Memorandum submitted by Green Alliance
SUMMARY
Green Alliance welcomes the Energy and Climate
Change Committee inquiry into Emissions Performance Standards
(EPS). We believe that the Committee's input can help define the
potential role and scope of EPS policy options for the UK. Improved
clarity on this would be a useful contribution to imminent policy
developments in the fields of carbon capture and storage (CCS)
and electricity market reform (EMR) that will shape crucial investment
decisions to be made in the next few years.
In this submission we highlight three central
themes to the EPS debate:
1. The need for a policy framework to accelerate
the commercialisation of CCS, which will require action to provide
both high investor confidence and high climate confidence.
2. The emerging conceptualisation of EPS as a
market signal to guide investment and shape the transition to
a low-carbon power sector.
3. The gaps in current and proposed UK CCS policy
and the role an EPS could play in addressing these.
1. INTRODUCTION
1.1 Green Alliance aims to make environmental
solutions a priority in British politics. We are an independent
thinktank and work with representatives from political parties,
government, business and the NGO sector to encourage new ideas,
facilitate dialogue and develop constructive solutions to environmental
challenges.
1.2 Green Alliance has been a proactive
supporter of CCS demonstration and deployment over recent years,
in both the UK and Europe. We believe it is a strategically significant
technology for international efforts to reduce carbon emissions,
and that the UK is ideally placed to be an early mover in demonstrating
CCS and building a new low-carbon industry. We have worked to
identify policy solutions that can enable investment in CCS projects
and build public confidence and stakeholder support for the technology.
1.3 Green Alliance has undertaken a range
of activities with relevance to the debate about the use of EPS
as a potential policy tool. Throughout, we have always underlined
that a coherent package of financial support and regulatory measures
will be required to bring CCS to commercial deployment, and that
an EPS is one of the policy levers that could be considered. Within
this context Green Alliance has sought to bring together different
stakeholders to identify how an EPS could be defined in ways that
can gain widespread support, and we have been pleased to note
the growing trust between stakeholders and the identification
of shared interests. As a reflection of our convening role we
have therefore not defined a specific proposal on the dates or
levels of an EPS. Green Alliance activities on EPS and CCS that
may be of immediate interest to the committee include:
1. Publishing in autumn 2008 the compendium of
cross-sectoral viewpoints "a last chance for coal: making
carbon capture and storage a reality", which set out
the case for both public financial support and regulatory measures
to bring forward CCS demonstrations.
2. Convening a delegation visit to London and
Brussels in March 2009 by energy regulators and CCS experts from
the USA. Delegates included representatives from the California
Public Utilities Commission (originators of the California EPS)
and NGO and industry members of the US Climate Action Partnership
(USCAP) coalition that had advocated an EPS as part of a comprehensive
package of US climate legislation.
3. Co-organising two separate workshops on EPS
for NGOs and Industry in summer 2009, in association with Jon
Gibbins and Hannah Chalmers, then of Imperial College London.
4. Convening in September 2009 a two-day structured
cross-sectoral stakeholder dialogue on the theme of accelerating
the commercialisation of CCS in the UK and beyond. This was attended
by 50 individuals from 42 organisations from all interested sectors,
and timed to contribute to the DECC consultation on a Framework
for the Development of Clean Coal. This was accompanied by a series
of private conversations with key industry and NGO players in
the CCS field about how a package of finance and regulation could
be designed.
5. Co-organising two cross-sectoral workshops
on EPS for NGOs, industry, regulators and officials in summer
2010 in London and Edinburgh, in association with Jon Gibbins
and Hannah Chalmers of University of Edinburgh.
2. A POLICY FRAMEWORK
TO ACCELERATE
THE COMMERCIALISATION
OF CCS
2.1 Policies to aid the demonstration and
commercial deployment of CCS technology need to address the imperative
of reducing emissions from the power sector, the economic drivers
upon investors (including the broad spectrum of interests from
equipment providers to capital providers), and the valid concerns
about CCS that have given rise to public opposition to CO2 storage
elsewhere in Europe.
