Appendix: Government
Response
Introduction
The Department is grateful for the Energy and Climate
Change Select Committee's detailed consideration of an Emissions
Performance Standard (EPS).
In the Coalition's Programme for Government, it was
stated that the Government will establish an EPS that will prevent
coal-fired power stations being built unless they are equipped
with sufficient carbon capture and storage to meet the EPS. In
the 2010 Annual Energy Statement, the Government announced its
intention to consult on the EPS as part of a wider consultation
on reform of the electricity market.
On 16th December the Government launched
the Electricity Market Reform (EMR) consultation. This contains
more detailed proposals on the design of an EPS as a complementary
mechanism to a package of reforms, including the introduction
of Feed-in-Tariffs, Carbon Price Support and Capacity Payments.
The Committee will appreciate that, as we are in
consultation on the EPS proposals as part of a potentially complex
and far-reaching series of interventions in the electricity market,
the Government cannot make any firm commitments on the outcome
as regards EPS, but we will have more to say on this subject as
part of a White Paper later this year. For the moment, everything
which we say here about Government's views and intentions in connection
with the EPS proposals and the other elements of the proposed
EMR package of reforms has to be read as representing conclusions
which at this stage are only provisional and remain subject to
the outcome of the ongoing consultation. Accordingly we have
tried to respond in a timely fashion to the Committee's recommendations,
whilst recognising that Government will need to analyse the responses
and feedback on the consultation carefully before making any final
decisions on the design and approach to the EPS or other aspects
of EMR.
This Government is fully committed to decarbonising
the power sector, and must do so in a way which is affordable
for consumers and maintains security of supply. We consider that
the package we are consulting on provides an effective way to
do this, by giving revenue certainty to low carbon generation
and adequately rewarding back up capacity. As part of this package,
the EPS would provide assurance that no new coal power stations
are built or operated unless they abate a proportion of their
carbon emissions.
The ECC Select Committee made 19 recommendations
and conclusions in its report. These are detailed below, together
with the Government's response.
Energy and Climate Change Select Committee recommendations
and Government responses
THE UK POWER SECTOR: TRENDS AND TARGETS
1. We believe that the policy framework as
it currently stands is grossly inadequate and will not deliver
adequate investment in new low-carbon generating capacity for
the 2020s and 2030s. The Government has acknowledged this fact
and plans to consult shortly on a number of reforms to the electricity
market. Reforms to the electricity market are required urgently
in order to ensure sufficient investment is made now to deliver
infrastructure for the 2020s. The Government must not delay in
conducting its consultation and delivering a White Paper in Spring
2011. Any slippage of the timetable will jeopardise climate change
and energy security objectives. (Paragraph 18)
The Government believes that transforming our electricity
system is crucial to meeting our security of supply and climate
change goals. Our electricity system has served us well up to
now, but new objectives and challenges over the next few decades
mean that reforming our electricity market is essential to deliver
the investment we need in new plant, and in particular low-carbon
generation.
The UK Climate Change Act (2008) sets out a requirement
to reduce our greenhouse gas emissions by at least 80% by 2050
relative to 1990 levels.
The UK will need to achieve these emissions reductions
while at the same time safeguarding energy security, by replacing
plant that is already scheduled to close and by ensuring that
the system is sufficiently flexible to balance supply and demand
and avoid outages. The transformation of the electricity system
will require large scale investment and the Government is also
keen to maximise the economic opportunities for UK business presented
by national and global decarbonisation.
The Government's own analysis, including the 2050
Pathways Analysis, has identified conclusions about actions which
appear to be common to many of the plausible pathways to meeting
our targets.
Key among these conclusions was the need to change
the way we use energy and the need to transform our energy supply.
A new policy framework is essential to help change the way energy
is used and deliver the investment required to build a low carbon
power system that provides security of supply at a price affordable
for consumers.
As a result of this analysis the Government launched
a consultation on its proposals for Electricity Market Reform
(EMR) on the 16 December, and is on track to deliver the White
Paper later this year. The Government recognises the importance
of providing early certainty to investors but must balance this
with the need to get the detail of these major reforms right.
The Government's objectives for reform of the electricity
market are security of supply, decarbonisation and affordability.
Alongside this the Government is using four broad principles
of cost effectiveness, durability and flexibility, practicality
and coherence to judge the effectiveness of different market design
options.
