Emissions Performance Standards

Memorandum submitted by the Carbon Capture and Storage Association (EPS 15)

Introduction

1. The Carbon Capture and Storage Association welcomes this opportunity to respond to the Committee’s inquiry into Emissions Performance Standards.

2. The CCSA was formally launched in March 2006, and brings together a wide range of specialist companies across the spectrum of carbon capture and storage (CCS) technologies, as well as a variety of support services to the energy sector. The Association exists to represent the interests of its members in promoting the business of CCS, raising awareness of the benefits of CCS and to assist policy developments in the UK, EU and internationally towards a long term regulatory framework for CCS, as a means of abating carbon dioxide emissions.

3. We note the upcoming DECC consultation on electricity market reform, which will include consideration of an EPS policy. Meanwhile, the CCSA would like to offer the following early comments in response to the Energy and Climate Change Committee’s Inquiry.

Comments on the EU Emissions Trading Scheme:

4. The CCSA strongly supports the commitment to the EU Emissions Trading Scheme (EU ETS) as the primary long-term mechanism for delivering cuts in emissions across the EU and incentivising low-carbon technologies such as CCS. However, should the UK Government reach a decision to implement an Emissions Performance Standards (EPS) policy, there are a variety of issues that must be considered, and these are set out in this submission.

5. It should firstly be noted that a domestic (EPS) policy in the UK may achieve lower emissions in the UK, however these will be offset by higher emissions in the EU due to the EU ETS cap, so there would be no net reduction in EU emissions. In addition, an inappropriately designed UK EPS risks undermining the EU ETS price, encouraging investment in less cost-effective technologies, and thereby reducing investor confidence. A drop in the EU ETS carbon price coupled with a UK EPS policy would mean that UK industry and consumers would be faced with a disproportionate share of EU’s emissions reductions.

6. However, due to weak market prices and uncertainty, the EU ETS does not currently incentivise investment in low carbon generation. One possible solution to address the ineffectiveness of the EU ETS would be to push for a tighter overall emissions cap for Phase III (2012-2020) and beyond.

Comments on the reform of the electricity market:

7. As part of the government ambition for a wide reform of the electricity market, a variety of regulatory and financial measures are being considered – both to ensure security of supply as well as to meet the UK’s emissions reductions targets. The application of EPS is one such regulatory measure, alongside other measures such a carbon floor price, Feed-in Tariffs and capacity mechanisms. An EPS policy will not be the main driver to achieve a UK low-carbon economy and can only be considered as part of the wider package of measures needed to reform the electricity market to ensure the UK can achieve a low-carbon economy. The CCSA therefore strongly supports the upcoming DECC consultation on the reform of the electricity market, which will include consideration of an EPS policy, and we look forward to further discussions with government on whether and how an EPS policy can fit within the wider electricity market reform.

Specific comments on Emissions Performance Standards:

8. We would like to begin by emphasising the need for development of an appropriate regulatory and financial framework for CCS and congratulate the UK government in the significant steps that have already been taken in this respect. An appropriate regulatory and financial framework will need to be created both for the long-term development of CCS, but more importantly in the initial demonstration phase that we now find ourselves in. It is imperative that regulation developed in this crucial stage of demonstration will need to be as flexible as possible, to enable these demonstration projects to go ahead, thereby ensuring important learning as to how the longer-term regulation should be developed. The balance of regulation and incentives will be vital in enabling companies to invest in these early projects and only if the right balance is struck, will we begin to see the development of a longer-term CCS industry.

9. Whilst it is important to note that the implementation of EPS policies elsewhere in the world (particularly in California) have been introduced with positive outcomes for CCS development, it should not be assumed that the same policies will be appropriate for the UK. In particular, careful consideration must be given to the introduction of such a policy in the UK, to avoid unintended and unwelcome consequences. As mentioned above, only the appropriate balance of a regulatory policy coupled with financial incentives, will stimulate CCS investment. Investors must have confidence that the cost of their investment can be recovered, and the introduction of an EPS policy without appropriate financial incentives will not encourage CCS development.

