Session 2010-11
Publications on the internet

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

House of commons

oral evidence

taken before the

Energy and Climate Change Committee

EMISSIONS PERFORMANCE STANDARDS

Tuesday 19 October 2010

Matthew Farrow, Dr Jeff Chapman and Dr John McElroy

Charles Hendry MP and Jonathan Brearley

Evidence heard in Public Questions 66 - 161

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 19 October 2010

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Tom Greatrex

Dr Philip Lee

Albert Owen

Christopher Pincher

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Matthew Farrow, Head of Energy, Transport and Planning, CBI, Dr Jeff Chapman, Chief Executive, The Carbon Capture & Storage Association, and Dr John McElroy, Chairman, Environment Committee, Association of Electricity Producers, gave evidence.

Chair: Welcome. As you know, we took evidence on this subject last week. You may have seen what was said then. Would you like to introduce yourselves very briefly?

Matthew Farrow: Yes, good morning. I am Matthew Farrow, Head of Energy, Transport and Planning at the CBI.

Dr Chapman: I am Jeff Chapman. I am Chief Executive of The Carbon Capture & Storage Association.

Dr McElroy: I am John McElroy. I am here this morning as the Chairman of the Environment Committee for the Association of Electricity Producers.

Q66 Chair: Would you like to say what you think the purpose of an Emissions Performance Standard should be?

Matthew Farrow: Shall I kick off perhaps, Chairman, if I may? I think there can be no secret that the CBI has never been a big fan of the EPS concept, precisely because it is not obvious to us what its purpose or what value it might add would be. I think there are two questions. The context that we probably all share is the need to decarbonise electricity very substantially by 2030. The question then is, would EPS contribute to that or not? I think, to my mind, there are two questions within that.

One is, does it add value to existing policy and a second is, does it increase or decrease uncertainty for investors? I think our view would be, with existing policy, given we have a policy established by the previous Government, which in effect would stop the permitting of completely unabated new coal without some CCS demonstration, it’s not obvious what an EPS, unless it was set much tighter than that, would add.

In terms of uncertainty, I think our concern would be that a new piece of regulation, which could be changed possibly quite easily by future governments, is more likely to increase rather than decrease uncertainty for investors. I think those are the two questions the Government would need to address in bringing forward an EPS: what would it add to existing policy, restricting new coal build; and would it not increase uncertainty for investors?

Dr McElroy: Yes, I would agree with what Matthew has said. I think it comes back to where we are trying to get to in this issue. Ultimately, what we are trying to get to is a lowcarbon electricity system. The issue is, does the EPS help facilitate that and I think that is where we have major problems. EPS is essentially a moratorium on fossil plant, but the key issue for us is investment in lowcarbon technology. I think EPS on its own certainly doesn’t deliver investment in lowcarbon plant. So the issue really is the market design and getting that right to stimulate investment, and EPS, if introduced in the wrong way, could be more of a barrier to the goal than a facilitator.

Dr Chapman: I would agree with those comments. I would like to take us forward to 2030, when we ought to be thoroughly decarbonised in the power sector. Of course, fossil-fuel power stations will never emit zero emissions. There will always be some emissions and they will have to be accounted for. So, in order for your fossil fuel power station in 2030 to qualify as an effectively zeroemitting power station, there will have to be an Emissions Performance Standard.

At the moment, though, our view is that we don’t need Emissions Performance Standards. We have sufficient policy in place to take us into the next phase of transition. We welcome very much the energy market or the Electricity Market Review that John has just referred to. That is really very important indeed.

I would just like to point out that a lot of people think that an Emissions Performance Standard is some kind of way of introducing a nocost, or lowcost, option to decarbonise fossil fuel power plants. That is not going to happen because the cost of decarbonising fossil fuel power plants will ultimately get passed through to the consumer. Applying a stick like an Emissions Performance Standard is probably a fairly blunt instrument to do that and is probably going to result in a higher cost than alternative methods.

Q67 Chair: At the moment, if we rely primarily on the EU ETS, that clearly is not going to deliver; the recession has exposed the cap as being hopelessly loose. So you could have a situation where, given the longterm nature of investment in power stations, Britain continues to build power stations whose performance is nowhere near going to be adequate to reach the goal we have to in 2030. So we would then be faced with a much more expensive system where we would be buying in huge amounts of allowances, and the carbon price in the late 2020s might be quite high. The folly of not taking action now would then be paid for by the next generation of electricity consumers.

Dr McElroy: In terms of coal plant current policy, effectively, an EPS wouldn’t add to that anyway because of the requirement to demonstrate CCS on any new coal plant. So I don’t really see what an Emissions Performance Standard is adding in that area. Clearly, there are issues around CCS and gas and whether there is a role for CCS on gas in the longer term. I think we need to be careful there in the sense that gas is already considerably lower in terms of carbon intensity than coal and has a role to play in the transition. It also has a role to play as flexible plant in the system as well.

So it is a question of coming back and asking how we get there in a holistic manner. Emissions Performance Standards may have a role at some point, but I think how you set them is critical, when you introduce them is critical and making certain that we don’t deter or scare off the right investment that we need is an absolute priority because we will need some gas plant in that system to help us get to a lowcarbon economy.

Dr Chapman: All new power plants must be built “carbon capture ready” and that may not be the most efficient way to do it because it is very important to integrate the design of carbon capture with the design of the power plant itself. But, for the moment, it probably is the most efficient because you couldn’t fit every new fossil fuel power plant fully with CCS anyway; it just would be unworkable. We need the capacity. So we need to build new plants. So we need to build new plants that are “carbon capture ready” and can be retrofitted by design later on.

Matthew Farrow: I think, Chairman, we shouldn’t lose sight of your point about EU ETS, which we still see as a core tool here. The purpose of ETS is to deliver the cap at lowest cost and that is what will happen. You are absolutely right to point out that, because of the recession, the current cap for Phase III is not as demanding as people had imagined it would be and that is why the price is lower than expected. There is a debate about whether it is providing a sufficient incentive.

I think part of the need is, as well as looking at alternative measures in the Energy Market Review, to look at how we can make sure ETS is performing effectively. So, for example, with Phase IV, where the directive already has an indicative trajectory for the cap, if we in the UK feel we need to be decarbonised pretty much, as colleagues have said, by 2030, I would imagine that is pretty much the same across Europe, given the overall European targets. So you expect the phase for an ETS cap to be going down to equate to virtual decarbonisation of electricity by 2030.

There is a debate to be had, I suspect, about Phase III. Now, we haven’t taken a view on whether you should actually look again at the cap at Phase III, but you can imagine people saying perhaps that might be a sensible thing to do. So rather than simply saying, “ETS isn’t working, can we invent/create a new set of regulation to address those concerns?”, I think one should at least look at ETS and make sure that it is functioning as effectively as possible.

As colleagues said, given that we have a policy which in effect prevents unabated new coal from being built-so that shores up the need to prevent a lot of new fossil fuel being built-and given that CCS demonstration support is going to be initially, at the most, for four projects, then we are going to see, at the most, four new coal plants being built in the next few years. So the debate then becomes around, would EPS do anything for gas?

I think, initially, we are clearly going to need some gas-fired power stations to provide energy security for the next few years or so. The debate is then about in the 2020s what happens to those gas stations. I think, as colleagues say, it is conceivable one might want to use an EPS at that point. It might be that a very tight ETS cap is doing the job for one, but at this point now it is not clear to us what an EPS adds over the existing coal policy.

Q68 Chair: I think it is a bit bizarre to say that relying on gas increases energy security. It seems to me it is one of the things that actually decreases energy security. It is clear from the figures produced by the Climate Change Committee that unabated gas by itself doesn’t actually get us anywhere near where we need to be. So if we start building loads of gasfired power stations, in addition to exposing our dependence on the goodwill of Mr Putin, we are actually going to deliver a system which doesn’t meet the targets.

Matthew Farrow: The question, I think, is, certainly by 2030, if you had more than about, I think, 15% or 20% of unabated gas in the system, it becomes very hard to meet those targets. Then, as Jeff said, all the new fossil fuel power stations have to build “carbon capture ready”. So the debate is around how one would incentivise/encourage the retrofit of CCS on those gasfired power stations.

My point about energy security is that in the short term, when we have so much capacity coming off the system, certainly our judgment would be we are not going to get new nuclear and enough renewables on to the system quickly enough by 2016/17 to make up for what is coming off. Given the policy on coal, we are going to need something to fill that gap plus something to back up the intermittent wind, and it is hard to see what else that could be apart from gasfired power stations.

Perhaps it is not our subject today particularly, but like yourselves, we in the CBI have had concerns and reservations about a heavily gasdependent system going forward, and our members’ view is very much for a diverse system to try and balance energy security needs. But I think there are some developments in the international gas market--the discovery of shale gas and exportation of shale gas--which possibly make the international gas market a slightly more comfortable place to be than we had suspected. But I think the key is a diverse system, and that goes back to the Energy Market Review that we have all referred to.

Dr Chapman: The location of gasfired power stations will be very important in the context of being “capture ready” as will the ability to lay a CO2 pipeline from the station, principally to the coast, and principally to the east coast. It may well be that some of our existing gasfired power stations will become stranded because it may not be worthwhile providing a CO2 pipeline over that distance to outlying stations. So we will have to think very carefully in the future about how to ensure that new gas capacity can be decarbonised into the future.

Q69 Sir Robert Smith: One of the things we were hearing last week was that the EPS would have the benefit of sending a signal to the highly capital intensive investments with low fuel costs, where the ETS is not so effective in sending that signal. Is that something-

Dr McElroy: I would question that. It certainly sends a signal to discourage fossil fuel plant, but the issue is, does it send a signal to encourage investment? I think this comes back to the fact that we need a range of policy issues addressed, both on CCS and on nuclear, to bring those technologies forward. Without that, an EPS doesn’t deliver and doesn’t actually provide any comfort in terms of the rate of return on those investments.

Dr Chapman: I think we have a policy signal. We have an 80% reduction target by 2050 and we have the Climate Change Committee recommending that, in order to get on the trajectory to hit that target, we need the power sector more or less completely decarbonised by around about 2030. That, I would say, is a sufficiently strong signal. We don’t need the EPS at the moment because, as John said, it is likely to result in quite substantial unintended consequences.

Q70 Chair: Just explain why it is such a bad thing. I am not quite clear.

Matthew Farrow: I will pick up the points I was alluding to earlier on. I think the question is: does it add anything to existing policy given we have, in effect, a ban on new coal without CCS?

Q71 Chair: What are the malign consequences, though? You may say it’s not necessary, but I can’t quite see what damage it is going to do.

Matthew Farrow: My concern would be, and colleagues will have their own thoughts on this, that it won’t add anything and what it will do negatively is it could increase uncertainty because, if you say to investors, “We have all existing policies, e.g. ETS, etc, etc, and we are going to introduce a new policy, a new regulation, which is a standard and that standard could perhaps be changed almost on a whim through secondary legislation of a Minister at some point in the future,” as an investor I would be thinking, “How can I be sure my longterm asset is going to always be compliant?”

