Session 2010-11
Publications on the internet

CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 523-i

HOUSE of Commons

ORal Evidence

Taken before the

energy and climate change Committee

EMISSIONS PERFORMANCE STANDARDS

Tuesday 12 October 2010

Lord Turner of Ecchinswell, David Kennedy and Professor Jon Gibbins

Nick Molho, Simon Skillings and Chris Littlecott

Evidence heard in Public Questions 1 - 65

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 12 October 2010

Members present:

Mr Tim Yeo (Chair)

Dr Philip Lee

John Robertson

Sir Robert Smith

________________

Examination of Witnesses

Witnesses: Lord Turner of Ecchinswell, Chair, Committee on Climate Change, David Kennedy, Chief Executive, Committee of Climate Change, and Professor Jon Gibbins, University of Edinburgh, gave evidence.

Q1 Chair: Good morning and welcome to, I think, our first public session with the Committee. Congratulations on finding your way to this rather remote corner of the Palace, which might have been too much for some of my colleagues. Anyway, it is very good to see you again. Do you want to say anything by way of opening statement or shall we just crack on with some questions?

Lord Turner: I think we should just crack on.

Q2 Chair: Fine, okay. Perhaps a general one to start with because I know that the Committee has been very explicit about the dramatic decarbonisation of electricity generation that is needed by 2030. I think you talked about a 90% reduction in emissions from electricity. Do you think at the moment that the UK is on track to achieve that quite challenging target?

Lord Turner: Broadly speaking, if we think about the path that has got to occur, we are now at just under 500 g/kWh. We need to get to somewhere in the region of 50 g/kWh, or something like that, by 2030. The forecast would show us getting to somewhere in the region of 300 g/kWh by 2020. So you can break it into two questions: how realistic are the forecasts that take us to the region of 300 g/kWh in 2020; and what is our plan to drive it thereafter?

On the road to 2020, as we set out in the letter, which was public and went to the Secretary of State in relation to renewable energy targets, we basically believe that, if we manage to hit the renewable energy targets and they are doable but they require a lot of building, particularly of wind plants, between now and 2020, and if by 2020 we have one new nuclear plant in place, then, yes, that story of from here to 300 g/kWh, with the phaseout which is going to occur of several of the coal stations, is doable.

I think the challenge then is how we keep that pressure up in the 2020s where it has to come from some combination of a nontrivial element of nuclear, a further rollout of wind-and possibly other renewables but still primarily wind-and a role for carbon capture and storage? I think our concern is whether that will occur without some category of new policy instruments including, we are suggesting, some quite fundamental reforms to the structure of the electricity market to make sure that there are incentives for that longterm investment. I think that is how I would sum up. I do not know, David, whether you want to add to that.

Dr Kennedy: Just in terms of investment requirements, to give you an order of magnitude, I would say that we need about 20 to 25 GW of low-carbon plant added to the system over the next ten years. Between 2020 and 2030, we are looking at up to 40 GW, so a very significant acceleration in the pace of low-carbon investment. We don't think that would happen under the current market arrangements, so there is a need for fundamental reform.

Professor Gibbins: If I can just add something here, in terms of where you want to be by 2020, I think you can characterise it as certain amounts of plants that are constructed, but you also need capacity in place, and that is actual physical construction capacity-people-and then also regulations so that you can do things rapidly in the 2020s. You cannot start from having done nothing on CCS, for example, and hope to get large numbers of plants built in the 2020s. So there is potential and preparation as well as actual metrics of plants built.

Dr Kennedy: And it tells you if you want to have this stuff coming on the system in the 2020s, you need to plan for it now; you can't wait five or ten years to change the market arrangements. We need to be really focused and do that for the next one, two and three years so that then investors can make decisions on, for example, nuclear plants.

Q3 Chair: We will come back, I think, on to the question of the reform of the existing market, which is clearly very relevant. Are there any other specific obstacles you see to making this programme?

Lord Turner: Obviously, apart from the reform of the electricity markets, there are crucial things that continue to be important simply on the planning regime. There have been reforms to the planning regime, but we are now, for instance on the nuclear side, going to come up to real tests as to whether things do go through that process in a reasonably smooth fashion. That is an important potential barrier, both in relation to wind and in relation to nuclear.

On CCS, of course, that is in a different category from either nuclear or wind in the sense that it is not yet a technology proven at full production scale rather than at experimental scale. Clearly, therefore, for us to have confidence that that is available as an option-both in relation to coal but also, we would flag, in relation to gas during the 2020s-it is important that it is tested at scale and demonstrated at scale. So that is an important part of the picture which has to happen during the next decade in order for it to be an option which is feasible in the decade thereafter.

Q4 Chair: Is it your view that we could produce enough electricity in the UK without commissioning any new coalfired capacity?

Lord Turner: Yes, I think that is possible. There are tradeoffs at the margin in terms of cost and, indeed, I think it is quite possible that the free market left to itself, with the carbon prices that are likely to exist in the 2020s, would do large amounts of gas rather than coal, but the system would still work. Indeed, one of the points we have made is that we should not, on the CCS story, entirely concentrate on coal. We see no feasible role for coal without CCS in the 2020s, given the then likely carbon price and given what we are going to achieve, but we are also increasingly concerned, if there are large amounts of unabated gas in the 2030s, that that also would be incompatible with achieving what we need to achieve by 2050.

Professor Gibbins: Can I just add something there, though? I think there may be an interim period when existing coal plants would still be useful as backup, essentially for other activities, because you can store coal-it does not evaporate; you can have a coal stockpile. There is also some interest in looking at running or converting existing coal plants to biomass. If they still retain the capacity to use coal, as they would, that could also be a useful national security backup.

Lord Turner: Can I just say I think we would agree with that? One of the things which we did flag at an earlier stage is that one of the things that one could be doing with unabated coal in the 2020s is having a hoursperyear limit on it. So it would still be part of what was available to meet peak capacity or downturns in other things going off the system, but with a sufficiently small hours-per-year running that it does not make a fundamental difference to the average grams per kWh.

Q5 Chair: Eventually would the same apply to unabated gas?

Lord Turner: Yes. I think eventually unabated gas would only have a role as a peak capacity element. It cannot be something running all the time. Basically, if you have got to get below 50 g/kWh by 2030 and lower thereafter, you cannot have much in the system running at the sort of 300 g/kWh that is typical of a gas system.

Dr Kennedy: We should just differentiate. If you get to 2020, there is very limited scope to add any new gas capacity to the system and decarbonise at the same time. There is a question of what you do with that capacity that we add to the system over the next five and 10 years. You would run that, but you would run it at reducing load factors over time.

Q6 Sir Robert Smith: Can you just clarify on that back-up role of coal? Obviously we are looking here at carbon emissions mainly, but do the other emissions from coal mean that it won’t be able to fulfil that back-up role?

Professor Gibbins : It depends on what sort of derogation you have if it is not fully fitted with emission reductions. But, actually, I think most of the plant that will be around in the 2020s will have quite advanced emission controls on it, if it is there, so I don’t see that as being a serious problem.

Q7 John Robertson: I wonder if we could move on a wee bit. Do you think the Government's aims for an EPS-emissions performance standard-to provide certainty to investors and to contribute to reducing emissions from the electricity sector are appropriate and adequate? Would you suggest any alterations or additions?

Lord Turner : I will let David talk in detail about this, but our overall attitude is that there could be a role for an EPS system. Of course an EPS system can be applied in a number of ways, from corporate average EPS through to something very specific on individual coal plants requiring them to achieve a degree of capture. We certainly see it as one among the tools which is available to help drive decarbonisation, but we have also become increasingly convinced that it is not adequate in itself, or necessarily the best instrument in itself. We also see a role for more fundamental reform of the electricity market to create elements of price and quantity certainty for low-carbon providers, and these can be done by, essentially, contracting for longterm delivery. You can keep price discipline through a tendering process. These are fundamentally tendered feedin tariff-type systems rather than administered feed-in tariff type-systems. We will be talking in our December report about things that go above and beyond EPS. David, do you want to comment on that?

Dr Kennedy : We had recommended an EPS in two specific contexts. One was the investments in unabated coal, where we had said that there is not a role for significant generation from unabated coal through the 2020s, and a way to signal that would be an EPS which basically says, "You will not run a plant unless it has CCS beyond a certain point in time."

The second recommendation is that, given very limited scope for investment in unabated coal or gas generation beyond 2020, you could have an EPS which effectively says you can’t invest in unabated coal or unabated gas.

You wouldn’t want to put those in place on their own. These are stick instruments. You would want, as Adair says, a carrot in the form of longterm certainty that you can give to investors so that they can put their money into nuclear or renewable sources.

Q8 John Robertson: So the Government’s ambition is to try and accelerate CCS. Is it feasible to do that?

Professor Gibbins : It certainly is feasible, yes, given where we are now. We are not moving very fast but things are moving. Obviously, doing CCS for the first time takes longer than you think it does, going into it, but certainly there could be movement. The biggest obstacle at the moment, I think, is guarantees about funding. The levy was a very strong signal. We now know it is potentially under threat, and I think that would send a disastrous message in terms of accelerating CCS.

As regards what you might achieve with accelerated CCS, the Advisory Committee on Carbon Abatement Technologies to DECC, which has recently finished, said that we could probably achieve 5 GW of CCS capacity by 2020 in a combination of gas and coal. I think that target is still achievable, and I think one of the things that we should actually bear in mind is that-David was talking about capacity and what needs building-you cannot confuse some renewables capacity, particularly wind, with CCS capacity. You have to divide the wind by three or multiply the coal by three. So actually even 5 GW of CCS is quite a lot of wind-it is of the order of 15 GW. That is significant. I have to say I think that, if you actually want to be in a position of rolling out tens of gigawatts of CCS in the 2020s, 5 GW is not too much, and it is not actually that many plants. You are talking about five significant sites.

