Emissions Performance Standards

Memorandum submitted by Green Alliance (EPS 35)

Summary

Green Alliance welcomes the Energy and Climate Change Committee inquiry into Emissions Performance Standards (EPS). We believe that the Committee’s input can help define the potential role and scope of EPS policy options for the UK. Improved clarity on this would be a useful contribution to imminent policy developments in the fields of carbon capture and storage (CCS) and electricity market reform (EMR) that will shape crucial investment decisions to be made in the next few years.

In this submission we highlight three central themes to the EPS debate:

1. The need for a policy framework to accelerate the commercialisation of CCS, which will require action to provide both high investor confidence and high climate confidence.

2. The emerging conceptualisation of EPS as a market signal to guide investment and shape the transition to a low-carbon power sector.

3. The gaps in current and proposed UK CCS policy and the role an EPS could play in addressing these.

1. Introduction

1.1 Green Alliance aims to make environmental solutions a priority in British politics. We are an independent thinktank and work with representatives from political parties, government, business and the NGO sector to encourage new ideas, facilitate dialogue and develop constructive solutions to environmental challenges.

1.2 Green Alliance has been a proactive supporter of CCS demonstration and deployment over recent years, in both the UK and Europe. We believe it is a strategically significant technology for international efforts to reduce carbon emissions, and that the UK is ideally placed to be an early mover in demonstrating CCS and building a new low-carbon industry. We have worked to identify policy solutions that can enable investment in CCS projects and build public confidence and stakeholder support for the technology.

1.3 Green Alliance has undertaken a range of activities with relevance to the debate about the use of EPS as a potential policy tool. Throughout, we have always underlined that a coherent package of financial support and regulatory measures will be required to bring CCS to commercial deployment, and that an EPS is one of the policy levers that could be considered. Within this context Green Alliance has sought to bring together different stakeholders to identify how an EPS could be defined in ways that can gain widespread support, and we have been pleased to note the growing trust between stakeholders and the identification of shared interests. As a reflection of our convening role we have therefore not defined a specific proposal on the dates or levels of an EPS. Green Alliance activities on EPS and CCS that may be of immediate interest to the committee include:

1. Publishing in autumn 2008 the compendium of cross-sectoral viewpoints ‘a last chance for coal: making carbon capture and storage a reality’, which set out the case for both public financial support and regulatory measures to bring forward CCS demonstrations.

2. Convening a delegation visit to London and Brussels in March 2009 by energy regulators and CCS experts from the USA. Delegates included representatives from the California Public Utilities Commission (originators of the California EPS) and NGO and industry members of the US Climate Action Partnership (USCAP) coalition that had advocated an EPS as part of a comprehensive package of US climate legislation.

3. Co-organising two separate workshops on EPS for NGOs and Industry in summer 2009, in association with Jon Gibbins and Hannah Chalmers, then of Imperial College London.

4. Convening in September 2009 a two-day structured cross-sectoral stakeholder dialogue on the theme of accelerating the commercialisation of CCS in the UK and beyond. This was attended by 50 individuals from 42 organisations from all interested sectors, and timed to contribute to the DECC consultation on a Framework for the Development of Clean Coal. This was accompanied by a series of private conversations with key industry and NGO players in the CCS field about how a package of finance and regulation could be designed.

5. Co-organising two cross-sectoral workshops on EPS for NGOs, industry, regulators and officials in summer 2010 in London and Edinburgh, in association with Jon Gibbins and Hannah Chalmers of University of Edinburgh.

2. A policy framework to accelerate the commercialisation of CCS

2.1 Policies to aid the demonstration and commercial deployment of CCS technology need to address the imperative of reducing emissions from the power sector, the economic drivers upon investors (including the broad spectrum of interests from equipment providers to capital providers), and the valid concerns about CCS that have given rise to public opposition to CO2 storage elsewhere in Europe.

