Emissions Performance Standards

Memorandum submitted by the National Grid (EPS 08)


1. National Grid owns and operates the high voltage electricity transmission system in England and Wales and, as National Electricity Transmission System Operator (NETSO), we operate the Scottish high voltage transmission system. National Grid also owns and operates the gas transmission system throughout Great Britain and through our low pressure gas distribution business we distribute gas in the heart of England to approximately eleven million offices, schools and homes. In addition National Grid owns and operates significant electricity and gas assets in the US, operating in the states of New England and New York.

2. In the UK , our primary duties under the Electricity and Gas Acts are to develop and maintain efficient networks and also facilitate competition in the generation and supply of electricity and the supply of gas. Our activities include the residual balancing in close to real time of the electricity and gas markets.

3. Through our subsidiaries, National Grid also own and maintain around 18 million domestic and commercial meters, the electricity Interconnector between England and France, and a Liquid Natural Gas importation terminal at the Isle of Grain. We have also formed National Grid Carbon Limited which is a wholly owned subsidiary advancing the transportation and storage elements of the Carbon Capture and Storage (CCS) supply chain.

Executive Summary

4. National Grid welcomes the opportunity to provide input into the Energy and Climate Change select committee's hearing on Emissions Performance Standards (EPS). National Grid analysis suggests that to meet Government’s 2050 targets all coal-fired generation would need to be CCS-equipped by 2030 with all fossil fuel generation being abated by 2050. We support Government plans to maintain a diverse energy mix while delivering emissions reductions.

5. Emissions reductions can be brought about by either; i) Cap and Trade schemes; 2) environmental taxes; 3) mandatory emissions standards; or 4) some combination of these. National Grid believes that an Emissions Performance Standard could play a future role as part of a full regulatory system. However, in the first instance energy market reform as part of a future Energy Bill should encourage low carbon investment, and provide a platform for a future EPS. A better immediate strategy would be to await definitive results from the CCS projects to enable a clearer picture to inform EPS development. Setting the level of EPS at too early a stage could have unintended outcomes, applying it at one blanket level could force all coal stations to implement CCS but allow Combined Cycle Gas Turbines (CCGT) to continue to operate unabated. This has the potential to trigger a dash for gas which would lead to volatile price changes and reduced fuel diversity which in turn has potential implications for energy security.

6. In summary National Grid believes there may be a beneficial future role for Emissions Performance Standards, but on balance the time is not yet right. We consider that in the immediate term, the objectives of the select committee would be better served by continuing / expediting the CCS demonstration policy, expanding it to include at least one gas plant , clarify ing an acceptable regime for storage and provid ing incentives for investment in CCS infrastructure with a view to the future wider scale roll out of CCS when commercially and technically proven , facilitating the potential introduction of an EPS once the infrastructure exists to make it viable and sustainable.

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?

7. The goal of an Emissions Performance Standard (EPS) should be to maintain a diverse energy mix while delivering carbon reductions; it should be a realistic but challenging target concentrating on absolute levels of emissions rather than output per energy.

8. An EPS is likely to work best in the presence of a funding mechanism to provide funds to substantially cover the difference between the cost of low carbon generated power and unabated power. Without this it is likely that while generators will be forced to build CCS to meet the EPS target they will operate it as little as possible because it is uneconomic compared to the competing unabated fossil fuel generation. Funding needs to make CCS competitive with unabated plant to ensure that its operation is maximised. Our analysis suggests that to meet 2050 targets all coal would need to be CCS equipped by 2030 with all fossil fuel generation being abated by 2050.

9. However it is not clear that an EPS would encourage CCS investment; in fact there is a risk that the introduction of an EPS could have unintended consequences of prompting a dash for unabated gas plant, thereby diverting potential investment away from CCS. Instead National Grid considers that the stated objectives of the select committee would be better achieved by:

o Clarification of an acceptable regime for long term storage liabilities;

o Retaining existing policy that requires CCS demonstration on any new coal plant and the consideration of an extension of CCS demonstration requirement to new gas fired plant;

o Expedite award decision for construction of the first CCS demonstration project;

o Expedite process for selection of coal CCS demonstration projects 2-4;

o Making an additional commitment to at least one gas CCS demonstration project;

o Implement a floor price for carbon as committed to in the Coalition government policy – this together with ETS should be the primary policy instruments to drive investment in low carbon technologies.

o Stimulate investment in storage characterisation;

o Stimulate investment in shared user CO2 transportation infrastructure where the economies of scale render this a least regrets anticipatory approach to investment

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

10. The EU-ETS remains unproven as an effective tool to drive reduction in emissions, the surplus of certificates has led to low carbon prices. The potential advantage of an EPS is that it could provide a glide path for the industry in terms of volume of low carbon generation needed. An EPS would give the UK unilateral ability to exceed EU Emissions Trading Scheme (EU-ETS) targets if set accordingly.

11. Industry has considerable uncertainty regarding the level of carbon prices into the future and so investment decisions in low carbon technology are very difficult. An EPS on the other hand can provide a clear volume signal setting out the future requirement. The price of carbon becomes only indirectly relevant because the EPS provides an absolute requirement to reduce emissions. It is our view that if an EPS were to be introduced, then there should be scope for companies to trade their EPS obligations and this should ensure that those that can develop low carbon technology at the lowest cost will do so in order to earn revenues from selling the EPS certificates.