Q72 Chair: Why on earth would a Minister want to do something which would destroy the investment? The car industry has been having this special pleading for years, saying that they can’t improve engines, and, gradually, we have discovered they can improve engines.

Matthew Farrow: Again, colleagues will be able to give more detail on this, but with energy investments you have a long timescale. So you have to be convinced that your asset will earn returns over that timescale so that you get payback on the investment.

One of the judgments the investor has to make is the political risk around that investment in terms of change in regulations, and that might be the planning system, the carbon price and so forth. I think the potential negative of an EPS, introducing it at this point, would be if it introduced another uncertainty-another policy mechanism in addition to the others, which could be changed, possibly quite frequently. I think if the Government does persist with the EPS concept they need to show to investors how it wouldn’t be subject to frequent change.

Dr Chapman: Can I put some broad numbers on to this? Let’s talk about coalfired power stations for a moment. A coalfired power station emits about 900g or thereabouts per kilowatt hour of CO2, and a gasfired powered station is about half of that. The current policy for a new coalfired power station is that you can’t build one unless it is equipped with about 400 MW of carbon capture and storage. 400 MW out of a regular 1600 MW power station would be about quarter of the capacity and so it would reduce the overall emissions by about a quarter. It would reduce it by about 200, let’s say.

So that would bring it down to about 700g. You can impose an EPS of 700g and end up with the same policy, but if you impose an EPS of 500g or 400g to bring it down to the same level of gas, then nobody will build that station because there isn’t a policy in place to provide the incentive to do so. Subject to what the Treasury says tomorrow, we are going to be struggling even to justify the incentives on the four that are currently proposed.

Dr McElroy: I think, adding to that as well, in terms of the whole CCS strategy, an Emissions Performance Standard is essentially a standard imposed at one end of the chain. We have the whole issue then of transport, infrastructure and networks. We have the whole issue of the storage end. If you impose standards at one end of the chain without having the necessary policy framework, establishing the liabilities and the other aspects in terms of, “What’s the cost of accessing the network going to be?”, there is a whole host of issues which need to be resolved if you are serious about the CCS option. I think it comes back to the need for any EPS to be set within the context of a coherent policy framework, not just on CCS but on lowcarbon policy in general.

Q73 Laura Sandys: What you are also saying is that there are too many different regulations and too many different layers, but, John, you are also proposing that there need to be layers right the way through the whole supply chain. If one, let’s say, parked EPS, what are the drivers that are going to really truly jumpstart the investment in CCS and other technologies that make you think that EPS is merely an additional distraction? Where do we get to and what policy framework do we need to deliver that investment and to deliver the targets that we need to achieve?

Dr McElroy: I think there are a number of issues here. There is the market framework, first of all, which is vitally important, so, "How do we ensure a return on that investment?" There is the planning framework, and the consultation on the NPSs was launched yesterday, so having a planning framework which we know delivers. There is the whole issue of liabilities and making certain that those are clear so that we know what the endoflife liabilities are on CCS, on nuclear, etc. We need to understand the boundary conditions and also have a market framework in which the investment can be delivered.

Q74 Laura Sandys: But what you are saying is that EPS only covers one end of the socalled regulatory framework.

Dr McElroy: Yes.

Q75 Laura Sandys: But what you are now also saying is that we have got regulation right the way through that framework. So why is it not possible to have something that is specifically environmentally driven rather than just market driven?

Dr McElroy: I think it comes back to this issue of doing things piecemeal. I think what we are saying is it needs to be thought of holistically and the policy framework needs to be rolled out.

Q76 Laura Sandys: And holistically it would work within a framework?

Dr McElroy: If we knew the technology was deliverable. We are in a demonstration phase. That is an important consideration with CCS--exactly what performance will be delivered on coal, on gas, etc. So it is unusual in any technology to be trying to introduce performance standards when we actually haven’t demonstrated the technology commercially anywhere. So that is unusual.

Dr Chapman: Can I add that I think the most important thing of all is the incentive to build CCS? I think CCS, however you look at it-and you can only look at it in theory in the sense that we haven’t built the plants yet-looks set to be a considerably costefficient way of reducing this country’s emissions. Therefore, compared with many other instruments of policy that are supplementary, if you like, to the EU ETS, CCS would not cost very much on the public purse and could be encouraged into existence with the right incentive very easily.

Q77 Christopher Pincher: What are those right incentives?

Dr Chapman: Well, as it happens, in--

Q78 Christopher Pincher: You’re ready for the four stations, but there is no guarantee that will continue. If it does have to continue, that surely is going to feed into the cost price for the consumer.

Dr Chapman: Yes.

Q79 Christopher Pincher: So what is the major cost incentive?

Dr Chapman: As I think I mentioned before, whichever way you do this, it is going to cost the consumer, and the consumer will be paying, if you like, for premiumgrade electricity--that is, electricity without emissions. So, yes, it will feed into the consumer.

What I would like to draw attention to is the fact that here in the UK we have invented a mechanism, that will support CCS investment, which is probably unique-well, it is unique in the world. A lot of other countries-and they have to be congratulated for doing so-are throwing a lot of money at CCS, such as, for example, Canada, which on the face of it is very much ahead of the UK, having already selected four projects and put $2.5 billion towards them, so it looks like it is further ahead.

But we have in the CCS levy an excellent mechanism which can be applied to the first four projects but then to the retrofit of the rest of the stations where the first four projects are and also to more projects as they come along. This mechanism can be tailored to the market as it moves forward and can be fitted in to whatever comes along in the Electricity Market Reform, which we are all looking forward to.

Matthew Farrow: It’s perhaps worth adding, if I may, that obviously most of the CBI’s members are energy users, so price is perhaps a key concern, but we also feel CCS is such a crucial technology for decarbonising our system in a secure way that we have supported the policies which Jeff has outlined.

So, even though a CCS levy will clearly add a slice of cost to all users, we think that is a price worth paying, as it were, to actually get CCS moving. We have lobbied the Chancellor very directly and very strongly on the need to retain all four projects. There’s been lots of press speculation that that might be scaled back. We feel it would be a big mistake to do that, and obviously hopefully tomorrow we will find out whether we have been successful in that. But, as I say, despite the fact most of our members are users and therefore concerned about cost, we think actually the CCS levy is the right thing to do.

Q80 Dan Byles: Just on that, on the cost, do you think there are any steps that the Government can take to try to minimise the potential impact on energy prices for consumers, and of course for industry, because what we are talking about here potentially is us running ahead with developing premiumgrade electricity that is going to saddle the rest of industry with higher energy costs than perhaps some of our competitors who may not be running ahead quite so quickly towards this premium energy.

Matthew Farrow: I have two points to make in response to that. I think the first is that the best way to try and ensure the increase in costs is as small as it can be is to have an efficient market system, and so that is why I think all of us are so concerned about the need to have an orderly process of energy market reform and make sure that we have the right sort of framework and the right sort of policies--that we are not throwing policies at the problem without thinking through the implications.

In terms, then, of the specific cost on industry, our concerns are very much focused around the socalled carbon leakage sectors, so there are sectors such as steel, cement and chemicals which are competing often on price with competitors outside the EU, and, as you say, they are facing potentially, certainly going forward looking at the projections, increases in prices above what their competitors face.

I think the Government has recognised there is an issue here and the debate around free allowances under ETS is a way to try and protect those sectors. I think for the economy as a whole, while the cost will be unwelcome--and all of us dislike paying more--it is a manageable cost. I think there will be particular sectors who are quite exposed, and increasingly we will need to look at specific ways to try and provide a level playing field for those sectors. Free allowances is part of that. The ETS directive allowed Member State Governments to pay compensation for cost price increases and so on, and I think we are going to have to start looking at that sooner or later.

Q81 Dan Byles: Do you have any concerns that this whole approach could lead to reducing the diversity of energy supply within the UK, with the knockon effect that not only do we become more exposed to price shocks in certain types of raw energy, raw materials, but also, of course, we have already talked about energy security, and the less diverse our domestic supply, the less secure we are?

Matthew Farrow: I think again colleagues will have their own views, but my view would be potentially it does; it needn’t necessarily, but potentially it does. Our settled view is that the best way to protect us against energy insecurity is to have this mix of generation-so nuclear, renewables, fossil fuels. If we can get CCS demonstration up and running, that gives us some new coal on the system. We are going to need some gas, clearly. If an EPS led to only certain types, if it made new gas very difficult to build, for example, I think that would be a shortterm concern.

Dr Chapman: This is very much where the reform of the electricity market needs to come in because the nuclear generators will be generating flat out on base load; the wind generators will be generating intermittently; the public will be consuming electricity intermittently; and the fossil-fuel industry has got to fill that gap and has got to be very, very flexible.

What that means is that very few fossil fuel power stations will be running on base load in the future. Many of them will be running at midmerit, i.e. a proportion of the time. Some will even be running for a very, very few number of hours each year, and that is something that we need to look into. But what it means is that those stations, especially those stations running on midmerit, will be even more expensive because they are equipped with carbon capture and storage. So what we have to do is to create an electricity market structure that compensates power plants that have been built specially to be that flexible, and we don’t have that at the moment and that is what we need into the future. We need to be able to pay for the availability of capacity to keep the lights on as well as for the kilowatt hours of carbonfree electricity.

Q82 Dr Whitehead: CCS means gasfired power stations, base load only?

Dr Chapman: You could say that with current technology. It is not always going to be the case. Coalfired power stations used to run on base load. Look at what they do now.

Q83 Sir Robert Smith: But you would say it with current technology?

Dr Chapman: Yes.

Q84 Dr Whitehead: But we don’t know what technology might come to the rescue of base load gasfired power stations running on CCS.

Dr Chapman: And also we don’t know how yet we will improve current technology.

Q85 Dr Whitehead: Isn’t that rather a significant consideration-that if all gasfired power stations for the future are retrofitted with CCS, they, on present knowledge and understanding, effectively become gas versions of nuclear power stations?

Dr Chapman: There are plenty of engineering ideas and engineering ways to make fossil fuel power stations with CCS flexible. The first thing we have got to do is to build some running flat out and make sure that we are on the case to begin with.

Q86 Dr Whitehead: As far as the incentives, however, to get to a position where CCS might be deployed on a far wider basis than the initial demonstration projects, what is clear is that you would need some form of convergence between the likely cost of CCS on that retrofitting and then the decisions that that plant will have to make to enter the electricity market-

Dr McElroy: Yes.

Dr Chapman: Yes.

Q87 Dr Whitehead: -and the likely price of carbon which will cause those decisions easily to be made. What is that convergence point? What is the likely price of carbon that would cause that sort of decision to be made and that power station to operate easily in the sort of market arrangement you have described?

Dr McElroy: I think that is a very difficult question to answer because it will depend on what the price structure in the market is at that time. There is a lot of talk about capacity mechanisms at the moment and how capacity mechanisms might play in. There is the issue of what the flexibility of the fleet is.

