Emissions Performance Standards

MEMORANDUM SUBMITTED BY SCOTTISHPOWER (EPS 26)

Introduction

1. ScottishPower is one of the "big 6" UK energy utilities. We provide electricity transmission and distribution services to more than 3 million customers and supply over 5 .2 million electricity and gas services to homes and businesses across Great Britain . We operate some 6GW of power stations as well as gas storage facilities and energy management activities.

2 . We are at the forefront of research into and investment in Carbon Capture and Storage (CCS) and we are among the final two applicants in the Government’s Competition for funding to demonstrate CCS. Our proposal is based on retro-fitting a 300 MW post combustion CCS plant to our existing power station at Longannet .

3 . We are part of Iberdrola, one of the world’s leading utilities . The group also has major interests in UK renewable energy and is working with GDF Suez and Scottish & Southern Energy on a proposed new nuclear power station adjacent to the existing nuclear complex at Sellafield.

Summary

4 . A n Emissions Performance Standard ( EPS ) for generation could play a role as part of the suite of energy policies designed to reduce emissions , but it will be important that its impacts are fully understood and that it is carefully structured and timed to deliver the intended objectives . A poorly designed EPS could have the potential to create unintended consequence s or impacts on security of supply .

5. As far as new plants are concerned, the function of the EPS is already being undertaken by the previous Government’s policy on new coal consents. We believe that an EPS applicable to new plant could potentially provide a clearer and more transparent approach than planning restrictions. However, it must be recognised that restrictions on new plants, of whatever sort, are less likely to foster CCS development than they are to divert investment into other types of generation.

6. If the effect of the EPS is essentially to maintain in a more transparent framework the previous Government’s de facto moratorium on new coal, we would judge there to be few negative effects in the short term since we do not consider new coal generation to be economic at the current time.

7. We think that extending an EPS to existing plant could have significant adverse effects on security of supply as it would be likely to force the closure of the great majority of the remaining coal generation fleet, which remains a very important element of supply security in GB.

8. The principal direct effect of restrictions on coal generation in the UK would be to reduce the price of carbon in the EU ETS, rather than to achieve any net reduction in emissions. A net change in emissions would only occur if the EU ETS cap was set at a lower level as a result of the restrictions or if the EPS acted as a spur to wider carbon reduction activities outside the EU traded sector. The combination of lower EU ETS prices plus more expensive substitute generation could have negative impacts on UK competitiveness and investment.

9. Finally, if an EPS is applied prematurely to gas plant, effectively requiring CCS, it could again risk security of supply if the technology is unproven or not competitive.

10. We would therefore ask that the Committee encourages Government to consider the following:

§ If an EPS is applied, it should only be applied to new coal fired electricity generation in the first stage.

§ Any extension to new gas-fired power stations should only be considered as and when where the commercial and technological case is proven. Furthermore, it would be essential that a ready infrastructure for transportation, storage and supply chain for implementing gas CCS is in place. This is not expected until at least 2025 on current estimates.

§ Government must be clear on the connection between policies designed to oversee point source CO 2 emissions within the power sector. There is a risk that the policy may not be aligned between the EPS, the Emissions Trading Scheme (ETS) and any future carbon price floor mechanisms and that multiple instruments may work against each other or against UK competitiveness.

Response to Inquiry Questions

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

11. In designing an EPS, Government needs to consider the impact on security of supply and the potential impact on consumer prices. Different EPS designs and levels can have various effects upon generation investment strategies taken by market participants and these, in turn, will impact the overall plant margin for the UK as a whole. Investment costs and plant margin levels will also have a potential impact on market prices.

12. For new plant, setting the precise level of an EPS must also consider practical factors. For example, in some circumstances the implementation of a tight EPS would rely upon the availability of proven techniques for CCS and the availability of functioning transportation and storage infrastructure for CO 2. At this time CCS is not mature and is some way from being regarded as a Best Available Technique reference standard. It is unlikely to become so until such times as it has been successfully demonstrated and made cost effective. Demonstration should therefore remain the priority, but also with the realistic expectation that developments and refinements in CCS will hopefully be produced, providing the opportunity to reflect that knowledge and experience in the setting of more appropriate EPS levels over time.

13. For existing plant, we are not persuaded that EPS standards should be applicable because of the potential impacts on security of supply.

What benefits would an EPS bring beyond the emission reductions already set to take place under the ETS?

14. It does not appear to us that an EPS will directly contribute to any overall reduction in emissions, as any such reductions are likely to be offset by increases elsewhere within the traded sector cap. Indeed, any changes in the pattern of generation arising from an EPS are more likely to lead to a reduction in the price of carbon than a reduction in emissions. An EPS will only reduce emissions overall if:

(a) The level of the EU ETS cap is set lower as a result (and the displaced coal is not burnt elsewhere in the world); or

(b) The EPS acts as a spur for other carbon reductions outside the EU ETS traded sector.

