Emissions Performance Standards

Memorandum submitted by International Power plc (EPS 30)

(I) About International Power

IPR welcomes the opportunity to contribute to the Energy and Climate Change Committee’s call for evidence on an Emissions Performance Standard (EPS) for CO2.

 

International Power plc (IPR) is a global independent power generation company with interests in over 32,000 MW of generation capacity in 21 countries. This includes approximately 5000 MW of plant in the UK market where, in partnership with Mitsui & Co., it owns and operates the coal fired station at Rugeley, Deeside Power CCGT, Saltend Cogeneration Plant in Hull, First Hydro Pumped Storage Stations at Dinorwig and Ffestiniog in North Wales, and Indian Queens peaking plant in Cornwall; the company also has a share in Derwent Cogeneration plant. These assets represent a 7% market share, making IPR one of the country’s largest independent power producers.

IPR is one of the world’s top 10 owners and operators of wind farms with an installed capacity of over 1100 MW, much of which is in Europe. The company is keen to develop its renewable portfolio further and is hoping to develop a range of projects in the UK as part of this strategy.

(II) Summary key points

· IPR supports the widely acknowledged need to reduce carbon dioxide (CO2) emissions as part of the response to climate change and that substantial decarbonisation of UK electricity generation by 2030 is an important part of this response.

· IPR does not support the introduction of an EPS for either new or existing generation plant. IPR believes that the European Union Emissions Trading Scheme (EUETS) is the primary regulatory mechanism by which to bring about reduction of industrial CO2 emissions.

· IPR believes that the EUETS should be allowed to continue to operate without undue distortion in order to best meet objectives (e.g. through adjustments to the overall cap to achieve the required overall reduction ) . Prescribing technology specific restrictions will limit flexibility in achieving overall reductions targets and impact on the efficiency of the scheme. It would also undermine the EUETS, indicating a lack of confidence in the ability of the EU ETS to function as intended.

· I PR believes that the introduction of an EPS may also have a damaging effect upon investment decisions needed now to ensure a smooth transition to a low carbon economy. Carbon Capture and Storage (CCS) should become the relevant Best Available Technique (BAT) for abatement of CO2 emissions from new plants, when it is commercially available. Until then IPR welcomes Government’s support for demonstration CCS projects.

· To provide a diverse energy mix, coal with CCS will be an energy source not only in the UK but throughout the world for the foreseeable future. Therefore investment in coal needs to be encouraged as is the case with the demonstration CCS plants. An EPS will not serve to encourage this investment or the similar investment required to develop CCS for gas fired plant.

· E xisting plant in the latter part of its natural life cycle has decreasing operational load factors as more modern generation replaces it. In a speech at the Economist U K Energy Summit on 24 June 2010 the Secretary of State for Energy and Climate Change said ‘We need a meaningful carbon price t o underpin investment decisions . We note the Government’s plans to introduce a carbon price floor in order to achieve ‘meaningful’ levels. Application of an EPS in addition to such measures at best seems redundant, and at worse potentially damaging to security of supply should older fossil plant be regulated out of the market at times when reliable capacity is required.

· If despite these arguments the Government is wishes to introduce EPS, the latter should only apply to new coal plant, addressing the highest carbon intensity generation.

(III) On the Questions posed in the Call for Evidence

Q1: What are the factors that ought to be considered in setting the level for an EPS and what would be an appropriate level for the UK? Should the level be changed over time?

1. IPR does not consider that an EPS is a useful option to encourage reductions in CO2 emissions and the investment needed to move to a low carbon economy and acceptable security of supply. The alternative pathway that IPR would welcome is a move by the UK to work with other EU Member States to strengthen the EUETS to make it more effective; this is particularly important given the desire to move from 20 to 30% overall carbon emission reduction target and the associated need to decarbonise the electricity sector.

2. With this in mind, existing fossil plant will be increasingly impacted by the Industrial Emissions Directive and will eventually close. However the short-term operation of this plant can help to contribute to the longer term decarbonisation process by providing necessary security of supply during the period in which CCS and low carbon generation is brought to commercial fruition thus, reducing the risk of new fossil plant being built which ultimately does not contribute to the low carbon future.

3. If the Government is seriously set on introducing an EPS, it should be applied only to new coal plant so as not to threaten security of supply. In addition Government should be clear about the detail of what an EPS is intended to achieve over and above the requirement to fit CCS. If it is to stop unabated coal generation in the event of CCS failure, then an EPS would have to be set at the appropriate level to achieve this but also avoid replacement generation at a higher carbon emission rate.