2.2 Through our active engagement with stakeholders
from all sectors, Green Alliance has developed a scenario framework
which helps us to analyse the CCS policy landscape. Our belief
is that CCS policies will only succeed if they are able to provide
both high investor confidence and high climate confidence. Figure
1 below provides an overview of this scenario framework.
Figure 1
2.3 Climate confidence refers in the first
instance to the need for policy to ensure that CCS demonstration
projects and future deployment actively and visibly contribute
to meeting the UK's decarbonisation objectives as part of a coherent
energy policy. Furthermore, we argue that without this alignment
of aims it will be difficult to secure public support for CCS
and avoid accusations that CCS is a fig leaf for continued use
of unabated fossil fuels. Conversely, an upfront approach to address
stakeholder concerns within a policy package that has clear climate
outcomes would allow the UK to avoid the public opposition to
CCS experienced elsewhere.
2.4 Investor confidence incorporates both
"technology push" and "market pull" elements.
CCS is only being developed in response to the climate imperative,
and will require that a range of policy and market drivers be
aligned with this aim in order for CCS to become available as
a commercial technology. As with other new technologies, it is
widely recognised that public financing and policy support for
research, development and demonstration activities are required
to address market failures that result in under-investment in
CCS. However, even once demonstrated, CCS will not be deployed
unless appropriate market structures are put in place. These need
to be signalled in advance in order to enable the construction
of CO2 transport and storage infrastructures; the development
of industry supply chains, economies of scale, and competition
between alternative equipment providers; and the provision of
adequate private sector finance. Central to this "market
pull" approach will be policy signals regarding the nature
of the energy mix and the acceptability of different forms of
power generation over the coming decades. These policy signals
will help define the commercial case for investment in new power
generation and enable comparisons to be made between the opportunities
and risks of CCS alongside those of competing technologies.
2.5 Many proponents of the EU Emissions
Trading Scheme (ETS) initially suggested that the ETS alone may
be sufficient to incentivise reductions in carbon emissions, including
via the deployment of CCS. While we agree that the ETS has been
a factor supporting fuel switching between gas and coal to date
(but less important than changes in fossil fuel price), and that
it could potentially play a role in rewarding low-carbon generation
in future, we believe that the ETS is ill-suited to addressing
broader market failures beyond the carbon price that lead to under-investment
in innovation and infrastructure. Even if the current weaknesses
in the ETS were to be addressed and a stronger carbon price were
to result, we would still suggest that additional policy mechanisms
would be required to provide a stable framework for investment
in CCS to take place. This is particularly relevant for the UK,
given that the timetable for UK decarbonisation to meet our domestic
carbon targets will need to move more quickly than the rate currently
agreed for the ETS declining cap.
2.6 Green Alliance would therefore underline
that clarity on the UK's proposed decarbonisation trajectory for
the power sector is the single most important upfront signal that
will assist in the definition of an energy policy that will provide
both high investor confidence and high climate confidence for
CCS. The repeated view of the Committee on Climate Change that
the UK power sector needs to be close to decarbonisation by 2030
has been widely accepted by industry as a feasible target date,
and has been confirmed as government policy in Scotland. It has
not however been accepted thus far as a focus for UK government
policy and is a source of uncertainty as to the timescale for
action and whether policy measures are being put in place to support
this aim. We would strongly encourage the government to provide
greater certainty on this point ahead of its consultation on electricity
market reform so that reform measures can be selected with this
outcome in mind.
3. CONCEPTUALISING
EPS
3.1 There are a range of different approaches
which could fall under the description of EPS, differing by the
locus of regulation and whether the EPS is conceived as a "go/no-go"
permission or a requirement subject to monitoring. The common
theme from discussions of EPS in recent years (and in the USA
and EU as well as the UK) is that interest has grown in using
regulatory signals to promote CO2 reduction in a similar way to
that used to drive reductions in emissions of classical pollutants
responsible for acid rain or direct impacts on human health.
