Emissions Performance Standards

Memorandum submitted by EDF Energy (EPS 18)

Summary points

· We agree with the Government that an Emissions Performance Standard (EPS) will not on its own achieve decarbonisation. Nevertheless, we believe that EPS will ultimately have a role to play, alongside electricity market reform.

· The primary objective of the proposed EPS would be to prevent new coal-fired power stations from being built unless they are equipped with sufficient carbon capture and storage (CCS) facilities. However, the proposal for an EPS raises the question of its potential extension in two respects, firstly to encompass other new fossil fired power stations and secondly to encompass existing fossil fuelled power stations.

· Applying an EPS to new coal plant alone implies the acceptability of new unabated gas plant. We believe that further investment in Combined Cycle Gas Turbine (CCGT) plant, beyond the minimum that is required to bridge the gap to transition to low carbon technologies, will reduce the medium term potential for decarbonising the electricity sector and increase the risk that the long term emissions reduction targets will not be met, as the carbon emissions from these new assets will be ‘locked in’. As well as increasing the country’s exposure to gas price risk, there would be little immediate contingency if CCS were delayed or demonstrated to be too expensive.

· We believe that the arguments are finely balanced in respect of the adoption at this stage of the proposal by the Climate Change Committee (CCC) that no new gas-fired power stations, except perhaps for peaking purposes, should be constructed after 2020 unless equipped with CCS. While the direction indicated by this proposal is undoubtedly correct, there is a risk that this approach may create perverse incentives leading to an unnecessary ‘dash for gas’ ahead of the 2020 deadline. Nevertheless, we agree with the CCC that there would be merit in including a gasfired plant in the four CCS demonstration plants to which the Government is committed.

· CCS is still at an early stage of development, and, on the Government’s current best estimate, it is only likely to become technically and economically viable for new plant after 2020 at the earliest. The technical and economic challenges of retrofitting CCS to existing plant will be even greater than for new plant. Until CCS has been proven technically and economically or the UK has made sufficient progress in constructing new low carbon generation capacity, we believe that it will be difficult to specify the detail of any EPS measures to restrict the operation of existing fossil fuelled plant and ultimately to force their closure. Such measures would need to be carefully calibrated in order to deliver emissions reductions in a cost-effective manner without jeopardising security of supply by forcing the premature closure of existing plants.

· Therefore, while we believe that it is useful for Government to signal the intention to phase out fossil fuelled generation, other than potentially for peaking purposes, on a timescale consistent with the CCC’s recommendations that electricity generation should be largely decarbonised by 2030, we believe that it is too early to specify the detailed rules for implementation of an EPS for this purpose. At this stage, the immediate priorities for Government should be the implementation of a carbon price floor to strengthen the incentive for investment in all low carbon technologies, and the reform of the electricity market to ensure the right capacity mix is built for economic delivery of decarbonisation and security of supply.

Introduction

1. EDF Energy is one of the UK’s largest energy companies with activities throughout the energy chain. Our interests include nuclear, renewables, coal and gas-fired electricity generation, combined heat and power, electricity networks and energy supply to end users. We have over five million electricity and gas customer accounts in the UK, including both residential and business users.

2. EDF Energy believes that, as well as concerted efforts to improve energy efficiency, large scale investment in electricity infrastructure is urgently required to replace existing plants and meet the UK’s climate change targets. It is important that the transition to a low carbon economy is progressed efficiently to ensure that the competitiveness of UK energy supplies is maintained while also ensuring the stability and affordability of energy prices. It is essential that the right decisions are made now to secure investment in large-scale low-carbon electricity generation and to promote the transition to a low carbon economy. There will need to be a diverse energy mix, including nuclear, renewables and CCS technologies that can be applied to fossil fired generation plant subject to their successful demonstration.

3. We must recognise the scale of the challenge that this represents for the electricity sector and the importance of the need to take action now. The current markets have served us well up until now, but these need to be modified to deliver the UK’s current energy policy objectives. We welcome the planned consultation by DECC on market reform in the autumn, as well as the work that is being taken forward by HM Treasury to underpin the carbon price this year to ensure that we get a robust signal on the future carbon price. Together these elements should provide sufficient clarity to continue with our plans to invest in low carbon electricity generation.

Response to specific questions

What are the factors that ought to be considered in setting the level for an Emission Performance Standard (EPS) and what would be an appropriate level for the UK? Should the level be changed over time?

