Emissions Performance Standards

Memorandum submitted by the Sussex Energy Group1 (EPS 27)

About the Sussex Energy Group

 

1. The Sussex Energy Group undertakes academically rigorous, inter-disciplinary research that engages with policy-makers and practitioners . The aim of our research is to identify ways of achieving the transition to sustainable, low carbon energy systems whilst addressing other important policy objectives such as energy security . We a group of 15 social scientists, working from a multidisciplinary perspective. We are funded from a diverse range of sources, primarily UK Research Counci ls, Government Departments, the European Commission . Through the Group, the University of Sussex is a core partner of the Tyndall Centre for Climate Change Research. The Group is also part of the UK Energy Research Centre.

2. We welcome this inquiry into Emissions Performance Standards. This is a potentially important policy instrument that could, if implemented carefully, make a significant contribution to the low carbon transition required in the UK. In our response to the Committee’s questions, we have drawn on both our broad expertise in UK energy policy, and on our research on policy approaches to the development and deployment of carbon capture and storage (CCS) technologies. With respect to the latter, the Sussex Energy Group is leading a project funded by the UK Energy Research Centre. The project is analysing the multiple uncertainties of CCS technologies to help inform policy responses.

3. Before turning to the Committee’s specific questions, it is important to place the possible implementation of an EPS into context. The overall aim of UK policy is to reduce greenhouse gas emissions by 80% by 2050. As part of this, the Committee on Climate Change has argued that the power sector should be largely decarbonised by 20301. This particular milestone has not yet been formally endorsed by the government, but reflects the widespread view that reducing emissions from the power sector will be achievable more quickly than doing so in other parts of the UK’s energy system and economy. An EPS can potentially provide an incentive to help achieve this aim.

4. However, it is unlikely that an EPS alone will shift investment away from unabated coal and gas fired power plants in favour of plants with CCS technologies. It is widely acknowledged that investment in CCS technologies will only happen if complementary policies are also implemented. Of particular importance are financial incentives and an appropriate legal framework to handle long term liabilities associated with carbon storage. Legislation is already in place as a result of the Energy Act 2010 so that a financial incentive can be implemented.

5. If it is implemented, an EPS will need to be designed so that it integrates successfully with other existing policy instruments such as the EU emissions trading scheme and the climate change levy. Furthermore, it is likely to be implemented alongside related policy reforms that are part of the Coalition government’s programme. An EPS may have significant overlaps and interactions with the intended carbon price floor and the envisaged reform of the electricity market. These interactions will need to be analysed carefully. In the absence of further details of the precise form of the EPS or details of these other reforms, it is not possible to analyse these interactions in any detail. Previous climate policy research shows that such interactions can be complex2 – and can lead to conflicting or overlapping incentives if not thought through. For this reason, it makes sense to evaluate an EPS and other related policy reforms as an overall ‘policy package’ to check for coherence and to avoid excessive complexity.

Specific responses to the Committee’s 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?

6. The level of the EPS should be informed by the Committee and Climate Change’s recommendation that the power sector should be largely decarbonised by 2030. It should therefore be designed to help ensure that the carbon intensity of electricity generated in the UK falls from the current level of 496g CO2 per kWh1 to less than 100g CO2 per kWh by 2030. This will not only help to underpin investment in CCS technologies, but will provide a general incentive for investment in other low carbon technologies.

7. Changing the level of the EPS over time makes sense in principle, not least to take into account the current uncertainties associated with CCS technologies – and the fact that these technologies are just entering the full scale demonstration phase. An initial level that prevents new, unabated coal plant from operating is clearly needed – perhaps of around 300g CO2 per kWh. It is more debatable whether the initial level should also prevent new, unabated gas-fired plant – or whether such plant should only be covered at a later date (e.g. 2020) to allow investors more flexibility. Gas-fired plants emit less than half the CO2 per unit of electricity generated than coal-fired plants.

8. Furthermore, whilst it is appropriate that the EPS initially applies to new plants, it will be important to also apply the standard to existing plants at a later date. This should be between 2020 and 2025 so that investment in (and operation of) fossil fuel plants will be in line with the Committee on Climate Change’s recommendations. This will provide time for the CCS demonstration programme to scale up CCS technologies and to demonstrate that they can operate with high levels of carbon capture.

9. Whilst we see a strong rationale for changing the overall rate of the EPS over time, we think that the number of ‘milestones’ should be minimised and signalled clearly in advance to provide certainty to investors. In addition, the same EPS rate should be applied to all power generation technologies. Implementing too many intermediate adjustments and different rates for different technologies would risk micro-managing the power sector, and constraining the flexibility of investors to make efficient decisions.

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

10. In theory, the EU emissions trading scheme and other complementary policies covering the non-traded sectors should ensure that the UK and EU climate targets are met. Furthermore, targets for the traded sectors should (again, in theory) be met at the lowest overall cost. As a result, the EPS will be unlikely to lead to additional emissions reductions over and above those that would have happened anyway. All other things being equal, this is because increased emissions abatement in the UK would be offset by less abatement elsewhere in the trading scheme.