2.2 Through our active engagement with stakeholders from all sectors, Green Alliance has developed a scenario framework which helps us to analyse the CCS policy landscape. Our belief is that CCS policies will only succeed if they are able to provide both high investor confidence and high climate confidence. Figure 1 below provides an overview of this scenario framework.

Figure 1

2.3 Climate confidence refers in the first instance to the need for policy to ensure that CCS demonstration projects and future deployment actively and visibly contribute to meeting the UK’s decarbonisation objectives as part of a coherent energy policy. Furthermore, we argue that without this alignment of aims it will be difficult to secure public support for CCS and avoid accusations that CCS is a fig leaf for continued use of unabated fossil fuels. Conversely, an upfront approach to address stakeholder concerns within a policy package that has clear climate outcomes would allow the UK to avoid the public opposition to CCS experienced elsewhere.

2.4 Investor confidence incorporates both ‘technology push’ and ‘market pull’ elements. CCS is only being developed in response to the climate imperative, and will require that a range of policy and market drivers be aligned with this aim in order for CCS to become available as a commercial technology. As with other new technologies, it is widely recognised that public financing and policy support for research, development and demonstration activities are required to address market failures that result in under-investment in CCS. However, even once demonstrated, CCS will not be deployed unless appropriate market structures are put in place. These need to be signalled in advance in order to enable the construction of CO2 transport and storage infrastructures; the development of industry supply chains, economies of scale, and competition between alternative equipment providers; and the provision of adequate private sector finance. Central to this ‘market pull’ approach will be policy signals regarding the nature of the energy mix and the acceptability of different forms of power generation over the coming decades. These policy signals will help define the commercial case for investment in new power generation and enable comparisons to be made between the opportunities and risks of CCS alongside those of competing technologies.

2.5 Many proponents of the EU Emissions Trading Scheme (ETS) initially suggested that the ETS alone may be sufficient to incentivise reductions in carbon emissions, including via the deployment of CCS. While we agree that the ETS has been a factor supporting fuel switching between gas and coal to date (but less important than changes in fossil fuel price), and that it could potentially play a role in rewarding low-carbon generation in future, we believe that the ETS is ill-suited to addressing broader market failures beyond the carbon price that lead to under-investment in innovation and infrastructure. Even if the current weaknesses in the ETS were to be addressed and a stronger carbon price were to result, we would still suggest that additional policy mechanisms would be required to provide a stable framework for investment in CCS to take place. This is particularly relevant for the UK, given that the timetable for UK decarbonisation to meet our domestic carbon targets will need to move more quickly than the rate currently agreed for the ETS declining cap.

2.6 Green Alliance would therefore underline that clarity on the UK’s proposed decarbonisation trajectory for the power sector is the single most important upfront signal that will assist in the definition of an energy policy that will provide both high investor confidence and high climate confidence for CCS. The repeated view of the Committee on Climate Change that the UK power sector needs to be close to decarbonisation by 2030 has been widely accepted by industry as a feasible target date, and has been confirmed as government policy in Scotland. It has not however been accepted thus far as a focus for UK government policy and is a source of uncertainty as to the timescale for action and whether policy measures are being put in place to support this aim. We would strongly encourage the government to provide greater certainty on this point ahead of its consultation on electricity market reform so that reform measures can be selected with this outcome in mind.

3. Conceptualising EPS

3.1 There are a range of different approaches which could fall under the description of EPS, differing by the locus of regulation and whether the EPS is conceived as a ‘go / no-go’ permission or a requirement subject to monitoring. The common theme from discussions of EPS in recent years (and in the USA and EU as well as the UK) is that interest has grown in using regulatory signals to promote CO2 reduction in a similar way to that used to drive reductions in emissions of classical pollutants responsible for acid rain or direct impacts on human health.