4. EDF Energy believes that energy policy must address the three general overarching issues of security of supply, decarbonisation of the economy, and affordability. Without a holistic approach to the problem that considers how the proposed policy interacts with existing frameworks of decarbonisation measures, we believe that a mandatory and inflexible mechanism to limit carbon emissions, like an EPS, may run the risk of unintended consequences, with considerable potential for delay in vital low-carbon infrastructure. For example, if the EPS is set too high then this may simply encourage the development of unabated gas-fired plant instead of low carbon. California has an EPS limit of 1,100lbs CO2/MWh (~500kgCO2/MWh), which is often used as a point of reference for proposed levels around the world, and, while this prevents the construction of unabated coal-fired plant, it still allows for the construction of modern CCGT plant, which have direct emissions of around 350kgCO2/MWh. Favouring one fossil fuel over another will not deliver the level of decarbonisation required to meet the UK’s climate change objectives, and it will also pose a significant risk to the country’s security of supply due to a lack of diversity. We believe that further investment in CCGTs, beyond the minimum that is required to bridge the gap to transition to low carbon technologies, will not be the right answer for the UK, because it will increase the risk that the long term reduction targets will not be met as it will lock in the higher carbon emissions from these new assets. As well as increasing the country’s exposure to gas price risk, there would be little immediate contingency if CCS were delayed or demonstrated to be too expensive.

5. While an EPS can be used to curtail emissions from fossil fuel plant, it will do little to create a tangible incentive for investment in new low carbon generation. It should be seen therefore as only part of the solution. Furthermore, the CO2 emissions from fossil fuel plant are dictated by the carbon intensity of the input fuel and the efficiency of the plant: both of these parameters are fixed in the design and construction of the plant. The options therefore for changing the carbon footprint of fossil generation are relatively limited.

6. CCS does provide a potential option for keeping coal and gas in the generation mix by capturing and storing CO2 emissions. However, CCS is still in an early stage of development and, at the Government’s current best estimate, is only likely to become economically and technically viable after 2020. Setting an EPS before the CCS is first implemented at scale could be premature, since it could risk the enforced closure of fossil plant, which could jeopardise security of supply in advance of other measures to bring forward investment in other low carbon technologies.

7. Therefore, the introduction of an EPS must be considered in the context of the successful development and demonstration of CCS. Without CCS being demonstrated, it could be premature to recommend the level at which the EPS should be set. If a retrofit programme to install CCS were mandated at a later stage, then the expectation would be that the level of the EPS would decline over time, matching the timescales for completing a CCS retrofit for existing fossil plant.

8. We therefore believe that once CCS has been proved viable or the UK has made sufficient progress in constructing new low carbon generation capacity, there would then be merit in an EPS as either a form of a regulatory ‘backstop’ to ensure emissions from operational fossil plant are abated, or as part of the longer-term solution in removing residual emissions.

9. At the same time, we do not believe that EPS can be the primary driver that promotes the UK’s transition to a low-carbon economy. We believe that this can only be achieved through a wider package of electricity market reform that produces both a strong carbon price and a credible revenue stream for low carbon generation from the market that is protected from the distortive impacts of excessive subsidies for various technologies.

10. If the objective of the EPS is simply to force a moratorium on new unabated fossil fired plants, this can also be achieved in a more flexible manner through the National Policy Statements (NPSs). The draft Overarching National Policy Statement for Energy (EN-1) currently states that all applications for new combustion plant should demonstrate that the plant is ‘Carbon Capture Ready’ (CCR) before the consent may be given. We recommend that once CCS is demonstrated to be viable, then this could be announced in the Annual Energy Statement. The wording in the relevant NPSs could then simply be amended to reflect the requirement of new combustion plants to have CCS. We believe that such an approach will introduce an effective form of regulation that is no longer based on arbitrary targets but is more process-orientated in both nature and scope.

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

11. An example can be taken from Germany’s experience with its aggressive centrepiece Renewable Energy Sources Act (EEG), which came into force in advance of the establishment of the EU ETS in 2005. A recent study by a German think tank1 cites academic analysis that finds that ‘that while the CO2 emissions in Germany’s electricity sector are reduced substantially, the emissions are hardly altered at the European scale by Germany’s EEG. This is due to the fact that Germany’s electricity production from renewable technologies mitigates the need for emission reductions in other countries that participate in the ETS regime, thereby significantly lowering CO2 certificate prices by 15% relative to the situation without EEG’ (p21). Due to this substitution effect, it concludes that ‘since the establishment of the ETS in 2005, the EEG’s net climate effect has been equal to zero and that the EEG ‘attains no additional emission reductions beyond those achieved by ETS alone’ (p6).