Equally, I think the other part of this equation, when we get to looking at what is the role of flexible fossil plant in the longer term, is what happens in the demand side and how responsive can the demand side be, because, if through the rollout of smart metering and decarbonisation of transport and heat and other mechanisms, we can use demand-side response to manage intermittency on the supply side, that can change the whole economics of the supply side as well. So I think it is actually a very difficult question to answer in terms of what price signal you think you would need to justify CCS on a peaking plant.

Q88 Dr Whitehead: I appreciate that that is difficult, and certainly the question of smart management of the Grid, for example, could make a big difference, but I would have thought it would be possible to have a go at a range. Perhaps we could try some ranges. Higher than £20?

Dr McElroy: Yes, absolutely.

Q89 Dr Whitehead: Higher than £40? Higher than £60?

Dr Chapman: That should--

Q90 Dr Whitehead: Okay, so we are talking about higher than £60 and maybe, what, £70-£80?

Dr McElroy: And maybe more than that. It really comes down to exactly what the market structure is at the time.

Q91 Dr Whitehead: So we are agreeing a range of, say, £80 to £100.

Dr Chapman: Well, McKinsey did a report a couple of years ago that came up with a range for the first round of plants of €60 to €90 and later on they would expect the price to drop down to €30 to €50. I think everybody expects that those figures are probably a bit on the low side.

Q92 Dr Whitehead: Yes.

Dr McElroy: And they also reflect base load rather than our peaking capacity.

Q93 Dr Whitehead: I imagine you would probably agree that it is extremely likely that EU ETS by 2020 would be nowhere near that level.

Dr Chapman: But I think if you convert, for example, the cost of providing ROCs to offshore wind into pounds per tonne of CO2, say, then you are still talking about CCS being good value compared to that. I don’t want to put these in competition because they are complementary.

Q94 Dr Whitehead: But it becomes good value at a certain point of a carbon price. That is what I think is the key point.

Dr Chapman: Yes, well, we just don’t have the carbon price to encourage any particular investment in Europe at the moment, do we?

Matthew Farrow: If I might pick up the implication of the question, I think we are all agreeing that one would need mechanisms to ensure decarbonisation into the 2020s. I think my starting point would be let’s not give up on the EU ETS. An enormous amount of effort by Governments, politicians and businesses has been put into ETS. The Phase IV cap has yet to be set. Logically, if you wanted a decarbonised electricity system by 2030, you would set the cap to deliver that, and, of course, for investors it is the expectations of future carbon price that is important--not the price today.

Having said that, if ETS is not delivering that market signal, we are clearly going to need alternative mechanisms. I think my view would be, “Well, let’s see whether the Electricity Market Reform the Government is planning to bring forward can deliver that”, but, if an EPS is needed as part of that in the future, then I think that would be legitimate. I think the CBI has no ideological opposition to an EPS. Our opposition is to a policy where the need is not clear at the moment and may not be needed at all. Let’s wait and see whether we need it at the time as opposed to putting it in now, given that it might have some negative effects.

Q95 Christopher Pincher: As to the design of the EPS, that is crucial if one is going to come. There is a lot of debate about what a good EPS design should be. Should it be plant-based, which could remove from the picture fossil fuel burning plants, potentially? Should it be fleet driven, so should the performance standard be across a particular supplier’s generating fleet? Should it be carbon intensive? What is your view as to the most desirable, or least undesirable, EPS design?

Dr McElroy: If we start at the UK fleet end, which is the energy intensives, etc, I think the issue there is we have the EU ETS, and trying to introduce something within that covering such a broad range is going to get incredibly difficult, and all sorts of potential complications could arise-arbitrages, etc. I think then you are looking at individual portfolios, and I would say that that is very difficult as well because of the nature of the range of individual portfolios within the UK and the very different mix of plant.

So that could actually be quite discriminatory in terms of how it was introduced. Then we get down to plant level. I think there are real issues there, particularly during the demonstration phase, as to what size is the overall plant and what proportion is abated and what is the performance of that abated plant. So it is quite a complex issue in terms of how you would set that, particularly at this stage in time given the state of the technology. Ultimately, I think it comes back to what is it that you are really trying to achieve at the end of this and what is the role of an EPS in achieving that?

Q96 Christopher Pincher: It is entirely possible that if you go for an abatement EPS then you are going to possibly increase the gap in the energy market because you are taking existing plants out of production. They need to be filled possibly by a "dash for gas". So you are either creating a difficulty for your energy security, potentially, or you have that energy gap.

Dr McElroy: I think part of this comes back to the question that Dr Whitehead raised earlier in terms of the peaking plant as well, because that is another aspect which you would have to take into consideration in terms of whether a peaking plant needed to be abated or not.

Q97 Dr Lee: Moving back to the CCS technology and getting it on stream as soon as possible and the potential economic benefits of it, we are talking a lot about reducing our CO2, but, as I understand it, there are some economic benefits here if we get up to speed and then we can start rolling that out. Do you think the Government’s current demonstration programme on its CCS levy will make us technology ready by 2020 for wider deployment?

Dr Chapman: Assuming that we get positive things tomorrow--and I fully expect that we will--then I think the programme at the moment is proportionate. We need to get on with it immediately, and, incidentally, if we do get on with it immediately there is a good chance that we will win about 50% of the capital funding for three of those projects from Brussels. So that is a very good reason to get on with it now. I think it is proportionate for now, but immediately, as soon as we get these plants on track, we need to start thinking about how to roll it out because we don’t have time to hang around if we are going to meet those Climate Change Committee targets.

Q98 Dr Lee: I am struck that the carbon price matters hugely here, doesn’t it? I have been looking at this briefing and the Committee on Climate Change projection of a carbon price at €56 per tonne by 2020, and its current analysis says €22 per tonne. That’s a pretty big difference, isn’t it, trying to work out what the carbon price is going to be? They’ve done that because of the impact of the recession. We are going to have recessions in the future; we haven’t got rid of boom and bust, have we? It sort of comes and it goes. I think with that sort of backdrop, how do you incentivise deployment? What has to happen to the carbon price?

Dr Chapman: That’s why, potentially, we have an excellent mechanism in the levy. Incidentally, we don’t actually know how it will be dispersed yet, and we have some views on that, but we will have an opportunity to share those with DECC another day. But, potentially, there are the bones of a very, very flexible mechanism in which the dispersal can be tailored each year to just the amount that is needed to incentivise CCS across the whole rollout.

Q99 Sir Robert Smith: I have just a quick question on the development of CCS. Are the other barriers being got out of the way fast enough, such as regulations, knowing what you can do in terms of sharing pipelines, and, in the future, of what can be happening under the North Sea in terms of international agreements? Is there enough urgency in that side of things?

Dr Chapman: There could be more. We still have some outstanding. The most important thing that has happened recently is that we have had to look at the liabilities on storage operators, and whilst we have achieved a huge amount of movement with the European Commission in their regulation in this respect, we haven’t got to the end of that piece yet.

So we still have something left to do. In the main, the international maritime legislation is almost there. I think, for down the road, our biggest problem is likely to be that the London Convention prevents transboundary movement of CO2, but that’s not going to stop us storing CO2 in our own territory. We in the UK have a considerable lead on the rest of the world in terms of our own regulation, and so we are in a good position generally, I would say.

Q100 Sir Robert Smith: If we can get the finance for it.

Dr Chapman: It is the finance.

Q101 Sir Robert Smith: Yes.

Dr Chapman: It’s the finance.

Q102 Tom Greatrex: I think we’ve all heard your wariness about an EPS, but I just wonder if I could give you an opportunity to crystallise your point in response to something which has been raised by quite a few respondents to this inquiry-the suggestion that an EPS would increase regulatory certainty. A map would therefore, in turn, support development of CCS. I have got a flavour of what I think your view is on that, but if one of you would like to crystallise that into a succinct point, that would be useful.

Dr Chapman: Matthew, I think you’ve said it before.

Matthew Farrow: I think it’s not clear to me what EPS would add over the existing coal policy, and the concern would be that, if an EPS is there as an instrument which Ministers in the future can tweak and change fairly easily, there will be a concern among investors that will see continuous-or not continuous, but periodic-changes to an EPS in the future which will actually make it harder to judge the value of investments. I think if the Government are to persist with an EPS-and they have said they wish to do so-a priority for them is to try and find a way to reassure investors that it would not be changed in a frequent manner.

I think the other point I would make is that what has made the whole debate about EPS a slightly unusual one is that there’s a consensus among business in the energy industry that we need market reform and new market mechanisms to enable the lowcarbon investment to come forward, and there is a lively debate in industry about the combination of instruments and about floor price capacity mechanisms, obligations and so forth. The Government has said, "We’ll consult on all those but, regardless of the consultation, how it’s written, the responses, how the debate goes, an EPS is part of the answer." I think our concern is, "Well, wouldn’t it make sense to look at all the mechanisms and how they might interact?" If everyone agrees EPS is part of the answer, that’s good and that will reassure investors, but why prejudge your own consultation?

Q103 Tom Greatrex: Then is your concern more about timing and how things fit into other mechanisms than about the concept of an EPS at all?

Matthew Farrow: That is the prime concern. I think we would expect the Government in the consultation to have things to say about an EPS, and, as I say, we are not ideologically opposed. We can’t see at the moment how it would actually add value to policy without creating uncertainty, but I think we are willing to have that debate with the Government. As I say, what seems slightly curious is that the Government has said that, regardless of all the other possible mechanisms and how they might be used, an EPS is always going to be part of the answer.

Dr Chapman: Mr Greatrex, I wonder who has been suggesting that EPS would bring regulatory certainty. Would they have been investors or would they have been people who are more observers than investors? I think what you have got here are representatives of investors saying that it doesn’t.

Q104 Tom Greatrex: But Dr Chapman, your organisation said in your submission that the introduction of an EPS in California had positive outcomes for CCS development. So is there a difference between what you are arguing about for the UK and what happened in California and what are the reasons for those differences?

Dr Chapman: I think there are peculiarities in California in their regulatory regime. EPS seemed to work in a certain circumstance. I am not even sure that it would work as a general rule rolled out even in California, but in California there are lots and lots of associated support mechanisms that are bringing forward, for example, the BPsponsored project.

Q105 Tom Greatrex: Right. So again it is about going back to the point you were making before then. It is about what other mechanisms exist in the environment long term.

Dr Chapman: If the financial support isn’t there, industry will not invest. You have to make a return on your investment.

Q106 Tom Greatrex: Okay. Just quickly on investment decisions. I think the CBI submission, and others, suggested that once CCS is proven then investors will use CCS technology without any form of mandation. What kind of fiscal and regulatory framework would need to be in place for that to be the case, do you think?

Matthew Farrow: Again, I think this comes back to the Energy Market Reform. It could be that the carbon price is sufficient to drive that, and, as I say, this comes back to the Phase IV cap and how that is set. It could be that some combination of capacity mechanisms or lowcarbon obligations, perhaps, like a reform of the RO, might be the way to drive it.

As I say, I think our view is let’s have a look at the Energy Market Reform and see how we can best use that to get the initial investment in nuclear and renewables and so on to gather momentum. Let’s aim to make ETS then the overall framework for the 2020s with a tight cap that drives investment in the right way. If ETS is not providing the right signal, and for whatever reason the other mechanisms that are put in place are not either, it would be legitimate at that point to look at an EPS--this would be my view--and see if that is the final piece of the jigsaw. But, as I say, it is not obvious at this stage what an EPS would add to the situation.

