HC 742 Electricity Market Reform

Energy and Climate Change Committee - Enquiry into the Electricity Market Reform: WWF-UK response

January 2011

Contact: Nick Molho, Head of Energy Policy, WWF-UK, nmolho@wwf.org.uk

WWF-UK welcomes the opportunity to respond to the Energy and Climate Change Committee’s enquiry into the Electricity Market Reform.

Executive Summary

We believe that the key objective of the Electricity Market Reform (EMR) should be to set a decarbonisation target for the power sector by 2030 (by specifying the target carbon intensity level) and to provide a clear mechanism to deliver this targeted level of decarbonisation.

In order to deliver this, the EMR should set an objective of substantially reducing energy demand (which would considerably reduce the costs of decarbonising the power sector in the first place), whilst focussing its support on the generation side to the most environmentally sustainable technologies as well as those that could be of maximum economic benefit to UK industry. We are strongly of the view that a new Feed-in Tariff scheme should not apply to new nuclear power stations (which would appear to breach the pledge in the Coalition Agreement not to provide any public subsidy to new nuclear power stations), given the maturity, cost uncertainties and significant environmental risks inherent to that technology choice, as well as the fact that new nuclear power stations are very unlikely to be of any economic benefit to the UK.

Question 1: What should the main objective of the Electricity Market Reform project be?

Under the Climate Change Act 2008, the UK is required to reduce its emissions of targeted greenhouse gases by at least 80% by 2050 relative to 1990 levels. In fact, it is clear that if we are to keep the rise in average temperatures to below 2 degrees Celsius – let alone the 1.5 Celsius limit that is advocated by more than 100 countries and supported by WWF – developed countries like the UK need to be aiming to reduce emissions by 95% by mid-century. Even at warming of 1.5 Celsius, new science is showing that we face very significant impacts from desertification, sea level rise and other effects of climate change – above this level, we are running into extremely dangerous territory.

Even under an 80% emission reduction target, however, it is clear that we face two urgent and over-riding challenges – to significantly reduce energy consumption and at the same time to rapidly decarbonise the electricity sector using sustainable technologies. The Committee on Climate Change (CCC) highlighted in the fourth carbon budget report [1] that the near-decarbonisation of the power sector by 2030 would play a key role in enabling the UK to meet its emission reduction targets. This transformation is not only important in terms of reducing the emissions from the power sector, but also in terms of allowing the low-carbon electrification of a substantial part of the transport and heating sectors.

WWF-UK is therefore of the view that the principal purpose of EMR should be to set a decarbonisation objective for the power sector by 2030 (by specifying the level of carbon intensity to be achieved) and to introduce clear mechanisms to deliver this objective. The EMR should aim to deliver this objective in the most environmentally sustainable way (by relying as much as possible on sources of energy that have the least environmental side effects, such as renewable technologies, rather than relying on environmentally hazardous new nuclear power stations) and in a way that provides best value for consumers and most benefit to the UK economy. Again, as recommended in the CCC’s July 2010 Building a Low Carbon Economy report, this is an area where renewable energy, especially marine renewables, could provide the UK with a great opportunity to become an industrial leader and generate substantial employment growth in the UK.

We have set out below in more detail what we see as the 5 key desired outcomes of the EMR:

· Introduce ambitious energy demand reduction targets and providing a clear framework to deliver these targets;

· Set a clear decarbonisation objective for the power sector by introducing a tight EPS;

· Improve investment certainty for the renewables industry (and CCS);

· Develop a strong innovation policy to support renewables (and CCS);

· Have a strategic approach to underlying infrastructure and European integration.

In addition to these 5 key outcomes, we are of the view that any new FiT regime should not apply to new nuclear power stations, as explained in detail in our response to question 4 below.

1st Outcome: Introducing ambitious energy demand reduction targets & providing a clear framework to deliver these targets

We are concerned that the EMR consultation paper is overwhelmingly focused on proposals that seek to incentivise investments in low-carbon generation and does not seek to address the equally important question of how the UK can substantially reduce its demand for energy. We believe that for the EMR to deliver an effective and cost-efficient package of measures to help decarbonise the power sector, proposals need to be put forward to both incentivise low-carbon generation (in particular renewables) and substantially reduce the UK’s demand for energy.