3.2 It is therefore erroneous to claim that an EPS is not appropriate for the UK simply because it was first implemented in one particular form in California and other US states. The UK and EU have significant experience of EPS-style regulation of classical pollutants under the Integrated Pollution Prevention and Control (IPPC) and Large Combustion Plant (LCPD) Directives. The relevant starting point is instead to ask the question of whether a regulatory instrument for CO2 would be an appropriate addition to the policy mix to aid power sector decarbonisation and the deployment of CCS. In the UK context the Committee on Climate Change has clearly set out its view that it sees a role for additional policy measures to buttress the ETS. While proposals for the introduction of an EPS in the UK have undoubtedly drawn on the experience in the USA and similar interest in the EU, there are therefore also strong domestic grounds for its consideration.

3.3 There are a range of motivations and objectives that might lead different stakeholders to consider an EPS as a positive regulatory measure. To provide just a few examples, the following suggested outcomes were identified at separate NGO and Industry workshops in summer 2009:

· NGO workshop:

o Reduce emissions.

o Accelerate low-carbon technology deployment.

o Promote a 'better' energy mix, including security of supply and addressing energy poverty concerns.

o Promote (global) leadership.

· Industry workshop:

o Meet EU target: complements EU ETS including by developing options, correcting market distortions, providing certainty and valuing what society gains.

o Affects future cap – avoid carbon lock-in.

o UK insurance against low CO2 price (if only EUETS implemented) to achieve UK Climate Change Act commitments and carbon budgets.

o Political signal to industry and/or the world on no unabated coal.

o Political tool to satisfy NGO concerns.

o Balance climate risk (kgCO2) and value of electricity (per MWh).

o Create need/market for CCS, in particular, by avoiding CCS being crowded out due to continued build of unabated plant.

o Get a more balanced portfolio: various aspects including how to avoid gas dependence, bring in new technology, value diversity including dispatchable back-up and get the ‘right’ decision in the presence of market failures.

o Decarbonised electricity – low cost asap.

3.4 Green Alliance has always sought to develop thinking on EPS options in ways that support investment in CCS. We believe that positive lessons can be drawn from previous experience of technologies designed to reduce emissions of classical pollutants (such as via flue gas desulphurisation). Where a CO2 EPS would differ, however, is in the relevant timespan for averaging / measurement and the subsequent level of influence over operational decision-making. While Emissions Limit Values for classical pollutants may be defined on time periods as short as a half-hourly basis, it would be more appropriate to calculate emissions of CO2 on an annual basis to match ETS reporting periods. Operational decision-making about the specific configurations of plant performance, electricity output and CO2 capture would therefore take place within the boundaries set by the EPS but operators would be afforded greater flexibility than traditionally permitted under IPPC / LCPD regulations. As such, an EPS for CO2 would provide a market signal that certain levels of emissions performance are to be expected from generating plant at relevant future dates. We have found that clarity on this point about the level of operational control helps to address industry concerns by making clear that an intelligently-set EPS could be a driver for investment in low-carbon technologies, providing a basis for plant operational decisions and energy market strategies to remain with operators.

4. Gaps in current and proposed policy

4.1 Given the context outlined above in sections 2 and 3, Green Alliance would make a number of observations about existing UK policy on CCS and the headline commitments made in the coalition programme for government. These help to identify where an EPS might be a useful tool for strengthening both investor confidence and climate confidence.

4.2 The Framework for the Development of Clean Coal (FDCC) sets out an initial requirement for the inclusion of at least 300MW of CCS, but does not provide a ‘bankable’ end point for when CCS will be required for full plant coverage (for plants starting with only a portion of CCS) or when similar emissions requirements will be required of competing plants (an important consideration for plants aiming for earlier full coverage of CCS eg pre-combustion integrated gasification combined cycle (IGCC)). Instead, current policy is that future CCS requirements will be determined in 2018 or after once CCS has been ‘proven’. It is foreseeable that the definition of ‘proven’ will be open to challenge and delay. The current FDCC policy is therefore by definition technology-following rather than technology-forcing, in contrast to previous successful regulatory regimes for classical pollutants in the power generation and automobile sectors.