Q107 Albert Owen: Just to keep on the theme and pin you down on some of the answers that you have given earlier, you say about "other incentives" and you mentioned that you were looking forward to the Electricity Market Review and possibly carbon floor price had been a mechanism. Do you see that as complementary? I heard what you have just said in your previous answer that "maybe if these things don’t work," but that is a bit of a risk, isn’t it? You want certainty. What I am saying to you is, is EPS necessary with a carbon floor pricing, given how you understand the carbon floor pricing mechanism might develop?

Matthew Farrow: I will try and give a sense of our general member view on this and then again colleagues might want to add some specifics. We published a report in the summer last year called “Decision Time” which looked at the whole question of decarbonising electricity and energy security.

What we said in that report was that a consensus had emerged among our members, collectively, users and suppliers, different generators and so forth, that the current market wouldn’t drive the investment in a lowcarbon generation and we needed some reform to the market to do that and there were various options which could be looked at. A floor price is one; lowcarbon obligation is another; capacity mechanisms is another. We didn’t single out EPS because certainly no member was saying to us that would make the key difference. What we also said was different companies have a slightly different perspective or view about the right combination of mechanisms. My sense is, at the moment, the view is that a floor price alone would not be sufficient but it would probably need to be applied-

Q108 Albert Owen: Sorry, Mr Farrow, my question is: do you think an EPS and a floor mechanism-a carbon floor price-are complementary?

Matthew Farrow: Would that drive? Not necessarily, because, as colleagues have said, an EPS by itself doesn’t drive investment. It simply limits certain forms of investment which are limited already. So my view would be no, but, again--

Dr McElroy: I would agree with that point. I think on carbon floor price, the general view certainly within the electricity sector is that on its own it’s not sufficient to deliver and it comes back to the issue of, if you were going to set a carbon price, a carbon floor, what would be a politically acceptable level? I would suspect that the level at which you would need to be able to set it would not be politically acceptable.

So the issue is how can you target efficiently the design of the market to bring forward that investment? It comes back to the point that Matthew made--that an Emissions Performance Standard is not an incentive for lowcarbon technologies. Therefore, what we are saying is that you need something in addition to a floor price, and the general view of the electricity industry is that that needs to be something which is market-aligned, which takes you into areas such as a lowcarbon obligation of some kind.

Dr Chapman: I think you must bear in mind that there are kind of floor price proxies in a way in the renewable obligation, and in this context the levy will be a floor price proxy. To actually put a floor price on carbon in the UK is a unilateral act within the 27 countries of the EU. I am personally not sure how that works. But in every country in the EU, pretty well, there are carbon floor price proxies, whether it is feedin tariffs, renewable obligations or whatever.

Q109 Albert Owen: That answers it, and I know Dr Whitehead wanted to come in on that one, but can I just again pin you down and arrive at a conclusion that you think EPS is a disincentive? Let us be clear about that. That is what you are telling us in a roundabout way?

Dr McElroy: It is certainly a disincentive at this stage in time, yes.

Albert Owen: Yes, thank you.

Q110 Dr Whitehead: You are looking forward to the Energy Market Review and one of the big issues, I guess, with the Energy Market Review, as has already been mentioned, will be the question of how the energy market will change in order to incentivise the emergence of peaking power plant in a way that has assumed to be a part of the market mechanism itself currently, which is that inefficient plant retires and then becomes available for peaking within the existing market system.

That will not be the case in the future and therefore, presumably, part of the process of the review would be how to incentivise, as it were, that plant to come on stream just for peaking purposes. You have suggested that, if those plants are abated, not only can’t they be easily available for peaking but perhaps there should be specific exceptions within the review for that to happen. Is that your view?

Dr McElroy: It comes back to, I think, the point I made earlier in exactly what is the role of peaking plant in the market in 2030? I think that is very hard to describe, and to actually develop market incentives for that now, I would suggest, is very difficult and probably-given that no market arrangements have survived more than ten years or so-premature. I would very much say that the priority of the Electricity Market Reform is to get investment in lowcarbon technologies underway--that is the absolute must--and to get on the path to 2030 we have got to get CCS demonstration up and running. We need first the next generation of nuclear. We need to make certain that that is the priority for delivery in terms of the Electricity Market Reform.

Q111 Dr Whitehead: Do you think part of the review, however, in terms of that question of how--and I mean a combination of developing abatement and getting peaking plants into the system--requires, as has been suggested already this morning, an extension of the levy beyond the four demonstration projects so that, as it were, the difference between what the EU ETS price comes out at, what a carbon floor price might look like, the price at which it becomes feasible to consider incentivising CCS on the basis of price alone, that gap might be covered by a continuation of the levy? And if that is the case, would the levy as it presently stands cover that gap even if it is extended?

Dr Chapman: If we take ourselves forward again to 2030, I would just like to get over this concept that people will be buying decarbonised power; it will be a premiumquality product to that extent and they will be paying a bit more for the power because it is costing more to produce decarbonised power than power with CO2 emissions. At that time, if we and the rest of Europe have decarbonised our power industry, then there won’t be very many emissions being traded in this business. So the impact of the ETS at that time will not be even as it is now, when it is very low; it will be something different. So we have got to think about that and we have got to plan for that, and that is where the Electricity Market Review comes in.

Q112 Dr Whitehead: Yes. In a sense that takes us to the starting gate but what does it actually do? What might it actually do in order to put those, in a sense, assumptions into place which enable the outcomes that you have described to actually happen?

Dr Chapman: I think, in my opening statement, I said that at that time in 2030 we will need an EPS just to say, “This is a decarbonised power station.” There will have to be incentives put in place between now and the magic 2030 date to encourage the investment that takes us there.

Q113 Dr Whitehead: And that might be a CCS extended way beyond the--

Dr Chapman: That might be the CCS levy. It might even last that long, with a gradual winding down. As the electricity price comes upwards to meet it, the CCS levy will wind down.

Q114 Dan Byles: Do you think under an EPS we will ever see a new coalfired power station built? You actually mentioned earlier, you very briefly said, there could be some small new coal, or you did actually allude to it.

Matthew Farrow: Yes. I think what I was saying was that under the current policy, where you would only permit a new coal station if it had, is it, 300 MW, whatever the precise level is, of CCS demonstration, and at the moment there is only funding for, at the most, four new CCS demonstration plants--and they may not all be new; some will be retrofit-- therefore under existing policy one wouldn’t see unabated coal built without any CCS demonstration and not a lot of new coal even with CCS demonstration. Obviously an EPS could reinforce or enshrine that in some sense in a new regulatory mechanism, but I think my point was that the existing policy, which I think is well understood by the industry, and the sort of permitting arrangements behind that already ensure that.

Q115 Dan Byles: But do you think there is a risk to that? I'm getting back again really to diversity and energy security. Do we need a certain percentage of coal production in our mix going forward and do we need to try and make sure that the system we put in place doesn’t stifle development of new coal?

Matthew Farrow: Yes, which I think comes back to the importance of having all four CCS demonstration plants. Our view is coal is a very useful element of the system, for all the reasons we well understand. Equally, large amounts of unabated coal into the 2020s clearly are incompatible with carbon targets, which must be met. So the reason we have been lobbying so hard recently to try and preserve all four CCS projects is that that gets some coal on to the system, with CCS demonstration, and then, as we all hope, if the demonstration is successful, costs start to come down, and possibly, with the CCS levy extended, coal can remain a component of our energy system in the future but with CCS.

Dr McElroy: I think, as the Association of Electricity Producers, we would see coal as having a role to play in the future. It comes back to the point that the priority is demonstration because, without demonstration, we don’t have a technical option and, without commercially-available CCS, then the opportunities for coal are severely limited post 2020 and EPS doesn’t get you there. It is actually demonstrating and making certain that the technology is commercially available.

Dr Chapman: CCSA is obviously not aligned with either gas or coal but we do believe that it is important to have a mixture for energy security, and I would just like to remind everyone that there is no better energy store than a big pile of coal and it has been proven in the past.

Dan Byles: And we’ve got a lot of it.

Q116 Dan Byles: Briefly on this filling the gap that we have alluded to, some people have suggested that perhaps an EPS should not apply to any gasfired power stations built before 2020 in order make sure we don’t disincentivise the "plugging the gap’"construction, as it were, but that the downside to that would be the potential "dashtogas" where we will lock in a larger amount of gas capacity that is not subject to EPS. Do you have any thoughts on that?

Matthew Farrow: I think, as perhaps Jeff said, all new plants have to be “CCS ready” so the option of retrofit is there. I think it would be extremely risky to prevent newbuild gas being an option for the market given, however quickly we are able to press ahead on new nuclear, which the CBI supports, or renewable rollout and so on, we’re clearly going to need, I think, some additional capacity beyond that. Given the coal policy we have all been talking about, newbuild gas is the only obvious way you could fill that hole, as it were. So if an EPS came in which prevented that, it is very hard to see how we could build sufficient new capacity to ensure energy security. The question is more about, can we demonstrate CCS and then can those gas stations be retrofitted at some point in the 2020s?

Dr Chapman: It just exemplifies, doesn’t it, the urgency to get on and get some experience of CCS so that we learn from our mistakes and we know how plants have got to be built into the future so that they don’t become locked in?

Q117 Sir Robert Smith: I should remind the Committee of my entry in the Register of Members’ Interests as a shareholder in Shell who are involved in CCS projects in this country.

One of the concerns some people brought forward is the legality of an EPS depending on how you read the European Directives. Have any of the witnesses got any views on the impact of European Directives on the legality of EPS?

Dr McElroy: I would suggest that it is a bit of a minefield in some respects. I think there are two issues. We have moved beyond IPPC. We now have the Industrial Emissions Directive, which is about to be adopted by the Council at some stage in the relatively near future. There is some very interesting wording in the Industrial Emissions Directive which effectively says that where emissions of a greenhouse gas from an installation are specified in the relevant annex of the EU ETS Directive “in relation to an activity carried out in that installation, the permit shall not include an emission limit value for direct emissions of” greenhouse gases “unless necessary to ensure that no significant local pollution is caused”.

I would have to suggest that in the case of carbon dioxide local pollution is a bit of an unusual concept in that the impacts of carbon dioxide are at the global level. I think there are also issues around the Lisbon Treaty as well in that does allow Member States to go beyond EU requirements, but I think it is the question of being able to demonstrate the environmental benefit and the case for environmental benefit of going beyond. Of course, in the case of carbon dioxide unilateral action to restrict CO2. it effectively means that that CO2 is emitted somewhere else in Europe because the cap is the cap. So I think there are some challenges around EPS at the EU level, but as they say the devil is in the detail.

Matthew Farrow: I would just like to add to that, if I may. I don’t know the detail of this, and who knows, but the fact that there is some uncertainty about it reinforces our view that we should only be introducing new policy mechanisms if there is a clear need for them, and again it comes back to that uncertainty point. If there is some doubt about the legality and how it would be overcome--and perhaps it can be overcome, I don’t know--again it just adds a more complex picture for investors.

