Emissions Performance Standards

Memorandum submitted by the Committee on Climate Change (EPS 06)

1) In our recommendations to Government, we have indicated that an Emissions Performance Standard (EPS) is one option, among others, that could help to achieve the decarbonisation of electricity supply in the UK.

2) It is important to clarify that the term EPS can be used to mean different things, i.e. a limit on the emissions (per MWh or per MW per year) of a new-build plant, or those of each plant on the system (including existing plant), or the average emissions across all plant on the system, or across the plants owned by a particular company.

3) We have highlighted the potential role for a plant-level EPS on new capacity in two contexts:

4) Coal: In our inaugural report in 2008, we highlighted the need to send a strong signal to investors regarding the future unabated operation of any new coal-fired capacity – possibly an EPS severely limiting operating hours or requiring retrofit – given that our analysis showed that unabated coal operation beyond the early 2020s was inconsistent with climate objectives. DECC’s response set out an expectation of full CCS retrofit to any new coal-fired plant by 2025 and a requirement to demonstrate CCS on part of its capacity from the start. The new Government has committed to the introduction of a plant-level EPS for new-build coal capacity.

5) Gas: Our recent letter to the Secretary of State outlined the merits of demonstrating CCS on gas-fired plant. It also highlighted the need to signal that beyond a certain point in time (e.g. 2020) the building of new unabated gas plant to run at high load factors would be inconsistent with the need for radical decarbonisation of the power system during the period to 2030 (although some gas plant may continue to operate unabated at low load factors). We therefore suggested that extending an EPS for new-build capacity to gas-fired plant – effectively requiring investment either in gas plant with CCS or another low-carbon option – should be considered as part of a coherent approach to fossil fuel generation.

6) Introduction of an EPS without wider reform of electricity market arrangements may risk under-investment in capacity that may have implications for security of electricity supplies. This may also risk higher emissions, given that possible responses to the imposition of an EPS for new-build plant commissioned from a certain date include:

i) a rush to build unabated gas-fired capacity before this deadline, and/or

ii) life-extensions to old, inefficient, unabated fossil plants.

7) Only by putting in place a framework to pull through low-carbon capacity can we mitigate these risks. Therefore, any EPS should not be considered in isolation, but rather in the context of wider reforms to the electricity market arrangements to incentivise build of low-carbon capacity. An EPS in this context may have a useful role alongside this framework as a means of underpinning and signalling directly the overall decarbonisation path for the sector.

8) In further work for our recommendations on the 4th carbon budget and review of the renewable energy target, we will:

· consider possible mixes of new low-carbon (i.e. renewable, nuclear and CCS) capacity that could be added during the 2020s, and the extent of electrification of heat and transport that might be feasible and desirable in this period;

· analyse the extent to which low-carbon options for providing flexibility on the power system (e.g. interconnection and demand-side response) could mitigate the need for unabated gas-fired plant to operate flexibly; and

· draw out implications for market reform, including an EPS and positive incentives to encourage investment in low-carbon generating capacity.

9) Two Annexes are included containing our letter to the Secretary of State in June 2010, and relevant extracts from CCC reports over the last two years.

September 2010
Annex 1: Letter to Rt Hon Chris Huhne, Secretary of State for Energy and Climate Change

17th June 2010

Dear Chris,

CCC advice on the approach to investment in fossil fuel power generation

The path to meeting the UK’s 2050 target to reduce emissions by 80% requires that the power sector is largely decarbonised in the period to 2030 (e.g. average emissions should be around 100 g/kWh in 2030 compared to around 500 g/kWh currently).

This will require a coherent approach to phasing out of conventional fossil fuel (i.e. coal and gas) generation. Currently the Government has proposed an approach to phasing out of conventional coal power generation and replacement with coal Carbon Capture and Storage (CCS), but there is no proposal for phasing out of conventional gas fired generation and replacement with gas CCS.

This letter recommends a more balanced approach (i.e. covering coal and gas) to required power sector decarbonisation. Specifically, we recommend that:

· Given new evidence on the potential competitiveness of gas CCS with other forms of low carbon generation, and the very limited international effort to develop this technology, serious consideration should be given to funding at least one gas CCS demonstration project as part of the four CCS demonstration projects committed to in the Coalition Agreement.

· 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.

· We are not proposing that an Emissions Performance standard should cover retrofit of plant added to the system in the period to 2020, given uncertainties over the economics of retrofit and the need for investment in conventional gas fired generation over the next ten years to maintain security of supply.

I am writing to you now in order to inform your thinking on design of the second competition for CCS demonstration, and design of an Emissions Performance Standard for possible inclusion in the recently announced new energy legislation.