3.2 It is therefore erroneous to claim that
an EPS is not appropriate for the UK simply because it was first
implemented in one particular form in California and other US
states. The UK and EU have significant experience of EPS-style
regulation of classical pollutants under the Integrated Pollution
Prevention and Control (IPPC) and Large Combustion Plant (LCPD)
Directives. The relevant starting point is instead to ask the
question of whether a regulatory instrument for CO2 would be an
appropriate addition to the policy mix to aid power sector decarbonisation
and the deployment of CCS. In the UK context the Committee on
Climate Change has clearly set out its view that it sees a role
for additional policy measures to buttress the ETS. While proposals
for the introduction of an EPS in the UK have undoubtedly drawn
on the experience in the USA and similar interest in the EU, there
are therefore also strong domestic grounds for its consideration.
3.3 There are a range of motivations and
objectives that might lead different stakeholders to consider
an EPS as a positive regulatory measure. To provide just a few
examples, the following suggested outcomes were identified at
separate NGO and Industry workshops in summer 2009:
— Accelerate low-carbon technology deployment.
— Promote a "better" energy mix,
including security of supply and addressing energy poverty concerns.
— Promote (global) leadership.
— Meet EU target: complements EU ETS including
by developing options, correcting market distortions, providing
certainty and valuing what society gains.
— Affects future cap—avoid carbon
lock-in.
— UK insurance against low CO2 price (if
only EUETS implemented) to achieve UK Climate Change Act commitments
and carbon budgets.
— Political signal to industry and/or the
world on no unabated coal.
— Political tool to satisfy NGO concerns.
— Balance climate risk (kgCO2) and value
of electricity (per MWh).
— Create need/market for CCS, in particular,
by avoiding CCS being crowded out due to continued build of unabated
plant.
— Get a more balanced portfolio: various
aspects including how to avoid gas dependence, bring in new technology,
value diversity including dispatchable back-up and get the "right"
decision in the presence of market failures.
— Decarbonised electricity—low cost
asap.
3.4 Green Alliance has always sought to
develop thinking on EPS options in ways that support investment
in CCS. We believe that positive lessons can be drawn from previous
experience of technologies designed to reduce emissions of classical
pollutants (such as via flue gas desulphurisation). Where a CO2
EPS would differ, however, is in the relevant timespan for averaging/measurement
and the subsequent level of influence over operational decision-making.
While Emissions Limit Values for classical pollutants may be defined
on time periods as short as a half-hourly basis, it would be more
appropriate to calculate emissions of CO2 on an annual basis to
match ETS reporting periods. Operational decision-making about
the specific configurations of plant performance, electricity
output and CO2 capture would therefore take place within the boundaries
set by the EPS but operators would be afforded greater flexibility
than traditionally permitted under IPPC/LCPD regulations. As such,
an EPS for CO2 would provide a market signal that certain levels
of emissions performance are to be expected from generating plant
at relevant future dates. We have found that clarity on this point
about the level of operational control helps to address industry
concerns by making clear that an intelligently-set EPS could be
a driver for investment in low-carbon technologies, providing
a basis for plant operational decisions and energy market strategies
to remain with operators.
4. GAPS IN
CURRENT AND
PROPOSED POLICY
4.1 Given the context outlined above in
sections 2 and 3, Green Alliance would make a number of observations
about existing UK policy on CCS and the headline commitments made
in the coalition programme for government. These help to identify
where an EPS might be a useful tool for strengthening both investor
confidence and climate confidence.
4.2 The Framework for the Development of
Clean Coal (FDCC) sets out an initial requirement for the inclusion
of at least 300MW of CCS, but does not provide a "bankable"
end point for when CCS will be required for full plant coverage
(for plants starting with only a portion of CCS) or when similar
emissions requirements will be required of competing plants (an
important consideration for plants aiming for earlier full coverage
of CCS eg pre-combustion integrated gasification combined cycle
(IGCC)). Instead, current policy is that future CCS requirements
will be determined in 2018 or after once CCS has been "proven".
It is foreseeable that the definition of "proven" will
be open to challenge and delay. The current FDCC policy is therefore
by definition technology-following rather than technology-forcing,
in contrast to previous successful regulatory regimes for classical
pollutants in the power generation and automobile sectors.