Q118 Sir Robert Smith: Who do you think would take a legal action?

Dr McElroy: Who would take legal action? It could be the European Commission.

Dr Chapman: Sir Robert, we included for this in our original submission and then we withdrew it after we were advised that there was some controversy over this, and we don’t know where it stands. I would suggest that the next panel might be able to help you.

Q119 Sir Robert Smith: Just returning to what Dr McElroy said about the rather fundamental economic thing, if you are in an ETS, anything you do unilaterally to affect the carbon makes no difference to the European emissions because of the trading of the ETS. So is there not some fundamental reform of the ETS needed if we are going to get anywhere?

Dr McElroy: I think, as Matthew has already alluded to, what we need to see is a more robust EU ETS at European level. There’s the whole issue of, what is the cap? Going forward, there is very little visibility beyond 2020--in fact no real visibility beyond 2020-- and the simple fact of the matter is we are sitting here talking about the CCS investments and the lead time for those. We are very much talking about investments which will come on stream after 2020, and I must admit, at the moment, there is just no visibility on carbon market from an investor’s perspective.

Q120 Sir Robert Smith: I have one final EUrelated question. We have talked about reforming the electricity market here. We have been, collectively, as a country at the vanguard of liberalising or attempting to liberalise the rest of Europe. Have we gone so far in terms of the fundamental rules of Europe, even if they are not being applied by other countries, that it might be difficult for our own market reforms to be restructured?

Dr McElroy: I think there is an issue around how it is done and how compatible that is with the EU energy policy. Again, it is a complex area and difficult but it is certainly something that officials are looking at fairly closely in terms of Electricity Market Reform.

Chair: Thank you very much for coming in. We look forward to seeing you again.

Examination of Witnesses

Witnesses: Charles Hendry MP, Minister of State, DECC, and Jonathan Brearley, Director, Energy Markets and Infrastructure, Energy Strategy and Futures, DECC, gave evidence.

Chair: Minister, welcome. You have heard some of the evidence. Would you like to introduce your colleague, perhaps?

Charles Hendry: Thank you. I am here with Jonathan Brearley, who is heading up the process for us--the Electricity Market Reform Process--which we will be formally consulting on later in the autumn.

Q121 Chair: What role do you see for coal in Britain’s energy mix in the future?

Charles Hendry MP: We see an important role for coal. We think that the future will involve a range of lowcarbon technologies. We certainly see a role for nuclear, and, as we have always said, that would be without subsidy. We certainly see an important role for clean coal – coal with CCS. We see a role for renewables on a large scale being taken much further than we have seen before, and we certainly see some continuing role for gas as well.

Q122 Chair: So you do envisage some new coalfired capacity being built in the UK?

Charles Hendry MP: Yes, very much so. We think that there is fantastic potential for coal with CCS in the United Kingdom. We think this is a technology where we should be leading the world. We have 60 plus years of coal supplies which are readily accessible. We have some of the best sequestration sites in the North Sea. We have the skillset for people who are used to working in those hazardous conditions and we think this is an area where we should be leading, and therefore we think that actually provides a great opportunity for a renaissance of coal in the UK.

Q123 Chair: When you say you see a "fantastic potential for coal," is it not the case that we don’t yet know how much it is going to cost to produce coalfired electricity with CCS?

Charles Hendry MP: I think you are absolutely right. I think there is a big challenge over all of the areas where we are looking to secure new investment. I think we are facing the biggest energy challenge of our lifetimes. We have to secure £200 billion of new investment in the energy infrastructure over the next 10 to 15 years. On nuclear we don’t know for certain that companies would choose to invest in Britain. On the renewables, clearly we still have to get masses of international investment, particularly on the offshore wind side, for that to happen and that is not clear. On coal, with CCS, there’s an enormous amount still to be proven. We have seen that the individual elements of that chain can work, but they haven’t yet been put together at scale, and so there could be technical problems but we certainly don’t have an absolute handle on what the cost of that would be.

Q124 Chair: So we might find in five years’ time, when we have got some evidence from the experiments, that the actual price of coalfired electricity is astronomic?

Charles Hendry MP: It will be higher--clearly much higher-- than coal without CCS but we do believe that it has an important part to play in the mix. I think there is an issue of energy security here. We have an abundance of different sources of supply which we can use, and therefore we don’t want to be unnecessarily dependent on any particular one of those. Therefore, if we have the potential of taking this forward, then we believe that we should do. We believe that, from the evidence we have seen so far, this can be done at scale. We believe that this is absolutely of huge importance globally because of the role which coal will still be playing in energy and electricity generation in 2030 to 2040, and therefore to try and make sure this works and to capitalise on the potential lead that we have is something that we should be driving forward.

Q125 Chair: So fossilfuel-powered electricity is crucial to meeting Britain’s needs from the security point of view?

Charles Hendry MP: Absolutely. We would expect it still to be that 70% of our electricity was from fossil fuels in 2009. We would expect it still to be a very major player in electricity generation by 2020 to 2030 and beyond, especially as we would expect to see perhaps a doubling of the volume of electricity which is necessary by 2050 as we decarbonise transport and we decarbonise heat and we see greater electricity generation required to make that happen.

Q126 Christopher Pincher: Minister, you said that you anticipate that the cost of electricity will go up because the cost of CCS is as yet unknown. How do you think that is going to feed into consumer prices and do you see the way that consumer prices will be kept down will be as a result of greater energy efficiency in the home or a greater mix of supply of energy?

Charles Hendry MP: In looking at these issues, the comparison is always where we think the price of oil is going to be, and if the price of oil is going to be $90 a barrel, which is a general working assumption, then some of these technologies are more expensive than relying extensively on oil and gas. But if that price goes up and the Americans, for example, assume a much higher price, with oil and gas in the mix, then some of these alternative technologies become relatively cheaper. So, in looking at the impact on consumers, one has to look at a comparative approach in that respect.

All of this is incredibly expensive--as I say, £200 billion of new investment, which is necessary. That is essential for our energy security. That is essential if we are going to keep the lights on and we have to find that investment. Therefore, we have got to find ways of mitigating costs for consumers, and there are two primary ways in which we are trying to take that forward.

The first is rolling out smart meters much more quickly. That does not of itself save electricity, but it does enable consumers to choose a more favourable tariff and to look around and to choose how they should optin to the tariff which suits them best and which is cheapest.

The second is through energy efficiency. We have some of the least energy-efficient homes in Europe. The centrepiece of the Energy Bill coming forward this autumn will be the Green Deal, which will systematically go through the housing stock to try and improve the energy efficiency, roof installation, cavity-wall insulation, and new boilers, looking at the sort of ways in which we can significantly reduce the number of units of electricity which people will be required to consume.

Q127 Christopher Pincher: But there will be an upfront cost in that, will there not, and that cost will need to be passed on?

Charles Hendry MP: There’s no upfront cost in that at all. The formula which we are looking at is a “pay as you save”. So we’ve got high-street retailers, we’ve got financial institutions, which are looking to come into that space. So the consumer will pay for nothing upfront. But the key element is that there will be a charge attached to the electricity bill of that property. So whoever lives there in the future over the next 20 to 25 years will pay back the cost. But the cost of the work should always be less than the total savings. So the consumer gets the benefit from day one but ultimately the cost is recovered over a 20 to 25-year period.

Q128 Dr Lee: I have a quick question. It is pretty obvious that we are going to rely upon gas and coal for the next 20odd years. Do we get any benefit when it comes to meeting our CO2 obligations from sourcing our gas from a country that produces the gas in a more CO2friendly manner? I cite in one fact that every year Russia flares more gas than Norway produces. Therefore, if that’s the case, if we source our gas from Russia, by just buying it from them we have already emitted a huge amount of CO2 that we would otherwise not be emitting by sourcing it from Norway. Is there anything within international agreements that we would benefit from sourcing our gas, say, from Norway instead of from Russia?

Charles Hendry MP: All the countries which are flaring are looking at how they can reduce that, and Russia is actively engaging with British companies to try--and others--to see if they can help reduce the flaring. Part of the fact is they have an incredibly outofdate pipeline infrastructure and that needs to be updated as part of that process going forward. We would expect to import from a wider range. We are net importers of gas now. That will become increasingly the case, and perhaps by 2020 certainly over 50%--perhaps as high as 70%--of our gas will be imported. We want to be securing those contracts or more longterm contracts. What we haven’t done, I think, in that is looking at how the carbon emissions stack up in the different countries and the different approaches which they are taking. I think that is an area which can be explored. But, without doubt, we are, as I say, seeing real drives in those countries to try and reduce the flaring and the CO2 emissions.

Q129 Dr Lee: I guess my point is, is there space here for a new international agreement whereby gas produced by those countries that have ageing infrastructure and therefore flare more is actually more expensive, because it all comes back to the cost? We were talking about the investment you are talking about. At the moment Norway produces the cleanest gas and yet you pay the same for the gas, do you not? Well, I know we have different arrangements with them, but essentially, on the open market, gas is X amount of money, and it strikes me, and we have heard from the previous panel, that actually it shouldn’t be like that. There should be a premium gas, that you pay more, because then you actually get back the return on your CO2 emissions. I'm sure Iran has an ageing infrastructure and they’ve got huge amounts of gas, and in the future we'll be importing from Iran, will we not? Is there not a danger that we can encourage poor production--an inefficient production of gas--if we don’t actually deal with this problem with flaring?

Charles Hendry MP: I think there are two separate issues. In Russia, where the gas is flared off, it tends to be where the gas is produced as a byproduct from oil, and they haven’t then got the infrastructure in place for capturing the gas. They are looking to address that, but where they are actually exploring for gas then they do capture that gas. It is not the most efficient system in the world, but actually there is a difference between where it is gas exploration for gas sales and where it is gas as a byproduct of oil exploration. As I say, there is a drive going in this direction the whole time, but as we see more and more countries developing their gas infrastructure, particularly with the development of shale gas, then how one monitors that and exactly which part of their gas infrastructure it has come from and therefore what were the associated carbon emissions could be extremely difficult to identify. But it is certainly an area that we could explore further.

Q130 Albert Owen: Minister, you made clear in your earlier response that you saw clean coal as an important part of the rich energy mix for the future, and taking the point of gas that was just mentioned, you heard what the CBI said earlier on--you had just come in--that they had been lobbying hard for the four demonstrations of CCS, for obvious reasons. Do you envisage, if that doesn’t go ahead, that we could be making the same mistakes as we made in the past by not investing in nuclear, for example, and then the gap has been plugged by a dashforgas? They have been lobbying the Treasury hard for the four projects. Do you see the four projects as being essential otherwise we could find ourselves in a similar position of our recent past?