4.3 The current lack of future clarity on requirements for CCS forms part of the broader absence of a target decarbonisation trajectory for the power sector as noted in point 2.6 above. This absence means that it is very difficult for investors to identify when investments in CCS will be required, where the liability for any retrofit costs will fall, how these costs will be covered, and what the market competition will be like. The absence of answers on these questions makes it much more difficult for investors to commit now to new plant, particularly partial post-combustion capture on new supercritical plant. Green Alliance believes that current policy, even with the addition of demonstration finance, does not yet provide sufficient investor confidence to enable a full programme of CCS demonstration in the UK or the sufficient scale-up of supply chains, manufacturing capacity and CO2 transport and storage infrastructure. While there are some excellent post-combustion retrofit projects available that could provide a rapid first tranche of CCS demonstration, greater clarity will be required to enable further demonstrations to proceed on a commercial basis.

4.4 Similarly, the current policy framework fails to provide sufficient climate confidence through an absence of a clear decarbonisation trajectory for the power sector and the open-ended nature of the FDCC CCS requirement. There would be significant risks of carbon lock-in (and therefore potential financial liabilities for public support for future retrofit) if new largely-unabated supercritical coal plant were to be permitted on the basis of the FDCC regulations. This is a recipe for public opposition to CCS and one that should be avoided if the UK is to make the most of its world-leading combination of available offshore CO2 storage, engineering expertise, and positive stakeholder engagement.

4.5 Green Alliance is therefore encouraged by the convergence of interest in EPS options from both investors (including generators, equipment providers and infrastructure operators within that broad definition) and NGOs, regulators and policy makers with a climate remit. The shared interest centres on how the future requirements for power sector decarbonisation (and therefore CCS deployment) can be signalled in advance, and with sufficient regulatory force that: A; CCS investments become a more bankable investment proposition, and B; that there is a visible route to power sector decarbonisation that has catalytic potential in the UK and beyond. Green Alliance believes that an EPS policy could play a role in setting out a widening scope for power sector decarbonisation and providing clarity on the types of investment that will be rewarded under reformed electricity market conditions. Crucially, this means that an EPS needs to encompass all fossil fuel types and biomass. It should also be accompanied by the demonstration of CCS on gas at the earliest possible opportunity, and should be followed by a package of EMR that incentivises low-carbon power generation. We would suggest that an EPS could be considered as a leading indicator of the direction of travel of EMR, with subsequent reforms putting in place the market structures and rewards for investment in low-carbon generating capacity that meet the EPS decarbonisation trajectory. We would propose that an EPS pathway should be identified and enacted by around the close of 2011 to provide clarity to investors entering into negotiations for UK CCS demonstration projects 2-4.

4.6 While Green Alliance warmly welcomed the coalition government’s commitment to introducing an EPS, we would recommend that this not be limited to coal plants alone, as such an EPS would be of limited value in respect to driving wider CCS market creation. Additionally, if such an EPS were to follow the FDCC framework and be set expressly to allow for largely unabated supercritical coal to proceed without a clear end-date for retrofit to full capture it would be unlikely to gain stakeholder support as a provider of climate confidence. We would therefore recommend that a broader approach be taken that provides clearer investment signals across the power sector. While such an EPS can be introduced as of now, and encompass demonstration plants, it should also make clear that any new generation capacity to be added in the 2020s must be low-carbon, and that there will be a pathway for high-carbon generation to either install CCS or face limited running hours during the same timeframe (as discussed in point 5.2 below). This aspect will be important to avoid investment in low-carbon generating capacity being crowded out or placed at disadvantage by unabated plant that is able to absorb the projected low carbon price.