Not only can energy demand reduction allow great cost savings for consumers and enhance the UK’s energy security, but it also fundamentally reduces the size of the decarbonisation challenge. This can be done by setting clear energy demand reduction targets and a robust policy framework for reaching these targets, which would need to involve ambitious nationwide energy efficiency and demand reduction measures in the residential, transport and business sectors.

With respect to the evolution of energy demand in the UK, WWF-UK is very concerned by the illustrative pathways put forward by DECC as part of the 2050 Pathway Analysis in July 2010. The 6 illustrative pathways suggest that energy demand in the UK would evolve in absolute terms from a 10% decrease to a 40% increase, leading DECC to the conclusion that electricity supply may need to double by 2050. This common message appears to have been derived from the fact that "a substantial level of electrification of heating, transport and industry is needed" to significantly reduce greenhouse gas emissions [2] .

There is a great potential to reduce energy demand

Whilst electricity will undoubtedly play an important role in sectors such as transport and heat over the next 40 years, we believe that the overall level of electricity demand may in fact only have to increase moderately given the potential for achieving significant energy demand efficiencies across all sectors of the economy, including those that are to be electrified.

For example, according to new research commissioned by WWF-UK on electric vehicles (EVs) [3] , additional average annual electricity demand from EVs is less than 1.5% of total forecast electricity demand in 2020 for all three of the scenarios that were considered. Even in the case of our extremely ambitious stretch scenario for the deployment of EVs (approximately 26.3 million EVs by 2030, representing 75% of the car stock by that date), additional annual electricity demand would amount to less than 10% of forecast electricity demand for all end-users [4] .

Based on a study looking at "what might be reasonable changes to expect in the future" [5] in terms of future energy lifestyles, the UK Energy Research Centre (UKERC) estimates in its report, ‘Making the transition to a secure and low-carbon energy system’ that a combination of energy service demand change and efficiency improvement in the transport and residential sectors could reduce energy demand in these 2 sectors by more than 50% by 2050 compared to business as usual levels in that same year. Not only is the potential for energy demand reduction key in helping reduce CO2 emissions, it is also compelling from an economic point of view. In particular, UKERC estimates in the same report that "in an energy system constrained to 80% carbon emissions reduction, the main effect of social and lifestyle change is to reduce the costs of delivering a low-carbon energy system, up to £70 billion" [6] .

We have clearly set out the potential for reducing UK energy demand in more detail in our formal response to the 2050 Pathway Analysis, which is attached to this response [7] .

The EMR needs to address the role of the retail market

It is therefore critical that the EMR delivers new market arrangements that place more importance on the potential for energy demand reductions, as well as on the need to make our demand for energy more flexible. In doing so, we think it is important that the EMR should not only focus on reform of the wholesale markets, but also considers the role that a reform of the retail market could achieve in terms of improving the responsiveness of UK consumers to energy efficiency and behavioural change measures. As Nick Eyre recently put it, "If we would like energy suppliers to engage more actively with their customers’ energy use, then the structure of the retail market should be designed to achieve that." [8]

2nd Outcome: Set a clear decarbonisation objective for the power sector by introducing a tight EPS

The EMR needs to introduce a formal decarbonisation objective for the power sector by 2030, by specifying the level of carbon intensity which is to be achieved. Such an objective will help provide a clear sense of direction to the electricity market framework and ensure that the framework as a whole is focussed on delivering a low-carbon power sector over the next 20 years or so.

In order to ensure that investments can only be directed towards the lowest carbon forms of electricity generation and in order to provide a clear and certain timetable for the decarbonisation of the power sector, we believe that a strong emissions performance standard (EPS) applying to new coal and gas plants needs to be introduced. An EPS is the only mechanism that can guarantee that only the least carbon intensive forms of electricity generation will be allowed to be built in the UK and will provide far more certainty in this regard than a carbon floor price [9] .

As previously indicated by WWF-UK and Greenpeace [10] , we suggest the introduction of a plant-based emission performance standard of 300gCO2/Kwh for all new coal and gas plants from now on, reducing to around 100gCO2/Kwh from 2025 onwards for all existing plants. In light of our previous recommendations, we are very concerned by the government’s current proposals to introduce an EPS at either 600gCO2/Kwh or at 450gCO2/KWh (which would exclude the CCS demonstration plants) and have set out our concerns in more detail in our answer to question 7.

