Emissions Performance Standards

Memorandum submitted by UK COAL Mining Limited (EPS 03)

1. UK COAL Mining (UKC) welcomes the opportunity to submit evidence to the Energy and Climate Change Select Committee looking into proposals for Emission Performance Standards (EPS). UKC is Britain's biggest producer of coal, supplying around 4% of the country's energy needs for electricity generation. The Group operates three deep mines and five surface mines located in Central and Northern England with substantial reserves and employs 3,100 people. Around 95% of the Group’s 7Mt/year production supplies the electricity generation market and as such we are heavily influenced by policy objectives affecting the electricity sector.

2. Coal-fired power stations provide security and diversity of supply. They are also able to respond more quickly to peaks in demand on the electricity grid than either gas or nuclear stations. This provides a vital load following capability, which ensures that the National Grid is able to meet fluctuations in electricity demand.

3. In 2009 coal generation provided 28% of the UK’s electricity needs, however European environmental legislation to reduce NOx and SOx will have a dramatic affect on the existing coal generation fleet1. The UK presently has 28GW of coal plant on the system. 8GW of plant will close by the end of 2015 and the majority of the remainder will close during the period 2016-2023. The replacement of this capacity with new coal is essential if the UK is to maintain a diverse and secure energy mix.

4. The UK is facing energy security challenges presented by a dramatically changing global economic, geopolitical and energy landscape. Global reserves of oil and gas are increasingly concentrated in a limited number of countries and there is a clear risk that global supplies will not keep pace with demand.

5. Last winter’s cold spell has highlighted our reliance on gas, with four national balancing alerts in the first weeks of January and many industrial consumers having their supply cut off. Future planned gas build will exacerbate this position.

6. Coal generation, therefore is vital to the UK’s diversity and security of energy supplies especially at time of dwindling indigenous gas supplies and volatile international energy markets.

7. However for coal to play its part in the UK’s energy mix, within a low carbon economy, requires the development of carbon capture and storage (CCS). A fleet of clean coal stations with CCS would allow indigenous coal production to contribute to the UK’s security of energy supply by limiting energy imports from either unstable or potentially unstable countries.

8. Therefore swift progress on the four coal CCS demonstration projects announced in the Coalition Agreement and re-affirmed2 in Parliament by Charles Hendry, the Minister of State, Department of Energy and Climate Change, is imperative.

9. The current planning regime forbids the building of new unabated coal plant, but yet allows new gas stations to be built without carbon capture. An EPS on all plant would send out a clear signal with regard low carbon generation, however Government must be confident that the technology exists to achieve the required goal in the timeframe envisaged.

10. Most importantly an EPS must not discriminate against coal in favour of gas. If an EPS is set at a level that simply allows the target to be met by fuel switching to unabated gas, this would have an adverse affect on the UK’s diversity, security and affordability of energy supply.

Specific Questions posed by the Committee

1. 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?

Emissions performance standards (EPS) have been in place in California since 2006 when a limit of 1100lbs CO2/MWh (500g/kWh) was introduced on all baseload electricity generation. This is often used as a point of reference for proposed limits in other parts of the world. At this level, it essentially prevents the construction of unabated coal-fired power plants (efficient modern plants emit around 1500lbs while older plants emit around 1800lbs CO2/MWh), whilst allowing unabated gas plant to be built.

A blanket EPS, at the level set in California, would not encourage power plant operators to invest in technologies such as CCS. Rather it will lead operators to simply switch to the cheapest, short-term option to meet energy demand and the standards set by an EPS, which is unabated gas. It is therefore essential that an EPS does not discriminate against coal and allows unabated gas to be built as a result. This would adversely affect the UK’s diversity, security and affordability of energy supply.

A standard should be set which forces abatement to be applied to both coal and gas. This should only be applied to new build. An EPS on existing coal generation, at the Californian level, would immediately close stations with resultant blackouts and power shortages.

Because CCS technology is still largely unproven in the generation sector, EPS levels have to start high and be ratcheted down over time as more experience and confidence is gained. Ultimately a level of 150g/kWh could be introduced for all new fossil generation built after 2020, which would force carbon abatement to be installed on all stations.

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

The EUETS is currently the primary instrument to deliver Europe’s carbon reduction commitments. It is market based and technology neutral and delivers the necessary reductions required.

An EPS would have the effect of removing higher carbon emitters earlier than would be the case within the EUETS. But under the EUETS’s cap and trade system there would be no absolute benefit, as there is already an absolute limit on the amount of CO2 emissions that can be emitted. An EPS would therefore limit emissions from UK coal plant, which would be utilised elsewhere either within the UK or across Europe.

Eastern European nations within the EUETS are still heavily coal based and are unlikely to agree to an EPS scheme which would limit use of their indigenous energy resources and threaten economic recovery.