12. This experience would suggest that specific targeted policies can achieve specific outcomes even though they could in practice undermine broader policy frameworks. However in the case of the EU ETS it isn’t clear if these specific interventions are simply serving to disguise the shortcomings of the EU ETS or if it is genuinely being undermined. We have already alluded to the need for market reform and the need to underpin the carbon price because we believe that while the EU ETS has been useful in establishing a market price for carbon, it is failing to provide a credible long term market signal to bring forward investment in the low carbon generation that is required to deliver the UK’s emissions reduction targets.

13. It is therefore possible that the introduction of an EPS could help sharpen the incentive to reduce CO2 emissions. However we must recognise that while the introduction of an EPS would deter the construction of new unabated fossil plant it is not an instrument that will create a tangible value or additional revenue to incentivise low carbon generation. We therefore believe a greater emphasis should be placed on strengthening the carbon price by taking action to set a floor in the EU ETS price paid by UK generators by using a topup tax that can work along side the EU ETS and believe that this will ultimately be more effective.

14. Accelerating the deployment of low carbon technologies and/or the successful demonstration of CCS could in turn provide policy makers in the EU greater reason and confidence to set more stringent targets for the EU ETS.

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

15. For the reasons outlined above, we believe that an EPS alone will not be a catalyst for CCS innovation, and that it must only be considered as part of a robust and holistic long-term policy framework. The economic and technical viability of CCS should determine an EPS, and not the other way round. We should also note the unintended consequences that could arise from introducing a single EPS as in California where setting an EPS simply led to investment in gasfired generation.

16. We agree with the recommendation of the Committee on Climate Change (CCC) to fund at least one gas CCS demonstration project as part of the demonstration programme committed to by the Government. We believe that this would support the UK’s objective of securing the decarbonisation of the power sector. One of the primary benefits described by the CCC of having gas with CCS on the system is the better economics of the plant when running at lower load factors, which will be an important consideration if significant intermittent wind capacity comes on to the system. We therefore believe that an explicit objective of any gas with CCS demonstration project should be to prove that this type of plant is technically capable of operating flexibly in this way and is able to contribute to system balancing. However, any subsidy to gas with CCS should be limited to the demonstration programme and, after this, the pace of implementation of CCS across all fossil generation should be driven by the carbon price and the electricity market - just as it should be for the implementation of all forms of low-carbon technology.

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

17. While an EPS will curtail emissions if CCS is available, it could lead to generation shortages brought on by the early closure of fossil fired plant if CCS is uneconomic, and without there being immediate adequate provision of a suitable alternative. This is why we believe that the focus of energy policy and the introduction of an EPS should be to provide a robust and holistic long-term framework to develop and deliver low-carbon technologies.

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

18. At this stage, without having sight of the level of the EPS (which is linked to CCS, the costs of which are unknown) or its scope, it is difficult to speculate on what the effect on domestic energy prices will be.

19. We believe that the Government should be focussing on the facilitative actions that lead to a successful CCS demonstration programme. Otherwise, there is a real risk that the impact on annual domestic electricity bills will end up higher than the Government’s current forecast of £8 and £15 in 2015 and 2020 respectively2, and that consumers will end paying more for no extra tangible benefit.

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

20. We are currently not aware of any other European countries actively considering an EPS as a national policy measure. While in theory the standards could be harmonised (presumably along the lines of the EU Industrial Emissions Directive), agreeing a common standard across the EU would be difficult given the very wide range of carbon intensities that currently prevail across all of the Member States and the differences that exist in individual Member States’ energy policies.

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

21. It is unlikely that any action by the UK to introduce an EPS will have sufficient time ahead of the Cancun meeting to establish evidence that justifies its introduction.

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

22. It may, but we believe it would be of limited value. As outlined above, an EPS would only apply to fossil fuel plant and so would not capture the full scope of decarbonisation efforts. It would also do nothing to proactively make other forms of low-carbon technology, like new nuclear build, attractive to developers.

September 2010