The EMR consultation contains a number a of proposals,
and the preferred package of reform measures includes:
- carbon price support, which
would encourage investment in low carbon technologies by increasing
the cost of fossil fuel generation;
- feed-in tariffs, which would be long-term contracts
to provide more certainty on the revenues for low-carbon generation;
- capacity payments, targeted to encourage security
of supply through the construction of flexible reserve plant or
demand reduction measures; and
- an Emissions Performance Standard to provide
a backstop to limit how much carbon new coal plant are permitted
to emit.
Taken together, the proposals are designed to ensure
that low-carbon technologies becomes a more attractive choice
for investors and adequately reward back up capacity to ensure
security of supply.
THE ROLE FOR AN EMISSIONS PERFORMANCE STANDARD
2. We welcome the Government's decision to
consider an EPS alongside a wider package of market reforms, rather
than in isolation. However, we are concerned that interactions
and overlaps with existing policies as well as proposed new market
reforms are insufficiently understood. We therefore recommend
that the Government commissions an independent review of regulations
and market reforms in the electricity sector. The review should
investigate the combined impact of new and proposed policy measures
on energy costs, greenhouse gas emissions, energy security and
the cost of compliance and should be conducted alongside the Government's
own consultation. (Paragraph 22)
The Government fully understands that the attractiveness
of the UK electricity market is affected by other areas of policy
including the planning system, technology licensing and grid connection
regime that all support the development of major infrastructure.
The EMR is not seeking to address these wider factors, but Government
recognise that they are critical enablers for investment decisions
that have the potential to significantly reduce investment costs
and are being considered in other areas and consultations.
The market design should deliver its objectives efficiently
to minimise cost increases for consumers and ensure that the UK
is an attractive place for energy companies to do business. The
Impact Assessment accompanying the consultation considers the
impact of the range of measures, and, among other things, includes
assessment of the overall costs to society, affordability and
efficiency.
It is expected that the consultation will elicit
a large number of views from stakeholders, and there will be extensive
engagement by DECC over the consultation period to elicit further
responses and discuss the issues in more detail and receive expert
input. This will enable the Government to take a range of independent
views into account in developing its response to the consultation
in the White Paper. Furthermore, there have already been a large
number of reports from independent commentators on what should
be done to reform the electricity market, and these have been
taken into account when developing the proposed framework. The
responses of stakeholders will add to the analytical work already
undertaken by the Government and will add to the large evidence
base already existing.
3. We conclude that it would not be sensible
to introduce an EPS if its sole aim is to drive immediate emissions
reductions from the power sector since the EU ETS already exists
to do this. However, we also note that the EU ETS cap needs to
be significantly tighter than its current and planned future level
if it is to be effective in achieving reductions. (Paragraph 32)
The Government's proposals for an EPS are not designed
to drive immediate emission reductions from the power sector.
The Government remains committed to the EU ETS as the primary
means of driving emission reductions across Europe, and is not
seeking to design a market framework which undermines this. However,
we are also clear that the ETS on its own is very likely to be
insufficient to deliver the significant investment we need in
the UK in low carbon generating capacity in the UK over the coming
years, and as it stands the electricity market is not appropriately
structured to achieve the balance between decarbonisation, security
of supply and affordability. This is why we are proposing a package
of reforms to the way in which the market operates, which includes
supporting the carbon price as part of an HM Treasury and HMRC-led
proposal to reform the climate change levy (and fuel duty).
With regard to EU-wide emission reductions, the Government
agrees with the Committee that that the current cap on the ETS
is not sufficient. The Coalition Programme for Government states
that the Government will support an increase in the EU emission
reduction target to 30% by 2020, and tightening the ETS cap will
play a key part in delivering these additional emission reductions.
4. An EPS will not result in any additional
global savings to carbon emissions if they are offset by other
participants in the EU ETS. It may also lead to a reduction in
the price of carbon. In order to avoid these outcomes, the Government
should consider retiring an equivalent number of EU allowances
to those saved through the EPS. We recognise that there is some
uncertainty about the legality of this option and the Government
should seek to clarify this situation. (Paragraph 33)
As a preventative measure and targeted only at new
coal-fired power stations, the Government considers from the evidence
that the EPS proposed in the consultation would have a negligible
impact on the EU-wide carbon price. In addition, it would be difficult
to ascertain the level of emission reductions directly associated
with the EPS, as opposed to other measures such as carbon price
support and the low carbon support mechanism. The Government will
continue to engage with the European Commission to ensure that
implementation of any of the EMR proposals is well aligned with
the EU ETS.
