Emissions Performance Standards

Memorandum submitted by the Department of Energy and Climate Change (EPS 01)

1. Summary

1.1. The Department welcomes this opportunity to provide evidence to the Committee’s inquiry into the Emissions Performance Standard (EPS).

1.2. In the Coalition’s Programme for Government, it was stated that an EPS would be established that would prevent coal-fired power stations being built unless they are equipped with sufficient carbon capture and storage to meet the emissions performance standard.

1.3. The Government has, in its first Annual Energy Statement, stated its intention to consult on an EPS as part of a wider consultation in the autumn on electricity market reform, with the outcome to be published in a spring 2011 White Paper.

1.4. The Government considers that an EPS should provide longer term certainty to investors over future regulatory measures, closely linked to development of CCS technology. The Government also believes that an EPS should contribute to reducing emissions in the UK electricity sector and complement other market instruments. We will be assessing this as part of the consultation and will look for views on the role the mechanism could play.

1.5. The following document outlines some of our other key considerations as we move to consultation. Given the fact that we plan to do further detailed analysis on the EPS as part of the Electricity Market Reform project, the Government would welcome the opportunity to provide further evidence in due course.

1.6. This document addresses the Committee’s questions in turn, and covers the Government’s considerations including the type of EPS, its level and its application. It also addresses some of the considerations in the context of the CCS demonstration programme and outlines current arrangements under the EU Emissions Trading System.

2. Introduction

2.1. As outlined in the 2010 Annual Energy Statement1, the UK economy is reliant on fossil fuels, and is likely to be so for some time to come. Most of our power stations are fuelled by coal and gas, and in 2009 over 70% of net electricity supplied was from fossil fuels2.

2.2. The 2050 Pathways Analysis shows that under some scenarios, in the context of an overall 80% CO2 reduction, electricity generation would need to be virtually emission-free, given that we would expect some emissions from industrial and agricultural processes, transport and waste to persist.

2.3. Furthermore, most of the 2050 pathways show that demand for electricity will double by 2050, as a result of the need to electrify large parts of the heat and transport sectors3. For this to have the required impact on emissions, the electricity being consumed will need to be almost exclusively from low carbon sources. In addition, the Committee on Climate Change has recommended that electricity supply should be almost entirely decarbonised by 20304.

2.4. The Government’s overriding imperative is to enable low carbon generation to take over the sector, without undermining the reliability, security and cost of supply.

2.5. Coal plays a vital role in today’s energy mix. In 2009 it supplied 28% (net) of electricity, and 31% in 20085. It is a reliable fuel, providing diversity and security to electricity supply. There are abundant remaining global reserves, and countries across the world are set to use increasing quantities. However, it is also the most polluting fuel, having the highest carbon emissions.

2.6. In 2009, the estimated carbon intensity of the UK’s coal electricity supply was 915 g/kWh, compared to 405 g/kWh for gas and 452 g/kWh across all generation6.

2.7. It is vital that we find ways to reduce substantially the emissions from coal if it is to play a part in our energy supply in the long-term, which is why the development of CCS is so important.

2.8. CCS has the potential to reduce carbon emissions from fossil fuel power stations by around 90%, enabling coal and gas to continue to provide secure base load and flexible generation without jeopardising emission reduction goals and helping to maintain our energy security.

2.9. Whilst the discrete items that make up the technology underpinning CCS are understood, they have not yet been demonstrated anywhere in the world at commercial scale in a fully integrated manner for electricity production. As such, there remains considerable uncertainty over the cost of demonstrating CCS successfully at commercial scale. These uncertainties mean the private sector is unwilling to shoulder the financial risk of demonstration projects until the technology is further developed. It is for this reason that the Government has committed to continuing public sector investment in CCS for 4 power stations. As well as demonstrating the global potential of CCS as a technology, work on these projects should give the UK a leading role in an industry with a potentially large worldwide market.