Lord Turner: I would say on CCS that there have to be two things. There have to be some very clear signals, which can include EPS signals, that tell the generators that if they want to have fossil fuel plants running in the 2020s, they are going to have to have CCS on them of some certain percentage of capture. That depends on what you set the grams per kWh within the EPS. That determines whether they have got to get 80% capture or 90% capture or whatever, so it is a sort of sliding scale. That is, as David has said, the stick-the driver-that means that they know there will be limits on their ability to run unabated. But it is also vital that we actually have the capability created, and that is why I think the demonstrations are important and the funding for the demonstrations is important.

Professor Gibbins: And subsequent reference plants. Can I just say, though, Lord Turner, I think the idea that if the generators want to run unabated fossil fuel, they won’t be allowed to, is not tenable. If the country wants electricity, we will have to run fossil fuel plants in the 2020s. Now, whether those have CCS is clearly an option, but not running fossil fuel plants in the 2020s is not an option.

Lord Turner: We think it is an option to be not running coal plants. You could be running gas plants and certainly we could end up with no unabated coal plants. We see that there will continue to be unabated gas but we would like that coming out of the system during the course of the 2030s and being, therefore, replaced with, probably, CCS gas-gas with CCS.

Professor Gibbins: I agree entirely-

John Robertson: Can I interrupt? I am sorry to interrupt, but you are now having a conversation and I feel I am out of it.

Chair: It is a very, very interesting one.

Q9 John Robertson: Let me try and bring together what I think you are saying to me here-I am trying to clarify it into very simple terms-and that is that we are talking about cost here and how much money is going to be invested. So how would that affect the price of carbon? What would you have to have in the carbon price to achieve what you are suggesting?

Dr Kennedy: We haven't worked this out as a price of carbon. I think the estimates are that the four demonstration projects that are planned at the moment will cost up to £4 billion in support through the levy or through some other mechanism. But certainly for us that £4 billion would be money well spent, and if we don't move ahead with it-if we don’t have the four demonstration projects-you have to question actually is it plausible then to decarbonise the power system through the 2020s just based on nuclear and based on renewables? So there is a significant investment, but it is an investment that will have a pay-off in terms of our longer term objectives.

Professor Gibbins: May I just say something, Chair, on the price-of-carbon issue? It is interesting that we would expect the cost of carbon capture and storage to be highest at its inception. So we have carbon capture and storage with a falling cost and we expect carbon price to increase over time. So there is a natural mismatch in using the carbon price to incentivise carbon capture and storage. One starts out high and goes low; the other starts out low and then goes higher.

Q10 Chair: Just to be clear on what you said a moment ago, Professor Gibbins, are you saying that if next week in the CSR we learn of any change in the funding for the CCS competitions, that will be disastrous?

Professor Gibbins: I think it will certainly delay, depending on the change, whether or not CCS is available to deploy in the UK in the 2020s. It takes a long time to develop technology. Even if we could import the technology, we still need to have practice in regulation and deploying pipelines and infrastructure, and that has to be with our particular country. You can’t import that sort of experience.

Q11 Chair: I think a lot of what has been said in the last 15 minutes emphasises the importance of having that ready by 2020.

Professor Gibbins: As I say, we will be running fossil fuel plants to keep the lights on. It will have to be done.

Q12 Dr Lee: I get the impression that we are a bit late to the party and that we are trying to play catchup a bit here, in that we have got this gap to fill in time and, if we don't do this, we are going to have to do this, and it’s because it is all a bit late. I was just struck by this interconnector between Norway and Holland-the electricity connector that has actually paid for itself already and has only been in since 2007. Norwegian electricity is 100% renewable. We had an interconnector plan and it did not happen because it wasn't viable. I wonder, in terms of the fact that we need almost to buy ourselves some time from a renewable source so that we can hit CO2 emissions targets, etc., is it cheaper to proceed with that even if it requires some subsidy than pursuing some of the other paths that we have just been discussing now in terms of buying in electricity that is from a cleaner source?

Professor Gibbins: My understanding is that Norway in some years has been a net exporter and in other years has been a net importer of electricity. They have done badly in dry summers. There was a period when they were importing coal-fired electricity from Denmark to meet a shortfall. The have had some wet summers recently, so they have managed to export a bit. But their main value is a balancing. In other words, you can effectively use them as longdistance pumped storage.

Dr Kennedy: We are just actually finishing off some work on interconnection as one of a number of options for providing more system flexibility and we will publish this in our report in December. I think the key message is that this is not a substitute for investment in low carbon capacity; it is a complement.

Q13 Dr Lee: What about the shortfall, because clearly there is some debate as to whether we are going to need coal or not, or gas, in terms of the timing of everything? I am just wondering whether one way we might circumvent that is by importing it from a renewable source.

Dr Kennedy: Well, if the objective is just to keep the lights on over the next ten years-

Q14 Dr Lee: I think at the moment that is probably the number one objective, being realistic.

Dr Kennedy: We can quickly add gas-fired generation to the system. We know actually that more capacity already has planning approval in terms of gas-fired generation than we will need over the next 10 years, and the lead times for those projects are relatively short. I think the risk of security of supply can be dealt with.

Professor Gibbins: But you are talking about quite large amounts of electricity. Interconnectors are of the order of a few power plants, not tens of power plants, and they may not have the capacity themselves to generate that much electricity.

Lord Turner: I think also that if you said, "We’ll do an interconnector and then we’ll have somebody else's low-carbon electricity," the fact is that everybody else is driving for low-carbon electricity, so it’s highly likely that that is going to be at the expense of them at the margin of doing something else.

Q15 Dr Lee: I am not suggesting it is a longterm solution. I am just suggesting, without wanting to get party political, that in view of the fact that we have arrived at this a bit later than perhaps we should have done, I wonder whether we just need to-

Lord Turner: I think some of the things that we were late doing but are now rapidly catching up on are things like the issues of Scotland-to-England grid connections-the ability to take some of the large developments of wind power in Scotland and bring them south, where there have had to be quite significant changes in the degree of strategic outlook of National Grid, and the whole greater willingness to take a more planned approach to that has been important. I think we probably were at one stage behind in our thinking on that, but that has gone through a significant acceleration over the past few years

Dr Kennedy: Looking forward, the key thing is decarbonisation of the power sector, which is central to moving towards the 80% target. That is still in play, but it is in play only if we support the CCS demonstration and it is in play only if we reform the electricity market. If we don’t do those things, you have to ask a question.

Q16 Dr Lee: In terms of where the UK fits in in the CCS race, are we fast coming up? Are we up front here, because it strikes me as an opportunity?

Professor Gibbins: Yes, we are actually. Just to use an example with which I am fairly familiar, if you look at Canada, which has traditionally been fairly active on CCS, they have a couple of projects for which they have got funding approved. They also have one to do with tar sands and also a coal plant in Alberta, but nothing has been built. We are very, very close to that ourselves. If the levy was there, we would be at exactly the same position with Longannet particularly, where we have an existing plant that is ready to retrofit. We have also got the project at Peterhead-an existing plant ready to retrofit. These are very analogous to the projects that are being talked about in Canada. Also, if you look at the FutureGen project in the States, which has now turned into a retrofit of oxy-fuel on to an existing plant, that is just at exactly the same stage. They are doing design studies and waiting to make the final financial commitment. So we are actually almost parallel with those countries.

Dr Kennedy: The fact that there are other countries active here, whether it is Canada the States, Australia or China, is a good thing as well because if we get a critical mass in the UK, we are in the club and we can share their learning. We can leverage what we learn here, and it is good for us then to be able to deploy the technology in the 2020s.

Q17 Sir Robert Smith: But what happens if there is not a levy? Is there anther way of trying to keep the momentum going without a levy?

Dr Kennedy: It’s not clear what that would be, and if you are looking for £4 billion, given the current fiscal situation, without the levy, you have to question where would that come from? I think we would be in the situation we have been in for the past few years before we had the levy, and that was we had one demonstration project. It took many years to get to where it is now, which is we are at the engineering-feasibility-study stage, and the reason it took many years was because there was not a funding source for that one project. Now, looking forward, we’re talking about four projects which wouldn’t have a funding source and it’s not clear what that funding source could be.

Q18 Chair: Let’s not assume the news is going to be bad. Just turning to the EPS itself, of which there are a whole variety of different designs, do you have a view about which one would be particularly effective in achieving the goals we have talked about?

Dr Kennedy: It depends what you are trying to address. If you are trying to give a signal to potential investors in conventional coal, you would have something that is plant-specific that says there is a limit on how much you can run this coal. If you want to give direction of travel for the system as a whole and investors thinking of investing in anything for the 2020s, you would look at something that is broader which says you can't invest in anything that is unabated fossil fuel. There is a third option, which says, "Okay, if this is the path that we want the sector to achieve-to go from 300 gCO2/kWh to 50 over a 10-year period between 2020 and 2030-you could divide that path up and give it to the energy companies."

Now, for us, there are a lot of complexities with that third option. It is not something we would dismiss, but we are not absolutely confident that that would deliver. I think the first two you would have in conjunction with broader electricity market reforms around tendering of longterm contracts or low-carbon tariffs, which Adair has referred to.

Q19 Chair: Is there a case for saying that we should wait until we know about the outcome of the work on CCS before we start playing around with EPSs?

Lord Turner: I don't necessarily think that is the case. I think, for instance, the role of unabated coal in the 2020s is so clear and, as I think we agreed earlier, not essential to keep the lights on-let’s draw a distinction between that and unabated gas-that I think it would be very valuable to be making it clear that that is simply not going to be allowed, or allowed for only a certain number of hours per year. That could take the form of some category of EPS which is setting either some limit on the grams kWh that is going to be allowed, or basically some sliding scale that says you can have so many hours at this grams per kWh that are unabated, but that if you want to run it for more than that, you are going to have to have it down to X g/kWh, which will require CCS.