5. We note that at this stage, CCS has not
yet been proven to work at scale. Even if it is proved to work
technically, there are still questions about how much it will
cost and whether it would be economically viable to build and
operate in the future. An EPS could help ensure that the UK does
not become reliant on high carbon electricity in the event that
CCS does not work at scale or proves too costly. (Paragraph 36)
6. We conclude that an EPS offers a more certain
and predictable way to prevent lock-in to high carbon infrastructure
than other means. This goal itself provides adequate justification
for implementing an EPS. (Paragraph 37)
As a technology which has the potential to reduce
emissions from fossil fuel power stations by up to 90%, CCS is
vital in the global battle against climate change. The Government
is committed to the successful demonstration of CCS, and has allocated
funding of up to £1 billion for the first project and remains
committed to a further three projects. It is fully expected that,
in time, CCS will be proved commercially viable, and that we will
see the market drive retrofit and wider deployment. The proposed
low-carbon support mechanism detailed in the EMR consultation
could have a key role in making this happen.
The Government agrees that an EPS can be used as
a measure to prevent lock-in to high carbon generation (although
it should be noted that even if plant are built, there is no guarantee
they would operate). The EPS that the Government has proposed
would ensure that, while coal continues to play an important role
in electricity generation, in the future it does so in a manner
consistent with decarbonisation objectives. The Government is
required, under the 2010 Energy Act, to produce decarbonisation
reports on a rolling basis, and possible future versions of the
EPS will naturally fall to be considered as part of this process,
including whether it is an appropriate mechanism to drive further
use of CCS. In this assessment, the Government will also consider
the impact of any future EPS on security of supply.
7. We conclude that an EPS could play a role
in providing a transparent framework for regulating carbon emissions
from the electricity sector by making clear the Government's expectations
in terms of emission reductions from this sector. This would be
an additional justification for its introduction. (Paragraph 40)
As part of the analysis for the consultation, the
Government explored the option of setting an EPS which would act
as the key driver in decarbonising the electricity sector. This
would be set as an annual limit of CO2 for all fossil
fuel plant, both new and existing, and progressively tightened
such that by 2030 only fossil-fuel power station equipped with
CCS would be able to operate at baseload. While this could mark
out the decarbonisation trajectory, it would entail greater cost,
less flexibility, and have greater security of supply risks than
the preferred package. It would make it unattractive to build
the flexible back-up generation needed to support a low-carbon
mix, and investors would have little certainty over the economics
of their power station. Furthermore, preventing the construction
of fossil-fuel power station would not automatically mean that
investment in low-carbon generation would replace it - the UK
is competing internationally for investment capital and developers
may chose to invest in other markets with lower regulatory risk.
Instead, the Government considers that a mix of incentives
and rewards, coupled with an EPS which prevents new unabated coal,
is the most efficient way to achieve its objectives of decarbonisation,
security and affordability. It is considered that the preferred
package would provide the competitive conditions necessary to
drive efficiency in a carbon-constrained market.
8. An EPS has the potential to provide certainty
to investors that there will be a future market for low-carbon
electricity. However, it is important to design an EPS which avoids
the risk of undermining investor confidence by increasing policy
and political uncertainty. We conclude that an EPS is more likely
to be successful in encouraging the development of CCS technology
and indeed other low carbon electricity generation, if it is introduced
as part of a package of measures rather than in isolation. This
should include some form of financing help in order to help reduce
risk for investors. This could be an extension to the CCS levy,
beyond the initial four demonstration plants, or some other mechanism.
(Paragraph 50)
9. We are not convinced that generators will
use CCS as a matter of course once the technology has been proven.
This is because the current fiscal and regulatory framework does
not currently provide a strong enough incentive to do this. In
particular, the carbon price under the EU ETS is not high enough
to make the roll out of CCS technology economically viable. We
therefore believe that there is a role for an EPS in ensuring
the deployment and operation of CCS in the future. (Paragraph
53)
The proposals outlined in the consultation seek to
support the successful demonstration of CCS, whilst also providing
a clear and unambiguous regulatory backstop against the construction
and operation of new unabated coal-fired power stations. Given
the early stages of CCS development, in our proposals we have
sought to achieve this through a number of design factors:
- The Government has presented
two options for the level of the EPS, both intended to provide
the necessary flexibility to allow demonstration of the full range
of approaches to CCS. The first proposal is for a level consistent
with demonstrating CCS on around ¼ of the capacity of a new,
coal-fired power station (equivalent to 600g/kWh). The second
proposal is for a tighter EPS, set at equivalent of 450g/kWh,
but to allow demonstration projects exemptions.