5. Answers to committee 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?

5.1 Green Alliance would suggest that an EPS should be defined in a staged approach that would include all relevant fuels and extend its scope over time to both new and existing plant. Such a standard could be defined initially to allow for tightened requirements in the later 2020s once CCS operational performance provides data on ultimate performance capabilities. Given the necessary technology testing and inevitable teething problems to be faced by CCS demonstration plants we would suggest that these plants be given greater flexibilities for an initial period, either through the level of the EPS applied to the CCS portion of the plant or via the percentage of time during which performance at that level is required. Any unabated portions of new plant (both coal and gas) should from the outset have to meet Best Available Technology (BAT) energy efficiency standards and should also be given clear timelines for when they should meet stricter EPS levels that would require CCS retrofit. It may be appropriate for coal and gas plant to be set differing EPS levels given the respective carbon intensities of the fuel stock and the initial expected levels of CCS performance.

5.2 As with existing regulations under IPPC/LCPD (now part of the combined Industrial Emissions Directive (IED)), we would envisage that existing coal or gas plant approaching the end of its operational life could be granted exemptions from EPS coverage on the basis of equivalent limits on running hours or total annual CO2 emissions for a limited period. Such plant should not be totally exempt from EPS coverage during the 2020s but could be provided with such flexibilities to help maintain UK security of supply. Such an approach would be necessary to reflect the 2008 advice from the Committee on Climate Change that emissions from unabated coal should not occur beyond the early-2020s. We would therefore envisage that any remaining UK coal plant that is still online beyond the 2023 IED opt-out deadline should therefore be subject to an EPS from that date onwards. Furthermore the Committee on Climate Change has now also recommended that CCS will also be progressively required on gas during the 2020s. Following current regulatory practice it may be desirable to allow peaking plant operating less than 1500 hours per year to opt into transitional arrangements that provide continued security of supply while incentivising the construction and operation of new flexible low-carbon generating capacity. Electricity market reform efforts will undoubtedly also seek to address this issue, and could potentially apply an EPS as a filter for eligibility for capacity payments or other market support measures.

5.3 The definition of levels and implementation dates for an EPS will require careful consideration of the expected levels of CCS technical performance and commercial development, but should seek to set reachable targets ahead of the technology becoming available rather than following behind in a BAT approach. It will also be important to model likely industry responses to reduce scope for gaming. We would however recommend that the government clearly signal its intention to introduce an EPS within a defined timescale. Recent lack of clarity on whether EPS legislation will be included in the forthcoming Energy Security and Green Economy Bill means that the policy debate is stuck at the ‘whether’ stage rather than moving to a discussion of ‘how’. This clarity would be positive in helping to elicit positive engagement from industry and other stakeholders as to how an EPS can be designed.

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

5.4 The emissions reductions set to take place under the ETS are currently insufficient to match UK targets, while the carbon price alone is not yet capable of driving investment in low-carbon technologies such as CCS. Although there are aspirations that ETS caps might be tightened if the EU were to move to a 30% emissions reduction target for 2020 there remain significant political difficulties that would mean progress is likely to be slow and contested by certain industrial and power sector interests. This will have an unsettling effect on investment in new low-carbon plant due to continued uncertainties as to when the carbon price may increase and the perceived longevity of competition from existing high-carbon plant with access to banked ETS allowances or the ability to absorb continued low carbon prices.

5.5 An EPS could therefore play an important role in pulling through investment in CCS, provided that it is accompanied by an ambitious demonstration programme and related infrastructure development, and that EMR puts in place market conditions that make such investments attractive. This is particularly the case for CCS on gas, as its lower carbon intensity would require a much higher carbon price per tonne of CO2 abated, despite gas CCS likely to be competitive on a £/MWh basis.

5.6 The introduction of such a package of finance, regulation and EMR would make the UK a more stable investment proposition than other EU member states where future emissions reduction regimes are more uncertain. This would also have a positive exemplar effect, as has already been seen in respect to the UK Climate Change Act, which would help create the political momentum required to significantly tighten ETS caps.

5.7 If in the interim period there was a desire to address the potential for emissions to increase elsewhere in the EU it would be possible for the UK government to retire a corresponding amount of ETS allowances from its auctions. Such an approach may also be required if the UK were to introduce a carbon floor price.