I think that is something that we could have as part of the armoury at the moment because I think it is very important for the generators to understand and therefore for them themselves, along with public support for CCS, to have a very strong incentive for CCS-to know that they will need CCS on coal in order to be able to run it on a significant scale.

Dr Kennedy: There is a specific opportunity, and that is the broader consultation on electricity market reform that DECC will publish in November. We would expect to see discussion of an emissions performance standard as part of those broader sets of reforms and then expect to see it in a White Paper next spring.

Professor Gibbins: Chair, could I just say something here? I think, since we have already agreed that coal is not essential to keep the lights on, coal is not essential to the utilities either. If the emphasis is on coal, all that will happen is we will get unabated gas, and since we will have gas in shed loads and we won’t have that much coal, if we don’t have CCS on gas, and if the utilities are in a position where they can claim that they cannot be forced to have CCS on gas, we will be in a mess. I think this emphasis on coal is interesting but it is yesterday’s fight. It was a fight that was important when coal was relatively cheap compared with gas. That isn’t the situation we are in now.

The point was made in the debate on the previous Energy Bill whether existing measures for the permitting of new coal plant gave sufficient power to the Secretary of State to say that they would not be built without fitting CCS. I think that power is already there and I think it is at least worth considering whether or not we have sufficient measures in place for new coal plant, should they be built, and it’s pretty unlikely that they will be built.

I think what we really ought to consider is the message that is going in on gas and the development that is ready on gas and that will really convince the utilities that CCS is needed. If they think CCS is needed on gas then for sure they will think it is needed on coal. But if they think it might not be needed on gas, they will leave no stone unturned to preserve gas as not needing CCS.

Lord Turner: I agree with this and it is interesting. The attention has changed-I think legitimately and appropriately over the last year-from coal to gas, both with the realisation of outlooks for the gas price, which now looks relatively cheap relative to coal, with the whole shale gas issues, combining with our increasing realisation that the decarbonisation that we require to meet our climate requirements actually requires that we are abating gas as well. So those two things come together and that was one of the reasons why we wrote to the Secretary of State earlier this year arguing that it is important to have gas CCS projects as part of the four projects, not just coal CCS projects.

Q20 Chair: This is also behind your thinking about how an EPS could apply to new gas after 2020?

Lord Turner: Yes.

Q21 Sir Robert Smith: One of the other questions is what impact an EPS would have-whether it would encourage other lower-carbon technologies like largescale biomass.

Professor Gibbins: It would do if the EPS was applied properly to biomass. With large-scale biomass at the moment we are seeing some travesties of environmental do-goodery, in fact, because we are seeing 295 MW biomass plants being built, which is 5 MW under the capture-ready limit. If you are going to build a large biomass plant like that, it should have CCS at that scale. It is a very large source of carbon; it’s about the same amount of carbon as an 800 MW gas plant. So, yes, it could encourage things but it needs to be applied properly. If you give people an out with large biomass plant from capturing the very large stream of CO2 that is coming out from it, they will do it. You need to look at all large sources of carbon; not capture-ready for biomass is just as wasteful.

Q22 Sir Robert Smith: Do there need to be more safeguards in how biomass is calculated?

Professor Gibbins: Absolutely, yes.

Dr Kennedy: In calculating it. They need to be thinking as well, "If we’ve got constrained biomass here in the UK and globally constrained biomass, where is it best used?", and it’s not clear that it is best used in electricity generation when you have alternatives to decarbonise it. It may well be best used, for example, in energy-intensive industries where we haven’t got a good story about how we will cut emissions.

Professor Gibbins: Can I just differ from that? I think if it’s used in electricity production with carbon capture and storage, then actually it is as good as using it anywhere and better than most. It is the carbon capture and storage in conjunction with the biomass that achieves the benefit because you can effectively transfer the negative emissions from your power plant to your industry, if that is more convenient.

Dr Kennedy: Yes, but you would use CCS on biomass in industry as well and decarbonise the whole sector and you would be in a better position.

Professor Gibbins: If you can do that. But if it is unabated biomass anywhere, it’s probably not as effective as biomass with CCS.

Dr Kennedy: Yes.

Q23 Sir Robert Smith: The other question is what should be done about combined heat and power? Is it a Cinderella still, in the sense of not having a recognition of the efficiencies that come from the heat it produces?

Dr Kennedy: This is something we have not considered in detail as the Climate Change Committee until recently. We will publish a view on the future of CHP and district heating as well. We think actually now it has been a bit neglected. You have to differentiate between CHP that uses unabated gas, which you cannot regard as low-carbon and so there can't be a longterm future for that, but there is CHP that is CCS, or there is CHP where you are using, for example, the waste heat from nuclear and piping it to residential areas and district heating. There may be a very useful role for those kinds of CHP and district heating in the future. I don’t think we’re anywhere near having a policy framework to support that, and actually we don't understand the potential role, so a lot more thinking needs to be done in this area.

Q24 Sir Robert Smith: Should an EPS for a CHP, though, recognise-not just applied to the electricity but applied to the heat-the advantages coming from that heat being made use of? Obviously one plant is sitting there wasting the heat and another plant is using the heat.

Professor Gibbins: Can I just say, sir, the efficiency of a CHP plant for heat is no better than a good condensing boiler, and in fact it is probably worse? So, as the benchmark for heat, we have already achieved perfection, effectively, with condensing boilers. Now, if you have a CHP plant, the heat is no better than a condensing boiler. The electricity is maybe 100% efficient if you are running the plant very precisely. A central natural gas plant is achieving nearly 60% efficiency on its electricity already, so there are actually relatively small savings. I think it would be quite relevant actually to say you have got to do better for your heat than you can do in a condensing boiler for it to be seen as a significant advantage.

Dr Kennedy: So the principle that you would not expect investment in a carbon-constrained world, and that you wouldn't expect investment in conventional gas-fired generation beyond 2020, I think you can extend to conventional CHP, and we would want to look at other forms of low-carbon CHP for that period.

Sir Robert Smith: Chair, I forgot I should have reminded the witnesses-and I think it is relevant to this inquiry because I think they put it in their submission-that I am a shareholder in Shell on the entry in the Register of Members’ Interests.

Q25 Dr Lee: What progress has the Committee on Climate Change made in its analysis of the implications of the fourth carbon budget and renewable targets for market reforms? Have you reached any conclusions about the role for an EPS?

Lord Turner: We are working on the recommendation for the fourth budget period, which is the period 2023 to 2027, which we will produce in December, but in working on that, rather than just focusing on the years 2023 to 2027, we thought about 2030-we have thought about where we want to be by the end of the 2030s. We still have-indeed, if anything, we have intensified it-our story about the importance of decarbonisation of electricity, both to take out the emissions from electricity itself and also to then enable low-carbon electricity to be used in new uses, whether they be surface transport or domestic and other heat. So we see it as incredibly important, and I commented in relation to the Chair's question earlier about what was our confidence level that we would achieve the degree of decarbonisation. We think it is technologically possible but we think there are more instruments required.

What we will be commenting on in the fourth budget is the issue of electricity market reform. We believe that the time has now come really to look in depth at the issue of how we run our electricity market. We have an electricity market which was designed to achieve some very specific effects which it achieved in the early 1990s. It drove some cost efficiencies in de-manning in particular functions. It drove a shift from coal to gas, and it is organised in a very particular way. Basically, you invest in your plant, and 15 or 20 years later you are getting a stream of revenues which depends on a fluctuating price of electricity which fluctuates during the day.

Now, this is a system which works and has some advantages if you have a set of competing alternative fossil fuel providers, each of whom has a capital cost but also a significant marginal cost. It is a system which, if your system entirely existed of low carbon, in which you broadly invest in the ground and then have zero marginal cost-or close to zero marginal cost as you do with wind and nuclear-you would never have designed this system because not only would it not be optimal, but it couldn't work at all, because when you have competing zero marginal cost providers, they would compete the price to zero on a marginal basis and they would never get paid back for their investment. So we have a system that was designed for one purpose and, as we head towards a more low-carbon basis, which tends to be or has this feature of incredibly high capital intensity and very low marginal cost, is just not an effective system.

You can pull through the low-carbon investment by chucking money at it. You can increase the ROCs higher and higher and higher, you can have a very high carbon price, and there is some level of price at which you will just subsidise it through. But that may not be actually the most efficient way for society to make sure it gets low-carbon electricity. The Government have the ability to change the rules of the game so that you take some of the risk off the table for the low-carbon providers. There are some risks you shouldn't take off the table for them. They have got to own the risk of the construction and the operation. That should clearly exist with the private players, but we can have a structure where, in some fashion, they are being given-tendering for-contracts for future delivery at pre-set prices. That is doable. That is the sort of thing that we are going to be talking about, and we are wary of the idea that it is always possible when you have an existing system to say, "Well, okay, I’ll make the existing work by doubling the ROCs here or increasing the carbon price there or doing some fiddles with it." We think we are now at the position where we’ve really got to step back and say, "What is a logical structure of incentives within an electricity system which has huge amounts of very high capital cost, low marginal cost production?"

Q26 Dr Lee: Would you agree that an EPS should be introduced as part of a package of measures by government or should it be a standalone policy?

Lord Turner: We would see it as part of a package. We would like to see-

Q27 Dr Lee: If that’s the case, a package of what? What other policies would you like to see?

Lord Turner: As I was just describing, there is, we believe, a need to do electricity market reform that has this nature of providing low-carbon, high-capital-intensive providers with the ability, in advance, to contract for the delivery of future electricity with preset quantities and prices. That is the proposition we are putting on the table. That is not incompatible with also doing some other things, like having a carbon price underpin-mechanisms to make sure that although the carbon price oscillates it has a minimum level within it, which essentially can be done by a variety of different devices. So we are not against that. We think there may be a role for EPSs and we think there may be a role for a carbon price underpin, but we think the really fundamental thing we have got to do is to look at this fundamental electricity market reform.

