Emissions Performance Standards

Memorandum submitted by Centrica (EPS 22)

1. Centrica plc (Centrica) was formed in February 1997 when the former British Gas plc was demerged to form BG Group plc and Centrica. We are the UK’s largest energy supplier, with around 16 million customer contacts in the domestic sector and around one million in the non-domestic sector.

2. We also own upstream gas production and power generation assets to support our supply businesses.

- We own 8 gas-fired power stations including Britain’s newest power station in Langage, near Devon.

- We are a leading developer of offshore wind and were recently awarded exclusive rights to develop the Irish Sea zone which provides us with the potential to develop up to an additional 4.2 gigawatts of renewable electricity, representing around £9bn of investment.

- Centrica has already built and refinanced the Lynn and Inner Dowsing wind farms on the east coast, and expects to commence construction at the 270 megawatt (MW) Lincs offshore wind farm development later this year.  Docking Shoal and Race Bank, Centrica's two other Round Two wind farm proposals, which are awaiting consent, could add a further 1.1GW - enough to power 760,000 homes.

- Centrica also plans to play a role in the UK’s new nuclear renaissance. We own 20% of British Energy, through our Joint Venture with EDF Energy. Through this we are undertaking the pre-development activities for a planned nuclear new build programme, with the intention of constructing, and operating and decommissioning four European Pressurised Reactors.

3. We welcome the opportunity to respond to the DECC Select Committee Inquiry into Emissions Performance Standards.

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?

4. We believe the introduction of an EPS is an unnecessary policy instrument that risks causing unintended consequences and putting up energy bills for consumers. If the intention is to prohibit unabated coal, we believe Government policy prohibits this anyway, through it’s existing position and that the Secretary of State will not sanction new coal plants unless they demonstrate CCS technology. This has the impact of a de facto EPS. In addition, planning policy means the Government and other stakeholders can restrict the development of new coal. Therefore an EPS is, we believe, unnecessary.

5. If the intention is to support clean coal technology, we believe this is best done by supporting that technology through the existing policy framework including a competition and CCS incentive to support new plant. This will identify the barriers to CCS development, uncover the costs of this emerging technology, and share R&D and development learnings with the broader sector.

6. If the intention is to support low carbon generation investment more generally, this is best done through the Energy Market Review. This is considering the appropriate market arrangements and incentives for encouraging investment to deliver decarbonisation and security of supply. Investors will look at the long term investment case, predominantly considering expected returns within that investment climate. Specific banning of technologies may limit options for investors, but will not consequently make specific alternative options more attractive. Without proper support for near zero-carbon generation technologies, investors are as likely to be attracted to gas-fired generation.

7. If the intention is to reduce carbon dioxide emissions from the power sector, the sector is already covered by the EU ETS, and EPS would provide no additional benefit whatsoever.

8. Instead, the unintended consequence of an EPS is likely to increase the costs of new generation investments as investors place additional regulatory risk costs to them. This is because the EPS would represent an additional ‘unknown’.

9. Should an EPS be introduced, its level should not be altered over time. Keeping open the option to change the level would lead to significant investment risk for new and existing plants.

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

10. An EPS would bring no additional benefits over and above the EU ETS. This is because the emissions from the power sector are capped, so any additional efforts in Member States to reduce their emissions simply means that other Member States can increase theirs. We suggest that the EU ETS should remain the primary CO2 reduction tool within the EU. As such it remains unclear at this stage whether an EPS would be required and if it is deemed necessary.. In addition to capping existing emissions, the priority should be to support investment in low carbon technologies in order to decarbonise the power sector. This can be achieved through establishing a framework that brings forward low-carbon generation and R&D support for emerging technologies such as wave and CCS.

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?

11. Restricting certain fuel sources is not a credible policy mechanism for encouraging investment in other technologies. The challenges facing untested, unproven CCS are linked to policy, regulatory, cost, technology development and operational challenges; simply banning higher-carbon feedstocks would not direct investment towards addressing those challenges.