3rd Outcome: Improve investment certainty for the renewables industry (and CCS)

Given that the overall costs of decarbonising the power sector will be strongly affected by investment financing costs in the low-carbon sector, the EMR needs to provide increased investment certainty for the renewables industry in particular. Improving investment certainty will also be important if the EMR is to facilitate the arrival of new entrants on the market [11] , which is a key requirement to increasing competition in the power sector and improving transparency in wholesale market prices, both of which would benefit consumers [12] . Improving investment certainty requires three key elements:

- first, investors in renewables need to be given long-term predictability as to the level of their return on investment and the period during which they will qualify from particular financial incentives. This in particular requires that regardless of the type of financial incentives scheme that is introduced as part of the EMR, complete certainty be given as to the level and duration of the proposed incentives for each of the technologies covered by the scheme. This is important given the number of times the Renewables Obligation scheme has been amended since its introduction in 2002 and how a perceived lack of stability could discourage investors from committing to the UK’s renewables sector. This revenue predictability is not only required for projects that are currently being developed but it is also needed for projects and technologies that are currently going through the development stage (such as wave and tidal technologies) and which need to benefit from a guaranteed revenue pull to be rapidly deployed on a commercial scale;

- second, unnecessary investment risks and barriers need to be removed. In this regard, we consider that it is unacceptable that existing Crown Estate leases granted to offshore renewable developers currently allow for the early termination of these leases in the event that oil and gas is subsequently discovered in a similar area of the seabed and that oil and gas exploration licences are granted by DECC. These sorts of provisions, which create early decommissioning risks for offshore renewable developers and do not even provide for compensation being awarded to these developers, seriously undermine investment certainty in the offshore renewables industry. Given that the offshore renewables industry is expected to play a key role in providing the UK’s future low-carbon electricity and could provide the UK with a unique opportunity to become an industrial leader, it should be a key objective of the EMR to disapply the application of these clauses, and to ensure a level playing field for renewables as a bare minimum;

- third, access to funding for renewable energy (and CCS projects) needs to be facilitated, in particular through the establishment of a Green Investment Bank (GIB). We see it as extremely important that the GIB be well capitalised and set up as a bank rather than a fund, thus enabling it to engage in a wider range of financing activities and to leverage significantly higher levels of funding than a fund, for example by issuing bonds. This could play a key role in reducing investment risk and increasing the levels of private sector funding available to low-carbon technologies, in particular marine renewables. Without access to substantial amounts of funding on favourable terms, the UK risks missing the opportunity of becoming an industrial leader in marine renewables, which would represent a major setback for the UK’s economic recovery, not to mention the UK’s ability to decarbonise its power sector. The EMR, therefore, must inform the development of the GIB.

4th Outcome: Develop a strong innovation policy to support renewables (& CCS)

An important outcome of the EMR should be to ensure that the level of R&D funding that is directed towards emerging low-carbon technologies – in particular offshore renewables (but also CCS technology) - is sufficient to allow the realisation of economies of scale and to enable the UK to become an industrial leader in these technologies. In its Low Carbon Innovation Report, the CCC referred to the fact that current levels of funding towards offshore renewables should be regarded as a minimum. In particular, the CCC referred to the Carbon Trust’s recommendation that up to £50 million needed to be invested in offshore wind RD&D each year if the UK was to take full advantage of opportunities for cost reductions, compared to investments of £15 million in 2009/2010 and planned investments of £40 million in 2010/2011 [13] .

Whilst WWF acknowledges the outcome of the Comprehensive Spending Review, it is important to stress that these investments could deliver significant long-term benefits to the UK economy by allowing the UK to become an industrial leader in these technologies. Given the outcome of the CSR, it is therefore key that the GIB is structured and capitalised in a way that allows it to play a substantial role in boosting innovation support for new technologies. In its Low Carbon Innovation report [14] , the CCC stressed that within the energy supply sector, the UK should focus its efforts on "developing" and "deploying" offshore wind and other forms of marine renewable technologies (as well as CCS technology), due to the UK’s existing manufacturing base and R&D skills, which could allow the UK to influence the shape of these technologies. Providing sufficient R&D support would not only help the UK meet its renewable energy targets, it would also allow the UK to export those technologies abroad, which could be of substantial benefit to UK-based employment growth.

