Emissions Performance Standards

Memorandum submitted by RWE npower (EPS 14)

Summary

1. RWE npower, part of the RWE Group, owns and operates one of the largest and most diverse portfolios of power generating plant in the UK with over 9,000 megawatts (MW) of large gas, coal and oil-fired power stations and cogeneration plant. Our retail arm, npower, is one of the UK’s leading suppliers of electricity and gas with around seven million customers.

2. We are pleased to respond to the select committee’s inquiry into emission performance standards. Investment in new low carbon generation will be essential for the UK to meet its greenhouse gas emissions targets of an 80% reduction in emissions by 2050. However it is important that a clear strategy is developed to ensure that new investment is delivered in a cost-effective way that does not adversely impact on either security of energy supply or UK competitiveness.

3. We are concerned that proposals for introduction of an EPS on new coal-fired power stations, whilst not necessarily setting more stringent emissions limits than existing coal policy, could set an unacceptable precedent for either new gas fired generation capacity or existing coal-fired power stations. Raising the possibility of an EPS for gas plant beyond 2020 will lead to investor uncertainty and is likely to lead to security of supply concerns in the 2020-2030 period as old nuclear and remaining coal plant are closed.

4. Whilst we recognise that CCS is likely to play an important role in low carbon generation in the future, the priority must be in ensuring that the technology is adequately demonstrated and that investors have the certainty needed to make decisions around the high level of capital investment that will be needed to achieve a low carbon energy supply. Prematurely setting an EPS on either coal or gas plant will not contribute towards this certainty.

Response to Specific 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?

5. The key factors that should be taken into account in deciding either the need for an EPS or the level that an EPS should be set at are as follows;

· Will an EPS be effective in delivering investment in low carbon electricity generation capacity?

· What are the likely impacts of introduction of an EPS on investor confidence in the UK? In particular are there any consequences for electricity security of supply?

· What impact will there be on electricity prices and consumers from introduction of an EPS?

· What level of emissions is achievable from commercially available technology? What are the practical implications for a demonstration plant?

6. The stated aim of the EPS as set out in the Coalition programme for Government is to prevent coal-fired power stations being built unless they are equipped with sufficient carbon capture and storage to meet the emissions performance standard. However, the coal strategy set by the previous Government already requires any new coal-fired power station to demonstrate CCS on at least 300 MW net capacity with the expectation that CCS would be retrofitted to its full capacity by 2025. Given this strategy introduction of an EPS is considered to be unnecessary and premature.

7. We are concerned that an EPS, whilst acting as a moratorium on construction of coal fired power stations, will do nothing to incentivise demonstration and development of CCS technology. Development of CCS demonstration must be part of a wider strategy for delivering a low carbon energy system which requires a comprehensive strategy to ensure that the necessary investment is forthcoming.

8. The EUETS remains the key mechanism which will deliver emissions reductions in the electricity sector in the UK. Additional policies may be necessary to incentivise investment in specific low carbon forms of electricity generation. However an EPS, whilst it would prevent investment in unabated coal, would not provide any incentive for investment in other low carbon electricity generation capacity.

9. Whilst doing nothing to encourage generators to invest in new low-carbon generation an EPS could have potential impacts on investors’ confidence in investing in new infrastructure in the UK. As a mechanism it would penalise investment in technologies with high levels of CO2 whilst failing to create appropriate incentives or an effective framework to deliver the necessary investment in low carbon technologies. Rather than focussing on an EPS Government should consider what is needed to make it attractive for investors to invest in low carbon technology.

10. Regulatory changes that could potentially impact on the return of an investment will impact on investors’ decisions on investment in new power plant capacity in the UK. The potential for the introduction of future emissions standards for either coal or gas fired power stations will have an impact on investors decisions on whether to invest in the UK and which power plants to invest in. This could have significant implications for security of electricity supply in the UK and consequently electricity prices for consumers.

11. Suggestions that the level of an EPS could also change over time or that an EPS could be introduced for gas fired power stations built after 2020 increases exposure to political risk, which can only have significant negative impact on investor confidence.

12. It needs to be recognised that whilst carbon capture and storage technology is a potential for future low carbon generation of electricity the full chain has not yet been demonstrated and is not likely to be commercially available for a number of years. It is far from clear that warranties on performance standards vendors will be able to offer and how these might impact on the cost of CCS.

13. Setting an EPS for a coal fired power station with demonstration plant fitted to 300MW is also likely to be difficult where the operating pattern of the unit with CCS fitted is difficult to predict at this stage. The fact that the CCS is at the demonstration stage would mean that it is very difficult to set a meaningful EPS until it is clear that the unit with CCS fitted is fully operational and meeting expected CO2 removal efficiencies. It is therefore difficult to see what can be achieved by setting an EPS prior to CCS being judged commercially available.

14. An EPS may have a role to play in setting future standards for fossil fired power generation but this should only be introduced once the technological performance and costs of CCS on both coal and gas-fired plant have been adequately assessed.