4.3 The current lack of future clarity on
requirements for CCS forms part of the broader absence of a target
decarbonisation trajectory for the power sector as noted in point
2.6 above. This absence means that it is very difficult for investors
to identify when investments in CCS will be required, where the
liability for any retrofit costs will fall, how these costs will
be covered, and what the market competition will be like. The
absence of answers on these questions makes it much more difficult
for investors to commit now to new plant, particularly partial
post-combustion capture on new supercritical plant. Green Alliance
believes that current policy, even with the addition of demonstration
finance, does not yet provide sufficient investor confidence to
enable a full programme of CCS demonstration in the UK or the
sufficient scale-up of supply chains, manufacturing capacity and
CO2 transport and storage infrastructure. While there are some
excellent post-combustion retrofit projects available that could
provide a rapid first tranche of CCS demonstration, greater clarity
will be required to enable further demonstrations to proceed on
a commercial basis.
4.4 Similarly, the current policy framework
fails to provide sufficient climate confidence through an absence
of a clear decarbonisation trajectory for the power sector and
the open-ended nature of the FDCC CCS requirement. There would
be significant risks of carbon lock-in (and therefore potential
financial liabilities for public support for future retrofit)
if new largely-unabated supercritical coal plant were to be permitted
on the basis of the FDCC regulations. This is a recipe for public
opposition to CCS and one that should be avoided if the UK is
to make the most of its world-leading combination of available
offshore CO2 storage, engineering expertise, and positive stakeholder
engagement.
4.5 Green Alliance is therefore encouraged
by the convergence of interest in EPS options from both investors
(including generators, equipment providers and infrastructure
operators within that broad definition) and NGOs, regulators and
policy makers with a climate remit. The shared interest centres
on how the future requirements for power sector decarbonisation
(and therefore CCS deployment) can be signalled in advance, and
with sufficient regulatory force that: A; CCS investments become
a more bankable investment proposition, and B; that there is a
visible route to power sector decarbonisation that has catalytic
potential in the UK and beyond. Green Alliance believes that an
EPS policy could play a role in setting out a widening scope for
power sector decarbonisation and providing clarity on the types
of investment that will be rewarded under reformed electricity
market conditions. Crucially, this means that an EPS needs to
encompass all fossil fuel types and biomass. It should also be
accompanied by the demonstration of CCS on gas at the earliest
possible opportunity, and should be followed by a package of EMR
that incentivises low-carbon power generation. We would suggest
that an EPS could be considered as a leading indicator of the
direction of travel of EMR, with subsequent reforms putting in
place the market structures and rewards for investment in low-carbon
generating capacity that meet the EPS decarbonisation trajectory.
We would propose that an EPS pathway should be identified and
enacted by around the close of 2011 to provide clarity to investors
entering into negotiations for UK CCS demonstration projects 2-4.
4.6 While Green Alliance warmly welcomed
the coalition government's commitment to introducing an EPS, we
would recommend that this not be limited to coal plants alone,
as such an EPS would be of limited value in respect to driving
wider CCS market creation. Additionally, if such an EPS were to
follow the FDCC framework and be set expressly to allow for largely
unabated supercritical coal to proceed without a clear end-date
for retrofit to full capture it would be unlikely to gain stakeholder
support as a provider of climate confidence. We would therefore
recommend that a broader approach be taken that provides clearer
investment signals across the power sector. While such an EPS
can be introduced as of now, and encompass demonstration plants,
it should also make clear that any new generation capacity to
be added in the 2020s must be low-carbon, and that there will
be a pathway for high-carbon generation to either install CCS
or face limited running hours during the same timeframe (as discussed
in point 5.2 below). This aspect will be important to avoid investment
in low-carbon generating capacity being crowded out or placed
at disadvantage by unabated plant that is able to absorb the projected
low carbon price.
5. ANSWERS TO
COMMITTEE QUESTIONS
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?
5.1 Green Alliance would suggest that an
EPS should be defined in a staged approach that would include
all relevant fuels and extend its scope over time to both new
and existing plant. Such a standard could be defined initially
to allow for tightened requirements in the later 2020s once CCS
operational performance provides data on ultimate performance
capabilities. Given the necessary technology testing and inevitable
teething problems to be faced by CCS demonstration plants we would
suggest that these plants be given greater flexibilities for an
initial period, either through the level of the EPS applied to
the CCS portion of the plant or via the percentage of time during
which performance at that level is required. Any unabated portions
of new plant (both coal and gas) should from the outset have to
meet Best Available Technology (BAT) energy efficiency standards
and should also be given clear timelines for when they should
meet stricter EPS levels that would require CCS retrofit. It may
be appropriate for coal and gas plant to be set differing EPS
levels given the respective carbon intensities of the fuel stock
and the initial expected levels of CCS performance.