As an illustration of the economic benefits of supporting the development and deployment of offshore wind and other marine renewable technologies in the UK, the Offshore Valuation Report recently highlighted that by using 29% of the UK’s practical offshore resource, the offshore renewables industry could enable the UK to install 169GW of offshore renewable capacity (whilst it is important to note that this capacity would be of a variable nature, this compares to an existing installed generation capacity in the UK of 85GW [15] ), thus allowing the UK to become a net exporter of electricity by 2050 and create 145,000 UK-based jobs and £62bn of annual revenues in the process [16] . These figures omit the additional employment and economic benefits that would arise if the UK, as an industrial leader, was to export marine renewable technologies abroad.

5th Outcome: The need for a strategic approach to underlying infrastructure & European integration

If the UK is to see a strong deployment of renewables on its electricity system, it is absolutely key that either as part of or alongside the EMR, the new regulatory framework takes a strategic approach as to (i) how the UK reinforces and expands its transmission system infrastructure, in particular offshore, (ii) but also how it can improve its interconnection infrastructure with other European grids. Improved interconnection with other European grids could play a key role in helping address the intermittency of renewable energy in a cost efficient manner, as recommended by the European Climate Foundation’s Roadmap 2050 report [17] . In particular, we strongly recommend that the development of a co-ordinated offshore grid should be a central objective of the competitive offshore transmission regime. By allowing clusters of offshore renewable projects to be connected together to the onshore grid as opposed to having the current system of individual point to point connections, a co-ordinated offshore grid could allow a cheaper, potentially faster and more environmentally sustainable way of connecting offshore renewable projects to the onshore grid [18] . It could also be used as a basis for better interconnection with other European grids, which is a key issue if the UK wishes to deal with the variability of renewable energy in the most cost-efficient manner [19] .

We have attached to this submission WWF-UK’s response to the latest offshore transmission regime consultation [20] , which sets out the benefit of a co-ordinated offshore grid approach in more detail.

Question 4: Should the system of Feed-in Tariffs be focussed on particular technologies or maintain a wider technology-based view?

Given the importance of rapidly decarbonising the power sector by 2030 in the most environmentally sustainable, cost-efficient and economically beneficial way possible, we are of the view that the system of feed-in tariffs should primarily apply to renewable technologies, with a particular (but not exclusive) focus on marine renewables. We do not believe that nuclear power generation should benefit from feed-in tariffs (FiTs) given the very mature stage of this technology, and the environmental and economic risks inherent to that technology. We consider that FiTs for nuclear would represent a subsidy, in particular given the fact that the Office of National Statistics is likely to consider all of the FiT options to be classified as tax and spend [21] . Applying the FiT regime to new nuclear power stations would therefore break the government’s own pledge that new nuclear will receive no subsidy beyond the carbon price.

The key reasons for our proposal are as follows:

Impact on consumer bills

As made clear in the Ofgem Corporate Strategy Plan for 2010-2015, the impacts of low-carbon policies is likely to represent approximately up to 2/5th of consumer bills going forward [22] . In order to limit these impacts, consumer bills should only be expected to support new and emerging technologies that by definition require additional financial support in order to be widely deployed in the first place and gradually take full advantage of cost reductions. Feed-in tariff policies are normally introduced as a type of innovation policy (such as in Spain and Germany), to support in particular onshore and offshore renewables. To introduce a FiT to support a very mature technology, which despite the introduction of a carbon floor price would still not be competitive in a liberalised electricity market, introduces an unreasonable burden on consumers, particularly given that the costs (and construction time) of nuclear power stations are highly uncertain and still rising [23] .

Nuclear power does not offer the same economic benefits to the UK as the renewables industry

A fundamental flaw with the reliance on new nuclear power stations is the fact that this is not an area where the UK can become an industrial leader, as a new nuclear fleet in the UK would have to mainly rely on technologies imported from overseas-based suppliers. In contrast, the stage of development of offshore wind and other forms of marine renewable technologies (as well as CCS) mean that the UK could become a leader in the development of these technologies if the right level of public support is given to the development of these technologies. This would allow the UK to export its know-how on the international markets, which would be of great benefit to UK plc.