15. Once CCS is commercially available we would expect it to be evaluated through the EU Commission BREF process (Reference Document on Best Available Techniques) whereby technical experts evaluate the performance of combustion technologies and advise on what standards are achievable and should be applied through the environmental permitting process. In considering appropriate standards a number of factors would need to be taken into account including appropriate compliance periods, age of plant, whether to include or exclude start-up and shut-down, scope for derogations and exclusions etc.

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

16. The EUETS sets the overall level of emissions that will be achieved in the traded sector out to 2020. Introduction of an EPS will therefore not result in any further reductions in CO2 emissions from the traded sector.

17. If investment in the UK resulted in greater reductions of CO2 than would have occurred if an EPS had not been introduced, these would clearly have to be paid for by increased energy costs for UK consumers. In addition the overall emissions reductions required across the EU would be easier to achieve as a consequence of higher UK investment and the overall cost of carbon across the EU would reduce. Competitors elsewhere in Europe would therefore benefit from lower costs of carbon and consequently energy. In effect UK customers would be subsidising customers elsewhere in Europe.

18. The threat of any introduction of an EPS or mandatory retrofitting of CCS on gas plant would act as a strong deterrent for investment in new plant at a time when a significant amount of existing coal and nuclear capacity will be closing. This could then result in the perverse consequence of higher UK CO2 emissions if existing coal fired power stations remain open for longer.

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?

19. An EPS will not drive forward the development of CCS technology. If investors perceive that it is too risky to invest in new coal plant with demonstration on one unit because it is not clear that a future EPS level would be achievable, it could in fact act as a delay in driving forward the technology. Many pan-European companies such as RWE have a number of options for investment across Europe. Uncertainty around introduction of an EPS in the UK could result in investment decisions favouring other European countries rather than the UK.

20. Rather than focus on an EPS to drive development Government should aim to ensure that investment in low carbon technologies is attractive to investors. Once the technology has been demonstrated effectively on the first round of projects through funding via the CCS levy and European funding the next stage of investment should be driven by the same criteria as investment decisions in other low carbon technologies.

21. To ensure that low carbon investment is achieved in the most economically efficient way then it is important that there is a level playing field for making choices between alternative low carbon investments.

22. Unabated fossil fired power generation may still have a role (albeit a much smaller role) in the electricity generation mix and in the transition to a low carbon electricity system. In particular unabated gas generation may be a necessary back up for intermittent renewables.

23. In addition to recommending consideration of an EPS for new gas fired power stations from 2020 onwards the CCC has recommended that serious consideration should be given to funding at least one gas demonstration project. However the relatively low CO2 intensity of the emissions from a CCGT would result in a very high cost per tonne of CO2 abated compared with other technologies. We do not believe that CCS on gas fired plant will be a competitive or cost effective means of reducing CO2 emissions in the UK for a significant period of time. The focus should be on demonstrating the technology on coal-fired power stations which remains the global priority. Given this context it is not clear what benefits there would be from demonstration on gas fired plant. In addition it is likely to lead to significantly higher demonstration programme costs for the consumer.

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

24. Introduction of an EPS will not stimulate investment in low carbon technologies and, if introduced for gas plant in addition to coal, could deter investment in high efficiency CCGT plant. If introduction of an EPS leads to delay in investment in new capacity then clearly energy security could be impacted. Delayed investment will tend to maintain older higher emissions plant on the system for longer, making it harder to achieve UK climate change goals.

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

25. If an EPS is introduced in a way that does not constrain investment decisions beyond the current policy on new coal fired generation then it is unlikely that an EPS would result in any impact on domestic energy prices.

26. However if the manner of introduction of an EPS leads to delays in investment in new capacity (particularly new gas fired generation) and Government fails to come forward with an effective framework for encouraging investment in low carbon technologies this could result in a shortage in capacity and domestic energy prices are likely to rise.

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

27. As far as we are aware no other European countries are currently considering introduction of an EPS. However, we understand that a legislative proposal for the introduction of an EPS from 2020 was discussed in the Dutch Parliament earlier this year, but has not progressed since the Parliament re-formed following elections.

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

28. Introduction of an EPS would send out the message that the UK Govt does not consider that the EUETS will be sufficient as a mechanism to meet Kyoto and successor targets.

29. This is likely to lead to lack of confidence in whether global mechanisms will contribute to reductions in greenhouse gas emissions and potentially make it harder to reach agreement on these mechanisms.

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

30. Emission performance standards can be part of the mechanisms to address climate change but it is difficult to see how emissions trading and EPS can be used alongside each other. The aim of an emissions trading scheme is to deliver emissions reductions in the most economically efficient manner. Imposition of an additional standard will reduce the economic efficiency of the scheme.

31. Suggestions of a mandatory EPS would be unacceptable to countries with significant domestic fossil fuel reserves, until such time as CCS is proven to be technically and commercially viable at scale.

September 2010