Memorandum submitted by the Association
of Electricity Producers
ABOUT AEP
The Association of Electricity Producers (AEP)
represents large, medium and small companies accounting for more
than 95% of the UK generating capacity, together with a number
of businesses that provide equipment and services to the generating
industry. Between them, the members embrace all of the generating
technologies used commercially in the UK, from coal, gas and nuclear
power, to a wide range of renewable sources of energy. Members
operate in a competitive electricity market and they have a keen
interest in its success—not only in delivering power at
the best possible price, but also in meeting environmental requirements.
Contact details for the Association are given
at the end of this paper.
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?
The key factors that should be taken into account
in deciding either the need for an EPS or the level that an EPS
should be set at are as follows:
— Will an EPS be effective in delivering
investment in low carbon electricity generation capacity?
— What are the likely impacts of introduction
of an EPS on investor confidence in the UK? In particular are
there any consequences for the security of electricity supply?
— What impact will there be on electricity
prices and consumers from the introduction of an EPS?
— What level of emissions is achievable
from commercially available technology? What are the practical
implications for a demonstration plant?
The stated aim of the EPS as set out in the
Coalition programme for Government is to prevent coal-fired power
stations being built unless they are equipped with sufficient
carbon capture and storage (CCS) to meet the EPS. However, the
strategy for coal-fired power stations set by the previous Government
already requires any new coal-fired power station to demonstrate
CCS on at least 300 MW net capacity with the expectation that
CCS would be retrofitted to its full capacity by 2025. Given this
strategy, introduction of an EPS is considered to be unnecessary
and premature.
We are concerned that an EPS, whilst acting
as a moratorium on the construction of coal-fired power stations,
will do nothing to incentivise demonstration and development of
CCS technology. Development of CCS demonstration must be part
of a wider strategy for delivering a low-carbon energy system
which requires a comprehensive strategy to ensure that the necessary
investment is forthcoming.
The EU Emissions Trading Scheme (EUETS) remains
the key mechanism which will deliver emissions reductions in the
electricity sector in the UK. Additional policies may be necessary
to incentivise investment in specific low-carbon forms of electricity
generation. However an EPS, whilst it would prevent investment
in unabated coal, would not provide any incentive for investment
in other low-carbon electricity generation capacity.
Whilst doing nothing to encourage generators
to invest in new low-carbon generation, an EPS could have potentially
negative impacts on investors' confidence in investing in new
infrastructure in the UK. As a mechanism it would penalise investment
in technologies with high levels of CO2 whilst failing to create
appropriate incentives or an effective framework to deliver the
necessary investment in low-carbon technologies. Rather than focussing
on an EPS, Government should consider what is needed to make it
attractive for investors to invest in low-carbon technology.
Regulatory changes that could potentially reduce
the return of an investment will have a negative impact on investors'
decisions on investment in new power plant capacity in the UK.
The regulatory uncertainty engendered by the potential for the
introduction of future EPSs for either coal- or gas-fired power
stations will affect investors' decisions on whether to invest
in the UK and which power plants to invest in. This could have
significant implications for security of electricity supply in
the UK and consequently electricity prices for consumers.
Suggestions that the level of an EPS could also
change over time or that an EPS could be introduced for gas-fired
power stations built after 2020 will also have significant impacts
on investor confidence.
It needs to be recognised that whilst carbon
capture and storage technology is a potential technique for the
future low-carbon generation of electricity, the full technology
chain has not yet been demonstrated and is not likely to be commercially
available for a number of years.
Setting an EPS for a coal-fired power station
with a demonstration plant fitted to 300MW is also likely to be
difficult where the operating pattern and performance of the unit
fitted with CCS is difficult to predict at this stage. The fact
that CCS is at the demonstration stage means that it would be
very difficult to set a meaningful EPS until it is clear that
the unit fitted with CCS is fully operational and meeting expected
CO2 removal efficiencies. It is therefore difficult to see what
can be achieved by setting an EPS prior to CCS being judged commercially
available.
An EPS may have a role to play in setting future
standards for fossil-fired power generation but this should only
be introduced once the potential and costs of CCS on both coal
and gas-fired plant have been adequately assessed. A review of
the technical and commercial viability of CCS technology in the
UK by the Environment Agency is currently planned for 2018.
2. What benefit would an EPS bring beyond
the emissions reductions already set to take place under the EU
ETS?
The EUETS sets the overall level of emissions
that will be achieved in the traded sector out to 2020. Introduction
of an EPS will therefore not result in any further reductions
in CO2 emissions from the traded sector.