10. The CCSA supports the Committee on Climate Change’s recommendation that the UK must have a largely decarbonised power sector by 2030 in order to meet its 2050 target of reducing emissions by 80%. If an EPS policy is introduced, it must be seen in the context of a journey towards this 2030 timeline for near-decarbonisation of the power sector and the long-term objective of ensuring CCS can fulfil its role within this framework. It would be unreasonable to expect that fossil fuel power plants would have absolutely zero emissions. Therefore, to ensure that generators do not emit above acceptable standards, some form of EPS regulation (or similar) will likely be required in the longer term.

11. However, as we progress towards the 2030 timeline for near-zero emissions in the power sector, it is important to consider whether applying intermediate levels of EPS is a useful policy instrument on new coal-fired power stations. It would be premature to introduce an EPS policy at this stage, as emissions limits which reflect the end objective cannot be implemented for fossil fuel power generation until technology optimisation of CCS has been established. As we have yet to build the first four CCS plants in the UK, the timeframe for introducing EPS cannot yet be clear. Indeed, there is a strong argument not to regulate by EPS until there is the experience to draw upon.

12. It is therefore very important that we urgently proceed to demonstrate CCS on both coal and gas plants in the UK, both to progress quickly to cost-effective emission reductions and to showcase UK capability in world markets. These projects will serve to inform future energy policy including consideration of an EPS. The CCSA would like to emphasise that we support all CCS development, and we are indifferent to the choice of fossil fuels. We believe that all fossil fuels must be decarbonised, if we are to reach a near-decarbonisation of the power sector by 2030, and CCS represents a cost-effective means by which this can be achieved. The UK urgently needs to move beyond the first four CCS demonstration projects and set the path towards the longer term development of CCS (on coal, gas and industrial sectors) to ensure that we are able to meet our ambitious climate change targets and achieve a near-decarbonisation of the power sector by 2030. We will need to be planning and implementing the next phase of CCS demonstration projects before the first demonstration projects have been operating for a significant period of time. In this respect, the CCSA supports the Committee on Climate Change’s recommendation that the government should consider demonstrating CCS on a gas-fired power station. Ideally, the CCSA would like to see the UK develop as many CCS projects as possible and certainly more than four – on both coal and gas. However, we would not want to see gas-CCS projects disadvantaged in any way at this stage and we therefore recommend that gas-CCS projects should be able to compete on a cost basis with coal-CCS projects in the current CCS demonstration programme. We would like to point out that the CCS industry has been operating under a UK CCS policy that has been solely focussed on coal over a long period with a commitment to four projects, and we would like to emphasise that constant sudden changes in policy create significant confusion and low investor confidence – not a conducive environment to encourage investment in CCS.

13. The current UK policy for new coal is that no new power station should be built without demonstrating CCS on a proportion of its capacity (which is in effect, a de-facto EPS policy with some flexibility). This is a workable coal-CCS policy for the moment and in combination with the CCS Levy that was introduced in the Energy Act 2010 (which was extended to cover gas as well) to fund demonstration projects, the UK policy will provide the necessary funding of the additional CCS costs to generators. However, a UK energy policy must also consider how to incentivise gas-CCS (and industrial CCS) in the long term, and there is currently little incentive for gas power plants to demonstrate CCS. Should an EPS policy be introduced to limit the emissions from coal-fired power stations alone, the result is likely to be increased reliance on unabated gas, which will not incentivise CCS demonstration on either coal or gas. However, it must be noted that an EPS introduced at the same level and timing across all fuels/technologies will cause perverse outcomes and must be avoided.

14. The UK will need a mixed portfolio of energy sources and low-carbon technologies to ensure diversity and security of supply. Nuclear power will provide a stable base load. Renewable sources must be accommodated in the mix but are intermittently available. Demand side management through smart metering and grids will likely help to reduce demand variation but it will remain an inevitability that fossil generation (with CCS) will continue to provide a large proportion of the mix (in particular gas generation) as well as providing the flexibility that will ensure continuity of supply.

15. There will also be the need for a diversity of fuel sources in the future as we have now. Coal will be needed as well as gas but there may be an increasing role for biomass in the mix. New technologies will be developed appropriate to each fuel source including CCS technologies as well as fundamental changes to combustion and power generation. Consideration will need to be given to tailoring any EPS to fuel and/or technology so as not to inhibit development. As stated earlier, the possible introduction of an EPS policy must be seen in the context of the path towards near-decarbonisation of the power sector by 2030. If an EPS policy is introduced, an appropriate timeline must be carefully considered, incorporating the needs of different technologies and fuel sources (for example, EPS on coal would need to be implemented on a different timeline than EPS on gas). This timeline must also consider the necessary timeline for CCS deployment – again, to enable CCS to contribute to the 2030 goal of near-decarbonisation of the power sector.