12. Instead investment would either seize up, leading to a security of supply situation, or be directed in other, more proven technologies that are cost effective, for example gas. The focus should be on developing and trialling the technology before any mandation for it – direct or indirect – is introduced. We believe in any case that if CCS can be made to work on a commercial scale, and assuming the fiscal and regulatory framework is supportive, investors will naturally use CCS technology without mandation.

13. We see no reason why demonstration gas projects should not also be eligible for the CCS demonstration competition. In doing so however, the Government should not have any high expectation that gas projects will come forward given the high costs and unknown technology issues. 

14. Similarly, the Government should not provide additional regulatory intervention specifically to encourage gas CCS; the global priority should be to develop coal CCS.  Unabated coal-fired power generation is a major contributor to climate change, and developing this technology will be crucial to reducing emissions in China, India and other countries. In many circumstances, unabated gas-fired generation will be a key transition fuel, so developing coal CCS must be the priority.

15. New gas generation capacity is needed now to ensure sufficient flexible, relatively low carbon capacity as heavily polluting coal, oil and inefficient gas plants close. An Energy Performance Standard (EPS) ruling out certain technologies is a blunt tool and much care needs to be taken in consideration and introduction of it. An EPS which sets level equivalent to that of, say high efficiency CCGT, would rule out many investments, including possible peaking plant which may be beneficial to UK. It might also have implications for CHP and other plants where simple fuel efficiency is not the only factor considered when optimising dispatch.

16. Given the challenge in the massive scale of developments needed to get renewables and nuclear up to high levels of penetration by 2020, and the fact that the only flexible, large scale, balancing options proven to date is thermal plant, such a ruling could lead to serious risks of capacity shortfall and/or extreme pricing. The need for flexibility will increase as greater intermittent renewables is built. Demand side and energy storage options have potential to offer flexibility, but are at very early stages of development and it is unclear how much or in what timescale they can contribute

17. We therefore believe it is too early for any move which rules out new gas build without CCS, even applicable post 2020.

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

18. Yes. The introduction of an EPS risks creating additional investor uncertainty. This is because although the impact may be restricted to certain plants e.g. coal, investors would be concerned that the Government could arbitrarily change the rules and impact on other investments. This investor uncertainty would raise the overall cost of projects, and therefore costs to consumers, and would potentially inhibit the development of new power generation including gas. Gas power plants are cheap, relatively straightforward to build, and can play a key role in the transition to a low carbon economy. This is because they can fill any energy gap created by the closure of coal power stations before sufficient renewables, nuclear and CCS can be built. In addition, because they are flexible, they can be used to back up intermittent wind generation and balance the system, maintaining security of supply.

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

19. An EPS would most likely increase domestic energy prices. This is because the investor uncertainty associated with an additional policy intervention would raise the overall cost of projects, and therefore costs to consumers, and would potentially inhibit the development of new power generation including gas. Investor uncertainty would revolve around how the policy lever would be used. There would be a concern that Government could overstretch the EPS in order to meet stakeholder demands, and then find circumstances in which it needs to relax the regulation. For example, in the context of extreme price spikes, it may be necessary to bring on existing coal or oil fired generation, albeit for a very brief interval. This would require politicians relaxing the EPS. All these uncertainties add risks to projects and therefore costs.

Could unilateral action by the UK to introduce an EPS contribute towards global climate negotiations in Cancun in November 2010? Can greater use of Emissions Performances Standards internationally help promote agreement on global efforts to address climate change?

20. We do not believe an EPS would have any impact in the international climate negotiations. Meaningful and credible actions are far more meaningful than additional policy objectives.

21. The UK Government has long-championed it’s CCS demonstration project within the international sphere as an indicator of its commitment to the technology. However, other countries will only take heed when we have a full scale plant operating, actively capturing and storing CO2 that they will take notice and turn to the UK for expertise. The impact of an UK specific EPS will be at best, marginal, and at worst, meaningless to the international negotiations.

September 2010