This point was well exemplified by the CCC in its recent report entitled "Building a low-carbon economy – the UK’s innovation challenge" [24] . In this report, the CCC made a clear distinction between (i) technologies which the UK should "develop and deploy" – a strategy that should be pursued where the UK has a particular advantage to accelerate the development of new technologies (such as where the UK has the full range of manufacturing and business R&D facilities) - and (ii) technologies which the UK should simply "deploy" - a strategy that should be pursued where the UK is less well placed to influence the development of a particular technology [25] . It is very telling that among the technologies that the UK should "develop and deploy", the CCC’s analysis did not refer to nuclear power, recommending instead that the UK should "develop and deploy" offshore wind, other marine renewables and CCS technologies. The CCC concluded that nuclear power was a technology that could only be "deployed" in the UK as opposed to "developed and deployed". One of the reasons given for this recommendation was that the UK would "need to rely on overseas based suppliers offering standardised designs" to develop new nuclear power stations. This would be extremely unlikely to benefit the UK’s economy and employment growth and would instead cement the leadership position of other countries in nuclear power, rather than building the UK’s industrial leadership in renewables.

Given the importance in the current context of supporting the sustainable growth of the UK economy and UK-based job creation, government should focus its energy policy on the growth of the UK’s renewable energy industry – in particular (but not exclusively) offshore. Not only can well sited renewable energy infrastructure provide the most sustainable forms of low carbon electricity generation, it can also provide substantial benefits to the UK’s economy. The Offshore Valuation Report, referred to above, provides a good illustration of this point [26] .

Giving priority to the least environmentally damaging technologies

Importantly, there is a clear environmental benefit in focussing the feed-in tariff system on technologies such as renewables, in that renewable technologies have very little environmental side effects, in particular when appropriately sited. This clearly is not the case for new nuclear power stations, for which no safe waste geological storage solution currently exists (despite 50 years of civil nuclear expertise), which creates clear environmental as well as national security risks.

Several well respected reports such as the European Climate Foundation’s Roadmap 2050 report [27] and the Offshore Valuation Report [28] have made it clear that it was technically feasible for the UK and the EU to receive the overwhelming majority of their electricity from renewable sources [29] without endangering the reliability of the electricity system (and at costs not substantially higher than other ways of decarbonising the power sector), as long as the UK significantly improved its interconnection infrastructure with other European grids. It is in particular worth noting that the UK possesses tremendous indigenous renewable resources that will always be available and which can be maximised through a wide range of technologies including onshore wind, fixed offshore wind, floating offshore wind, wave, different forms of tidal power and solar technologies – these technologies clearly offer significant potential energy security benefits to the UK by substantially reducing the UK’s reliance on foreign fuel imports.

Given the very limited environmental side effects of renewable technologies, the potential economic and energy security benefits that these technologies could bring to the UK, it is extremely unclear why a favourable pricing structure such as a feed-in tariff system should be applied to a mature technology such as nuclear that provides very few of these benefits and creates highly dangerous future waste liabilities.

Question 5: Will it be feasible to deliver EMR in one go, or will regulations and implementation be spread over time?

The investment required to make the transition towards a "green" power sector is substantial, with Ofgem estimating in Project Discovery that up to £200bn may need to be spent up to 2020. The level of investment required reinforces the importance of ensuring that investment is directed to the right technologies and that the key ground rules of the new market are put in place quickly. In particular, the main elements of the package that are to establish a clear pathway towards the decarbonisation of the power sector and provide the necessary financial incentives for the substantial deployment of renewable technologies should be given clear priority.

With respect to the introduction of an EPS for the power sector, we would recommend that enabling powers for an EPS be inserted in the Energy Bill that is currently before Parliament. Given that it is unlikely that a new Energy Bill will be presented to Parliament before Spring 2012, inserting enabling powers for an EPS in the existing Energy Bill will allow the Government to set out the detailed EPS measures in secondary legislation immediately following the outcome of the EMR, as opposed to having to wait for enabling powers to be put forward in an Energy Bill in 2012.

Question 6: Will market reform increase political risk for investors or create certainty?

It is now widely accepted that current market arrangements will not deliver a near-decarbonised power sector by 2030. One of the key reasons for this is that current market arrangements are not designed to incentivise substantial investments in the low-carbon power sector and also lack a clear sense of direction, thus causing significant uncertainty for investors in the power sector. The challenges are compounded by weaknesses in the EU Emissions Trading Scheme, in terms of weak caps, high access to use of imported offset credits and lack of clear price visibility or regulatory certainty beyond 2020.