2.10. An EPS is one of a range of possible measures which can be used to reform the way the electricity market functions in order to address challenges we face in delivering investment in the low carbon, secure energy mix that the UK needs to develop over the coming decades. Consultation in the autumn will allow us to consider properly the major reforms in the round, and how an EPS would interact with other measures being considered, including the full establishment of Feed in Tariffs, Carbon Price Support and capacity mechanisms. It is crucial that these reforms are considered as a package, rather than approaching them piecemeal.

2.11. While the details of an EPS are still being finalised, we are clear that without CCS it would be impossible for new coal power stations to meet such a standard.

3. Response to Questions

What are the factors that ought to be considered in setting the level for an Emissions Performance Standard (EPS) and what would be an appropriate level for the UK? Should the level be changed over time?

3.1. There are a number of factors that need to be considered for an EPS. Whilst the level it is set at is one of those considerations, there are a number of others which could play a key role in the mechanism’s effectiveness. We are still considering these issues and how they interact with each other, and how, overall, an EPS would fit with wider reform of the electricity market. The following highlights some of the issues we are considering, but given the early stages and complexities, these are only an indication and are subject to the autumn consultation.

3.2. Demonstration of CCS is critical, with the IEA identifying that it can deliver 20% of the least cost path to halving global emissions by 2050. One of the key factors we are considering is how to design the mechanism at a level compatible with commercial scale demonstration and with suitable flexibility to enable investment in plant equipped with CCS, particularly during the demonstration stage where CCS may only be fitted to part of the plant’s capacity. Setting it at a level, in a form and from a point in time which does not allow flexible operation of the power station hosting CCS could deter investment, and as such hinder the development of the technology.

3.3. The Committee on Climate Change has recently recommended that serious consideration should be given to extending an EPS to cover gas generation. In their letter to the Secretary of State in June this year, they stated:

"Given the need to decarbonise the power sector in the period to 2030, and therefore the very limited scope for investment in conventional gas generation beyond 2020, an Emissions Performance Standard that would effectively require any new gas plant beyond 2020 to be fitted with CCS should be seriously considered."

3.4. Given this recommendation, the Government will be considering whether an EPS could be applied in this way, whilst also ensuring the UK’s electricity supply remains reliable, affordable and secure. There are a number of considerations to take into account, which include the role of gas in the energy mix from the 2020s, the status of CCS technology and requirements for peaking plant to balance out intermittent renewables.

3.5. The Committee made it clear, in the same letter, that they do not propose an EPS that would require retrofit of CCS to plant added to the system before 2020. We will be considering this in our analysis, including how it could influence investment in gas-fired plant in the run up to 2020.

3.6. We are also considering how an EPS might be applied. There are a number of options, which include, for example, applying to individual plant or to a suite of plant. It has also been suggested that an EPS should be applied to electricity suppliers, to limit wholesale purchase of electricity from certain plant.

3.7. There are advantages and disadvantages to all the options. We need to consider how to provide a clear approach that provides enough regulatory certainty, whilst also building in the flexibility needed whilst CCS is a demonstration technology, in order to secure the investment in new capacity.

3.8. There are a number of options on how to set the level of an EPS. Whilst it could be set at one level universally, it is possible to set different levels for different fuels, and for different type of plant.

3.9. The Government will also be considering when an EPS should be effective from, and when and how to enforce it. Both of these factors could play an important role in helping an EPS achieve the objectives set out for it. We will also be considering whether a static EPS should be set or whether, over time –possibly subject to certain conditions being met – it should be decreased.

3.10. A further issue that is important when considering an EPS level is the form in which it should be expressed. Expressing an EPS per unit of electricity (e.g. g/kWh) is a commonly understood expression, which contains a degree of technology specificity - the EPS could only be met with CCS, greater efficiency (including CHP), or co-firing with biomass. However, the alternative of an annual limit on total emissions could provide more flexibility.

3.11. An EPS must be considered alongside other decarbonisation measures. It will be critical that all action taken over the next decade and beyond is closely aligned, and that impacts that an EPS, alongside other mechanisms, may have on the market are properly understood. Through this process, the Government is looking to ensure that the most appropriate outcome is delivered through the implementation of an EPS. This is the primary reason for consulting on an it as part of the package of measures in the autumn.

