Emissions Performance Standards

Memorandum submitted by the Association of Electricity Producers (EPS 32)

About AEP

The Association of Electricity Producers (AEP) represents large, medium and small companies accounting for more than 95 per cent of the UK generating capacity, together with a number of businesses that provide equipment and services to the generating industry. Between them, the members embrace all of the generating technologies used commercially in the UK, from coal, gas and nuclear power, to a wide range of renewable sources of energy. Members operate in a competitive electricity market and they have a keen interest in its success – not only in delivering power at the best possible price, but also in meeting environmental requirements.

Contact details for the Association are given at the end of this paper.

Responses to inquiry questions

1. 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?

The key factors that should be taken into account in deciding either the need for an EPS or the level that an EPS should be set at are as follows;

· Will an EPS be effective in delivering investment in low carbon electricity generation capacity?

· What are the likely impacts of introduction of an EPS on investor confidence in the UK? In particular are there any consequences for the security of electricity supply?

· What impact will there be on electricity prices and consumers from the introduction of an EPS?

· What level of emissions is achievable from commercially available technology? What are the practical implications for a demonstration plant?

The stated aim of the EPS as set out in the Coalition programme for Government is to prevent coal-fired power stations being built unless they are equipped with sufficient carbon capture and storage (CCS) to meet the EPS. However, the strategy for coal-fired power stations set by the previous Government already requires any new coal-fired power station to demonstrate CCS on at least 300 MW net capacity with the expectation that CCS would be retrofitted to its full capacity by 2025. Given this strategy, introduction of an EPS is considered to be unnecessary and premature.

We are concerned that an EPS, whilst acting as a moratorium on the construction of coal-fired power stations, will do nothing to incentivise demonstration and development of CCS technology. Development of CCS demonstration must be part of a wider strategy for delivering a low-carbon energy system which requires a comprehensive strategy to ensure that the necessary investment is forthcoming.

The EU Emissions Trading Scheme (EUETS) remains the key mechanism which will deliver emissions reductions in the electricity sector in the UK. Additional policies may be necessary to incentivise investment in specific low-carbon forms of electricity generation. However an EPS, whilst it would prevent investment in unabated coal, would not provide any incentive for investment in other low-carbon electricity generation capacity.

Whilst doing nothing to encourage generators to invest in new low-carbon generation, an EPS could have potentially negative impacts on investors’ confidence in investing in new infrastructure in the UK. As a mechanism it would penalise investment in technologies with high levels of CO2 whilst failing to create appropriate incentives or an effective framework to deliver the necessary investment in low-carbon technologies. Rather than focussing on an EPS, Government should consider what is needed to make it attractive for investors to invest in low-carbon technology.

Regulatory changes that could potentially reduce the return of an investment will have a negative impact on investors’ decisions on investment in new power plant capacity in the UK. The regulatory uncertainty engendered by the potential for the introduction of future EPSs for either coal- or gas-fired power stations will affect investors’ decisions on whether to invest in the UK and which power plants to invest in. This could have significant implications for security of electricity supply in the UK and consequently electricity prices for consumers.

Suggestions that the level of an EPS could also change over time or that an EPS could be introduced for gas-fired power stations built after 2020 will also have significant impacts on investor confidence.

It needs to be recognised that whilst carbon capture and storage technology is a potential technique for the future low-carbon generation of electricity, the full technology chain has not yet been demonstrated and is not likely to be commercially available for a number of years.

Setting an EPS for a coal-fired power station with a demonstration plant fitted to 300MW is also likely to be difficult where the operating pattern and performance of the unit fitted with CCS is difficult to predict at this stage. The fact that CCS is at the demonstration stage means that it would be very difficult to set a meaningful EPS until it is clear that the unit fitted with CCS is fully operational and meeting expected CO2 removal efficiencies. It is therefore difficult to see what can be achieved by setting an EPS prior to CCS being judged commercially available.

An EPS may have a role to play in setting future standards for fossil-fired power generation but this should only be introduced once the potential and costs of CCS on both coal and gas-fired plant have been adequately assessed. A review of the technical and commercial viability of CCS technology in the UK by the Environment Agency is currently planned for 2018.

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

The EUETS sets the overall level of emissions that will be achieved in the traded sector out to 2020. Introduction of an EPS will therefore not result in any further reductions in CO2 emissions from the traded sector.