16. Responding to variation in demand creates challenges in terms of return on capital investment for essentially low utilisation plant. In the extreme there are currently a small number of old plants with capital written off many years ago that clip peaks of demand. These will be required to close soon. To build new plant fully equipped with CCS is a very expensive option so for the limited time these plants run, it will likely be best policy to replace these plant with open cycle gas turbines. If an EPS policy is introduced, consideration would need to be given to an EPS easement for peaking plant.

17. In the long run, when the power industry is decarbonised, the additional cost of providing CCS will not be an issue for fossil fuel power stations, as this will simply be included in the cost of building and operating a fossil fuelled power plant and producing low-carbon electricity. Even in the mid-merit role high capital cost plant will suffer low utilisation to compensate for intermittent generation elsewhere. In this context electricity market reform will be essential to incentivise investment in low- carbon capacity. An EPS policy should seek to be consistent with best available technology (BAT) at the time of plant construction, and it should be the priority of government that CCS becomes BAT on fossil fuel power plant as soon as possible.

18. One of the factors that will encourage long-term investment in CCS will be the existence of, or plans for, local shared infrastructure in terms of transportation and storage. In the value chain an EPS will only place an obligation on a potential power plant developer to develop a full-chain CCS project that sufficiently meets the EPS. Without there being additional incentives to bring forward common transport and storage infrastructure an EPS alone will not ensure efficient development of a long-term CCS industry in the UK.

19. It has been suggested that one way to introduce an EPS would be through a Portfolio Standard in which the emissions are averaged over a generators total capacity – this could incentivise CCS development. Although it could be a workable instrument for generators with a balanced portfolio but for generators without a spread of portfolio it may cause problems. Using mechanisms to overcome this such as a tradable standard would entail a major policy departure, require considerable administrative resource and may conflict with the operation of the ETS. A Portfolio Standard seems to offer no benefit over current policy so the CCSA recommends that this mechanism is not considered further at this time.

20. If EPS requirements are brought to bear now then there is a considerable risk of incurring unintended consequences. There are major commercial risks associated with investment in new fossil fuel power plant with CCS. Imposing limits on emissions at a time when the operation of CCS-power is not commercially proven may well inhibit investment in either coal or gas or in fossil power altogether. At this stage combining EPS with the existing financial incentive (the CCS levy) seems to offer no additional policy benefit over the current policy for coal that offers a targeted voluntary approach with financial support. The CCSA therefore recommends that an EPS is kept under review at least until the first CCS demonstration projects have been built.

Conclusions

· In the long term it is to be expected that all power plants should be able to comply with some form of EPS. The question that must be asked is whether in the interim an EPS will be of value in incentivising investment in new fossil power plant with CCS.

· EPS should only be considered as part of a suite of policies including transitional incentives for CCS, electricity market reform and infrastructure policy. Taken in isolation an EPS risks major unintended consequences.

· If introduced, the level and timing of an EPS policy must be carefully considered, to take account of differences in fuels and technology options, and should be considered in the context of reaching a near-decarbonisation of the power sector by 2030, incorporating the necessary timeline for CCS deployment.

· Current policy for new coal fired power plant will ensure that CCS plant is built at commercial demonstration scale. An EPS would not contribute to that situation at present.

· It is recommended that consideration must be given to the longer-term need for gas-CCS and how this will be introduced in the UK. However, it must be recognised that requiring CCS on all fossil fuel power stations without careful policy design could lead to lack of investment in new power stations and resulting security of supply risks.

· The single most important issue at present is to get the planned CCS demonstrations built as quickly as possible. This will serve to inform technical policy development including an EPS.

· Therefore the CCSA recommends that the use of an EPS in power generation policy is kept under review until more information is available arising from the CCS demonstration programme.

The view expressed in this paper cannot be taken to represent the views of all members of the CCSA. However, they do reflect a general consensus within the Association.

September 2010