Professor Gibbins: Can I just comment on that? I’m not familiar with the mechanism, but clearly for CCS you are exposed also to a significant fossil fuel price risk. I think with nuclear and wind you know what your construction costs are and you could actually build a business model on firm prices out forward. With CCS, you would be taking a very big risk if you did that because you don’t know what international fuel prices are. But there’s still a large capital cost.

Lord Turner: I think what you have got to recognise here is that we have two different things. With CCS, because it fundamentally has somewhat higher capital requirements but still has this large marginal cost, you could imagine, if everything was CCS, essentially adjusting the existing system to have a high enough carbon price so that it would pull through. If it was all CCS, we would not necessarily need the fundamental reform. The fundamental reform comes in relation to nuclear and wind, and that is why I think we need a variety of different aspects of the total package that include a more certain carbon price-a carbon price underpin. I think that will be relevant for the CCS technology.

Professor Gibbins: There is also, though, a differentiation I think between how you would run the market in a steady state post 2030 and how you would make the transition from now to 2020 and from 2020 to 2030. I think you might well want different mechanisms there, because in 2030 just about everything that is running any significant amount of time wants carbon capture and storage, but in the transition, in this decade, we are looking at building a limited number of demonstration and then larger reference plants-plants that we would actually like to build. Then, in the 2020s, what we want to achieve, starting out with maybe four or five plants, is we want to build one and then another one and then another one. We do not want to do it across the board. That is not an economically efficient way of doing it. So you might need a different mechanism there to keep on adding a plant at a time than you would do in the 2030s when you want to run the plants you have got and you want to build the occasional new plant with CCS from the outset.

Q28 Dr Lee: If one can look at it in terms of UK plc-and clearly there are upfront costs for CCS; that goes without saying-is there a view that, if Britain takes the hit in this decade, it is going to benefit in the medium to longer term because it would then be able to do the CCS, because, ultimately, our emissions are pretty paltry in comparison with places like China?

Professor Gibbins: Yes, but it’s not a hit in the sense that we do not actually expect that carbon capture and storage is going to be significantly more expensive than other low-carbon options.

Dr Kennedy: There’s an upfront investment, which is the up to £4 billion. Is that worth doing? The pay back is in the 2020s because if you don’t have CCS and if we don’t demonstrate it-whether it’s available in other countries, you’ve got to question could we deploy it here-we will be at the back of the queue. So if it’s not available here, what happens in the power system? Either you invest more in offshore wind, which is expensive, or you revert to investing in unabated gas, which doesn't have a longterm future, and you buy carbon credits to offset the emissions from it and then you strand it. So there is a quick payback from it.

Q29 Dr Lee: My point is: is this an industry that we can create for ourselves?

Professor Gibbins: Yes, it most certainly is.

Dr Kennedy: It is an industry we can create for ourselves through deploying the technology here and possibly for exporting the technology as well, if we can become a leader in it. So there are two benefits from it.

Chair: Robert Smith’s disclosure reminds me that I should also remind colleagues about my entry in the Register of Members’ Interests as chairman and a shareholder in AFC Energy, whose fuel cell technology may conceivably be applicable to CCS. Robert?

Q30 Sir Robert Smith: I have just a couple of things on the back of that. In your new reformed electricity market, who is driving the decision making about where the priorities go?

Lord Turner: Well, it does require that we have made a strategic national decision that we want low-carbon electricity, but we have made that-we have got an 80% CO2 reduction target. Within that, it then essentially says, okay, what we want, because we recognise this is the structure the market requires, is to buy future low-carbon electricity at a price now that we know while also maintaining the price-competition discipline of a tendering process. Right? So you are basically tendering for the future delivery of low-carbon electricity. From the point of view of the generator, once it is in place, it gives them the same certainty as a feedin tariff, but it does not require that we say, "Okay, I am willing to pay you 7p per kWh." It basically says, "I would like somebody to deliver me so many TWh of low-carbon electricity in 2025. What am I bid?" We go through a tendering process and the lowest tender gets that promise to pay, but once that promise to pay is there they have a certainty of future price and quantity.

Q31 Sir Robert Smith: And that system would fit in with the EU’s liberalisation agenda under Lisbon?

Dr Kennedy: There are possibly some legal questions about whether you could have that kind of market arrangement under current EU legislation.

Lord Turner: I think if that is a barrier, we have got to face it. I think, to be blunt, there is an element to which we have been so proud of our complicated liberalised energy market, which was created for a particular set of purposes, that we have managed to sell it to Europe and they are rolling ahead to try and make everybody have to have it just at the point where we are realising that it is not necessarily the most efficient way to drive a low-carbon economy.

Professor Gibbins: Just to paraphrase one of my colleagues, Rob Gross, it was designed to sweat assets and build gas, and it does that quite well. It did it very well and we have reaped the benefits of it but we are not reaping them now.

As to the point about tendering for different sorts of low-carbon electricity, we have seen one tender, if you like-I think done in public-about the London Array where the builders said, "We would like two ROCs." After a bit of thought, the Government said, "Okay, made it two," but doing public procurement to one-significant-digit precision by a tendering process like that is not really very adequate. What we are suggesting here is a very effective way of getting people the money they need but not significantly more.

That would also apply, I think, with some proviso about fuel price allowances, to carbon capture and storage-certainly some of the larger projects. If, for example, you followed some of the recommendations that were made by a study group last year that I was part of to have a national carbon storage authority that would actually take carbon for a fee from people and transport and store it, that is something that could also be delivered against a tender.

Q32 Sir Robert Smith: One other interaction obviously with Europe is that if we have a successful EPS system, we could well lower the price of carbon. Could this hinder then the carbon abatement in the rest of Europe relying on the ETS?

Lord Turner: That doesn't just apply to EPS. That almost says anything you do in your traded sector-your EU ETS-by whatever means: building a gas plant not a coal plant; running a gas plant not a coal plant. At the margin, if you are not changing the EU ETS cap, it is, of course, reducing the price of carbon and shifting supply and demand within the carbon market. But I don’t think you can have that as an argument against. The crucial thing in here is: is the cap within the EU ETS tight enough? If it is tight enough, obviously it is the case that somebody who, within that, takes an abatement opportunity is then in a position to buy fewer credits or sell credits that they would not otherwise be able to sell.

I think the crucial issue here is: is the EU ETS cap tight enough? I think the answer is no, and I particularly think it is no because it has not been adjusted to deal with the very significant influence of the recession across Europe. I think that if one had known in advance that that was going to occur, one would have a different EU ETS cap than is in place at the moment. We do have significant concerns that the present EU ETS cap that has been set is not sufficiently tight to drive the sort of carbon price for the carbon price to be playing the role that it should be playing along with other instruments in driving through low carbon, both in the power sector and indeed in industrial sectors. So I think the big issue here is the overall tightness of the overall cap.

Dr Kennedy: It comes back to your earlier question. It would not make sense for the UK to be decarbonising the power sector at a rapid pace and no other European member state is doing the same thing. The way to get around that is, as Adair says, tighten the ETS cap to make sure everyone is decarbonising but get a consistent set of electricity market arrangements across Europe of the kind we are talking about, which are based on longterm contracts for low carbon.

Q33 Sir Robert Smith: So quite a big role-quite a major redirection of European strategy is really going to be needed.

Dr Kennedy: There’s a legitimate question around that.

Lord Turner: It relates to the debate about whether Europe is on 30% targets or 20% targets, post Copenhagen and post whatever happens at the end of this year. I think there clearly is an issue about the tightness of the EU ETS cap. Across Europe, as in the UK, there were very significant reductions in CO2 emissions last year with the recession, which had not been previously anticipated and which, therefore, have produced quite a significant shift in both the present year but also the future expected years’ supply-demand balance within the carbon market.

Professor Gibbins: We are now in a situation-and we always are in a situation-where it is hard to see how European emissions collectively would be any lower than the cap, irrespective of what individual countries do. The only way we could get lower emissions is if the UK cut its own emissions and also retired some allowances. Of course, you can retire allowances at any time anyway. So I think there is a serious question here not just of the price but also the effect on CO2 emissions, and that is just because we have a cap and you don't exceed the cap but also rarely do you go under it.

Q34 Dr Lee: Can we move on to energy security? How do you see an EPS affecting energy security-positively, negatively? What’s your general view?

Professor Gibbins: A typical academic response: what do you mean by "energy security"?

Q35 Dr Lee: Allow me to be a layman and say that for me it is do we know that we have enough power on the island to run business and domestic need?

Professor Gibbins: I think the question there comes down to what role we see for coal in the future mix, and I think there is a role in that coal is an easily stored energy source and a source that can be accessed from a lot of different countries. At the moment we think gas is going to be fairly cheap, but that’s not certain, so it would be very useful to have the option to build more coal plant. That option might be available if we had a gas CCS system. For example, it is a lot easier to go from a gas CCS system to a coal CCS system than it is to go from an unabated gas system to a coal system with CCS. So we could keep that option open.

In terms of keeping the lights on, I think CCS is quite a good back-up. It is actually potentially fairly flexible, although at a cost. It will fill in the gaps; it will come on. You can also, which is quite useful, as part of that flexibility, decide for periods of time not to operate with CCS provided you have that option. It does not matter; the climate will quite happily integrate CO2 emissions over years, so the fact that you are not operating with CCS for a short period is not an issue. So I think in terms of keeping the lights on in the short term, it’s quite good. Provided we do some CCS, it’s also quite good for energy security in terms of keeping a coal option realistically open.

Q36 Dr Lee: Do you see any problems with an EPS being applied only to new gas plants after 2020 as opposed to retrofitted? Is there a danger that if you say, "Oh, it’s from 2020," we’re going to have a sudden burst of gas power stations that then will not be compliant going forward with what we would like?"

Professor Gibbins: Yes.