3. How effective is an EPS likely to be in driving forward the development of CCS technology? Should the UK’s CCS demonstration programme cover gas-fired as well as coal-fired power stations?

An EPS is one way of driving CCS within the UK. Other alternatives include a CCS obligation similar to the Renewables Obligation (RO) or the introduction of a low carbon obligation, which would replace the RO, open to all technologies. An EPS in conjunction with other mechanisms may provide a more flexible approach to delivering the deployment of CCS technology.

The Committee on Climate Change (CCC) recommends the inclusion of CCS demonstration on gas plant within the CCS demonstration projects 2-4. The CCC argue that the ‘emergence of unconventional gas supplies, particularly shale gas in North America has called into question the previous view that coal is inherently more secure and lower cost than gas for the longer term3’.

However two recent events have highlighted our exposure to the imported gas market and illustrates that short term price trends cannot always be relied upon. Firstly the UK is now a net gas importer. In the first quarter of 2010, and for the first time since 1968, gas imports exceeded indigenous production. This was driven by high demand combined with a general decline in UK production.

Secondly the UK has also recently been exposed to volatile wholesale gas prices at a time of the year when traditional gas prices have been low. In June / July day ahead prices have exceeded 50p/therm, in response to interruptions in Norwegian gas supply. These prices are 25% higher than those experienced last January when the UK was experiencing the coldest temperatures of the last 30 years. As the UK becomes more and more dependent on imported gas there is a danger that prices will become even more volatile as countries start to compete for international gas supplies.

Poyry in their report to DECC, ‘Global Gas and LNG Markets and GB’s Security of Supply’ (June 2010), highlighted a number of reasons why unconventional gas may not expand at the rapid rate predicted by many analysts. These include:

· Environmental impact - unconventional gas extraction, and in particular that for shale gas, will typically result in disruption to a large area of landscape as a result of the high number of wells required to maximise gas production. In this respect, the environmental impact would typically be greater than for other energy infrastructure projects such as a gas storage facility or a power station. In addition, the extraction technique of hydraulic fracturing will require very large volumes of water, whose treatment and disposal are likely to provide significant environmental challenges. In addition, where chemicals are used in conjunction with the water, there is the potential for the water table to be affected and a risk of contaminating the supply of drinking water. Given these environmental implications, projects may be subject to delay or additional cost as a result of the licensing and permitting processes, particularly in ecologically sensitive areas.

· Geological uncertainty – in many cases, the potential for significant unconventional gas reserves is yet to be conclusively proven. In addition, some resource areas are likely to provide only limited reserves which prove to be either technically or commercially unexploitable.

· Proximity to existing pipeline infrastructure – this has proved to be an important factor in the rapid development of unconventional gas in the US . Where potential new reserves are remote from existing pipeline infrastructure, this may deter the necessary level of investment to exploit the unconventional gas sources.

In addition conventional gas prices are also likely to rise as LNG demand recovers particularly in the rapidly developing economies, i.e. China, SE Asia and South America, diverting away supplies from NW Europe.

By their very nature demonstration projects carry higher technical risks; and there is a better chance of proving a commercial technology, which can be rolled out worldwide by supporting four rather three coal projects.

Globally coal is the fastest growing fossil fuel in particular in China and India where it is driving economic growth. In the developing world the IEA4 have identified CCS on coal generation as a necessary part of the pathway to a 50% reduction in CO2 emissions by 2050, in order to limit atmospheric concentrations to 450ppm as identified by the G8 in 20075.

Therefore CCS on coal is the technology that needs to be proven quickly and rolled out, as it will have greatest impact on global emission reductions. As a consequence this sector offers the greatest market opportunity for UK export and if the UK were to diversify its initial efforts this market could be lost.

UK COAL believes that there is no reason to change the stated position of the Government and it should be reaffirmed that first four demonstration schemes should be undertaken on coal plant. Should subsequent funds be available, the next CCS demonstration programme should be undertaken on a gas fired station.

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

It is now generally accepted by groups including the G8 that governments and the private sector must work together to deploy CCS. This needs to involve policies that reduce the commercial risk of CCS and enable the private sector to make the massive investments that are required. To many investors an EPS does not reduce commercial risk, but adds another regulatory risk which increases the challenge of investing in first-of-a-kind plants.

At present there is 28GW of coal plant on the system. By 2016, 8GW will have closed under the LCPD. The Industrial Emissions Directive as proposed could see substantial further closures, possibly down to zero by 2023. Ofgem estimate that investment of around £200billion 6 is required in the electricity sector to meet this generation shortfall. At present o utside of the four demonstration CCS coal power stations proposed, replacement fossil fuel generation capacity will be met by the building of unabated gas generation .

There are six large companies which dominate the UK electricity market namely; E.ON, RWE Npower, Scottish Power, EDF, Centrica and SSE. The first four in the list are foreign owned, based in Germany, Spain and France. These multinational companies invest in schemes based on return and regulatory risk. If investment the UK is deemed as too risky, these companies will simply switch their attention elsewhere with the upshot that nothing is built and a generation gap results.