Gas CCS demonstration

Although the Energy Act 2010 allows for the possibility of financing gas CCS demonstration projects, the current plan is that the four demonstration projects committed to by the new Government will all be based on coal generation technologies.

The argument behind this has been that demonstration of coal CCS technology is crucial, both in UK and global contexts, and particularly for countries where in the absence of CCS there would be significant investment in conventional coal-fired generation. UK support for coal CCS demonstration will, together with efforts in other countries (e.g. Australia, Canada, China, US and EU Member States) facilitate possible early roll out of this technology both in the UK and globally.

However, our analysis suggests that there is also likely to be a very important role for natural gas CCS, which could be competitive with coal CCS on a £/MWh generated basis, particularly when operating flexibly and in a low gas price world (also see attachment).

Key considerations are that:

· There is a very limited scope for new conventional gas fired generation beyond 2020 if we are to achieve the decarbonisation needed to meet carbon budgets on the path to the UK’s 2050 emissions reduction target (i.e. 80% on 1990 levels).

· At least 25 GW of gas fired plant on the UK system by 2020 will be suitable for retrofit with CCS.

· Even at high load factors and with a reasonably high gas price scenario, gas CCS is competitive with coal CCS (e.g. our analysis suggests that gas CCS could be around £10/MWh cheaper than coal CCS at a gas price of 75 pence/therm as in DECC’s central scenario for 2030).

· The cost advantage of gas CCS increases at lower load factors, given that it has relatively low capital costs (e.g. our analysis suggests that gas CCS could have a £35/MWh advantage over coal CCS operating at a 50% load factor in DECC’s central gas price scenario). Flexible (i.e. low load factor) low-carbon generation plant will be required in the UK and other countries, particularly to support seasonal demand for electric heating from the 2020s.

· At both high and low load factors, the cost advantage relative to coal CCS increases if gas prices are lower (e.g. at today’s gas price of 40 pence/ therm, gas CCS could have a £30/MWh advantage over coal CCS operating at high load factors, and significantly more when operating flexibly). The IEA estimates that the cost of shale gas could be in the range 30-50 pence/ therm, although we note that there are significant uncertainties and outstanding environmental questions here.

Therefore whilst much of the current global effort on CCS demonstration relates to post-combustion coal and coal gasification (Integrated Gasification Combined Cycle, IGCC), demonstration of natural gas post-combustion CCS would provide an additional and potentially valuable option for required power sector decarbonisation.

UK demonstration would facilitate possible deployment here in the early 2020s. It would fill a current gap as regards development of gas CCS technology, where planned demonstration projects in Norway have been delayed, and where we are not aware of any current or planned demonstration projects in other countries. Given its potential importance in supporting required power sector decarbonisation in the UK, we recommend that you should seriously consider inviting bids for gas CCS demonstration projects, with at least one of the four demonstration projects being for gas CCS, and possibly more depending on bids received.

An Emissions Performance Standard for gas-fired generation

In the context of coal CCS demonstration, you have proposed that there will be an Emissions Performance Standard which would require retrofit of existing coal plant, and fitting of all new plant with CCS. This is appropriate given the need to decarbonise the power sector through the 2020s, and given the very limited role for conventional coal-fired generation beyond the early 2020s.

There is also a question of whether the Emissions Performance Standard should be extended to cover gas generation; this would potentially provide a coherent approach to fossil fuel (coal and gas) generation and therefore drive down power sector emissions.

Whereas it is clear that the role for existing conventional coal will be very limited in the 2020s, and therefore that conventional coal plant added to the system before 2020 should be retrofitted with CCS in the 2020s, it is less clear when existing gas generation in the period before 2020 should be retrofitted. For example, the economics of gas retrofit will depend on the pace at which the market for electric vehicles develops, and the rate at which the carbon price increases, both of which are highly uncertain. In addition, setting a standard for gas retrofit now could undermine investment in conventional gas fired plant required over the next ten years in order to maintain security of supply.

In contrast, significant investment in unabated gas generation through the 2020s would conflict with the objective to decarbonise the power sector in this period. The implication is that the appropriate strategy for investment in the 2020s should include possible investment in gas CCS along with investment in other low-carbon technologies, but not investment in conventional gas generation except to the extent this is required for balancing increasing amounts of intermittent renewable generation or to replace retiring peaking plant.

Therefore we recommend that you seriously consider an Emissions Performance Standard for gas-fired generation that would effectively require new gas plant from 2020 to be fitted with CCS, with possible limited exceptions (e.g. for very low load factor plant). This would provide a strong signal about required power sector decarbonisation in the 2020s, and would complement broader electricity market reforms to deliver low-carbon investment from secure generation sources at affordable cost.

We will set out our analysis of gas CCS in full as part of our advice on the fourth carbon budget, to be published before the end of the year. In the meantime, I would be happy to discuss further with you and share the detailed analysis underpinning this letter.