Dr Kennedy: So if you said that beyond 2020 you cannot invest in unabated fossil fuels including gas, you would expect to see a new dash for gas in the period to 2020, which would give you a load of plant in the system that you don't really want there ideally. The way around that is to have your emissions performance standard in conjunction with the arrangements that pull through the low-carbon investments. So you will not invest in unabated fossil fuels, but there will be sufficient revenues to make your projects in lowcarbon technologies viable and that would avoid the dash for gas.

Professor Gibbins: I would comment there, though, that at the moment we are building natural gas plants as capture-ready, and that capture-ready, in terms of a future retrofit of CCS-if it is exercised reasonably rigorously-actually does mean that you can retrofit CCS, and it is not a choice that you just have to make when you build the plant initially. So if people are building power plants before 2020-natural gas power plants-and they are capture-ready, then there is no reason why you cannot say, "Well, you said your plant was ready to retrofit capture. Go away and do it."

There have been some moves by industry, and I think even the Committee on Climate Change has seen this, to say, "Oh well, you either build it with CCS, but if you let us build it without CCS, we don't have to fit it for 10 or 20 years until the plant is refurbished." In other words, basically, "We’ve paid off our money. Go away and leave us alone."

I think we are in a situation now where if capture readiness is implemented sensibly, it is not a big deal-but it needs doing sensibly-and industry is made to realise that when they say their plant is capture-ready, they will have to retrofit CCS if required or take a financial penalty in terms of closing down. Then I think actually we are in quite good shape not to be left with a legacy of plants that can't be retrofitted.

Q37 Dr Lee: Is there a danger, though, that we may get to a point where we have seen coal off at the pass and we are left with a nuclear sector with which we’re dependent upon the French and with gas where we are dependent upon the Norwegians and the Qataris; and that we are at the point where we are fulfilling our targets but actually our dependence on others and the diversity of our energy supply has made us actually more vulnerable if there is a geopolitical change? I’m not suggesting that we are going to go to war with the Norwegians tomorrow, but I just wonder whether we are putting ourselves in a more vulnerable position.

Professor Gibbins: You are quite right, but if, for example, we have demonstrated CCS at scale and we know that we can do CCS, and we have left particularly some coastal power plant sites available to build coal plants, then we can build coal plants as rapidly as the money is there to do it. If people are not prepared to pay for coal at a time when coal is more expensive than gas, clearly we cannot have it, but we can have the options. I think one of the valuable things in longterm energy planning is options, and an option is valuable even if you do not exercise it. It is a backup, and you can guarantee that if you keep options open, you will be seen as backing losers, because not all of the options will be exercised, but, hey, you want more options than you need. You don’t want to have just no choice. I think we can see CCS on gas as also a way of keeping an option open for coal even if we don't do coal CCS.

Q38 Dr Lee: But in terms of preventing the diversification of energy sourcing-let’s say marine sources or whatever-is there a danger with CCS, in being so successful at managing CO2 emissions from gas and from coal, that wave technology, the Severn barrage and all those other things that have costs attached to them will be less likely to happen as a consequence of the success of CCS and therefore we will be less likely to be energy independent or as independent as perhaps we might have been?

Dr Kennedy: If there was only a small investment needed through the 2020s, it could be dominated by CCS but, given the scale of what we are talking about, which is 40 GW and about 30 power plants over a tenyear period, that’s going to need nuclear and gas CCS and coal CCS, onshore and offshore wind and probably marine as well, so we will have a very diversified mix.

Chair: Thank you very much. As ever, that was an extremely interesting and useful exchange. I am sure we look forward to seeing you again before very long.

Lord Turner: Thank you.


Examination of Witnesses

Witnesses: Nick Molho, Head of Energy Policy, WWF UK, Simon Skillings, Senior Associate, E3G, and Chris Littlecott, Senior Policy Advisor, Green Alliance, gave evidence.

Q39 Chair: Good morning and welcome. You probably heard the previous evidence. Would you like to introduce yourselves as this is the first time you have been to this Committee, at least under my chairmanship anyway?

Nick Molho: I am Nick Molho, WWF’s UK Head of Energy Policy.

Simon Skillings: I am Simon Skillings, Senior Associate at E3G. For those you of you who are not familiar with E3G, it is a small NGO working in the public interest on sustainability issues.

Chris Littlecott: I am Chris Littlecott, Senior Policy Advisor at Green Alliance, the independent think-tank.

Q40 Chair: Would you like to say whether you think that the Government's aims for an EPS are appropriate and adequate given the context in which they have been put forward?

Simon Skillings: Shall I kick off on that? I think, as we heard in the last session, that the scale of the challenge is to do with decarbonising, or nearly decarbonising, the power sector by around 2030, which is a huge challenge. The EPS is one important-but just one-tool in the toolbox to achieve that. Therefore, if we are looking at the objectives in the round, EPS is insufficient-it is part of the overall kit that we have to use.

Nick Molho: If I may just add to this, I think the advantage of an EPS, especially an EPS that is focused on a plantbyplant basis, is that it gives you a clear longterm physical certainty as to what type of plants can and cannot get built as part of a decarbonised power sector, so that gives you that longterm market signal. However, when you are dealing with new forms of technology that need to go from the demonstration stage to a substantial deployment level, such as CCS, offshore wind and other forms of marine renewable energy, an EPS does need to be complemented with appropriate levels of financial incentives, whether they be renewable energy financial incentives or the incentives that could be provided for the CCS demonstration programme.

Chris Littlecott: I think the one particular comment which needs to be made about the coalition agreement language on EPS is that it is rather a selfreferential statement just about coal in that "we will set an EPS so that our coal plants meet the EPS". That really needs to be fleshed out into a viable, credible market signal and, as we heard in the first session this morning, we would argue that that also needs to encompass gas within its scope. Whether that is across the same time frame is something which could be considered.

Q41 Chair: If we had a floor price of carbon, however, and if we combined that with the other targets we have got reducing emissions, would that be sufficient to drive CCS technology and other low-carbon technology? Could that mean that an EPS would actually not be needed?

Simon Skillings: Clearly we are operating in the world of the subjective here. There is a big, big difference between an EPS and a price signal. What an EPS does is it creates a secure future volume opportunity for low-carbon technologies. What it does, if you like, is it triggers that fundamental competitive process. There is a bunch of customers out there. I can't be competed away by high-carbon stuff that might be cheaper. There is something worth going for here. That works right back through beyond the utilities back into the supply chain. It is why it is critical that we begin to look at an EPS that is setting aspirations out over 20 years because where it really matters is in driving that supply chain investment. There is a volume out there that they are heading for. With a price signal, you have got something very different. In business, people are used to prices being the consequence of competition and are clearly very worried about prices that are set by policy and by regulators but, more importantly, I think what you have with a price signal is you have an optout. You have an optout which is incurring that cost and passing it through to your customers, which an EPS does not give you. So I think one of the key objectives of the market reform process is to create the secure future volume for low-carbon technologies and, I think to our mind, EPS is an altogether more effective way of doing that than purely pricing.

Nick Molho: If I could just add to this, I think one of our concerns with a floor price EU ETS is that you have issues with respect to exactly how you set the minimum price. It is not very clear at the moment, for example, at what level you should set the minimum carbon price to make CCS financially attractive to invest in, for example.

Equally, from an implementation point of view, if we were to have a floor carbon price for the UK only, given that we are operating within an EU emissions trading scheme, there could be various implementation issues that could make that quite complicated. In contrast, a plant-based EPS just tells you, technically speaking, exactly the type of plants that can or cannot get built as part of a decarbonised power sector and the level is fixed by reference to particular dates, so it gives you a really clear pathway for investors.

Chris Littlecott: I think the complementary point on this is that the value of the ETS comes in assisting the industry and power sector decision makers to trade off between relevant competing technologies, so at the moment the ETS carbon price has helped the shift from coal to gas. What it is not good at is tackling the other barriers to new technology development or nonprice barriers. You would expect that with a carbon price we would all be doing energy efficiency, but there are so many nonprice barriers to that, and what we are looking at, in terms of CCS and other new technologies, is that you need other mechanisms to tackle those market failures that are not tackled by the carbon price alone. That is why we have always been clear in talking about the need for an EPS as part of a package alongside the financing support for CCS demonstration, which I am actually very worried about at the moment, and the broader market reform. As a package, we see that as a deliverable that could actually catalyse the UK CCS industry.

Q42 Chair: Would one alternative be, in relation to new power stations, to use the planning system to say you cannot build a new coal-fired-or perhaps even in due course a new gas-fired-power station without some sort of abatement technology? Would that eliminate the need for an EPS?

Simon Skillings: There are clearly a number of ways you can achieve the objective. There is always a danger in starting the discussion around detailed mechanisms rather than around the objectives you are trying to fulfil. To my mind, the clear objective that we are aiming to achieve here is to create that secure volume for low-carbon generation. And, yes, there are many ways that that can be done there. Ways other than the EPS tend to look increasingly centralist, which may be good or may be bad, depending on your views. With EPS, we have a clear option that is on the table. We have an option that has been tried extensively around the world and, in an analogous form-through the large combustion plant directive-has been demonstrated to be very effective in driving disinvestment and therefore investment decisions.

Q43 John Robertson: WWF and Greenpeace have proposed a very specific EPS design of 300 gCO2/kWh for all new generating plants from now on and then tightening it to 100 by 2025.

Nick Molho: That is correct.

Q44 John Robertson: Could you explain why you support this design and whether you have identified any other possible weaknesses within it?

Nick Molho: Our proposal first of all would be to introduce enabling powers for an EPS as soon as possible, because that would send a clear market signal that the Government are serious about introducing an EPS and then in followup legislation having the clear levels set out. Our suggestion to introduce a carbon intensity level for an EPS at 300 gCO2/kWh averaged over a one-year period for new plants was chosen deliberately for two reasons.

First of all-and this point was discussed in the previous session-it does incentivise the efficient use of gas. So essentially what it would encourage is to build gasfired CHP-type plants for that initial period. What is important when you are dealing with gas-fired CHPtype plants is to look at not just the carbon intensity of the electricity generation, but the heat generation that it displaces. If you look at both components, that takes it below 300 gCO2/kWh.