WWF is therefore of the view that the EMR has a great potential to considerably improve certainty in the sector, particularly with respect to political risk. Clearly, the EMR could introduce new elements of political risk if the final package of reforms lacks coherence as well as a clear binding sense of direction for new investments in the power sector. We believe it is therefore crucial that the EMR provides on the one hand a formalised objective of decarbonising the power sector – with the introduction of a tight EPS being a key policy tool to help deliver this – and on the other hand clear long-term financial incentives to ensure substantial investments are directed mainly towards renewable energy infrastructure, but also towards an environmentally sound and safe demonstration and deployment of CCS infrastructure. In addition, the policy framework that emerges should maximise economic benefits by clearly supporting those technologies and sub-sectors which present the greatest opportunity for UK businesses. As made clear in our response to question 1 [30] , unless investors have long-term confidence in their return on investment, and are confident that underlying financial incentives will not be tinkered with by successive governments, these investors are unlikely to have the necessary certainty to provide the sustained and very large scale injection of capital needed for the UK’s low-carbon power sector.

WWF-UK is therefore of the view that as long as the EMR provides a binding sense of direction which is backed up by real and predictable financial incentives on the ground, the EMR will result in a reduction of political risk rather than an increase in such risk. Market reform needs to work closely alongside other initiatives, such as the proposed Green Investment Bank and move towards an EU approach to electricity network infrastructure and management.

Question 7: Will the Government’s proposed package of carbon price floor, EPS, FITs and capacity mechanism provide sufficient transformation to achieve goals on climate change, security of supply and affordability?

As explained in relation to question 6, we believe that whether or not the EMR is to provide sufficient transformation to achieve goals on climate change, security of supply and affordability, will depend on whether the EMR (i) delivers clear regulatory certainty as to where investment needs to be directed in the UK’s power sector and (ii) matches this regulatory certainty with clear long-term financial incentives that support the most environmentally sustainable low-carbon technologies. Clearly, these financial incentives will need to strike a balance between providing a sufficient level of return on investment to attract and retain investor interest, whilst minimising increases in consumer bills [31] .

The EPS Proposals are far too weak

Whilst the proposed package put forward by government seeks to address the need to provide sufficient financial incentives for supply technologies such as renewables – on which we have commented in relation to question 4 above - , we are very concerned by the weakness of the EPS proposals. Whilst financial incentives can play a key role in stimulating investments in low-carbon technologies (in particular renewables), these financial incentives cannot on their own guarantee that the UK power sector will reach a particular carbon intensity by a particular date. A strong EPS, that is set at a level that will gradually drive the carbon intensity of the power sector towards a stated decarbonisation objective (such as the one recently proposed by WWF and Greenpeace in the latest ECC enquiry on EPS) has the important advantage of creating regulatory certainty going forward as to the types of plant that will or will not be permitted to be built by a particular point in time. By doing so, a tight EPS can provide a clear sales volume opportunity for low-carbon generation (especially renewables) that will help investors in deciding whether to commit to the UK’s low-carbon power sector. However, the EMR proposals for an EPS present the following 4 key shortcomings:

1. they completely fail to introduce any kind of regulatory certainty about the UK’s decarbonisation ambitions;

2. they do not guarantee a clear sales volume opportunity for low-carbon generation, especially renewables;

3. they create a risk of lock-in to highly carbon intensive forms of electricity generation. Both EPS proposals mean that CCS will only need to be fitted to a limited amount of a new coal power station’s capacity [32] . This means that new coal plants could still be built with a significant amount of their emissions being unabated and that gas plants will continue to get built completely unabated for the foreseeable future. Given that coal plants can have an operational life of up to 40 years or more and that gas plants have an expected operation life of 25 years or more, the EPS proposals present a long-term risk of carbon lock-in, which is inconsistent with the decarbonisation trajectory called for by the CCC in the 4th Carbon Budget Report;

4. they risk having negative impacts on consumer bills. According to the Energy Act 2010, the CCS levy, which is estimated to be worth up to approximately £10bn over the next 15 years, could be used to finance the full retrofit of new CCS demonstration plants (presumably in the event that CCS is proven to be technically but not commercially feasible). The current EPS proposals could therefore result in consumers having to pay in the future for the full retrofit of CCS demonstration plants which were not appropriately sized in the first place because of an EPS set at a very high level.

In addition, introducing a tight EPS that would be structured to deliver a substantial decarbonisation of the power sector by 2030 would send a strong signal to the international community about the UK’s unequivocal commitment to tackling its own emissions of greenhouse gases. By not introducing a clear mechanism such as a tight EPS, the UK would miss the opportunity of substantially reinforcing its negotiating influence at international climate talks.