Yours ever,

Adair Turner, Chair, Committee on Climate Change

Annex 2: relevant extracts from CCC reports

Building a low-carbon economy, December 2008

[Executive Summary, pp xxiv]

"Conventional coal-fired power generation should only be built on the expectation that it will be retrofitted with CCS equipment by the early 2020s. Given reasonable estimates of likely carbon prices in the 2020s, it is unlikely that conventional coal-fired generation will be economic even if no other policy levers are in place. But there is a danger that uncertainties about future carbon prices could result in investments that lock the UK in to carbon intense generating plant. There is therefore a strong case for buttressing the carbon price lever by establishing a clear and publicly stated expectation that coal-fired power stations will not be able to generate unabated beyond the early 2020s.

One way to achieve this would be to establish a requirement that coal-fired power stations cannot be built beyond a certain date without CCS (say 2020), that those built before that date will be given a deadline for retrofitting CCS (say in the period 2020-2025), or that plants which choose not to retrofit should be allowed to generate for a very limited number of hours. Alternatives could be (i) to set emissions standards (i.e. company specific ceilings on the g/kWh emissions from power generation) implying the need for CCS retrofit in the 2020s to any conventional plant added over the next ten years, and ensuring that overall progress towards decarbonisation of electricity was in line with the required path to 2030 and beyond, and (ii) to establish a floor price within the EU ETS. These and other possible options warrant further consideration."

[pp 108-9]

"[It is] possible that proposals for coal-fired power stations will be brought forward, particularly if electricity generators have a preference in principle for a portfolio of different technologies in order to diversify risks of supply interruption and price volatility.

An important issue is therefore whether the only policy instrument influencing decisions on new conventional coal investments should be the carbon price, or whether other policies are required.

Provided that expectations of carbon prices in the 2020s and 2030s are consistent with the vision of radical decarbonisation, those expectations should themselves ensure that conventional coal stations are only built with the expectation and intention of retrofitting CCS, since conventional coal-fired generation will be in danger of becoming uneconomic in the face of those carbon prices.

But given the uncertainties of the political processes which determine EU ETS caps, and given uncertain and fluctuating carbon price expectations beyond the next few years, conventional coal investments could possibly go ahead without a clear acceptance of the need for future CCS installation.

There is therefore a strong case for buttressing the carbon price lever by establishing a clear and publicly stated expectation that coal-fired power stations will not be able to generate unabated through the 2020s and beyond the early 2020s.

One way to achieve this would be to establish a requirement that coal-fired power stations cannot be built beyond a certain date without CCS (say 2020), that those built before that date will be given a deadline for retrofitting CCS (say in the period 2020-2025), or that plants which choose not to retrofit should be allowed to generate for a very limited number of hours. Alternatives could be (i) to set emissions standards (i.e. company specific ceilings on the g/kWh emissions from power generation) implying the need for CCS retrofit in the 2020s to any conventional plant added over the next ten years, and ensuring that overall progress towards decarbonisation of electricity was in line with the required path to 2030 and beyond, and (ii) to establish a floor price within the EU ETS, as already discussed in the subsection on nuclear power above. These and other possible policy options warrant further consideration.

Alongside these possible policy measures, however, it is vital that planned demonstration projects of CCS technology go ahead as rapidly as possible, ideally on a larger scale and covering more variants of the technology than currently planned, whether in the UK or wider EU contexts."

Meeting Carbon Budgets – the need for a step change. First Annual Progress Report to Parliament, October 2009

[Executive Summary, pp 21]

"Given the need to decarbonise power to meet longer-term emissions reduction goals, concerns over increasing prices, and possible security of supply problems with increased reliance on imported gas, the Committee recommends that a range of options to reduce risks for investing in low-carbon generation are considered:

Measures to strengthen the carbon price (e.g. extending to all low-carbon generation an exemption from the Climate Change Levy, or a carbon price underpin/tax).

Measures to provide certainty over the price paid to low-carbon generation (e.g. feed-in tariffs for low-carbon power generation, tendering for low-carbon capacity).

Measures to ensure investment in low-carbon generation (e.g. an emissions performance standard, a low-carbon obligation).

The Committee recommends that these options are considered in parallel with wider consideration of any implications from Copenhagen for the carbon price, so that any changes to current arrangements can be implemented in time to support decisions at the beginning of the second budget period on the 25 GW of low-carbon investments required in the 2020s."

[Executive Summary, pp 21]

"The Committee broadly welcomes the Government’s response to recommendations in our December 2008 report, namely the draft framework – published in June 2009 – to support investment in CCS and phase out conventional coal generation. [However, the] Committee’s analysis shows that there is a very limited role for conventional coal-fired plant beyond the early 2020s. The Government should provide a strong signal to investors now that this is the case whether or not CCS is later proven – to prevent investments proceeding on the misconception (based on the lack of a clear carbon price signal) that conventional coal will continue to operate (even at low load factors) over the next decades."