If investment in the UK resulted in greater
reductions of CO2 than would have occurred if an EPS had not been
introduced, these would clearly have to be paid for by increased
energy costs for UK consumers. In addition, the overall emissions
reductions required across the EU would be easier to achieve as
a consequence of higher UK investment and the overall cost of
carbon across the EU would reduce. Competitors elsewhere in Europe
would therefore benefit from lower costs of carbon and consequently
energy. In effect UK customers would be subsidising customers
elsewhere in Europe.
The threat of any introduction of an EPS or
mandatory retrofitting of CCS on gas-fired plant would act as
a strong deterrent for investment in new plant at a time when
a significant amount of existing coal and nuclear capacity will
be closing. This could then result in the perverse consequence
of higher UK CO2 emissions if existing coal-fired power stations
remain open for longer.
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?
An EPS will not drive forward the development
of CCS technology. If investors perceive that it is too risky
to invest in new coal-fired plant with demonstration on one unit
because it is not clear that a future EPS level would be achievable,
it could in fact work to delay driving the technology forward.
Rather than focus on an EPS to drive development,
Government should aim to ensure that investment in low-carbon
technologies is attractive to investors. Once CCS technology has
been demonstrated effectively on the first round of projects through
funding via the CCS Levy and EU sources, the next stage of investment
should be driven by the same criteria as investment decisions
in other low-carbon technologies.
To ensure that low-carbon investment is achieved
in the most economically efficient way, it is important that there
is a level playing field for making choices between alternative
low-carbon investments.
Fossil-fired power generation without CO2 abatement
is expected to have a role (albeit an increasingly smaller role)
in the electricity generation mix during the transition to a low-carbon
electricity system. In particular, unabated gas-fired generation
may be a necessary back-up for intermittent renewables.
In addition to recommending consideration of
an EPS for new gas-fired power stations from 2020 onwards, the
Committee on Climate Change (CCC) has recommended that serious
consideration should be given to funding at least one gas-fired
demonstration project. The intensity of CO2 emissions from a Combined
Cycle Gas Turbine (CCGT) is low relative to that from a coal-fired
power station and would therefore result in a higher cost per
tonne of CO2 abated. It is therefore unlikely that CCS on gas-fired
plant will be a competitive or cost effective means of reducing
CO2 emissions for a significant period of time to come. Most generators
consider that funding for CCS technology demonstration should
focus on coal-fired power stations as they are not clear what
benefits would derive from a demonstration on gas-fired plant.
Extension of the demonstration programme to gas-fired stations
could also lead to higher programme costs for electricity consumers.
4. Could the introduction of an EPS pose any
risks to the UK's long-term agendas on energy security and climate
change?
The introduction of an EPS will not stimulate
investment in low-carbon technologies and, if introduced for gas-fired
plant in addition to coal, could deter investment in high efficiency
CCGT plant. If the introduction of an EPS leads to delay in investment
in new capacity, then clearly energy security could be reduced.
Government should be considering the most appropriate means to
encourage investment in the low-carbon technology that will allow
the UK to meet its ambitions for decarbonisation of the electricity
sector. We do not consider that an EPS will be useful in encouraging
this investment.
5. What is the likely impact of an EPS on
domestic energy prices?
If an EPS is introduced in a way that does not
constrain investment decisions beyond the current policy on new
coal-fired generation, then it is unlikely that an EPS would result
in any impact on domestic energy prices.
However, if the manner of introduction of an
EPS leads to delays in investment in new capacity (particularly
new gas-fired generation) and Government fails to come forward
with an effective framework for encouraging investment in low-carbon
technologies, this could result in a shortage in capacity and
domestic energy prices are likely to rise.
6. Are any other European countries considering
an EPS? If so, should the standards be harmonized?
We understand that a legislative proposal for
the introduction of an EPS from 2020 was discussed in the Dutch
Parliament earlier this year, but has not progressed since the
Parliament re-formed following elections.
7. Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
Introduction of an EPS would send out the message
that the UK Government does not consider that the EUETS will be
sufficient as a mechanism to meet Kyoto and successor targets.
This is likely to instil a lack of confidence
in the ability of global mechanisms to contribute to reductions
in greenhouse gas emissions and potentially make it harder to
reach agreement on the adoption of these mechanisms.
8. Can greater use of Emissions Performances
Standards internationally help promote agreement on global efforts
to address climate change?
EPSs can be one of the mechanisms to address
climate change, but it is difficult to see how emissions trading
and EPS can be used alongside each other. The aim of an emissions
trading scheme is to deliver emissions reductions in the most
economically efficient manner. Imposition of an additional standard
will reduce the economic efficiency of the scheme.
Suggestions of a mandatory EPS would probably
be unacceptable to countries with significant domestic fossil
fuel reserves, until such time as CCS is proven to be technically
and commercially viable at scale.
September 2010
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