The other point to make is with respect to CCS. Under the current CCS policy framework, the demonstration of CCS is limited to 300 MW of a plant’s capacity. If I could give you the example of the proposed plant at Hunterston in Scotland, which is a 1.8 GW coal plant, if you did not have an EPS limiting those CO2 emissions at 300 gCO2/kWh, you would end up with this 1.8 GW coal plant that would have CCS that would capture only 17% of the emissions of that coal plant. So the other 83% of the emissions from that coal plant would remain unabated and would actually result in the plant having an average overall carbon intensity of 650 gCO2/kWh, which is more than the current average carbon intensity of the UK power sector.

Q45 John Robertson: Given that the CCS technology is not there, do you think that this is a time to be introducing EPS? Particularly when we talk about coal, should we not be waiting until we actually have the technology in and working?

Nick Molho: Ultimately, I think the key thing about the EPS is that it is about the appropriate sizing of CCS demonstration plants. This might be something that Chris wants to say a bit more about, but the key point we are making is that you should avoid building enormous unabated fossil-fuel plants where you are just demonstrating CCS on a tiny fraction of the capacity of the plant. You are much better off building smaller plants that can comply both with the emissions performance standard while demonstrating CCS. That actually really helps. Given the fact that the value of the public levy for CCS under the Energy Act could amount to up to £10 billion over 15 years, it is really important, especially in the current climate, for the public to know that they are getting ‘climate value for money’ out of projects. Having a stringent EPS to start with of 300 grams gives you that certainty that you are investing in something that will result in emission reductions from day one and that also you are investing in a technology that aims to comply with a binding emissions performance standard in the long run, which we suggest should reduce to 100 grams by 2025.

Q46 John Robertson: To be fair to any kind of research and development, you never expect to reach your target at the beginning. As you develop, you will lower your target and reach where you want to go. If we set a target such as you are talking about at too high a level, there may be a disincentive for anybody actually to try and achieve the future targets that are going to be there simply because they cannot meet that initial target. Do you not put yourself in a position of where, by setting these targets, you actually are counter-productive to what might be the needs of the nation in the long term?

Chris Littlecott: Shall I come in on that just to make it clear? As Green Alliance, we have played a convening role over the last couple of years working very extensively with industry and the power sector as well as the NGOs. We do not have our own set position on what we think an EPS would be, but we have worked very closely to try and find ideas which would work for all concerned.

I think there are two important things here. One is that the debate on EPS has shifted from something that started off as just tackling unabated coal to being this broader thing about how we decarbonise the power sector. Along with that, you’ve seen an initial industry reaction of, "Oh no, we might be being forced to do something we don’t want to do," to actually very constructive engagement from industry-from the power sector but particularly equipment suppliers and manufacturers-about, "Well, what could work? How could an EPS build the market for CCS, build the market for low-carbon technology, and what might be a framework which makes that happen?" There are actually some interesting industry ideas that are not so dissimilar to the WWF perspective.

Q47 John Robertson: So would I be right in thinking that perhaps, unlike your colleague at the end, you have a more flexible way of looking at it in that you drive in hard targets to begin with but you would be more flexible in driving towards, in effect, by the time we get to 2030 or 2040, hard targets then?

Chris Littlecott: I think the ideas that are coming out of industry actually end up looking quite similar in shape to some of these ideas, which is giving the flexibility you are talking about to those first plants. You could do that by saying, "We recognise that CCS plants will have some downtime and they will need to be testing their technology." Perhaps we apply the EPS but give them a percentage of wriggle room so that they are not disincentivised from actually building CCS. That could certainly be incorporated into a model, but ending up at a low-carbon outcome, which is the same as the WWF wants.

Q48 John Robertson: Some people have been suggesting that we should allow the generators an average of emissions across all their fleet of power stations rather than the individual power stations themselves. Would that be acceptable? Would it be more flexible?

Simon Skillings: Shall I pick up on that? You can clearly design EPS in many, many ways. Those different designs will have impacts on potentially nearterm emissions. They will have, potentially, impacts on investment and disinvestment decisions. They will potentially have impacts on market structure incentives around the risk and risk allocation in the market.

Now, EPS applied to a portfolio is really quite a flexible mechanism-a bit like a broadbrush price signal-and, if you like, comes a little way away from price towards volume but does not go the complete way. It allows larger companies to manage their risk more effectively-presumably more effectively than smaller companies unless there is some secondary market that enables them to do it. I guess what I would say is, as with all energy market mechanisms, "Be careful about market structure implications and outcomes; are they what you want?"

Q49 Dr Lee: Mr Skillings, E3G recommended that EPS should not be applied to imported electricity because it might jeopardise the building of European interconnectors. Would not importing high-carbon electricity be a risk to the UK’s low-carbon ambitions?

Simon Skillings: One of the great challenges that we have in the UK and across Europe is that our traditional approach to energy policy is highly nationalistic, and there is a good chance that we could carry on doing that for the next decade or two. But if you start looking out over 20, 30 or 40 years-out to 2050-we can’t. Realistically, the lowest cost and most secure solution to our energy future is an international solution where there is a sharing of resources between countries. One of the big challenges we therefore have is how we deliver our shorter-term ambitions nationally while keeping an eye on the fact that we need to support and drive European integration going forward?

I would say we are relatively fortunate in the UK at the moment in terms of solving that problem because we have relatively little interconnection. I guess our view would be that we must put a lot of political force behind the single market agenda, which involves harmonisation of subsidy mechanisms and regulations. So it must be a key part of any EPS discussion that we are looking towards a European EPS rather than purely a UK EPS. We can take that decision earlier in the UK because we are not significantly at risk for a while to the issues you describe. However, if the situation has not moved in 20 years’ time, there will be a significant potential risk there. But we believe there are great advantages in moving early in the UK, particularly around CCS and making the UK an attractive place for those industries that know their long-term future has to be CCS. If we can actually move and drive forward a CCS agenda in the UK, we have the potential actually to trigger some green growth around carbon capture and storage, but there is clearly a longterm risk and we must drive forward on the European stage.

Q50 Dr Lee: In summary: interconnect first, carbon second-try to get to a point where we are interconnected and then start trying to bear down on the emissions of carbon.

Simon Skillings: No. I would have said it is in tandem, actually, but I recognise the incredible political difficulty we have in Europe. We basically have a whole series of different parts of Europe running different agendas at the moment. You’ve got the UK and Iberian peninsula trying to work out investment problems. You’ve got the middle bit of Europe trying to work out how it needs to change its markets so that it can interact and share balancing services to absorb wind, and you’ve got the eastern part of Europe doing absolutely nothing-sitting on its hands waiting for the cohesion fund to come along and solve its investment problems. That is not an easy problem to solve; I don't for one minute claim it is not. It is not something we can sort out immediately, but it must be something we keep pressure on over the next five or 10 years.

Q51 Dr Lee: I would suggest that maybe it is somewhat idealistic. History does not teach us that the Europeans work together terribly well. Often, previous disputes and wars have been over natural resources, and perhaps there is a danger of that being the case in the future. Therefore you need either to adopt an approach that we try to work together now, or we look after our own back yard, but I guess I will leave that hanging.

What potential do you think there is that an EPS might encourage large-scale switching to unabated biomass, moving on to something separate? Do you think there is a danger that an EPS could encourage large-scale switching to unabated biomass?

Simon Skillings: There is a danger of all sorts of things if it is poorly designed. I think, as was described in the first session, if we make sure that the rules for biomass are equitable with the rules for other forms of fuel, that will not happen. It just highlights the detailed complexities that you will get into with EPS, but they are surmountable-they are all surmountable.

Q52 Dr Lee: In terms of biodiversity-the lack thereof-and food security, if we are growing lots of-

Nick Molho: No.

Q53 Dr Lee: Are these all in the mix, do you think? I am just conscious that if it goes down that path, we will end up importing our food, which has security implications and also carbon implications.

Nick Molho: No, you are right. These are things that we absolutely have to think about, and that’s why we do need something. What we have been calling for in our responses is an introduction of some form of certification criteria for biomass, because one of the key things for biomass is that you have to understand the land-use change implications. There is a very, very simple example in the UK. If we are replacing 2% of forests with 2% of agricultural land on which we are going to be using biocrops, we are losing those carbon sinks, which in turn actually ends up having a negative impact on our overall emissions. So there is a real need to monitor that. I guess you can do that in two ways with respect to a plantbased EPS. You can either just look at the direct emissions on site, or you actually take a broader, more holistic view and try to look at the whole lifecycle of the greenhouse gas emissions of biomass, which would take into account the land-use changes as well as the direct emissions on the site. This is something we definitely need to work on, but it is precisely your point that it would be very helpful to look into during the electricity market reform.

Simon Skillings: Can I just come back on the Europeanisation because I think it is a very, very important issue? If we look forward into the longer term, I think there are two important issues to remember. One is that the decarbonisation of the economy as a whole will be hugely more expensive if we all try and do it ourselves. Now, that might be a price worth paying. From a UK perspective, we are actually endowed with far greater potential natural resources than elsewhere in Europe. So there is also a serious export opportunity over the decades in the future. I do not understand the details of geopolitical risk, and a proper risk analysis would have to be done over those time horizons, but it seems to me that they would have to be pretty severe risks not to want to take those opportunities.

Nick Molho: If I could add to this, I want to draw the Committee's attention to the recent report that was prepared by the European Climate Foundation: the Roadmap 2050 report. I would be very happy to send a copy of the report to the Committee. That report was put together by various consultants but also had really a lot of interesting feedback from various players in the industry. So it is a very compelling report. What it goes to show is that it is actually technically feasible to envisage a future EU energy system based on up to 100% renewable energy, with a certain amount of backup generation, if we make the right interconnection infrastructure decisions in the coming years to link up the different European grids. So, after doing a very detailed technical analysis, they found interconnection to be by far the cheapest way of dealing with the intermittency of certain forms of renewable energy generation. Unfortunately, we cannot put in place an interconnection infrastructure unless we work together at EU level, so we really think that that should be a priority in terms of our engagement with the EU energy policy.