Charles Hendry MP: I think part of the challenge here is timing. With the best will in the world, new nuclear plant can’t be on line before 2017/2018. Commercial scale CCS cannot be on line before the end of the decade or just beginning to come through. Some of the most exciting areas of renewable technologies, marine and tidal, would be in the 2020s rather than before then. But we have got an energy challenge which comes more quickly than that, not as early as had been thought because the recession has depressed demand, but we still need to see new infrastructure being built, and the one which can be built most cheaply and most quickly is gas. If you look at the investors’ commitment, 12 GW of the consented 20 GW is for new gas plant. So there is a need for new gas to see us through this period, but people will only invest in gas if they can see a longterm future for the plant. They won’t build it for an interim technology where they expect it to be closed down in ten years.

We will certainly take forward the development of nuclear, but we recognise there’s a realistic limit to how much that can deliver, and in the National Policy Statements yesterday we set out what we think can reasonably be done by 2025. Coal with CCS--we think we could get to four plants. That is the ambition--four plants by 2020--and then to see a further rolling out of that later. But it still leaves a challenge in between.

Q131 Albert Owen: I fully appreciate that. I am trying to be specific. We went for the dashforgas and nuclear was put back by previous governments of all colours, and that was a mistake in the dashforgas. Isn’t there a danger of repeating that if we don’t invest now in these four demonstrations?

Charles Hendry MP: We are looking to take forward the first project. We have brought forward some of the work on the projects 2 to 4. We have done a sounding exercise to find out the sort of projects which industry would be keen to invest in and to see taken forward so that we have got a better idea of how to phase the next competition. So I think we are taking that as fast as we can. If there are things which we can do to make it happen faster we certainly will, but there is a natural limit to the speed at which this technology can be physically constructed, tested and developed. But I do think we are going to have to see new investment in gas in the meantime if we are going to have the security of supply which is necessary.

Jonathan Brearley: It might be worth just adding that the rollout of CCS in the 2020s is going to be as dependent on the market reforms that we are putting in place as it is on the demonstration programmes. That is one of the things we are thinking through when we are designing the relevant incentives in the market formulas.

Q132 Albert Owen: Sure. I understand the supply side and the 2020 plus, but what I am saying is the disincentive to invest now. That’s what worries me--that gas fills the gap and then the investors go elsewhere or develop in other technologies.

Charles Hendry MP: There is a scramble for international investment in all of these areas, and the companies which would primarily be looking to do it are international companies. They’re looking at global opportunities. So we have to make the United Kingdom more attractive for them than elsewhere. There’s no reason why, by right, they will simply come here. We have got to put a better package together.

Q133 John Robertson: There are a couple of things there, Minister, that you have raised. Can I just ask a short question. You were talking about the costs for the energy saving projects you are going to put forward. How does that affect the bills of people who basically can’t afford the bills they have already got? Is it going to be that the poorest and the worst off social housing is going to be forgotten or are you going to put something in its place to make sure that social housing is looked after?

Charles Hendry MP: We have extended the requirement, and building on the work indeed of the last administration, on fuel poverty to try and make sure we protect vulnerable households. We are looking at how you can prioritise some of the work, for example, on smart metering, on energy efficiency, so that we target the homes of those who are perhaps most vulnerable and most likely to be in fuel poverty so we can try and help them first. We are looking very specifically at how we can help those who are most vulnerable.

Q134 John Robertson: I have concerns there, but over the years we will develop this argument, I am sure. Can I talk about the new power stations that you are talking about. The nuclear ones, whatever gas ones there are and future coal ones, all of which will be much more efficient and will have higher outputs and therefore we will have a problem with the National Grid in not being able to cope with the kind of power that is going to come out of there. Who is going to pay for the upgrade of the National Grid to make sure that all these new power stations have the facilities required?

Charles Hendry MP: At the end of the day, things can either be paid for by Government or they are paid for by consumers. We are, I think, suffering now from a lack of investment in much of this infrastructure over many years and that now has to be made up for. Ofgem suggested recently in looking at the Grid infrastructure that £32 billion is necessary. But I think we also have to recognise there is a fundamental change, which is that, historically, the big old power stations were built either where the fuel/coal was available or close to industrial centres. We now need to build new generating plant where it is geologically and geographically sensible to do so. So nuclear will be coastal; CCS will predominantly be coastal; offshore technologies, inevitably, are coastal. We are looking at the whole range of the ones which are available. We have actually got to have a totally different map of where we are generating electricity, and people will only invest if they can get their power to market. So the transmission issue is absolutely central to the success of this.

Chair: I think we'd better come back to Emissions Performance Standards. Laura?

Q135 Laura Sandys: As you say, investment is absolutely crucial and we have just had three representatives of investor groups here talking about the EPS and how that doesn’t seem, from their perspective, to give them a platform for longer term investment and it creates insecurity in that particular environment. Also, Sussex University say that we are now proposing multiple layers of regulation and of mechanisms that could be a sort of cocktail that actually creates conflict in behaviour. I just wonder whether we feel that there aren’t mechanisms that exist already that could be used or tightened rather than introducing yet an additional one through the EPS?

Charles Hendry: I think the Electricity Market Reform process--and I will ask Jonathan to build on this as well--is developing new mechanisms which will steer us towards lowcarbon investment. So the price on carbon, capacity payments to make sure that either we have backup capacity when it is required or we can find ways of managing demand, shaving demand at times of peak demand, other mechanisms, which I think are going to be necessary, as the previous speakers were saying in order to secure investment, are all going to be part of that process. This is the most fundamental reform of the electricity market in a generation. Some people, I think, don’t understand how radical this will be but it will very significantly change the way in which people are remunerated for building plant.

The EPS is also part of that process, and the reason why I put it into that process is that, if we put the EPS at the right level and people can see a longterm picture of what is expected of them on environmental grounds, then they can invest in the knowledge that that is what it is going to be. That is why we have actually chosen to do this at a very specific level rather than just a permissive power for ministers because that gives no security because it’s a Statutory Instrument and it can be changed. So actually looking at how we build into the legislation the levels at which it will be set I think is a better way of addressing that. Without any doubt, if we set it at the wrong level, it will drive away investment and the easiest way of meeting an EPS is not to build any new plant and therefore you have no problems with it. So we have to set an EPS at a level which gives security, and longterm security, to investors and so we think this actually can help to drive investment decisions because they know around the world that governments are looking at this. Actually, by being a leader in this area and saying, “This is how it will be and this is how it’s going to look for decades ahead”, I think actually gives them a significant amount of certainty.

Jonathan Brearley: I agree. If you look back before we started the market reform process, industry itself was saying to us that the existing incentives and trading arrangements in the current electricity market are already providing uncertainty and already making it hard to invest. So the process itself is designed to put together a series of financial incentives with a regulation like the EPS to give clarity to investors going forward. The Sussex University diagnosis is something that, I think, in a sense, of the current system we would agree with. What we want to do is design a reform process that is going to make it much, much clearer to investors what their returns will be for different types of investment. Now, as Charles has said, the EPS is part of that because it gives a very, very clear signal to investors what should happen in the future and essentially what they should be planning against, and that has to be there seen alongside the various changes we might make to the financial incentives, including the things set out in the Coalition Agreement.

Q136 Laura Sandys: But you have a range of different mechanisms, whether it be carbon floor pricing, whether it be the ETS and other mechanisms that you can look at. Is this more of a message or a mechanism, because in many ways we’ve got a situation where you could end up with conflicting behaviours reacting and responding to all these different incentives and sanctions? With regard to the other issue about the longterm setting of the EPS, which I know the investors are very keen to see, does that not also create a lack of flexibility as we reach better carbon emission targets and as the technologies come on stream? You don’t need that greater flexibility, or do you?

Jonathan Brearley: On your first point there are a number of different instruments you will need. We are trying to tackle an energy system that ten or fifteen years ago was simply just much, much simpler. You had security of supply and climate change was an issue but certainly not of the prominence and we didn’t know as much about what we would need to do, particularly within electricity. In a world where you are trying to double electricity and in a world where you’re trying to decarbonise that at the same time as well as maintaining security of supply, you need different instruments to do that. One of the reasons we are working up the EPS as part of the market reform process is that those things do need to fit together, and a risk of the process is that those provide reverse incentives, which is why we are so keen to make sure that we do these things in parallel and design both our financial incentives and our regulations together. On flexibility, all I would say is that you have to trade off a very clear and certain signal for investors who are making huge investments against the framework that we put in place with the need to be flexible over time and that is something we will consider further in the consultation.

Q137 Sir Robert Smith: Isn’t the EPS coming ahead of the market reforms, though?

Charles Hendry MP: No, it will be part of that same package so that there is a carbon price consultation, which will be led by the Treasury, and then the wider market reform package, which will include the EPS, will be part of that process.

Q138 Albert Owen: You’ve partly answered that, Minister, but you have heard what the potential investors and representatives are saying today. They feel--and to take Laura’s point up--that there are enough tools, if you like, for investment to come in but the EPS you’ve already made your mind up on, that you are going out to consultation and they may respond and say, "Other mechanisms, right", and that’s going to be ignored and EPS is just going to come in and that will be a disincentive. How do you respond to that?

Charles Hendry MP: I think there are specific areas that can drive investment. We have heard concern about whether something could be applied retrospectively, and a statement of saying, “Look, an EPS will only apply to new plant after certain dates,” then that gives a great deal of security to investors saying, “If I build a new gasfired plant now then I know what is going to be expected from me for the longer term.” I think they are now going to be looking, and there are other countries in Europe which are looking, at an EPS as well. So this is something which is out there globally. We have seen a number of states in the United States putting them in place. So until there is clarity on these issues, then, by definition, there is uncertainty. What we are trying do is to put in place a mechanism which will enable them to go to their boards and say, “This is the longterm requirement. We think we can live with that and therefore it makes our investment all the more secure.”

Q139 Christopher Pincher: You have mentioned one item which might give some clarity to the uncertainty that investors have around EPS and that is that retrofitting might take place after a certain point, but aren’t there other elements of the EPS design that need to be made clear to ensure certainty? So, for example, are you going to go for a carbon-intensity EPS which is going to essentially drive out certain fossilfuel power stations or are you going to go for an emissions target which might mean that they could operate for a certain period each year? Is gas going to be exempt? People will need to know what the EPS design is going to be to define for themselves whether they think they have a most desirable or least desirable EPS. So I wonder what your thoughts are on the design of EPS.

Charles Hendry MP: This is precisely the purpose of the consultation exercise--to make sure that we address that in the right way. The Committee on Climate Change has said that we should now look at an EPS on gas, and therefore we are thinking how best to respond to that and that will be part of the consultation process. You are absolutely right--there are very different ways of doing this. It can be done on an individual plant basis or it can be spread across a portfolio of plants. That has an advantage that a portfolio makes clearer driving down of emissions something which will happen, but if you are Drax, for example, with a single plant which is very carbon intensive, then how do you meet that? So there are challenges to that approach.

We also recognise that to meet an EPS one is going to have to have some degree of carbon capture, but in order to start up the plant you need to actually operate it without the carbon capture because there isn’t enough power to operate the plant until it is running. So you have got to have exemptions practically for periods like that. One also needs to look at whether there are particular times of very high demand where one wants all of the capacity in the country to be working at full output and therefore you might want to say at certain times you would not have to run the CCS plant because that will use up too much of the power which is available. So there is a very significant number of issues which we are looking to address in the questions which are posed in the consultation exercise. But, without any doubt, you are absolutely right that this is fundamental to how it will be perceived by investors.