15. It is also unclear how the EPS will work with the ETS and the forthcoming carbon price floor, where there is the potential for over complication of the policy landscape resulting in multiple regulation of CO 2 emissions.

16. In principle , we believe that delivering climate change policy objectives, at least cost, would be best achieved via by a properly functioning, robust EU Emission s Trading Scheme and that a real alternative to any EPS would be to look to secure a long-term ETS framework that is appropriately aligned to the lifespan of low carbon technologies , to provide investor confidence. Such an ETS would ensure that unabated coal would be restricted both by the cap on emissions and the corresponding price signal, as well as channel the market towards the most efficient carbon reduction options whilst remaining technology neutral .

17. However, an EPS may be attractive as a legally binding measure that would contribute to the accelerated decarbonisation of the UK power sector and provide a degree of certainty to the energy sector and investors over the regulatory requirements for clean thermal generation. It will be important that the costs of obtaining these benefits are well understood as there may not be any direct carbon savings to balance them.

18. Careful consideration must be given to the need to minimise any distortion or unintended consequences from an EPS . Any EPS must be properly aligned with other emission reduction measures and initiatives. It will also be vital for the future role of the ETS to be clarified in the context of the implementation of an EPS so that investors could understand the new regulatory landscape more clearly. Among the issues that could be considered in any design work would be how to deal with plant operating at low load factors and whether a more flexible portfolio approach to EPS might work more efficiently.

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 is unlikely to be effective in driving forward the development of CCS because the impact is more likely to be to cause investors to switch to other generation options or indeed to other investment options outside the UK generation sector. If the Government were to set an EPS such that all fossil generation required CCS, then the result could be highly negative for security of supply given the current maturity of the technology and related infrastructure. We think that it would not be prudent to set a fixed date for restrictions that may not prove practicable, or cost effective, to comply with.

20. We believe that the demonstration of CCS on gas-fired generation is a sensible and logical step, particularly allowing for the current policy requirement that new gas-fired stations have to be Carbon Capture Ready (CCR) and the ultimate need to decarbonise the power sector that must inevitably include such generation.

21. However, including gas-fired generation within the wider UK Demonstration programme for CCS should not be to the detriment of the current Competition or dilute the commitment to it. The most pressing priority remains the need to have successful initial demonstration on which further policy based around CCS as a proven technology can then be built.

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

22. The future role for coal – and other fossil fuel generation – in the energy mix must also be taken into account as well as wider electricity market structure and reform. We hold firmly to the view that coal and gas have a vital role in the overall energy strategy, contributing to security of supply and fuel mix diversity while economically supporting and complementing intermittent renewables by providing system flexibility.

23. In this context, if not properly structured or configured, or if implemented prematurely, an EPS could deter investment in new gas generation and would most likely take coal off the investment agenda altogether. This has the potential to impact energy security. A poorly timed EPS may also adversely impact investment in carbon abatement technology at an important time. If standards are set too tightly and too soon, an EPS has the potential to prohibit investment in technology classes rather than encourage continuous technology improvement. This could set back rather than accelerate the long term development of a CCS industry in the UK that can serve future EU energy needs.

What is the likely impact on domestic energy prices?

24. The price impacts of an EPS will depend on its design and whether it causes generators to change behaviour. If its impact is principally to prevent the construction of new unabated coal plants, this will have no material impact on prices in the short term as we judge such construction to be uneconomic at present in the UK. At the other extreme, if it forced CCS to be fitted to all new generation, the costs would be very large and difficult to quantify.

25. All the revenue needed to operate the power industry and remunerate its investments must ultimately come from consumers or possibly taxpayers. On the assumption that Government money is not available, the costs arising from any EPS policy will therefore inevitably end up in consumer bills.

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

29. At present we are unaware of any other European countries where the consideration of an EPS is as advanced as it is in the UK. However this does raise the concerns that we have expressed elsewhere that the absence of wider EU initiatives or common provisions may lead to investment being diverted elsewhere. Such harmonisation may eventually be achieved if and when CCS is recognised as Best Available Technology (BAT) although that designation may be some way off.

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

30. The forthcoming Cancun negotiations are likely to focus on areas of policy such as securing deals for the provision of finance, agreement on the architecture of future deals, the formation of individual country commitments and encouraging the commitment to remove fossil fuel subsidies. Against this background, a decision by the UK to implement an EPS seems to us to be unlikely to be material.

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

31. The use of EPS internationally could be beneficial, once CCS development and demonstration has moved further ahead, as part of sectoral agreements to tackle the wider global issue on a more concerted basis. It would also help in the creation of energy benchmarks between developed and developing countries.

September 2010