- Both options would be applied as a total amount
of CO2 that a plant can emit in any given year, based
on the size of the plant and the operating regime; the proposal
is to base the limit on baseload operation, and to apply it per
kW of installed capacity. While CCS is a demonstration technology,
there will inevitably be times when the equipment will need fine
tuning, may not operate at full efficiency, and will need to turned
off to be maintained. The Government considers that an annual
limit EPS would allow plant to do this, without undermining the
economics of the plant, as it would allow for reducing running
hours to meet the EPS.
As a demonstration technology, we cannot yet expect
plant to fit more CCS than can be funded through the Demonstration
Programme. As noted above, we are proposing that the EPS be reviewed
in line with the decarbonisation reports required through the
2010 Energy Act to assess if and when the EPS will have a role
to play in driving greater use of CCS. Any future version of the
EPS would also need to be weighed against the impacts on security
of supply.
The Committee will also have noted that, under the
package of reforms proposed, the Government is seeking to provide
support to all low-carbon technologies, including CCS. The preferred
option is to achieve this through a Feed-in-Tariff with a Contract
for Difference, which would provide generators with a contracted
tariff over the average electricity price in order to support
investment. The Government appreciates that there are a number
of design issues that need to be resolved, and will be working
on detailed implementation plans for the White Paper.
10. There is clearly some ambiguity about
why the Government intends to introduce an EPS. The rationale
must be made clear in the forthcoming consultation on electricity
market reforms.(Paragraph 54)
11. An EPS could be introduced for a number
of different reasons, including: to reduce the UK's greenhouse
gas emissions; to avoid "lock-in" to high carbon infrastructure;
to provide greater clarity about the expected level of emission
reductions from the power sector; to stimulate the development
of CCS technology; and to ensure the deployment and use of CCS
technology. We believe that an EPS would be most usefully employed
in providing a transparent emission reduction framework for the
power sector, in avoiding lock-in to high carbon infrastructure
and in helping to stimulate the development and deployment of
CCS and other low-carbon technologies. It is clear to us that
an EPS by itself will not deliver CCS, but it could play a useful
role as part of a package of wider measures that address the other
barriers to its introduction. (Paragraph 55)
As outlined in the EMR consultation, the proposed
purpose of the EPS is to provide a regulatory backstop against
the construction and operation of new unabated coal plant. A large
proportion of electricity generation in Great Britain comes from
unabated coal-fired plants[1].
This will need to decrease as more low-carbon sources come online.
Coal, however, has a valuable role in providing secure and affordable
electricity: it is a reliable fuel, can provide effective backup
generation when the generating capacity of intermittent power
sources such as wind are predicted to be low and is available
from a wide range of geographical locations, contributing to a
diverse energy mix. The Government considers that CCS is critical
in preserving these benefits while also decarbonising the electricity
system, and that no new power stations which use coal (or coal-derived
fuel) should be built in the UK unless a proportion of their emissions
are abated. The EPS is intended to ensure that this happens, and
prevent lock-in to high-carbon, unabated coal generation. In addition,
by establishing an EPS as an annual limit of CO2, there
would be certainty over the maximum emissions that can come from
new coal plant.
The Government considers that the EPS can provide
a level of certainty over regulatory requirements to demonstrate
CCS, but that it is too early to use the mechanism to drive wider
deployment. CCS has not yet been demonstrated at commercial scale
for electricity production, and the costs have yet to be fully
understood. As such, the market will not invest in the technology
therefore requiring public support. The Government considers that
the most cost effective way to do this is through the UK CCS Demonstration
Programme, demonstrating CCS on a mix of generation technologies,
which could include new coal, existing coal, IGCC[2]
and gas. However, the Government expects the technology to become
commercially and technologically viable in time, and an EPS may
have a role to play in ensuring deployment at this stage. The
proposed review linked to the 2010 Energy Act decarbonisation
reports will provide the opportunity to assess the EPS's role
in driving deployment. However, the Government agrees with the
Committee, that an EPS cannot be used in isolation, and that a
package of reforms is necessary.