Q140 Christopher Pincher: What will the timetable be for that consultation exercise?

Charles Hendry MP: We will be launching it in the autumn. I know autumn in governmentspeak can occasionally mean 24th December, but it is certainly going to be before that. It will be a threemonth consultation process leading into a White Paper in the spring, and the White Paper will be clear about the intentions. There will be legislation needed subsequently, but from when the White Paper is in place then people will be very clear about the intention.

Q141 Dr Whitehead: Could I get the process right? There will be no legislation on EPS coming forward in the Green Energy Bill.

Charles Hendry MP: That is correct.

Q142 Chair: And there will be no legislation coming forward in the second Bill that is due in the spring of next year?

Charles Hendry MP: We are not expecting a second Bill in the spring of next year. We are expecting that there will be a Bill towards the end of next year or thereafter which would then include measures on the EPS and the market reform elements. So in the spring of next year it will be a White Paper which provides the market structure which we plan to put in place following the consultation.

Q143 Dr Whitehead: So it is your intention to integrate the outcome of the consultations and discussions on Energy Market Reform and follow that with EPS legislation, which is informed by what happens with Energy Market Reform consultations?

Charles Hendry MP: Yes.

Jonathan Brearley: We expect other aspects about Energy Market Reform to also require legislation, so, for example feedin tariffs that were announced in the Coalition Agreement. What we would like to do is to discuss those in the consultation together, set out our plan in the White Paper together and then to legislate for these things together, because developing them at the same time and making sure there are no unintended consequences, coming back to the previous question, is something that’s incredibly important in terms of getting all of this right.

Q144 Dr Whitehead: I return to some extent to some previous concerns about how Energy Market Reform and EPS do indeed work together, and that is that, as has been recorded, Energy Market Reform will need to deal with a number of new issues concerning, for example, how new peak capacity comes on stream--capacity payments perhaps is a part of that process--and it will presumably need to take into account what incentives are likely to stitch together in terms of bringing that about and bringing a perhaps wider part or complete CCS on to stream, as far as those plants beyond the four pilot plants are concerned. Bearing in mind all those factors which are a part of the reform, you have, however, said there is one anchor point in this whole process and that is there is going to be an EPS come what may. Is that wise at this stage?

Charles Hendry MP: Both parties going into the Coalition had committed to that in their manifestos. It is part of the Coalition Agreement. It was discussed and debated significantly in the course of the last Energy Act going through Parliament and there was very significant backing in Parliament, we felt, for the concept. We believe, actually, as I said earlier, this is now like a Sword of Damocles hanging over industry. They believe it will be introduced in many countries round the world. It will make it easier to secure an investment decision if they know what the longterm outlook is here. The reason for putting them all together is that I think industry has a frustration about constant consultation, constant energy White Papers, reviews, policy changes, and by putting all of this together we can then say by the spring of next year, “This is the longterm framework going forward. These are decisions we have made. We have got to stop consulting about this. We’ve just simply got to go on and invest.” Our job as government is then to go out there and help to secure the investment. Otherwise, we will simply have another Ellerman and say, “Well, we can’t make our final investment decision until we know the result of the next consultation process,” and time isn’t on our side. We have got to get this money coming in.

Q145 Dr Whitehead: So would you be prepared to perhaps identify one or two other points that might be reasonable anchor points in Energy Market Reform which might go alongside EPS such as the extent to which an extension of carboncapture levy into the longerterm future might underpin a gap between ETS price, a carbon floor price and what might be necessary in order to stimulate CCS in the longer term? Are there a number of anchor points that you may be considering to go alongside EPS or do you think EPS, as you say, appears to be such a political imperative because of the commitments that you have already made that it rather trumps those other anchor points that might come on?

Jonathan Brearley: I think it is worth noting we have four anchor points set out in the Coalition Agreement, which include the carbon price floor, renewables obligation to feedin tariff, a capacity guarantee and the Emissions Performance Standard. Those are the things we are looking to develop as part of the Electricity Market Reform Process. When it comes to a question like, “Should we extend the levy to essentially fund the rollout as well as the demonstration of CCS?”, the question we are trying to answer within this reform process is how do you incentivise all low carbon, so CCS, nuclear and renewables? You might, as a result of that, extend the levy to fund the rollout of CCS. You might also think about some of the existing incentives within the system or potential new incentives like feedin tariffs. The process that we are going through is one that we hope at the end of it we will be able to look at and say, “We have a clear understanding of the sort of transition the power sector needs to make and we have the right incentives in place to do that.” And we do hope, at the end of that, that’s where we'll end up. A question like whether the CCS levy should be extended will be a part of that process, but we have to do all those together.

I think my main point is that, if you take a very practical example for an investor, you are thinking about investing, you are planning your investments far into the future, you are in now sort of 2016/2017 and you are planning your investments into the 2020s. You don’t only need to know what the financial incentives will be, which includes the lowcarbon incentives we might have. You need to know the regulatory framework under which you will operate, so the Emissions Performance Standards it will be operating under. It’s those two things we need to work out together because the financing you need depends fundamentally on the sorts of regulations you are going to be put under. If we were to split these things, then investors would be in a situation where we would solve one of those problems but they would still have this big uncertainty hanging over themselves. So our aim in this process is to solve them together and give investors a very clear picture of what is likely to come going forward.

Q146 Dr Whitehead: And, of course, the other dimension then is presumably the standing of all those pillars against what the EU is saying about its own future directive development. Are you confident that those pillars stand up well against those new directives and could you state, for example, with reasonable certainty, that at least EPS, and perhaps the other pillars, are proofed against those directives as they emerge?

Charles Hendry MP: Just to quote from the Industrial Emissions Directive, it says: "In accordance with Article 193 of the Treaty on the Functioning of the European Union (TFEU), nothing in this Directive prevents Member States from maintaining or introducing more stringent protective measures, for example, greenhouse gas emissions requirements, provided that such measures are compatible with the Treaties and the Commission has been notified."

So our view is that we can do this alongside that. But we do believe that we have to go beyond some of the European measures which are there. In an ideal world, the European Emissions Trading Scheme would be the key driver. But it is absolutely clear to us that that on its own is not going to provide enough certainty for investors in lowcarbon technologies and therefore we do have to have unique measures, we believe, for the United Kingdom.

Q147 Sir Robert Smith: Can I just ask on that, though, going back to all the purist economist argument, if we are still signed up to an ETS across Europe, anything we do here that goes faster than the price of carbon from the ETS only means that the rest of Europe has an easier ride and doesn’t have to try so hard and that the impact on the world is no different because the EU emissions are capped by the ETS, unless everyone in Europe goes faster than an ETS?

Charles Hendry MP: The challenge which we face is securing the enormous amount of investment in the infrastructure which is necessary. That is a greater challenge than in any of the other 27 EU countries. It is of a magnitude which is different. Therefore, we have to have additional measures which will stimulate that to happen. For example, Germany has much more modern coal plants than we have. Therefore, we are seeing much more of ours close as a result of the Large Combustion Plant Directive and the Industrial Emissions Directive. We will be losing our remaining oil plant as a result of that process. We have a much older nuclear fleet and so all of that, apart from Sizewell B, is due to close by the early 2020s. So it is that gap which we have to fill. Looking at it objectively, we simply don’t think that the EU ETS on its own will give enough certainty to investors to secure investment in lowcarbon technologies. So in an ideal world, yes, absolutely, we should have a level playing field across the EU, but that will not generate the investment which is necessary. That will therefore lead to much higher prices for consumers as they start to ration electricity availability by price. That is the challenge we have to overcome.

Q148 Tom Greatrex: Minister, you have alluded a couple of times, or more than a couple of times, to the need to provide longerterm certainty to investors and I think, as you came in, you heard some of the scepticism or wariness from some of those people representing those investors. So I don’t want you to repeat things you have already had the opportunity to answer in response to other questions, but could I just ask how an EPS might be reconciled, given the importance of having consistency and not having something that could be changed very easily with a Statutory Instrument, with the uncertainty over the development of CCS that currently exists because we still don’t know its capabilities and costs in the future? So if you are talking about an EPS being legislated for, or coming in in terms of the consultation, the position being very clear next year, then those type of things don’t really match up and that could cause that uncertainty that we have heard about earlier?

Charles Hendry MP: I think that there would be a number of steps which companies could take to try and get towards an EPS, so that carbon capture is one element of that; it’s not the only one. Some cofiring and some greater use of biomass will certainly help to reduce the carbon intensity. The use of the most modern supercritical plant will help to reduce the carbon intensity. So there is a number of things which come together to achieve things which are feasible. At the end of day we are not looking at setting a level here which is unattainable because that clearly becomes selfdefeating. So we have to look at the technology which is available to us. There may be a need to adapt the EPS over time, but our intention is that we try to lock it in as securely as possible with our understanding of what we would hope and expect to be available but recognising that if the facts change then we change our position as well.

Q149 Tom Greatrex: I think that, Minister, gets to the nub of the point that was being expressed, I think, by the investors because you very clearly said you didn’t want to have something that could be easily changed and fluctuate and yet you have just conceded that, because of the development of technology, you won’t necessarily know at one point what might happen in the future so that it needs to be flexible. That, I think, is the very point they were making about the potential disincentive to investment and maybe you could respond to that.

Charles Hendry MP: The purpose of the approach which we are taking of enshrining of the figures in the legislation is therefore to provide that greater degree of certainty. The concern which they would have above all was if the ministers had an enabling power which, at whim, they can change and therefore there’s no longterm certainty. Having it actually on the face of the Bill, as with the requirement to reduce carbon emissions by 80% by 2050, that is a much more fundamental building block of policy than something which is an enabling power. So we see this as being a much more robust structure with a view to helping them secure investment. What we are keen to do is to say, "Look, if the evidence is there that CCS can’t work at a price which is affordable, then we have to look at that evidence and say we will we have enough generation coming through which is of a lowcarbon nature? Will that be possible?" The evidence which we have from the academics, from industry, is that they are absolutely persuaded that CCS can work, and we are absolutely determined that Britain should be at the forefront of developing that. So we’re starting this from a position of determination to make this work. There will be nothing which happens which we could do more to make this technology work and to give Britain a global leadership in it.

Jonathan Brearley: Can I touch on two things there. First of all it depends on how you design the EPS. For example, we have choices that were already outlined around whether it’s grams per kilowatt hour, whether it’s number of kilograms per year or number of tonnes per year that you emit, or whether it’s portfolio, as Charles mentioned. Part of our consideration through the consultation will be how do we provide a clear signal and how do we make that as robust as possible to different scenarios?

The second point I would make is that, if CCS didn’t work or didn’t work at a price that was acceptable, we would still have the problem of what sort of generation we want to see in the power sector and essentially how we regulate our emissions to make sure that our power sector, which will be a major, major contributor to, we think, the country’s energy use, both in heat and transport as well, will limit its emissions to take us on the path to 80% and so we will have to be thinking hard about how to do that.