12. However, it is not clear that an EPS would bring any additional benefits; in fact it could bring unintended detrimental consequences such as deterring investment in UK clean coal technologies. Its disadvantage is that the volume will be delivered regardless of cost (i.e. an EPS could drive the (successful) delivery of emissions reductions but at great expense due to technology not being sufficiently mature.) The stated objectives would be better achieved by expediting/extending government commitment to CCS demonstration projects to prove and refine the technology and introduction of a carbon floor price.

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?

13. National Grid does not think an EPS would be effective in driving forward the development of CCS technology at this time. However there may be a point in the future when an EPS will provide a useful "line of sight" to the industry regarding the roll out of a more mature technology. This would then help with the development of large scale transport and storage infrastructure to be delivered to meet the targets in a timely and efficient manner.

14. We believe that the UK CCS demonstration programme should be extended to cover gas fired as well as coal fired power stations. Preferably this would be by the addition of one or more gas fired demonstrations in addition to the 4 coal fired demonstrations already mandated. If an EPS were to be introduced consideration should be given to the introduction of different EPS levels for coal and gas fired generation. In this way both forms of fossil fuel generation might be equally incentivised to adopt CCS in order to maintain a diverse energy mix and avoid a dash for unabated gas.

15. Rather than focussing all policy measures upon CO2 emitters (capture plant) there is merit in considering complementary policy measures to stimulate investment in CCS transport and storage infrastructure. At present we perceive the lack of maturity of offshore storage site characterisation, the lack of clarity over long term storage liabilities and the consequent residual uncertainties to be significant barriers for investment in the other parts of the value chain. The additional costs of CCS (compared to unabated fossil fuel generation) also pose a significant barrier to CCS market development. In this regard we believe there are substantial economies to be realised through multiple emitters in the same area sharing the same pipeline transportation infrastructure. It therefore seems to us that the objective of expediting CCS development could be served by complementary policy initiatives to procure the early "investment grade" characterisation of potential storage formations and the early development of "cluster sized" pipeline networks. These measures would significantly reduce barriers to entry for capture investments at both power station and industrial premises and pave the way for a fast roll out of CCS upon completion of the demonstrations.

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

16. An EPS for new plant may result in a delay in new plant being built until CCS technology becomes proven at a large scale commercial level. Coupled with the EU’s Industrial Emissions Directive (IED), which will tighten the rules on SO2 and NOx emissions from large combustion plant, this may result in lower plant margins with no plant able to fill the gap relatively quickly due to large scale plant being ‘new’ technology – abated gas and coal or nuclear. A decision will need to be taken whether to retro-fit abatement equipment in order to comply with the new legislation. The economics of this decision will be affected by any need to retrofit CCS and may result in further plant closures, lower plant margins and higher prices.

17. The majority of the coal plant that will still be open in 2020 will be 50 years old and coming to the end of its planned lifespan. Consequently, forcing the retrofitting of CCS, because of the EPS, would more than likely result in the early closure of plant due to the economic viability of retrofitting CCS to plant coming towards the end of its operational life.

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

18. National Grid believes it should be a Government objective that the transition to a low-carbon economy is achieved at the lowest cost possible to UK tax payers. Low carbon generation in general is likely to result in an increase in end-user energy prices and the cost increase brought about by an EPS may not be significantly greater than that arising from high carbon prices in the EUETS. UK wholesale power prices are currently closely related to underlying fuel and carbon costs, in particular gas due to the amount of existing plant and the plant currently under construction.

19. We believe that proposed Government policies, such as the Green Deal, should be given time to ensure consumers can maximise their energy efficiency in the first instance.

20. Additional CCS equipment will increase the capital cost of new plant and reduce overall fuel efficiency, thus increasing the breakeven price of new stations. Even with carbon prices of €30/tonne, CCGT and unabated coal are likely to be the lowest cost options for generation. An EPS would remove these options from the marketplace and / or a higher carbon price would make CCS abated plant more competitive – both are likely to result in higher prices passed through to the end consumer.

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

21. National Grid are unaware if any other countries are considering an EPS however we believe that there is merit in working with the EU to coordinate development as we operate within a wider European market for energy.

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

22. The UK has an important role to play within the EU, therefore any action taken by the UK leading to EU-wide positions would send out a strong signal ahead of the climate negotiations in Cancun. However it is National Grid’s view that a better approach would be to continue with our current CCS demonstration projects and clarify an acceptable regime for long term storage liabilities.

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

23. Emissions reductions can be brought about by either; i) Cap and Trade schemes; 2) environmental taxes; 3) mandatory emissions standards; or 4) some combination of these. Carbon dioxide emissions can in theory be regulated in the same way as other atmospheric emissions such as sulphur dioxide where absolute emissions limits have been set. In the US, the EPA mandate sulphur emissions reductions and this leaves operators with decisions to make on whether it is more cost effective to upgrade or close existing plant (note that the US EPA has recently tightened sulphur emission limits). The Large Combustion Plant Directive is having the same effect in Europe. Both set standards for new plant.

24. An EPS would fulfil a similar function and therefore, in principle, could be used as one of a basket of measures to help with efforts to reduce global CO2 emissions. Using the precedent set for sulphur, negotiations around the carbon equivalent might gain support. However, research would need to be carried out to understand the costs and benefits of such a strategy over other approaches such as cap and trade (although they are not necessarily mutually exclusive). In particular, what would energy prices, security and the energy mix be if such as strategy was introduced? This would probably be different for each country as each has a different proportion of coal generation in their energy mix.

September 2010