Q2: What benefit would an EPS bring beyond the emissions reductions already set to take place under the EU ETS?

4. IPR does not think that an EPS offers any benefits over a properly functioning EUETS. On the contrary IPR believes that an EPS would only serve to weaken and undermine the EUETS, indicating that the EUETS is not functioning as intended and that Government lacks confidence in the EUETS. An EPS would threaten security of supply and ultimately lead to higher prices for consumers.

Q3 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?

5. The development of CCS is not dependent on an EPS being in place; there is already interest in industry to proceed with CCS. Successful development of CCS is much more dependent on the success or otherwise of the four demonstration plants. If CCS development is successful, then an EPS is not needed; if CCS development is unsuccessful or is successful later than expected, then unabated coal will still be difficult to operate in a world of relatively high carbon prices and a declining carbon emission cap for the sector.

6. The electricity sector will need some gas in the future to provide ‘shape’ in the market, peaking plant, and stand-by generation. With this in mind it makes sense for one of the demonstration projects to be a gas-fired technology.

7. A properly functioning EUETS will be more likely to push forward development of CCS compared to an EPS, and preserve an acceptable level of security of supply.

Q4: Could the introduction of an EPS pose any risks to the UK’s long-term agendas on energy security and climate change?

8. The introduction of an EPS on existing plant would have a severe impact on energy security. IPR considers the EUETS to be a preferable means by which to protect short term energy security and to encourage a positive short-to-mid term response to climate change. While it can be argued that an EPS would help to support the UK’s climate change agenda, IPR believes that this issue must be assessed along with associated issues and not in isolation. Therefore the best way to encourage the climate change agenda in electricity supply, to protect security of supply, to help prevent fuel poverty, and to encourage diversity of fuel supply, is to focus on the EUETS and encourage the development of CCS. These tasks go hand in hand with the need to continue the encouragement of energy efficiency and the development of non fossil sources of electricity.

Q5: What is the likely impact of an EPS on domestic energy prices?

9. DECC’s Updated Energy and Emissions Projections published in June 2010 show electricity prices are set to rise between 60% and 85% between 2010 and 2025, consistently across the various scenarios presented. The contribution of coal is projected to drop dramatically over this period while gas generation continues to make a significant contribution. The imposition of EPS on fossil plant, particularly gas, would lead to higher cost generation options being adopted than would otherwise be the case, resulting in higher costs to consumers.

Q6: Are any other European countries considering an EPS? If so, should the standards be harmonized?

10. IPR is not aware of any other European countries considering an EPS. It is also worth noting that an EPS was considered for inclusion in the Industrial Emissions Directive but did not find sufficient support for ultimate inclusion.

11. The US State of California EPS of 500 gCO2/kWh introduced in 2007, cited by the Conservative Party as the example for a similar possible measure in the UK before the General Election, is the only form of carbon legislation in that state - California does not have an equivalent to the EUETS or a carbon tax on fossil generation.

Q 7 : Could unilateral action by the UK to introduce an EPS contribute towards global climate negotiations in Cancun in November 2010?

12. To date, unilateral action has not pro ven to be effective approach and IPR does not consider this to be a prudent strategy. IPR believes that it would be more beneficial to focus on improving what is already under consideration , for example the setting of meaningful targets within an agreed framework , the role of CDM , and international collaboration in the development of abatement technologies and renewables.

Q9: Can greater use of EPSs internationally help promote agreement on global efforts to address climate change?

13. While they will wish to work to the end of tackling climate change , it is u nlikely that the major economies will want to risk their growth prospects by the imposition of an EPS similar to that under consideration i n the UK. If available, t hey will want to use their indigenous fossil fuel reserves for the economic benefit of their people. Therefore it would be b etter to focus on making CCS work and to speed up the CCS development timetable as much as possible .

14. T he EUETS is now well established in the EU as an effective way to bring about reductions in CO 2 emissions – emissions trading has also provided an effective mechanism for addressing SO2 and NOx emissions from the power sector in the US. It is also worth noting that the EU ETS has also proved an effective is vehicle for engaging developing countries in climate change mitigation by offering a ‘market’ for Clean Development Project credits . The success of this engagement suggests strengthening the EU ETS, and encouraging ETS development in other countries is a more effective forward.

September 2010