Q150 Tom Greatrex: Can I just ask touching on one slightly different issue but picking up something Mr Brearley said a few moments ago about CCS and support for CCS, Minister, are you considering options for financial support for CCS that could be put in place alongside an EPS?

Charles Hendry MP: We have a funding mechanism which is in place. There will be greater clarity provided on many of these issues tomorrow. I'm very happy to come back and talk to the Committee in more detail on those issues, but I am constrained on what I can say today.

Q151 Dan Byles: I am very interested to know is there––and, if so, what is it––a plan B if CCS doesn’t work, because it seems to me that, if CCS doesn’t work, either the lights go out or we don’t hit our emissions targets and we can’t do both?

Charles Hendry MP: If you look at the sort of map up to 2020, then we are looking potentially at 5 GW of new coal with CCS. If you look at what is planned elsewhere, so, perhaps 14/15/16 GW of new nuclear by the early 2020s and the mid2020s, potentially 12 GW of gas already consented which could be built and more gas which could be brought on line quickly if necessary, there is a range of other technologies and we have obviously got a huge plan for rolling out renewables as well. We see that as having a great potential in this next tier, but we are not looking to get to a stage where we just have enough margin to get by. We’ve got to have enough capacity in the system that we don’t have to have the situation of some huge price spikes when it is a cold day in the winter or trying to get a more stable relationship for business users.

Q152 Dan Byles: But we know that fossil fuels as carbon capture is not an alternative to nuclear or an alternative to wind because nuclear provides a base load and wind is variable. We need the flexibility of an alternative power production that is not nuclear or renewable. So if carbon capture doesn’t work, are we going to accept that we are going to have noncarboncaptured fossil power stations in the medium term?

Jonathan Brearley: There are other things you can do to provide flexible capacity. For example, there is storage, there is interconnection, but it is true that if CCS didn’t work–

Q153 Dan Byles: It just seems that a lot of eggs are going in the CCS basket, which is still quite unproven.

Jonathan Brearley: You have to look at our kind of whole strategy for power supply. What we are saying is that we have three major areas of technology, so CCS, renewables and nuclear. At this stage we should be pushing hard to roll those out and test them. All the indications, as Charles has mentioned, are that CCS will work. If it doesn’t work, we will have to look towards some small amount of peaking gas plant, for example, but also technologies like storage, interconnection, and also demand side management, so looking at smarter grids to try and manage that intermittency problem. But I think it is fair to say that we would have a huge challenge if CCS didn’t work. However, our strategy right now has to be to develop the full range of technologies we might need and to push as hard on them as we can.

Charles Hendry MP: Just to add to that as well, if you look at the commonly international talkedabout level for an EPS, which is 500gCO2/kWh, that is massively below an unabated coal plant, which is 900 plus, but it is well above an unabated modern gas plant, which is about 405, so that gas can still play an important part in this process going forward.
The other thing which I think we will see significantly coming through in this decade, and the capacity market will help to encourage this, is methods of storage. So, for example, whether it makes sense if you have a major offshore wind farm to have a connection to Norway so that when we have excess wind in the system it is going into pumped storage in Norway then we get clean hydropower coming back at times of higher demand. The developments which are happening for other technologies in terms of hydrogen, batteries technologies, hot water even, there’s a whole range coming forward which will actually shift us from having the power when the variable source is available to having it when it is needed by consumers.

Q154 Dan Byles: Just briefly coming back to a figure you often quote of the £200 billion required for infrastructure investment, looking at the medium to longer term energy security threats facing the country, it does seem to me––and you have mentioned this yourself several times–– that there is an enormous implied threat or risk to us there that if we don’t attract the financial investment we are going to have a problem but also there is a limited construction capacity in the world to do some of the stuff we need to do, and there are a lot of other countries also seeking to do it. You yourself have said that if we don’t get the investment regime right, why should these companies come to the UK? They will go somewhere else. But that’s a huge risk. Again, is there a plan B if we don’t get it right? What if the limited number of companies who can build nuclear power stations, who can do some of the stuff we need to do, all go China and India and Brazil because they end up with a better investment regime than us?

Charles Hendry MP: I think there’s no doubt now that the United Kingdom is the most interesting market for investors in Europe for nuclear and possibly one of the most interesting in the world. That significantly built on the work which John Hutton did when he was Secretary of State which really started to transform the situation here. They all understand that there will be no subsidy, but we are removing some of the regulatory challenges. So some of the planning decisions and regulatory justification which were announced yesterday are looking at what are the potential nonfinancial barriers and how do we move those, and I think we are making very good progress in doing so.

At the end of the day, there are, as you say a relatively small number of companies globally who can be involved in that area. There is, nevertheless, at this stage, very significant interest in building in the United Kingdom and it is my job to make sure that that interest continues. In terms of the construction skills, 90% of a nuclear plant is basically civil engineering skills and 10% is nuclear related so that we have a significant base of civil engineering skills. But this is going to be one of the most important areas of growth in the economy moving forward, and, therefore, the opportunities for people to move into areas like this with the appropriate skills and to have a longterm career in that area is a great opportunity at this stage.

Q155 Dan Byles: Very briefly, coming back to EPS, do you anticipate that the EPS regime we put in place will only apply to new plants after a certain date, because there has been some suggestion––and we have discussed this with the previous panel as well––about bridging the gap and that if we get it wrong on the one hand we might actually create a disincentive to creating the extra capacity needed between now and 2020, but on the other hand there’s Albert’s point that if you go the other way there could end up being a dashforgas and actually we end up with too much sort of legacy productive capacity? So do you anticipate saying, "Right, EPS is only going to apply to everything built after 2020 or something like that"?

Charles Hendry MP: That’s certainly what the Committee on Climate Change has said––that it should be on gas post 2020 and it should not be retrospective. We will consult on this as part of the programme, but my instincts are that I don’t like retrospective changes. I think that when people have invested under a certain set of circumstances it is extremely difficult to maintain longterm confidence if you just feel at will you can change that. Therefore, people should be able to feel that the set of rules under which they invest will be maintained for the longer term. That is, for example, why we have grandfathered the ROCs for biomass and so to make it clear that, when there are changes which come through, then people who have invested under one set of circumstances have that maintained. But that will be part of the consultation process too.

Dan Byles: Thank you.

Q156 John Robertson: I'm interested in furthering plan B, I have to say. I could also mention investment about Sheffield Forgemasters, of course, but it wouldn’t be right to try and make political points, but if we are investing into new technology that might have been helpful, Minister. But, moving on to plan B, it isn’t unforeseeable that we could hit a scenario of where we have a severe winter followed by an extremely hot summer and that could happen in the whole of Europe, and therefore the demand and also the draw on storage would be great. Is there a plan B of where we would have standby power stations that would be brought into service no matter whether they meet the criteria of the day?

Charles Hendry MP: I will get Jonathan to add to this in a minute, but that is the thinking behind the capacity market as to what is necessary to secure investment in plant which may not be used for the whole time. As Dr Whitehead was saying earlier, in the past we have been able to use older plant for a declining number of hours each year, but as a result of the closure timescales of the LCPD and the IED that won’t be possible, moving forward, so that there will be a need for backup plant. But the critical change here on the capacity market is how do you also find ways of managing demand better? How do you shave the demand so that you don’t actually need to spend those hundreds of millions and billions of pounds on a new plant which will not be used on a fulltime basis? So that is going to be a key part of the thinking. I think that’s where you will start to see the emergence of energy service companies who go in there to help people manage their demand more effectively so that they can remove the spikes in demand as well. But you are absolutely right. If you go back to the beginning of January this year, it was an extremely cold day, there was no wind blowing anywhere and as a result of that all of the plant was operating at absolute full capacity and it was a fairly tight margin.

Q157 John Robertson: We have used the interconnector in these cases, but, in my scenario, there wouldn’t be anything to draw upon. That’s why I am saying has there been thought about having this plan B just in case of something that may happen and, with global warming, is more likely to happen in the future?

Charles Hendry MP: Under the system which we propose people will be able to come forward to advocate the development of a new gasfired plant, and it would normally be a gasfired plant in those circumstances, and then that will certainly be taken through the planning process. So we recognise that there will absolutely be a need for backup.

Jonathan Brearley: If you were to use your capacity mechanism, that would be the method through which you would pay for this. So you would generate scenarios. You would test your system against, as you say, a cold windless winter or a hot windless summer, and then you would look on the system to see whether or not you needed extra capacity to cover those scenarios. Then there’s a debate to be had––and we will talk about this through the consultation––about how you would pay for that or how you would make sure that happens. But one of the key changes we have in the future which we don’t have in our systems today really is a much, much greater amount of inflexible and intermittent generation, which means that that problem becomes more pressing, which is why we think about things like capacity mechanism as part of the reform process.

Q158 Sir Robert Smith: On those Electricity Market Reforms that you are looking at, in any of the thinking you have got, are they all compatible with where we have pushed the EU to go with the Lisbon Agenda and our own previous very open market? Is it possible to function in the new designs you are looking at without changing anything at EU levels?

Jonathan Brearley: We are looking at the moment at a very, very wide range of options. The sorts of things that we have talked about with stakeholders range from––You have seen, for example, Dieter Helm’s representations on a regulated asset base, etc. I think it is possible to make the reforms we need within the current EU regulations. That’s something we can say now, but as you begin to develop these things in more detail we will constantly need to look back at that and check whether that is still the case. My expectation is that we can.

Q159 Sir Robert Smith: On the EU level, what sort of discussions are you having with other Member States on the design of the EPS, and I think the Netherlands are looking at their own EPS? Is there any exchange of best practice or ideas?

Charles Hendry MP: There is nothing formal which has happened at this stage. We are aware of two or three EU countries that are beginning to explore that and so at this stage there is nothing formalised.

Jonathan Brearley: We, as part of the process, are looking at lots of benchmarks across the world, and actually, when you are looking at things that are up and running, it is the US states that we look to who already have this.

Q160 Sir Robert Smith: Do you see, on a positive side, rolling out or encouraging other countries to follow down the route, outside of Europe as well, in terms of international negotiations?

Charles Hendry MP: I think it will become inevitable. I think, once you get some early movers moving in this direction, that others are going to say they have to follow because it is then they need to be making it clear to their potential investors what is expected of them moving forward.

Q161 Sir Robert Smith: Finally, going back to the interaction in Europe, what signal does it give about our confidence in the Emissions Trading Scheme? Are we still going to try and make ETS work?

Charles Hendry MP: We certainly want to see it work. Post 2013 it will become much tighter in those years, and the number of allocations will be reduced every single year and so that will continue to make it tighter. But it is still going to have incredible variability within it as the costs of different fuels rise and fall. Accordingly, we don’t believe that provides enough stability for potential investors in terms of what they would see as being the price on carbon. So we do think we need to have that extra mechanism, as I was saying earlier, in the UK, but where we can get international agreement on these issues, then, without any doubt, that will be our preferred way of doing it.

Chair: Good. All right. Thank you very much indeed for coming in. It was a very illuminating session.