EPS DESIGN
12. There are many design options for an EPS,
some of which may be more beneficial than others. We welcome the
fact that the Government is considering a range of options in
designing the EPS. In its forthcoming consultation and review
of electricity market reform, the Government must consider all
the alternatives set out here and analyse the potential impacts
of each option on energy security, energy prices and environmental
sustainability in order to avoid unwanted outcomes. (Paragraph
89)
As part of the EMR consultation, we have considered
a number of different design options for the EPS, including scope,
level and how to apply it. It is proposed that the level be set
so as to affect new coal generation only, and that it be applied
to individual plant. To affect new gas generation at this stage
could have significant impacts on energy security. While over
the longer term the UK will need gas plant operating at baseload
to be equipped with CCS if we are to meet decarbonisation objectives,
unabated gas plant have an important role as we make the transition,
particularly due to the capacity closure in the latter part of
this decade, and in the longer-term to provide flexible, peaking
capacity to support intermittent low-carbon generation.
It is proposed that the EPS not apply to existing
plant; to do so could force closure and exacerbate security of
supply risks, as well as set a precedent which could affect investment
in new, low carbon generation. Furthermore, under the proposed
package of reforms, analysis shows that those coal plants remaining
on the system in the 2020s would operate at increasingly limited
hours. This would enable them to play an important role in backup
generation, and could avoid the need to build new unabated gas
plant in the early 2020s, which could easily remain on the system
for 40 years.
The Government has also considered whether the EPS
should apply at plant-level, or to a suite of plants, for example
in a generator's portfolio. It has proposed that it apply at plant-level,
as this would provide the most clear and transparent approach
to regulation, and avoids many of the complexities and uncertainties
that a 'suite' approach could elicit.
Further considerations have been detailed in the
EMR consultation.
13. To ensure that an EPS acts as an incentive
to new investment in low carbon generating capacity and a disincentive
to investment in high carbon generating capacity it is essential
that the timescale for its introduction respects the investment
cycle of the technology involved. It is also important that it
is designed in a way which increases investor certainty and thereby
reduces the cost of capital. An EPS must also protect the possibility
that, as long as baseload generating capacity is low carbon, there
may remain a role for high carbon power stations to operate for
brief periods of exceptionally high demand. (Paragraph 90)
The UK needs significant investment in energy infrastructure
if it is to successfully move to a low carbon, secure and affordable
energy mix. Some £110 billion is needed in new generation
and transmission in the period to 2020, over double the rate of
the last decade[3]. Part
of this is caused by significant closure of plant over the next
10 years, including around 8GW of coal capacity. The Government,
therefore, believes that now is the right time to be proposing
reforms, but is aware that there are a number of detailed implementation
questions that need to be answered if investors are to have the
certainty they require at the right time. We will be looking to
address these and make final decisions on the reform package by
the time of the White Paper.
As more renewables enter on to the system, there
will be more intermittency, and the market will need to respond
accordingly. This could, for example, be through management of
demand (so called negawatts), or from short-term increase in generation
from other sources, often at short notice. Some types of gas plant
are particularly good at providing 'peaking' services, being able
to start up quickly and operating for short period of time. Low
carbon plant are less able to provide this service, and, for example,
flexibility of plant fitted with CCS is currently untested. As
such, the Government recognises the need to retain unabated fossil
plant and allow them to operate when there is insufficient generation
from other sources or particularly high demand. The design of
the EPS seeks to address this principally by applying an annual
limit of CO2, which would allow infrequently used peaking
plant (such as Open Cycle Gas Turbines) to operate unconstrained
by the EPS.
14. We urge the Government to make every effort
to minimise the impact of an EPS on energy prices, particularly
for vulnerable groups and the fuel poor whose numbers may increase
as a result. In particular, the Government must prioritise the
delivery of domestic energy efficiency programmes in addition
to other policies such as the Social Price Support Scheme to vulnerable
groups and the fuel poor in order to keep their energy bills as
low as possible. (Paragraph 91)
As part of the analysis for the consultation, the
Government explored two primary options for the EPS: one targeted
at new, unabated coal, which is the proposal, and one used as
the principal mechanism to drive decarbonisation of the power
sector, as discussed above. The impact on energy prices was a
key factor in determining the proposal for a targeted EPS in the
consultation.
