Emissions Performance Standards

Memorandum submitted by the Combined Heat and Power Association (EPS 34)

 

Summary and introduction

 

1. The Combined Heat and Power Association welcomes the opportunity to respond to the Energy and Climate Change Committee’s call for evidence on an emissions performance standard (EPS).

2. The Combined Heat and Power Association (CHPA) is the leading advocate of an integrated approach to delivering energy services using combined heat and power and district heating. With around 100 members active across a range of technologies and markets the CHPA is widely recognised as one of the leading industry bodies in the sustainable energy sector. The CHPA works to promote a greater awareness and understanding of CHP and district heating and to create a strong, dynamic and sustainable environment for its members and the communities, businesses and households they serve. In the UK, CHP represents about 7% of electricity generation and, therefore, an important and growing part of the UK electricity mix.

3. The CHPA remains to be persuaded of the case for an EPS in achieving the Government’s carbon emissions targets but recognises that it could provide a policy backstop for emissions reduction, provided that it is correctly implemented. This response to the call for evidence sets out some key considerations that are vital be should an EPS be adopted,

Summary of response

4. The CHPA has identified the following key issues for the design and implementation of an EPS:

· An EPS must take into account the emissions saved in the supply of useful heat from a generation station (CHP plant) to ensure that it rewards optimal resource use and emissions savings

· An EPS should form part of a wider suite of fiscal and regulatory measures to ensure that the market delivers the Government’s energy ambitions.

· An EPS should be applied to individual plant NOT to a portfolio of plant to ensure that incentives are equivalent to all actors in the market. Furthermore, application to a portfolio will deliver little or no policy additionality.

· An EPS should not apply only to coal but also to gas

An EPS must take into account the emissions saved in the supply of useful heat from a generation station (CHP plant) to ensure that it rewards optimal resource use and emissions savings

5. As an EPS is designed to control emissions from electricity generation stations, the emissions limit is generally based on the CO 2 per unit of electricity. A CHP plant delivers both useful heat and power in which some power may be sacrificed to generate a large amount of heat (for every one unit of power lost between 3 and 10 units of heat will be generated dependant on the grade of heat supplied). In any circumstance, a CHP plant which meets the EU’s qualifying conditions is more efficient than separate heat and power generation. High efficiency CHP saves at least 10% of the input fuel compared to separate generation, although in reality this figure is often significantly greater. An EPS based purely on electrical output would, therefore, penalise a CHP plant compared to a power-only plant which exhausts its heat to the atmosphere. CHP plants burning either renewable or fossil fuels represent the optimal use of the fuel thereby contributing to energy security, affordability, emissions reductions and, where renewable, renewables targets. If an EPS failed to account for the delivery of useful heat, the EPS would penalise efficiency and emissions reductions and be a disincentive for CHP development. It is vital that the heat from CHP is adequately accounted for in any EPS.

6. The best methodology for determining an EPS would be to account for overall efficiency of useful energy conversion. For a power only generating station, this is simply the mean electrical efficiency. For a CHP plant, this would be the electrical conversion efficiency PLUS the heat efficiency. The Cogeneration Directive requires high efficiency CHP to have an overall efficiency of 70 per cent 1 (Net Calorific Value {NCV}); Accounting for overall efficiency is an effective and simple way of ensuring that an EPS does not penalise efficient plant operation.

An EPS should form part of a wider suite of fiscal and regulatory measures to ensure that the market delivers the Government’s energy ambitions.

7. An EPS is one of a range of fiscal and regulatory tools available to Government for delivering the low carbon electricity grid and wider energy system. An EPS either prevents or permits the construction of a given plant – in this respect, it is effectively an extension of the consenting process. Just because a proposed development would comply with the EPS does not guarantee its construction or continuing operation. 1

8. Crucially, any development of an EPS must occur within the context of wider policy in relation to the viability of developing and operating new plant. With particular regard to CHP, current uncertainty over the climate change levy exemption for CHP and accreditation timelines under grandfathering for biomass under the RO are creating significant risks that relevant plant will not pass the second or third tests set out above.

9. With a wider debate over the energy market a capacity guarantee and reform of the CCL, any EPS needs to be developed in the context of these other policy variables to ensure that there are no unintended consequences and that support in one area is not undermined by policy decisions in another. In this context, a capacity guarantee, if poorly developed, could run directly contrary to an EPS as it could drive least cost (and higher emission plant) to be built. The CHPA is developing proposals for how a capacity guarantee could operate to ensure that it does not run contrary to an EPS and would be very willing to share these with the Committee.