[pp 103]

"Power market reform. The Committee had previously raised the question whether investors could reasonably be expected to invest in low-carbon technologies under current market arrangements given multiple risks (e.g. over fossil fuel prices, carbon prices, electricity prices, technology costs and performance characteristics, etc.).

Based on a detailed consideration of new analysis, the Committee’s view is that there are plausible scenarios where risk-averse investors will revert to investment in gas fired power generation rather than low carbon technologies. This is problematic given the centrality of power sector decarbonisation to decarbonisation in other sectors on the path to meeting the 2050 target.

The Committee therefore proposes that alternative options to strengthen incentives for investment in low-carbon technologies (e.g. carbon price underpin, low-carbon obligation, emissions performance standard, etc.) should be seriously considered. A near term review of these options is required in order that any new arrangements can be introduced on a schedule consistent with the timing of investment decisions to be made early in the second budget period."

[pp 142-3]

"Power sector decarbonisation by the early 2030s is central to cutting emissions more generally (e.g. through the application of low-carbon electricity to cars and vans, etc.). Given the importance of moving to a low-carbon electricity system at affordable cost, the Committee believes that we should not accept the significant risks and costs associated with the current market arrangements.

We therefore strongly recommend that a range of options for power market intervention are seriously considered. New arrangements would replace current interim support for selected technologies. They should cover the full range of low-carbon generation technologies for the 2020s, and be designed to increase confidence about power sector decarbonisation, cut the costs of achieving this, and address any concerns about security of supply.

The options which we believe could potentially improve on the current market arrangements in delivering low-cost, low-carbon generation investment include (Box 4.15):

Measures to strengthen the carbon price signal (e.g. underpinning the carbon price at the EU or UK level, extending the Climate Change Levy exemption to all new low-carbon sources)

Measures to provide confidence over the price received by low-carbon generation (e.g. feed-in tariffs for low-carbon generation, tendering for low-carbon capacity)

Measures to ensure investment in low-carbon capacity (e.g. a low-carbon obligation, possibly as part of a wider capacity obligation, or an emissions performance standard).

These options have not previously been assessed in the UK. The Committee recommends that they should now be seriously considered given the new context, in which the UK has committed to cut emissions by 80% in 2050, and where decarbonisation of the power sector in the period to 2030 is vital in achieving this goal.

Our analysis shows that we require significant investment in low-carbon generation from now over the next 20 years and beyond to 2050. We expect that this investment will initially be mainly in wind generation (over 20 GW), with investment in up to around 3 GW of new nuclear plant and 2 GW of CCS coal by 2020, and around an additional 20 GW of low-carbon generation capacity in the period 2020-2030.

The risks that we have identified adversely impact cost and viability of investment in nuclear and CCS, and may increase the costs of wind investment required to meet EU targets. In assessing the appropriate timing of possible interventions, we have considered the timing of decisions to invest, the time likely to be required to introduce any intervention, and the need for near term investment in gas-fired generation:

Working back from when investments should ideally come on line, and given long project lead times, decisions to proceed with investment in low-carbon generation for the 2020s will have to be made in the relatively near term (e.g. during the second carbon budget period).

Detailed design of a market intervention could require a lengthy process. We note that it took several years each to move from the old power pool to the New Electricity Trading Arrangements (NETA), and from NETA to the current British Electricity Trading and Transmission Arrangements (BETTA).

Our extensive discussions with a wide range of industry stakeholders – energy companies, analysts, academics – suggest a strong consensus that current arrangements will not deliver a low-carbon power generation system through the 2020s, and that changes to the current arrangements are both required and inevitable. In these circumstances, a failure to review current arrangements may be perceived as creating more uncertainty by postponing introduction of inevitable change.

A new global agreement to reduce emissions and the EU response could have implications for the carbon price which in turn could change the power sector investment climate for the period to 2020 and beyond.

There is a significant amount of gas-fired generation currently in the pipeline that we expect to move forward and replace coal-fired capacity that will come off the system before 2016 and therefore maintain near-term system security (Table 4.2). These investments will be required whatever new mechanisms are introduced, and should be provided with appropriate comfort in the context of any review.

The Committee’s judgement in balancing these concerns is that a comprehensive review of the current market arrangements should be carried out in the near term. This should reflect any implications of Copenhagen for EU targets, the carbon price and UK carbon budgets. It should be designed to address adequately concerns for current investment in gas-fired generation. Any delay in moving forward with a review as soon as is practical following Copenhagen will jeopardise prospects for successfully decarbonising the power sector in the 2020s."