An EPS used as the mechanism to drive decarbonisation
would need to be set for all fossil fuel plant, both new and existing,
and progressively tightened such that by 2030 only fossil-fuel
power station equipped with CCS would be able to operate at baseload.
The principle behind this option is to increase the costs of electricity
to a level where low-carbon investment becomes attractive. Domestic
energy bills would on average be around 1.8% higher between 2010
and 2030 than they would otherwise have been, and an equivalent
figure of 2.6% for non-domestic customers. This compares to the
preferred package of measures, including a targeted EPS, where
the average increase is around 0.9% and 1.3% respectively.
As opposed to an EPS used to drive decarbonisation,
an EPS targeted at preventing the construction and operation of
new unabated coal-fired power stations has a minimal impact on
energy prices. Acting as a regulatory back-stop, as a preventative
measure as opposed to a measure which proactively shifts the market
towards low carbon generation, the Government does not consider
that it would have a discernible impact on energy prices (subject
to views expressed as part of the consultation). The Government
has used this as one of the principal reasons for recommending
a package of options which includes the targeted EPS - the package
provides a more affordable solution to decarbonisation and energy
security.
The Government recognises the need to help more of
the most vulnerable to keep their homes warm at an affordable
cost. We are considering the ways in which we can make further
progress towards our 2016 fuel poverty target and are committed
to doing all that is reasonably practicable to eradicate fuel
poverty.
The Government is committed to radically improving
and refocusing existing policy measures and bringing in completely
new measures to deliver a real step change in ambition for energy
efficiency in this country. The Energy Bill was introduced to
Parliament in December, and includes provision for a new 'Green
Deal' which the Government believes will revolutionise the energy
efficiency of British properties.
The domestic Green Deal policy is an opportunity
for householders to improve the energy efficiency of their homes
at no up-front cost. It will help protect people against price
rises through greater energy saving, with special support for
the most vulnerable.
Furthermore, the Government will ensure that additional
support will be available for those who most need it, including
low income vulnerable households and those in 'hard to treat'
homes, through a new Energy Company Obligation.
The Government has also recently extended CERT, introducing
a greater focus on targeting energy efficiency measures at the
most vulnerable households by introducing a Super Priority Group
of low income pensioners and families. We require that each benefiting
household receive at least one major insulation or heating measure
so as to maximise the impact on fuel bills. The CERT extension
is expected to remove 185,000 from fuel poverty in the longer-term
and help many others heat their homes for less.
The consultation on the structure of the Warm Home
Discount Scheme closed on 14th January 2011. Government
is currently reviewing responses and will publish a response shortly
that will set out the eligibility and delivery proposals.
INCREASING THE UK'S INTERNATIONAL INFLUENCE
15. The UK is an influential member of the
EU and action taken by the UK in reducing its carbon emissions
could provide an example for others. Several other Member States
have expressed an interest in introducing their own EPSs and a
UK EPS could provide a model for others to emulate. This is a
valuable opportunity for the UK to shape the EU's approach to
an important area of policy and we recommend that the Government
must seize it. Equally, there may be lessons for the UK to learn
from others. The Government must engage more closely with other
Member States that are considering EPSs in order to share best
practice and learning on EPS design and implementation (Paragraph
99)
16. We conclude that the risk that the introduction
of a UK-based EPS could undermine the reputation of the EU ETS
is easily outweighed by the positive leadership it would demonstrate.
There is already a widespread acknowledgement that the EU ETS
is not by itself delivering low-carbon investment, so any reputational
damage caused would be minimal. (Paragraph 104)
As discussed above, the primary means of reducing
emissions across Europe is the EU ETS. The Government believes
that the EPS proposed would not undermine the operation or reputation
of the EU ETS, and remains committed to using the ETS to drive
down overall emissions. The Government agrees, however, that the
scale of investment necessary cannot be achieved through the EU
ETS alone and that sectoral approaches are necessary. Different
Member States have, for example, taken different approaches to
encouraging and developing investment in low carbon technology,
and renewables in particular. The Government has explored the
various mechanisms in existence, and in particular has sought
to take best practice in developing proposals for low carbon support
mechanisms.