An EPS should be applied to individual plant NOT to a portfolio of plant

10. An EPS could be designed to apply to the portfolio of plants operated by a company rather than individual plant. Whilst this could operate well for the major portfolio operators, it would harm independent generators as these often only have a one, or a small number, of plant. For portfolio generators, such a system could permit the development of new, high emission plant, which could be offset by other existing low carbon plant defeating the objective of an EPS. Furthermore, for companies owning only one plant, compliance would have to be ensured by a form of carbon trading, directly replicating the EU emissions trading scheme which would be an unnecessary complication to an already highly complex market. In addition, independent generators, provide valuable market services such as a disproportionately high level of liquidity. Such services would be undermined by a portfolio EPS.

11. From a deregulation perspective, it is apparent that, if an EPS were implemented on a portfolio-wide EPS, the consequent effect would be the replication of an emissions trading scheme. The EPS would thus provide little or no additionality in terms of policy outcomes. On this basis an EPS could only add value on an individual plant basis.

An EPS should not apply only to coal but also to gas

12. The Committee on Climate Change has recommended that the Government provides support for CCS gas plant as well as CCS coal 1 . The CHPA believes that there is substantial value in pursuing CCS for both gas and coal. In addition, to ensure that fossil resources are used optimally, the application of CCS should be incentivised to operate in combination with CHP wherever possible. CCS reduces plant efficiency but, by combining CCS with CHP, much of the heat that would otherwise be wasted can be captured and supplied to meet new or existing heat demand, significantly improving overall plant efficiency. By supplying heat from CCS plant for industrial, commercial and domestic use, CCS plants could help to decarbonise heat supply in a very effective and efficient manner. This is particularly important in the industrial sector where options for decarbonising heat are particularly limited and challenging.

13. Given the extent of decarbonisation that will be required from the power sector in the period to 2050, the Association recognises that CCS may ultimately be required in gas-fired plant as well as coal. The extent and timing of this requirement will be highly dependent upon progress in respect of decarbonisation of the wider economy and the evolution of the generation mix.

14. For any input fuel the introduction of any EPS will need to be timed to reflect the commercial viability of CCS technologies, cost implications and impacts upon security of electricity supply. Application of too tight a standard may introduce costs or risks that may be excessive in respect to the requirement for carbon abatement. An understanding of these trade-offs and technological maturity will be critical in setting the levels of any standard, and the timing of its introduction.

15. It should also be recognised that different plant configurations may provide a degree of flexibility in setting standards, particularly in respect of gas-fired plant. Where the value of heat recovery is recognised in the assessment emissions factor, an unabated gas-fired CHP plant may be capable of meeting an emissions factor of 300g/kWh, whilst the equivalent power-only plant would not. Under appropriate conditions utilisation of CHP might therefore assist in providing safeguards over security of supply, whilst maintaining downward pressure on emissions from the wider generation fleet.

In any circumstances, incentives to operate must be maintained.

16. The application of an EPS will need to be timed to reflect the development of CCS technology. If an EPS were to be introduced, therefore, it could apply to both gas- and coal- fired plant. This will have the practical effect of ensuring that all new-build plant is likely to meet minimum standards of emissions performance in operation. It is important to note, however, that the EPS is only part of the picture. Since the EPS will act as a constraint on development, the Government must ensure that the commercial incentives for construction and operation of this plant will persist over the long term.

17. In setting EPS standards, it will be important to consider the option for setting levels that vary based on input fuel. It may be appropriate to set the EPS at a different level for coal than for gas.

Maintaining Security of Supply

18. In setting an EPS, it is vital that security of electricity supplies are not compromised. The timing of the application of the EPS is critical. Imposing an EPS before the technology is available to deliver the standard set would stall developments and may compromise security of electricity supplies. Alongside an EPS, incentives to invest in, and operate, new plant will need to be maintained in order to guarantee operation (and carbon savings) whilst, EPS-constrained plant is required to compete with existing, written-down plant. The risks associated with an EPS can be managed by providing sufficient flexibility to investors to adopt alternative approaches, including the application of low-carbon technologies that are proven and available today. Through operating a gas-fired power station as a CHP plant is a proven means of reducing carbon emissions without constraining gas-fired generation per se : It is possible to set an EPS at a level that provides CHP operation as a compliance option alongside CCS. Such a choice may be a valuable mechanism for ensuring security of supply whilst still reducing carbon emissions
CHPA responses to specific questions asked by the Committee.

19. 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?