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?

5.8 The demonstration and deployment of CCS technology will require a combination of: 1, public financing for demonstration; 2, ongoing incentives via the ETS and EMR; and 3, a regulatory framework that makes clear the need for emissions reductions, thereby providing a market structure for completion between low-carbon technologies via the phasing out of high-carbon generating capacity. An EPS would provide these last aspects of the policy package. While it is true that an EPS alone would not drive the development of CCS, we would also suggest that its absence would not provide sufficient commercial clarity to drive the development of a new CCS industry at scale. The absence of an EPS or similarly clear regulation on emissions would likely contribute to significantly increased risk of public opposition to CCS technology.

5.9 The UK’s CCS demonstration programme should certainly cover gas as well as coal plant, as CCS on gas will be increasingly important over the coming decades. New gas plant is already subject to carbon capture-readiness requirements. CCS demonstration on gas will be required to provide a ‘reference plant’ for future deployment of CCS on gas.

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

5.10 We would suggest that a package of measures (as described in 5.8), and the inclusion of relevant flexibilities (as in 5.2), would meet the UK’s long-term objectives on climate change and also support UK energy security by making the UK a stable and attractive location for investment in low-carbon generating capacity, including CCS. This would enable the UK to maintain a diverse range of energy sources as it moves to a zero-carbon energy system.

5.11 It has been suggested by some commentators that too early an indication of the need for CCS on gas would result in insufficient investment in gas plant in the immediate future. We would highlight that new gas plant is already subject to carbon capture readiness requirements and has been identified as requiring CCS within the next two decades by the Committee on Climate Change. We would suggest therefore that clarity on the likely timescale for CCS on gas would be a benefit rather than a hindrance to investors considering imminent investments. Significant gas plant capacity is under construction or has been permitted in recent years. An EPS could be designed to provide a range of options for these plants as to whether they opt in or out of an EPS regime.

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

5.12 Domestic energy prices will need to reflect the cost of investing in low-carbon generating capacity using a range of technologies. An EPS would not alter the range of technologies required, but would give clarity on the timeframe for such investment. It would therefore be hoped that an EPS that provides clarity on the investment framework would help to reduce a range of project risks and increase confidence in the likely returns from low-carbon investments. This could help lessen the impact on domestic energy prices. The impact of higher prices should also be offset by improved energy efficiency resulting in reduced consumption.

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

5.13 The CO2 storage directive already features a review in 2015 to consider whether an EU-wide EPS might be required. The new IED has also clarified that Member States are free to introduce national EPS if desired. The Netherlands and Hungary have both considered an EPS as part of climate legislation within the past year, but electoral cycles have meant that these proposals have yet to be enacted.

5.14 There would potentially be benefits from harmonising EPS policies at EU level, but recent history (and US experience) suggests that a vanguard member state or grouping will need to take action first, which could then be taken up either by neighbouring countries or by the EU as a whole. It would be unwise to wait for the introduction of an EU EPS as this would have a negative impact on UK policy clarity and its ability to attract inward investment.

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

5.15 The timescale for influencing the Cancun negotiations is very short. It would however be appropriate to consider the role that an EPS could play in helping to build broader political momentum for action on climate change. See 5.16 below.

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

5.16 Yes. UK climate diplomacy over recent years has recognised the importance of finding solutions to climate change that also contribute to domestic energy security and other political priorities in key countries. UK support for the NZEC CCS project in China is just one such example. The UK has the ability to export not just CCS technology and engineering expertise but also to create a template of policy measures that can be applied in different jurisdictions. An EPS can form a central part of such a package and could provide a means of identifying comparative efforts made towards power sector decarbonisation. A central aim for international CCS policy would be to see CCS become the default option for new coal plant in key developed and developing countries by the early 2020s. Due to energy market dynamics this will also require a timeframe for the introduction of CCS on gas.

October 2010