What benefit would an EPS bring beyond the emissions reductions already set to take place under the EU ETS?

3.12. Emissions from large electricity producers in the UK are covered by the EU Emissions Trading System (EU ETS). The EU ETS works on a ‘cap and trade’ basis to deliver a set amount of emission reductions against a verified emissions baseline. At the end of each year, installations must submit verified emissions data and retire an equivalent number of allowances to ensure compliance. Entities covered by the EU ETS can trade the right to emit with each other, creating a carbon price and enabling emission cuts to be made where they are cheapest.

3.13. Phase III of the EU ETS runs from 1 January 2013 until 31 December 2020. In Phase III, there will be a tighter, annually declining, EU wide cap. In recognition that the power sector is able to pass on the full costs of carbon to consumers, there will be no free allocation to electricity generation in the UK. This means that power generators will need to buy all the allowances required to cover their emissions. Allowances can either be bought from auctions or on the secondary market.  

3.14. Although the EU ETS is delivering emissions reductions across the UK and Europe, it cannot guarantee the decarbonisation of UK energy supplies over the coming decades. UK power generators could opt to purchase emissions allowances from emitters in other EU member states rather than pursuing further decarbonisation if it were economic to do so. Were Government to introduce a stringent UK EPS, UK power generators would only have the option to lower emissions to meet this standard, rather than also having the option to buy EU ETS emissions allowances. This, therefore, provides greater certainty about emissions reductions in the UK power sector, even if it does not necessarily ensure that the cap is met at lowest cost and could involve some additional costs being passed through to household and business customers.

3.15. The exact impact of an EPS will depend on its level and scope and, whilst introducing a stringent EPS could prevent the EU ETS cap being met at least cost, analysis by the Committee on Climate Change indicates that reductions in emissions from electricity generation are possible at relatively low cost when compared with other sectors in the UK, and that radical reductions in emissions in electricity generation are essential if long term overall UK greenhouse gas targets are to be achieved.

Could the introduction of an EPS pose any risks to the UK’s long-term agendas on energy security and climate change?

3.16. With regard to energy security, it is imperative that an EPS does not curtail the development needed in energy infrastructure in the run up to 2020 and beyond. Whilst an EPS has the ability to prevent unabated fossil fuel plant being built, it is only part of the package necessary to deliver investment in low carbon sources. It is critical, therefore, that we look at this as part of the wider incentive mechanisms.

3.17. It would be very easy to devise an EPS which simply resulted in no new fossil fuel plant being constructed (as has happened with coal in California), but this would have an adverse effect on security of supply. It would also mean that the UK would be deprived of the opportunity to demonstrate CCS technology on either modern pulverised coal power stations or gas power stations, and would therefore lose the opportunity for global leadership in this area.

3.18. An EPS is not being considered with a view to reducing emissions at EU-level, as the primary means of achieving this is through the EU ETS. Aside from providing regulatory certainty, the focus of an EPS would be on supporting the delivery of a low carbon electricity sector in the UK.

How effective is an EPS likely to be in driving forward the development of CCS technology?

3.19. An EPS is only one tool in the package of measures that may be necessary to decarbonise the electricity sector and it will not, in itself, drive forward the development of CCS. In particular, given the costs and risks involved, commercial CCS will only develop with Government funding.

3.20. An EPS would only contribute to wider deployment of CCS once the technology is successfully demonstrated and the combination of market factors, regulatory requirements and policy interventions are such that there is an economic case for CCS. Therefore, design of the whole framework is critical to ensure secure, low-carbon electricity.

3.21. We consider that an EPS could provide a means of giving some regulatory certainty on future expectations, and this will need to be balanced with the status of the technology both now and in the future. As discussed above, CCS has not yet been demonstrated at commercial scale for electricity production. An increase in regulatory certainty will only support the development of CCS once there is confidence in its commercial and technical feasibility at this scale. This will be one of our key considerations when designing the mechanism.

Should the UK’s CCS demonstration programme cover gas-fired as well as coal-fired power stations?