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

The impact of policies designed to ameliorate climate change is to raise domestic energy bills. DECC estimate7 that their existing policies will raise domestic electricity bills by 24% by 2020, before energy efficiency measures are taken into account.

An EPS is likely to increase prices further as substantial investment will be required in new generation capacity. This is difficult to quantify as it depends on the running regime of the plant and in particular the load factor assumed. If a new fossil fuel plant is built as backup to renewable generation then it will be looking to generate at high prices in order to make a return over lower running hours. An EPS would further exacerbate running costs.

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

To the best of our knowledge no other European countries are proposing to introduce an EPS.

Europe’s leading economic power German, still encourages the building of high efficiency unabated coal plant to replace older coal coal stations. This policy can reduce CO2 emissions by up to 25%, the efficiency difference between older sub critical and modern ultra super critical plant.

Many European countries are highly dependent on power generation from coal and lignite as can be seen from the table below. In particular in Eastern Europe coal and lignite is seen as essential to economic development and provides energy security against reliance on neighbouring Russian energy supplies.

Coal Share of Electricity Generation8

Poland

91%

Czech Republic

60%

Greece

55%

Bulgaria

52%

Germany

47%

Romania

41%

It is highly unlikely that European Member States would agree to an EPS at the level envisaged by the Committee for Climate Change / UK Government as this would have an adverse affect on their economy and threaten security of energy supply.

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

At the recent Copenhagen talks, the EU unilaterally proposed a 20% CO2 reduction target with an additional offer to increase its emissions reduction target to 30% if an international agreement was reached. This initial 20% offer was unable to kick start the negotiations and in the end the EU was marginalised, as the final text was brokered by China, South Africa, India, Brazil and the USA.

In reality any international deal will centre on China and the USA. A unilateral declaration by the UK on an EPS scheme is unlikely to sway their opinion, if the agreement is not in their national interest.

8. Can greater use of Emissions Performances Standards internationally help promote agreement on global efforts to address climate change?

Coal is the world’s most abundant fossil fuel, with the majority of the reserves residing in USA (29%), Russia (19%), China (13%), Australia (9%) and India (7%). Coal will continue to dominate these economies for the foreseeable future and it is therefore imperative that policy frameworks to address climate change and CO2 emissions also ensure continued energy security through a role for coal in the energy mix.

Globally coal currently supplies 26%9 of primary energy and 40%10 of electricity generation. The International Energy Agency11 (IEA) forecast that coal will remain the main fuel for power generation throughout the period to 2030, where its share will increase to over 44%. Most of this growth in coal fired generation occurs in non OECD countries which are projected to generate over two thirds of all coal fired electricity, compared to less than half now. Overall coal generation capacity is forecast to increase from 1,261GW to 2,101 GW by 2030.12

In developing countries, where economic growth is strong, coal drives these economies. China is the world’s biggest coal consumer, currently at 2.76 billion tonnes13 which is 70% of its primary energy demand. By 2030 this production will have almost doubled14, giving an indication of its dependence on coal to drive its economy.

It is highly unlikely that developing countries would adopt policies that will limit their economic growth. As an EPS on coal effectively can only be achieved through the introduction of CCS and is therefore only likely to be considered if supported by funds from developed countries.

Establishing emission standards for CO2 would place an immediate restriction on coal-fired electricity generation without consideration for the long-term consequences for the global power generation fuel mix and energy security.

Consequently because of the scale of investment required by developing countries to fit CCS, it unlikely that an EPS would promote an international agreement. A better solution would be to allow CCS to be included within the Kyoto project mechanisms such as the Clean Development Mechanism (CDM). This would allow operators in developing countries to generate Certified Emission Reduction (CER) credits. These CER credits can be used by industrialised countries to meet a part of their emission reduction targets under the Kyoto Protocol and the EUETS.

September 2010


[1] Large Combustion Plant Directive / Industrial Emissions Directive

[2] Hansard: Column 987, 1st July 2010

[3] CCC letter to Rt Hon Chris Huhne, Secretary of State for Energy and Climate Change , 18 th June 2010

[4] IEA CCS Technology Roadmap, 2009

[5] G8 Communiqué, Heiligendamm Summit 2007

[6] Ofgem: Project Discovery, 9 th October 2009

[7] DECC: Estimated impacts of energy and climate change policies on energy prices and bills , July 2010

[8] European Commission, EU Energy and Transport in figures 2010

[9] BP, Statistical Review of World Energy 2010

[10] IEA, World Energy Outlook 2008

[11] IEA, World Energy Outlook 2008

[12] EIA International Energy Outlook 2009

[13] IEA, Key World Energy Statistics 2009

[14] IEA, World Energy Outlook 2008 p128