11. However, economics are not the only consideration. Climate change policy and politics mean that the kinds of actions that are taken to meet such targets matter. It is important that no unabated coal-fired power plants are built in the UK, and that in the medium term the same should apply to gas-fired plants. An EPS will help to ensure this, and to send a signal nationally and internationally that the UK is serious about its commitment to the low carbon transition. Having said this, the impacts of an EPS should be taken into account when the European Commission sets the allocation of emissions permits in future phases of the EU ETS.

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?

12. As noted earlier, an EPS alone is not likely to be effective in driving the development of CCS technologies in the UK. Because of the high costs of CCS technologies, and the high risks to investors financing the first full scale demonstration plants, financial incentives are required to complement an EPS. So far, the price of carbon within the EU ETS has been too low and too volatile to provide such a financial incentive for CCS and other low carbon technologies.

13. Therefore, other measures are required to complement an EPS and the EU ETS, particularly for low carbon technologies entering the demonstration stage such as CCS2. We therefore support the provision in the Energy Act 2010 for a new electricity supply levy to help fund the 4 CCS demonstrations planned for the UK. Given the need to phase out unabated gas-fired generation well before 2030, it will be important to include at least one gas-fired power plant in the programme of four UK demonstrations. Gas currently plays a key role in the UK’s energy and electricity systems, and is likely to do so for the foreseeable future.

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

14. It is unlikely that an EPS will pose any risks to UK energy security unless it is implemented in a draconian manner in too short a timescale. For this reason, we have suggested earlier in this submission that an EPS should apply first to new plants, followed by extension to existing plants after several years. Furthermore, setting the initial level of an EPS so that new, unabated gas-fired plants can operate for the next few years without fitting CCS would add further flexibility and resilience to the UK electricity system.

15. Applying en EPS to all plants from either 2020 or 2025 will provide enough time for decisions to be made about retrofitting or closure of older fossil fuel plants. For those existing plants that will only be used for peaking duty, there many be a case for an ‘opt out’ based on reduced running hours. Such an ‘opt out’ would be similar to that in the Large Combustion Plant Directive which places limits on the operation of plants that do not have equipment fitted to control sulphur dioxide emissions.

16. There is a possibility of risks to the UK’s long-term climate change agenda from implementing an EPS if this is done without careful thought. It is conceivable (though unlikely) that a hastily implemented EPS which leads to unintended consequences could lead to a backlash against policies to reduce power sector emissions. Perhaps a more important risk is that mentioned earlier – that an overly complex EPS policy would constrain the choices of power developers too much, and discourage investment.

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

17. Energy prices are likely to remain high irrespective of whether an EPS is implemented. This is not only because of the underlying costs of fossil fuels which provide the vast majority of our energy. It is also because of the costs of investing in low carbon technologies including CCS, renewables and nuclear power. The support policies to enable such investment (i.e. the renewables obligation and the new levy for CCS plants) will increase electricity bills – as will the carbon price floor that has been proposed, primarily to make private investment in new nuclear power plants more likely.

18. Having said this, an EPS will (in theory at least) lead to emissions reductions in the UK at a higher overall cost than a generic economic incentive such as that in the EU ETS. This is because it will effectively force UK power plants to reduce their emissions even if the costs of doing so are higher than the costs of abatement at other plants elsewhere in the EU ETS. In practice, it will be hard to disentangle the extent to which cost increases will stem from an EPS per se. As noted earlier, this is because an EPS will be part of a complex array of policy instruments, and is likely to be implemented alongside other measures such as a carbon floor price and energy market reform.

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

19. A key challenge for the negotiations at Cancun is to rebuild trust after the disappointing and chaotic experience at Copenhagen in 2009. Measures to show that low carbon transitions are possible and practical in particular countries are badly needed to help re-build that trust. Whilst an EPS will clearly have no impact on UK emissions before Cancun, its planned implementation will send a positive signal of leadership. It would demonstrate the intention that the UK will not permit the construction of new, unabated fossil plants. It would also strengthen the credibility of the UK’s continuing calls for the EU to go further in its medium term emissions reduction target for 2020.

September 2010


[1] This response was written by Dr. Jim Watson , Director and Dr. Florian Kern, Research Fellow, Sussex Energy Group, SPRU, University of Sussex; http://www.su s sex.ac.uk/sussexenergygroup .

[1] Committee on Climate Change (2010) Meeting carbon budgets: E nsuring a low-carbon recovery . Second Progress Report. London : CCC. June.

[2] Sorrell, S. (2003), 'Who owns the carbon? Interactions between the EU Emissions Trading Scheme and the UK Renewables Obligation and Energy Efficiency Commitment', Energy and Environment, 14(5), 677-703.

[1] Committee on Climate Change, op. cit.

[2] Watson, J. (2008). Setting Priorities in Energy Innovation Policy: Lessons for the UK . ETIP Discussion Paper. Cambridge , MA , Belfer Center for Science and International Affairs, Kennedy School of Government , Harvard University .

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