5.2 As with existing regulations under IPPC/LCPD
(now part of the combined Industrial Emissions Directive (IED)),
we would envisage that existing coal or gas plant approaching
the end of its operational life could be granted exemptions from
EPS coverage on the basis of equivalent limits on running hours
or total annual CO2 emissions for a limited period. Such plant
should not be totally exempt from EPS coverage during the 2020s
but could be provided with such flexibilities to help maintain
UK security of supply. Such an approach would be necessary to
reflect the 2008 advice from the Committee on Climate Change that
emissions from unabated coal should not occur beyond the early-2020s.
We would therefore envisage that any remaining UK coal plant that
is still online beyond the 2023 IED opt-out deadline should therefore
be subject to an EPS from that date onwards. Furthermore the Committee
on Climate Change has now also recommended that CCS will also
be progressively required on gas during the 2020s. Following current
regulatory practice it may be desirable to allow peaking plant
operating less than 1,500 hours per year to opt into transitional
arrangements that provide continued security of supply while incentivising
the construction and operation of new flexible low-carbon generating
capacity. Electricity market reform efforts will undoubtedly also
seek to address this issue, and could potentially apply an EPS
as a filter for eligibility for capacity payments or other market
support measures.
5.3 The definition of levels and implementation
dates for an EPS will require careful consideration of the expected
levels of CCS technical performance and commercial development,
but should seek to set reachable targets ahead of the technology
becoming available rather than following behind in a BAT approach.
It will also be important to model likely industry responses to
reduce scope for gaming. We would however recommend that the government
clearly signal its intention to introduce an EPS within a defined
timescale. Recent lack of clarity on whether EPS legislation will
be included in the forthcoming Energy Security and Green Economy
Bill means that the policy debate is stuck at the "whether"
stage rather than moving to a discussion of "how". This
clarity would be positive in helping to elicit positive engagement
from industry and other stakeholders as to how an EPS can be designed.
What benefit would an EPS bring beyond the emissions
reductions already set to take place under the EU ETS?
5.4 The emissions reductions set to take
place under the ETS are currently insufficient to match UK targets,
while the carbon price alone is not yet capable of driving investment
in low-carbon technologies such as CCS. Although there are aspirations
that ETS caps might be tightened if the EU were to move to a 30%
emissions reduction target for 2020 there remain significant political
difficulties that would mean progress is likely to be slow and
contested by certain industrial and power sector interests. This
will have an unsettling effect on investment in new low-carbon
plant due to continued uncertainties as to when the carbon price
may increase and the perceived longevity of competition from existing
high-carbon plant with access to banked ETS allowances or the
ability to absorb continued low carbon prices.
5.5 An EPS could therefore play an important
role in pulling through investment in CCS, provided that it is
accompanied by an ambitious demonstration programme and related
infrastructure development, and that EMR puts in place market
conditions that make such investments attractive. This is particularly
the case for CCS on gas, as its lower carbon intensity would require
a much higher carbon price per tonne of CO2 abated, despite gas
CCS likely to be competitive on a £/MWh basis.
5.6 The introduction of such a package of
finance, regulation and EMR would make the UK a more stable investment
proposition than other EU member states where future emissions
reduction regimes are more uncertain. This would also have a positive
exemplar effect, as has already been seen in respect to the UK
Climate Change Act, which would help create the political momentum
required to significantly tighten ETS caps.
5.7 If in the interim period there was a
desire to address the potential for emissions to increase elsewhere
in the EU it would be possible for the UK government to retire
a corresponding amount of ETS allowances from its auctions. Such
an approach may also be required if the UK were to introduce a
carbon floor price.
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?