Chris Littlecott: Perhaps I could just come back to the question of the relationship between an EPS and the European scene. Given the pressure that we have in the UK, both to invest in new plant and to decarbonise, as the Committee was saying this morning, it is obvious that the UK has to be making decisions over the next two or three years about its future market structure and how we are going to roll out that decarbonisation. The EPS could be a part of that, and obviously in the longer term it would be great to have a similar EU solution on that, but it is certainly not going to happen in the short term. We have been involved in those conversations at EU level. But it is conceivable that the UK could work with other Governments who are interested, and there has actually been interest in the Netherlands within Parliament, but also with their broader stakeholders of industry and NGOs actually calling for an emissions performance standard. Their CCS hub around Rotterdam would be entirely happy with that outcome and that would be part of a hub of UK-Netherlands interconnection.

But I think the other thing it comes back down to is the question of how does the UK leverage its influence internationally? Part of that is having CCS technology available and demonstrated in the UK and a new market and a new industry coming here, but it is also about how do we export the policy framework that enables CCS to happen? I think, depending on the outcome of the comprehensive spending review, that the UK is on the cusp of having a very good policy framework that brings together CCS demonstration financing and an emissions performance standard and energy market reform that would enable CCS to happen. That then is a model which can be picked up and taken elsewhere. We have learned from the emissions performance standards in California that they then had to add their CCS financing and other measures to that afterwards. We are actually very close to that and that is why I think that in the next few months, in terms of the energy market reform consultation and the outcome on the levy, we need to see that as a whole, and getting those things working together is actually part of our international influence as well as our domestic delivery.

Nick Molho: Can I come in there on a tiny point? I obviously endorse what you have just said but also it is just worth remembering-because it’s very easy when we’re talking about the EPS to end up getting bogged down just looking at the CCS element of it-that obviously while EPS has a really positive role to play in helping to bring CCS forward, ultimately an EPS is also there to help the deployment of low-carbon technology such as the wide range of renewables that an island like Great Britain can actually really help to push forward. So, when looking at the different levels at which we could set an EPS and the various implications, it’s also worth remembering that we have an enormous potential in our seas as well.

Just to give you a very quick example, the Offshore Valuation Report that was put together by Government and by various industry players back in July found that by just using 29% of our practical offshore resource-the resource offshore that can actually be used for renewable energy deployment-the UK could become a net electricity exporter by 2050 and create around 145,000 jobs within a UK offshore renewable energy industry. It is interesting that that report is based on a scenario of very high electricity demand. It imagines that electricity demand goes up by 74% from 2010 levels to 2050, which we think, through energy efficiency measures that the Government could put forward, we could even lower. So it is these sorts of findings that show the abilities that our seas can give us in terms of renewable energy and what they can do for employment in the UK that are really worth considering.

Q54 Chair: The design of the EPS obviously has an impact on whether it drives investment in other forms of low-carbon technology. Do you have a view about whether, looking across companies that deploy a variety of technologies to generate electricity, it is desirable, therefore, to set them a companywide target so that they can then direct their investment over a period of time towards low-carbon technologies or the ones that they would choose for themselves?

Nick Molho: From WWF's perspective, we have looked into the different designs in quite a bit of detail, so between the bubble approach, the portfolio approach that you are describing and the plantbased approach. The problem with the portfolio approach is that it does give rise to a bit more investment uncertainty in the sense that with a plantbased EPS you know exactly technically what can or can’t be built-there’s no ambivalence about that-whereas with a portfolio approach, actually, you’re still leaving the door open to a certain amount of unabated fossil fuel plants being built because as long as you have sufficient renewables in your portfolio to offset that, you can still build these sorts of plants. So it does not send the same clarity in terms of a market signal. But from a market point of view, you also create, potentially, certain barriers to new market entrants because if you are a new market entrant and you do not have a high level of renewables in your portfolio because you’re new to the UK market, compared to other competitors that have a much wider portfolio plant, you could end up having to build power plants that are far less carbon intensive than what some of your rivals have to do because they have a wider portfolio. So we do think that one of the risks with a portfolio approach is that you could have barriers to new entrants which a plant-based EPS does not because it doesn’t pick any winners from the outset. Everyone who wants to build a new power plant in the UK has to comply with the same requirement.

Simon Skillings: I would make two quick points. Any system where the value of an asset depends on corporate structures seems to me inherently unstable because corporate structures can be changed. They can be redesigned to maximise the value of the asset and you would really need to think through very carefully what incentives you are putting on corporates and the way they structure their assets.

The second point is that I think it is a mistake to think of the EPS primarily in terms of the signals it gives to energy utilities. The key industries that we are looking to give signals to here are the providers of the low-carbon technologies. They are the Alstoms, the Siemens, the GEs. These are the people who are really going to be incentivised by EPS, and interestingly, of course, these are all the companies that are strongly in favour of an EPS because it helps them so much with their internal business cases in investing in the development of these new technologies.

Q55 Chair: So in terms of the direct impact, an EPS may act as a deterrent to people not to build unabated fossil fuel plants. It doesn't provide a direct incentive in favour of CCS or, indeed, anything else.

Simon Skillings: No, and I think that is right. I think an investment decision is always based on a combination of expectations of volume and price. Clearly, when you are working in the supply chain, price is an altogether more nebulous concept and you do actually have to work much more off future market volume expectations than price expectation. But, no, I am absolutely clear that EPS is about creating a volume opportunity. In parallel, it requires a system of incentive mechanisms that go way and beyond the current system, and, I think, as we heard very well explained this morning, a system that depends upon continuing to have fossil fuel plant operating at the margin is really quite bizarre given the world we want to move into, and we need a new way of incentivising investment, which is probably going to be around some form of longterm contracting or feedin tariff system to create the incentives. It is difficult to think how we can avoid that ultimately.

Q56 Chair: So reforming the electricity markets is at least as important as an EPS in terms of achieving that objective.

Simon Skillings: There are many other important changes that need to be made, absolutely.

Q57 Chair: We are going to have an Energy Bill later in this Session. Is that too early to introduce EPS?

Nick Molho: From the WWF’s perspective, we think that it certainly would not be too early to introduce enabling powers for an EPS in the Energy Bill. We appreciate that the levels at which you need to set an EPS need to be looked at in more detail and we think that is certainly where the electricity market reform comes in handy so that we can make sure we take a properly well-informed decision as to the right level at which to set the EPS that takes us to a decarbonisation of the power sector by 2030. By introducing enabling powers in the Energy Bill, it would already show to the markets and the industry as a whole that the Government are clear about ultimately introducing a binding EPS, and we think that would be a move in the right direction. Inserting an enabling power is a very sort of simple amendment to make. We are not yet looking at the details of it-that is for the electricity market reform-but it would be a very good thing to do.

Simon Skillings: It seems to me that the ultimate complete energy policy package is clear about what are the things we want to be delivered, what are the things that really matter to us and who is responsible for doing it. Within that context, I think an EPS can be introduced and can be introduced early.

Q58 Sir Robert Smith: Can I just pursue one of the arguments that the EPS could have a perverse effect on the potential for CCS because developers might think, "Well, if the CCS isn’t going to come off, I’d better not build my carbon plant. Because of the EPS, I will be better off building renewables or nuclear," and therefore if there is not new carbon plant, there will not be CCS.

Nick Molho: Ultimately-and Chris might want to complement this-the whole point with the EPS is that it has to be accompanied by the right amount of financial incentives to take it through what is known as the ‘valley of death’-from the demonstration stage of the technology to substantial deployment. So, yes, in order for CCS to happen, you are right that, in parallel with EPS, we do need financial incentives that allow investors to invest in the CCS demonstration programme with the right sort of back-up so that we can get to the stage where the Government assist the technology to be proven before it goes ahead. Chris, you might want to add to that.

Chris Littlecott: I think there are two things that relate to the demonstration of CCS and the role of new investment. One is how severe you make an EPS when you are applying it to demonstration CCS plants. I think there would be a very good case to allow additional flexibilities for the first wave of plants, but then you need to accompany that with either a progressive tightening or a future signal to the level of performance that will be required across the industry as a whole during the 2020s, which was what was being discussed in the first session this morning.

What we have to avoid is a situation where we may currently be at the moment where people building CCS demonstration plants believe that they will be continuing to compete against unabated gas in the 2020s and into the 2030s, so this is what Simon says about creating the scale of the market opportunity and looking at the competitive basis. Giving a future signal to an EPS for the 2020s is actually a good way of incentivising people to do CCS earlier, because they believe that they will then be well positioned ahead of that time.

Simon Skillings: I think we need to be clear. The problem you describe is indeed a problem, but it is a problem derived from decarbonisation-the problem that you build a fossil fuel plant in the expectation that CCS will work, it doesn’t, and you are left with a stranded asset. That is nothing to do with EPS; that is a function of decarbonisation. It can be caused by a high carbon price; it can be caused by whatever instruments are used to decarbonise. So that is a key issue that needs to be addressed through a welldesigned demonstration programme that seeks to minimise the costs to society of those inherent risks.

Nick Molho: Just to build on that, ultimately it goes back to the fact that that is precisely why we need to avoid locking ourselves into a high-carbon pathway and why, as much as possible, we need to focus investment on the cleanest forms of renewable energy, if we want to avoid that sort of situation.

Q59 Sir Robert Smith: Can you think of some examples where setting a standard like EPS has been effective in stimulating technology?

