fired generation, is a critical sector for policy-makers to focus attention. The overall scale and urgency of the climate challenge means that new, fossil capacity cannot be fully utilised over a normal lifespan without CCS being included, thus presenting today uncertainties for investors and regulators. EPS-type operating requirements provide an effective framework to resolve these uncertainties and ensure that continued coal and gas use is not permitted to jeopardise international efforts to decarbonise energy systems in the face of climate change.

8. Can greater use of Emissions Performances Standards internationally help promote agreement on global efforts to address climate change?

40. To achieve the levels of emission reductions necessary to achieve the EU's 1995 goal of keeping global average temperature increases to below 2C above preindustrial levels, and more importantly the 1.5C limit goal demanded by over one hundred of the world's poorest and most vulnerable countries, strong action is needed to reduce emissions in every relevant sector.

41. While cap and trade and offset schemes provide some flexibility in meeting short term commitments, they do not provide the long-term strategic framework for developed countries to reach near zero-emissions by 2050. Additional policies and measures are important tools to provide energy markets with a visible hand that will help avoid high carbon infrastructure lock-in that would make emissions reductions more expensive over the medium to longer term. In the power sector, EPSs are one such policy that can provide a good framework to drive technology development in a way that helps to avoid this lock-in.

42. As in our response to question 7, there is a strong need in the international climate fora especially the UNFCCC but also the G8, G20 and the MEF for countries to demonstrate leadership by doing as a means of fostering trust between different negotiating blocks. Collaboration between states at different stages of low carbon technological and policy development, enabling the sharing of knowledge and implementation of best practice is an important means through which to build this trust.

September 2010