5.8 The demonstration and deployment of
CCS technology will require a combination of: (1) public financing
for demonstration; (2) ongoing incentives via the ETS and EMR;
and (3) a regulatory framework that makes clear the need for emissions
reductions, thereby providing a market structure for completion
between low-carbon technologies via the phasing out of high-carbon
generating capacity. An EPS would provide these last aspects of
the policy package. While it is true that an EPS alone would not
drive the development of CCS, we would also suggest that its absence
would not provide sufficient commercial clarity to drive the development
of a new CCS industry at scale. The absence of an EPS or similarly
clear regulation on emissions would likely contribute to significantly
increased risk of public opposition to CCS technology.
5.9 The UK's CCS demonstration programme
should certainly cover gas as well as coal plant, as CCS on gas
will be increasingly important over the coming decades. New gas
plant is already subject to carbon capture-readiness requirements.
CCS demonstration on gas will be required to provide a "reference
plant" for future deployment of CCS on gas.
Could the introduction of an EPS pose any risks
to the UK's long-term agendas on energy security and climate change?
5.10 We would suggest that a package of
measures (as described in 5.8), and the inclusion of relevant
flexibilities (as in 5.2), would meet the UK's long-term objectives
on climate change and also support UK energy security by making
the UK a stable and attractive location for investment in low-carbon
generating capacity, including CCS. This would enable the UK to
maintain a diverse range of energy sources as it moves to a zero-carbon
energy system.
5.11 It has been suggested by some commentators
that too early an indication of the need for CCS on gas would
result in insufficient investment in gas plant in the immediate
future. We would highlight that new gas plant is already subject
to carbon capture readiness requirements and has been identified
as requiring CCS within the next two decades by the Committee
on Climate Change. We would suggest therefore that clarity on
the likely timescale for CCS on gas would be a benefit rather
than a hindrance to investors considering imminent investments.
Significant gas plant capacity is under construction or has been
permitted in recent years. An EPS could be designed to provide
a range of options for these plants as to whether they opt in
or out of an EPS regime.
What is the likely impact of an EPS on domestic
energy prices?
5.12 Domestic energy prices will need to
reflect the cost of investing in low-carbon generating capacity
using a range of technologies. An EPS would not alter the range
of technologies required, but would give clarity on the timeframe
for such investment. It would therefore be hoped that an EPS that
provides clarity on the investment framework would help to reduce
a range of project risks and increase confidence in the likely
returns from low-carbon investments. This could help lessen the
impact on domestic energy prices. The impact of higher prices
should also be offset by improved energy efficiency resulting
in reduced consumption.
Are any other European countries considering an
EPS? If so, should the standards be harmonized?
5.13 The CO2 storage directive already features
a review in 2015 to consider whether an EU-wide EPS might be required.
The new IED has also clarified that Member States are free to
introduce national EPS if desired. The Netherlands and Hungary
have both considered an EPS as part of climate legislation within
the past year, but electoral cycles have meant that these proposals
have yet to be enacted.
5.14 There would potentially be benefits
from harmonising EPS policies at EU level, but recent history
(and US experience) suggests that a vanguard member state or grouping
will need to take action first, which could then be taken up either
by neighbouring countries or by the EU as a whole. It would be
unwise to wait for the introduction of an EU EPS as this would
have a negative impact on UK policy clarity and its ability to
attract inward investment.
Could unilateral action by the UK to introduce
an EPS contribute towards global climate negotiations in Cancun
in November 2010?
5.15 The timescale for influencing the Cancun
negotiations is very short. It would however be appropriate to
consider the role that an EPS could play in helping to build broader
political momentum for action on climate change. See 5.16 below.
Can greater use of Emissions Performances Standards
internationally help promote agreement on global efforts to address
climate change?
5.16 Yes. UK climate diplomacy over recent
years has recognised the importance of finding solutions to climate
change that also contribute to domestic energy security and other
political priorities in key countries. UK support for the NZEC
CCS project in China is just one such example. The UK has the
ability to export not just CCS technology and engineering expertise
but also to create a template of policy measures that can be applied
in different jurisdictions. An EPS can form a central part of
such a package and could provide a means of identifying comparative
efforts made towards power sector decarbonisation. A central aim
for international CCS policy would be to see CCS become the default
option for new coal plant in key developed and developing countries
by the early 2020s. Due to energy market dynamics this will also
require a timeframe for the introduction of CCS on gas.
October 2010
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