3.22. The Committee on Climate Change has recently recommended that serious consideration should be given to funding at least one gas CCS demonstration as part of the demonstration programme.

3.23. Tackling emissions from coal continues to be our priority as it is the fossil fuel with the highest carbon emissions, but is reliable and provides security and diversity of electricity supply in the UK.

3.24. We recognise that, in time, gas plant will need to reduce their emissions. We are giving careful consideration to whether a CCS demonstration project on gas would prove beneficial and add value to the programme.

What is the likely impact of an EPS on domestic energy prices?

3.25. An EPS could increase the price of electricity to customers. In a scenario where the carbon price was not high enough to provide an economic incentive to operators to generate with CCS, an EPS requiring CCS on both new coal and gas generation (discounting capacity supported under the UK demonstration programme) and leading to greater emission reductions than those incentivised by the ETS would lead to increased costs to the operator and thereby increase the price of electricity beyond that which the market conditions alone would drive. These costs would be passed on to customers.

3.26. On the other hand if an EPS was set so that it could be met by new unabated gas and by new coal only if at least partially fitted with CCS before it is proven at commercial scale, then prices may not be affected significantly, as the only new coal generation likely to come forward would be part of the demonstration programme.

3.27. If the EPS is set at a level that requires a greater proportion of CCS on new coal than will be supported through the demonstration programme, only gas generation is likely to be built, which would reduce diversity of supply. Coal with partial CCS is unlikely to generate electricity more cheaply than unabated gas, and the economies of scale associated with CCS make it unattractive to investors because it will be more expensive to retrofit CCS to the balance of plant at a later date than to fit CCS to the whole plant from the outset.

3.28. A key driver for the CCS demonstration programme is to help bring down the costs of CCS and make it commercially deployable in order to minimise the price impact of meeting an EPS.

3.29. If the EPS is not designed in the right way, adding to uncertainty and delays in investment, there is a further risk that this could impact domestic energy prices and the security of the UK’s electricity supply.

Are any other European countries considering an EPS? If so, should the standards be harmonized?

3.30. We are not aware of any European countries formally considering an EPS. If this were to change, then we would look to share best practice and assess the ways in which a harmonised approach could play a role in emission reductions.

3.31. A number of states in the US have implemented an EPS, including California, which is not covered by a carbon trading scheme such as the EU ETS. This is set at around 500g/kWh. Since its introduction, there has been no investment in new coal plant in the state. It is important that we consider the approach that has been taken in California and elsewhere, to ensure that the EPS does not serve to prevent investment in CCS.

Could unilateral action by the UK to introduce an EPS contribute towards global climate negotiations in Cancun in November 2010?

3.32. The climate change negotiations centre around the need for countries to agree legally binding targets to reduce emissions, rather than necessarily to confirm how they intend to meet those targets.  The UK negotiates as part of the EU, which advocates carbon markets as the best way to deliver reduction at least cost. However there are discussions around sectoral approaches to curbing emissions where the issue of EPS may arise, although we would not expect it to be central to securing a deal. 

3.33. To enable countries to take on more ambitious targets there are negotiations around the transfer of finance and low-carbon technology to developing countries to help them make the transition to a low carbon future – the UK’s position on these issues is more likely to contribute to progress in the negotiations.

Can greater use of Emission Performance Standards internationally help promote agreement on global efforts to address climate change?

3.34. EPS is a means to an end but at the moment global efforts to address climate change are focussed on the need for every country to agree legally binding targets.  Without such targets there is less impetus for countries to deploy an EPS.  Deploying an EPS in the UK might demonstrate leadership and commitment to meeting our declared targets, but might not be an appropriate measure for all countries.

September 2010


[1] Annual Energy Statement, Departmental Memorandum, 27 th July 2010

[2] Digest of United Kingdom energy statistics (DUKES) , 2010

[3] 2050 Pathways Analysis, July 2010

[4] Building a low-carbon economy - the UK's contribution to tackling climate change , December 2008

[5] DUKES, 2010

[6] DUKES, 2010