The Government will provide any Member States who
decide to take a sectoral approach such as an EPS with information
and models on how this could be done. It is important to note,
however, that the markets in different Member States across the
EU operate in different ways, and the particular approach the
Government is proposing is specific to the UK market, and to the
reforms proposed. The EPS has a valuable role to play, but the
Government considers that it is only one of the tools necessary.
The Government agrees that the UK can demonstrate positive leadership
in Europe, but that it is the package of reforms as a whole that
can do this, rather than one particular part of them. The EPS
would demonstrate the Government's commitment to preventing lock-in
to high carbon generation in the form of unabated coal-fired power
stations, and that, along with the financial commitment it has
made, it is serious about the development of CCS. However, the
model proposed may not be appropriate across the EU. The Government's
focus has been on exploring the options for the UK, but it agrees
that there will be greater opportunity to work with European counterparts
to learn lessons and share best practice should it be appropriate.
17. It is not clear whether a UK-based EPS
would be permitted under the EU Industrial Emissions Directive.
Article 9 of the Directive prohibits the use of emission limit
values for greenhouse gases and although the preamble states that
Member States may introduce more stringent measures, it is not
clear whether an EPS might in fact be considered an additional
measure. There is therefore a risk that the introduction of an
EPS may result in a legal challenge. We call on Government to
clarify the legality or otherwise of an EPS in its response to
this report. (Paragraph 106)
Ultimately, the interpretation of any law is a matter
for the courts - including, in this case, the Court of Justice
of the EU. However, the Government's view is that, notwithstanding
Article 9 of the Directive (and its equivalent in the current
IPPC Directive), it is possible for a Member State to implement
an EPS which is compatible with EU law. That is not to say that
any Member State EPS would necessarily be compatible, and this
is an area where detail matters, so until a proposal is developed
in some detail it cannot definitely be judged to be compatible.
However, in general terms, as Recital 10 to the IED points out,
it is important in this context that a proposed EPS should not
infringe the general applicable principles of EU law derived from
the Treaties (for example by unjustifiably interfering with single
market freedoms, or breaking the rules on competition or state
aid) - we would add that it should not actively undermine the
operation of the EU ETS - and, at a procedural level, the European
Commission must be informed of the proposed EPS. As noted in
the EMR consultation, the Government intends to take forward any
EMR-related proposals in a manner which is compatible with our
EU and other relevant legal obligations, and EU law considerations
will obviously figure in the design of any more detailed EPS proposals.
18. Even though the introduction of an EPS
may not be as influential at the international level as a successful
demonstration of CCS technology, we nevertheless believe that
it could bring significant benefits. We call on the Government
to work with other countries to share best practice on EPS in
order to facilitate global emissions reductions from the power
sector. (Paragraph 112)
19. The introduction of a UK-based EPS would
bring a number of benefits at the international level. Within
Europe, it would provide a template for other Member States to
follow. Other Member States are considering EPSs of their own
and leadership from the UK could help to encourage the uptake
of EPSs elsewhere in Europe, particularly since the UK is viewed
as a leader on climate change within the EU. At the international
level, the introduction of a UK EPS would demonstrate commitment
to tackling climate change. Providing a model for other countries
to emulate could help bring forward sectoral agreements and help
to achieve global emission reductions from the power sector. (Paragraph
113)
As discussed above, the Government will provide any
Member States who decide to take a sectoral approach such as an
EPS with information and models on how this could be done. It
will look to provide leadership on decarbonisation as a whole,
while recognising that any one particular tool may not be suitable
across all markets and regulatory regimes.
Advancements in UK domestic policy are also of interest
on the international stage, including in the context of the UNFCCC
process. The UK is tracking closely the development of sectoral
approaches in 3rd countries, for example the United States, in
recognition of the role that these might play in reducing power
sector emissions. Developing countries are also in the process
of putting together low carbon development strategies to help
deliver their UNFCC commitments and aid a transition to a low
carbon economy - electricity market measures, such as an EPS
and other low carbon policies, could play a role in that process.
The UK is also proposing to reform the global carbon market to
allow for a greater contribution by large-scale, or sectoral,
market mechanisms. This could also help support a role for an
EPS, particularly in advanced developing countries.
1 By the third quarter, around 25% of generation came
from coal in 2010. Source: Energy Trends, Dec 2010 Back
2
Integrated Gasification Combined Cycle Back
3
DECC analysis Back
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