If investment in the UK resulted in greater reductions of CO2 than would have occurred if an EPS had not been introduced, these would clearly have to be paid for by increased energy costs for UK consumers. In addition, the overall emissions reductions required across the EU would be easier to achieve as a consequence of higher UK investment and the overall cost of carbon across the EU would reduce. Competitors elsewhere in Europe would therefore benefit from lower costs of carbon and consequently energy. In effect UK customers would be subsidising customers elsewhere in Europe.

The threat of any introduction of an EPS or mandatory retrofitting of CCS on gas-fired plant would act as a strong deterrent for investment in new plant at a time when a significant amount of existing coal and nuclear capacity will be closing. This could then result in the perverse consequence of higher UK CO2 emissions if existing coal-fired power stations remain open for longer.


3. 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?

An EPS will not drive forward the development of CCS technology. If investors perceive that it is too risky to invest in new coal-fired plant with demonstration on one unit because it is not clear that a future EPS level would be achievable, it could in fact work to delay driving the technology forward.

Rather than focus on an EPS to drive development, Government should aim to ensure that investment in low-carbon technologies is attractive to investors. Once CCS technology has been demonstrated effectively on the first round of projects through funding via the CCS Levy and EU sources, the next stage of investment should be driven by the same criteria as investment decisions in other low-carbon technologies.

To ensure that low-carbon investment is achieved in the most economically efficient way, it is important that there is a level playing field for making choices between alternative low-carbon investments.

Fossil-fired power generation without CO2 abatement is expected to have a role (albeit an increasingly smaller role) in the electricity generation mix during the transition to a low-carbon electricity system. In particular, unabated gas-fired generation may be a necessary back-up for intermittent renewables.

In addition to recommending consideration of an EPS for new gas-fired power stations from 2020 onwards, the Committee on Climate Change (CCC) has recommended that serious consideration should be given to funding at least one gas-fired demonstration project. The intensity of CO2 emissions from a Combined Cycle Gas Turbine (CCGT) is low relative to that from a coal-fired power station and would therefore result in a higher cost per tonne of CO2 abated. It is therefore unlikely that CCS on gas-fired plant will be a competitive or cost effective means of reducing CO2 emissions for a significant period of time to come. Most generators consider that funding for CCS technology demonstration should focus on coal-fired power stations as they are not clear what benefits would derive from a demonstration on gas-fired plant. Extension of the demonstration programme to gas-fired stations could also lead to higher programme costs for electricity consumers.

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

The introduction of an EPS will not stimulate investment in low-carbon technologies and, if introduced for gas-fired plant in addition to coal, could deter investment in high efficiency CCGT plant. If the introduction of an EPS leads to delay in investment in new capacity, then clearly energy security could be reduced. Government should be considering the most appropriate means to encourage investment in the low-carbon technology that will allow the UK to meet its ambitions for decarbonisation of the electricity sector. We do not consider that an EPS will be useful in encouraging this investment.

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

If an EPS is introduced in a way that does not constrain investment decisions beyond the current policy on new coal-fired generation, then it is unlikely that an EPS would result in any impact on domestic energy prices.

However, if the manner of introduction of an EPS leads to delays in investment in new capacity (particularly new gas-fired generation) and Government fails to come forward with an effective framework for encouraging investment in low-carbon technologies, this could result in a shortage in capacity and domestic energy prices are likely to rise.

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

We understand that a legislative proposal for the introduction of an EPS from 2020 was discussed in the Dutch Parliament earlier this year, but has not progressed since the Parliament re-formed following elections.

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

Introduction of an EPS would send out the message that the UK Government does not consider that the EUETS will be sufficient as a mechanism to meet Kyoto and successor targets.

This is likely to instil a lack of confidence in the ability of global mechanisms to contribute to reductions in greenhouse gas emissions and potentially make it harder to reach agreement on the adoption of these mechanisms.

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

EPSs can be one of the mechanisms to address climate change, but it is difficult to see how emissions trading and EPS can be used alongside each other. The aim of an emissions trading scheme is to deliver emissions reductions in the most economically efficient manner. Imposition of an additional standard will reduce the economic efficiency of the scheme.

Suggestions of a mandatory EPS would probably be unacceptable to countries with significant domestic fossil fuel reserves, until such time as CCS is proven to be technically and commercially viable at scale.

September 2010