Nick Molho: Absolutely. I would like to refer you to a report, which I am happy to provide the Committee with afterwards, that was prepared by the Pew Center last June as part of its series of coal initiative reports. It looked at the impact that introducing binding standards to monitor sulphur dioxide emissions and nitrous oxide emissions had on the potential of developing technologies to capture these gases. What it found in the case of sulphur dioxide emissions was that, in the various countries where binding plant standards were introduced, introducing a plant standard actually helped to reduce the cost of flue gas desulphurisation-FGD-which is what helps to capture sulphur dioxide emissions. Exactly the same happened in Japan and Germany in the 1970s and 1980s when plant-based standards were introduced to limit the nitrous oxide emissions from those plants, and that in turn helped to reduce the cost and improve the cost-effectiveness of selective catalytic reduction technology-SCR-which is what allows you to capture nitrous oxide. So it has been proven to be very effective.

Simon Skillings: Personally I think we need to separate in our minds this idea of EPS being about driving innovation. They are separate things. EPS is about creating a market for low carbon technologies-there are lots of those that work. We need separate and clear innovation policies that are targeted on pulling through technologies that are immature and in need of help. You are not going to do the two things with one instrument.

Q60 Sir Robert Smith: Turning back to the European interaction, what sort of signal does the fact that we are having to go down the EPS route send to our European colleagues about our faith in the ETS?

Simon Skillings: I have always been amazed when I am over in Brussels at quite how interested everyone else is in what happens in the UK. They are very, very interested in what we are doing with our power system. We do remain a thought leader in Europe, but I think now the key difference between where we are and where most of the rest of Europe is that we have reached that point where investment is needed. That point has not been arrived in most of western Europe-and, as I say, in eastern Europe the solution is being viewed elsewhere. In most of western Europe, the problem is about integrating the renewables; it is not about building new largescale capacity. So they are looking at us, I think, in a very interested way as to how we are tackling a problem that they are going to have to tackle in a few years’ time. I think the report that Nick referred to by the European Climate Foundation flags up very, very clearly that for all of Europe ETS is not sufficient and requires complementary measures to drive investment.

Nick Molho: Just to add to that about the impacts it could have on the perception of how the ETS would work, back in May, the European Commission issued a report looking into whether or not we should, at EU level, increase the emissions reduction target from 20% to 30%. What the Commission found was that because of the impact of the recession, we have a considerable amount of unused allowances in Phase II of the scheme, which runs from 2008 to 2012. The scheme allows the carrying forward of those allowances into the next phase from 2013 to 2020, which is the phase that is supposed to help us reduce our emissions by 20% by 2020. I would just like to read you a very short sentence that comes out of that report from the Commission. It stated: "Between 2013 and 2020 and despite the linear reduction of the ETS gap, no absolute emission reductions in the ETS need to take place due to the availability of a large buffer of allowances from the period 2008-2012 and unused international credits." So this really shows that the Commission itself is very aware that the system as currently designed is really inadequate to take us to a longer-term pathway.

Q61 Sir Robert Smith: Do you see a European-wide EPS as a response, or reducing the price-the cap-of the ETS?

Nick Molho: Sorry? Do I see?

Sir Robert Smith: Would it be a European-wide emission performance?

Nick Molho: Ultimately I think that is what we should strive for, but I think we will be more efficient in getting to that point if we take the lead and provide the example. I think Lord Turner said this morning that it is very interesting how the rest of Europe is always very interested in what happens in the UK and likes to follow. We put in place a very liberalised energy market that the EU has now been trying to implement through a series of three directives. I think, in a very similar way, we should show the way forward with respect to introducing an EPS at EU level but, ultimately, I think an EPS would be more powerful. It is important to note that an EPS does not exclude an ETS. You could have both, but I don't think the ETS alone can give us what we want.

Q62 Dr Lee: Moving on to international negotiations on climate change and measures to mitigate it, could you explain the potential role for sectoral approaches-and by "sectors" I mean power and land use-to international agreements and how an EPS could support this?

Nick Molho: I think, from the international perspective, power sector emissions represent a considerable amount of our emissions. I think for the UK it is in the order of 45%1. It is the biggest polluting CO2 emitting sector in our economy. So if the UK was to take a decisive step in introducing an EPS ahead of other nations, it would put us in a very strong position in international negotiations going forward, because not only would we have been the first country to introduce a Climate Change Act, for which there is no equivalent at the moment anywhere else, but if we can also be the first country to have introduced a clear emission performance standard which shows that we are directly tackling emissions from our largest CO2 emitting sector, it would put us in a far more credible position than a lot of other developed economies during the international negotiations.

Q63 Dr Lee: Would it be better for us to demonstrate CCS on a large scale in a practical sense rather than having a policy position on EPS? Perhaps we do both, but I am just saying in terms of the impact on the people who matter, which is basically the Chinese and the Americans.

Nick Molho: I think there are two aspects of it. On the one hand you have the technological rollout side of things that you need to consider, so that is where the CCS demonstration is helpful and it is where, for example, if we are able to demonstrate CCS doing a post-combustion demonstration on a sub-critical coal plant, it could be of great use to the Chinese to have plenty of sub-critical coal plants. So the CCS aspect is important in terms of the technological rollout, but then you also have the actual political or the international policy side of how do we get to the situation where we can get a really challenging emission reduction treaty at UN level. We saw in Copenhagen there was a complete deadlock and we did not really manage to get very far. I think one of the reasons for that is that we did not have a clear set of countries that were clearly leading the way in not just having a good vision, but actually implementing their vision. Having the UK introduce an EPS alongside funding demonstration programmes for CCS could allow us to do precisely that because we are showing credible actions for the vision that we are promoting.

Simon Skillings: It seems to me that the logic flows through from the carbon budgets that the Committee for Climate Change is setting and they are being set in the context of international discussions. EPS is part of the toolbox to deliver those, and, in combination with other instruments, the great value comes if we can demonstrate not only that economies are robust to decarbonisation, but actually if we can trigger the green growth in new jobs that are available. That then is the real message for the rest of the world.

Q64 Dr Lee: Is there a danger, though, that if an EPS led to no coal plants being built here, the Chinese and the Americans would say, "Well, we are not going to do that because we have got loads of coal that we want to burn"? What I mean is that, if an EPS leads to no new coal, is that not a negative in the eyes of the Chinese and the Americans?

Chris Littlecott: I think much depends on what package is put in place in the UK. I could very easily imagine a situation where you have an EPS and demo funding and you actually have perhaps two or three new pre-combustion coal plants coming forward-perhaps an oxy-fuel plant-demonstrating CCS on existing coal plant, certainly, and potentially new post-combustion super-critical plant in the future, if we really needed it. Actually I do not think it is a risk that we would end up with no coal if we get the package right. I think, as per what I was saying earlier, that this is partly about having the technology but it is also about demonstrating that we have put together a policy package which makes that happen. My understanding of where British climate diplomacy has been over the last few years is that efforts have been going into not only thinking creatively about the UNFCCC process, but how we build the conditions for other key actors in the international framework to want to engage. CCS is one of those potential key catalytic technologies that could help do that. You could potentially envisage a separate agreement among a key cluster of developed and leading developing countries that they would implement CCS as a step measure for their power sector without necessarily having the whole package. I think there are some creative things that you could do around CCS and the broader framework that would help to catalyse that international perspective.

Q65 Chair: Is there scope for EPSs on a national scale-to look at a country's total electricity generation-and introduce those into international negotiations? It is a less challenging requirement for a developing country to accept a gradually tightening EPS than an absolute cap on its emissions.

Simon Skillings: It seems to me that energy policy would be an awful lot easier if we were clear about the carbon emissions that would be acceptable or unacceptable from the power sector going forward over the next 20 years. So I do not jump straight from that to an instrument. Once you are clear about that as a high-level objective, you can then look at the options that are available and take a view as to the extent to which you are happy for the market to make those choices because there are enough choices and the costs are broadly comparable or that innovation is needed to drive through new technologies. But it seems to me that we are not yet clear on the question "Do carbon emissions matter over the next decade?"-EPS could help in that regard, as could a carbon underpin-and I do not know that we have got a clear view on that. With regard to the rate of decarbonisation out to 2030, are we looking for 70, 100, 200? These will matter massively in terms of then what makes sense in terms of the policy instruments.

Chris Littlecott: I just wanted to pick up something that was not mentioned in the first session this morning: the question of the 2030 timetable as advised by the Committee. It is very interesting to see how stakeholders from industry, the power sector and elsewhere are working on the assumption that that is Government policy, but it isn’t Government policy. The 2030 target range has never been accepted by the previous Government or the current one as its kind of end point for the power sector to be on that decarbonisation trajectory. I think that is the key central point for all these discussions around EPS or energy market form or any other mechanism we want to bring in, which is, "What is the trajectory? What is the speed? What is the level of investment that will be required?" Last year we hosted a twoday facilitated dialogue for over 40 stakeholders from officials, regulators, industry and NGOs, to discuss how we accelerate the commercialisation of CCS in the UK. The No. 1 thing that came out of that was that everyone said, "We need clarity on the 2030 time frame". Alongside that, people then said, "An EPS could then be one of the means by which you make that visible and tangible for decision makers, but it needs the financial package put in place and it also needs more strategic attention to transport and storage for CO2." But I think that is the situation we are now in as we go into energy market reform which will discuss the EPS, and as we also see what comes out of the CSR and whether we still have the levy to play with or not. It is the messages around 2030 that will be increasingly important as to how the whole picture fits together.

Nick Molho: In that sense, we see it as really important that the UK Government follow what has happened in Scotland, where the 2030 decarbonisation objective is now reflected as a clear objective. It is the sense of direction it gives you that is extremely important for then ensuring that you have the right package of measures that delivers the objective that you have set yourself.

Chair: Right, okay. In that case thank you very much. That is another useful session for us.


[1] Note from the witness : “ the UK power sector accounted for 180 million tonnes of CO2 emissions in 2007, roughly a third of the UK’s emissions that year. See Page 4 of WWF Evading Capture Report ( http://www.wwf.org.uk/filelibrary/pdf/evading_capture_brief.pdf )”