The key factors to consider when setting an EPS are:

· The commercial availability of CCS technology

· The cost of applying CCS to plant

· The availability of wider compliance options,

· Crucially, the wider electricity grid emissions trajectory

· Any potential impacts on security of energy supply

20. The Association notes that CHP could provide an appropriate compliance option both initially and into the future as emissions levels become more constrained (i.e. CCS CHP as a measure for continued emissions reductions)

21. Consideration also will need to be given to application of any EPS to plant when operating flexibly to meet grid requirements, including low load and transient operation. One possibility would be for an EPS to be determined on the basis of average annual operational emissions accounting for increased emissions when operating as spinning reserve or during start up/shut down processes. A second option to account for operational flexibility would be to permit all affected plant to be allowed a maximum total number of operating hours which can be excluded from the calculation of the average emissions factor for EPS compliance.

Should the level be changed over time?

22. In theory, the level of an EPS should decline over time for new generation plant only. The EPS should be set to drive cost effective emissions reductions and maximise plant efficiency (for both heat and power generation). If adopted, the ultimate aim should be to ensure that an EPS along with other government policies, facilitate the development of CCS CHP plant which will provide the lowest possible emissions from coal, gas and bioenergy plant whilst maximising the useful energy output.

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

23. If the EUETS operates successfully under phase 3, it is unlikely that an EPS will bring additional emissions savings. It could, however, prevent new unabated coal plant from being constructed and drive more efficient use of fossil fuels. As such the EPS provides a policy backstop for emissions reduction. In so doing it is vital however, that the net effect of the wider incentive and market framework is to deliver both investment and operation of qualifying plant.

How effective is an EPS likely to be in driving forward the development of CCS technology?

24. On its own, an EPS will not drive the development of any new technology; it will merely prevent the development of generation stations with emissions over that set by the EPS. It is vital, therefore, that to promote, CCS and CCS CHP, the Government will need to ensure that the economics are attractive enough for developers to invest in these over and above other technology options. It is for this reason that an EPS should apply to gas generation as well as coal as, if applied only to new coal stations, it will simply drive new, unabated gas power plant not CCS.

Should the UK’s CCS demonstration programme cover gas-fired as well as coal-fired power stations?

25. Yes, gas will continue to be an important fossil fuel in the future and a failure to include gas within the CCS demonstration programme is an unnecessary limitation. Should an EPS be applied to gas, the option to operate as gas CHP should be available as a compliance option to drive down emissions whilst preserving security of UK energy supplies.

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

26. If an EPS failed to account for heat off-take this could limit the ability of industry to decarbonise and could have the perverse effect of driving an increase in emissions in some sectors.

27. CCS will have to be made to be profitable for investment in any new thermal power plant to take place at all. Application of EPS unilaterally by the UK may discourage investment by international players if other power markets more profitable.

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

28. The decarbonisation of energy in the UK is likely to have direct and indirect impacts on consumers through the cost of energy directly and in consumer goods. The EPS in itself does not add direct costs to consumers unlike other Government support mechanisms, it simply prevents certain developments. Developers will, therefore, select options which are permitted and give the best returns on investments be that through Government support (e.g. feed in tariff and renewables obligation) or through natural market conditions. The fitting of CCS technology will add a significant cost to development that will be reflected in electricity prices. CCS processes use a material amount of power that reduces the overall efficiency of the power plant requiring more plants to be built. Gas CCS is at least 7% less efficient compared with unabated CCGTs. By operating as CHP, CCS plant can operate at far greater overall efficiency contributing to both emissions reductions and security of supply. As such efficiency losses (and associated costs) can be mitigated by operating CCS plant as CHP.

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

29. The CHPA supports harmonisation of standards across member states but this should only be done if the key issues highlighted earlier (accounting for heat, application to coal and gas) are incorporated. It may be that the varying energy markets across the EU could prevent an EPS being optimal for the UK energy market.

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

30. The CHPA does not propose to answer this question

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

31. The CHPA does not propose to answer this question

September 2010


[1] The Cogeneration Directive: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32004L0008:EN:HTML

[1] There are at least three major tests that must be met for a plant to be built and operate:

[1] 1. Can the plant be built – is the plant under consideration legally acceptable within the UK. This is the only test only that would be affected by an EPS. If legally acceptable, the project can proceed to the second test.

[1] 2. Project financials – does the financial modelling provide a predicted rate of return (or other measure) that is sufficient and competitive compared to other options available to the developer. This test includes returns from Government policies such as the renewables obligation and climate change levy exemption. The tests will include the regulatory risk of these policies changing or being withdrawn during the lifetime of the plant

[1] 3. Ongoing operation: If the second test is met the plant is likely to be built. Ongoing operation (and therefore contribution to emissions reductions) will be dependent on a combination of market conditions and government support. Changes in government support could cause a plant to reduce or cease operations.

[1] Letter from Lord Adair Turner to Rt . Hon Chris Huhne, Secretary of State for Energy and Climate Change concerning CCS 17 th June 2010 http://hmccc.s3.amazonaws.com/gas%20CCS%20letter%20-%20final.pdf