The proposals are not sufficiently focussed on the need to reduce energy demand

As highlighted in our response to section 1, we are concerned that the EMR consultation is mainly focussing on how low-carbon electricity generation could be better incentivised and fails to sufficiently address the question of how best the UK can ambitiously reduce its demand for energy, which is an equally important issue.

Question 8: What synergies and conflicts will there be between proposed mechanisms and policies already in place?

With respect to the applicability of the EMR to Scotland, the Renewables Obligation Scotland Order allows for some flexibility in the scope it offers the Scottish Government to target support at particular renewable technologies. Scotland has clearly adopted the UK CCC’s advice of securing a near decarbonised power sector by 2030 and has set achievable but ambitious renewable generation targets for 2020. Any future FiT scheme should explicitly support both ambitions and offer sufficient flexibility to the Scottish Government to drive the emerging offshore wave and tidal energy industry in particular.

Question 9: Will a carbon floor price be feasible in the context of EMR and at what level should it be set?

WWF is not opposed as such to the introduction of a carbon-floor price. A carbon floor price could, depending on its design, be helpful in terms of supporting energy efficiency measures, by increasing the carbon liability attached to energy use. However, if the aim of a carbon-floor price is to ensure that new investments on the supply side are directed towards low-carbon technologies, we have strong reservations as to the effectiveness of this mechanism (especially if it is not complemented by a tight EPS), for the following reasons:

- carbon prices would still continue to vary above the floor price and this will still create a certain amount of uncertainty for investors;

- relying solely on a carbon-floor price to direct investment towards low-carbon technologies is still leaving a substantial amount of discretion to the market as to whether or not to invest in the low-carbon power sector, in particular as carbon prices will be one of many variables that will be taken into account prior to investment decisions being made. The failure of the EU ETS in guiding investments towards the low-carbon power sector is very telling in this regard;

- from an implementation perspective, it is also unclear at what level a carbon floor price should be set to incentivise the different types of renewable and CCS technologies.

In contrast, a strong EPS can provide clear regulatory certainty as to where new investments in the power sector will be directed and can be implemented far more easily than a carbon-floor price. We would therefore recommend that if it is the intention to introduce a carbon-floor price to incentivise investment in the low-carbon power sector (alongside other financial incentives such as a FIT), this be done in conjunction with the introduction of a tight EPS applying to all new plants on the system (as described in our answer to question 7).

For a carbon floor price to play a key role in the transition towards a low-carbon economy, we see it as key that the additional revenues from a carbon floor price be ring-fenced for use to support this transition, by for instance being directed to help capitalise the GIB, support the implementation of the Green Deal, support innovation policies for new renewable technologies, etc. Failing to ring-fence these revenues would deprive UK energy and climate change policy from some of the important potential benefits of a carbon-floor price.

[1] In its fourth carbon budget report (2023-2027), the CCC recommended an average carbon intensity of 50gCO2/Kwh by 2030 compared to approximately 490gCO2/Kwh currently. Fourth Carbon Budget Report (2023-2027), the Committee on Climate Change, December 2010, http://www.theccc.org.uk/reports/fourth-carbon-budget . See executive summary in particular.

[2] 2050 Pathway Analysis, Department of Energy and Climate Change, July 2010, http://www.decc.gov.uk/assets/decc/What%20we%20do/A%20low%20carbon%20UK/2050/216-2050-pathways-analysis-report.pdf

[3] WWF-UK is to release a report in early 2011, looking at the potential for electric vehicles deployment in the UK and will be happy to share the key findings of this report with the ECC and DECC.

[4] WWF research also shows that the realistic worst case peak demand from EVs, at under 10GW by 2030 for the most ambitious Stretch scenario, is also within National Grid forecasts of load growth.

[5] Making the transition to a secure and low-carbon energy system, UK Energy Research Centre, UKERC Energy 2050 Project, April 2009, http://www.ukerc.ac.uk/Downloads/PDF/U/UKERCEnergy2050/0906UKERC2050.pdf , page 104.

[6] See Footnote 5, page 103.

[7] WWF-UK response to HM Government consultation “2050 Pathway Analysis: call for evidence” (October 2010)

[8] “What has retail competition achieved?”, Nick Eyre, Chapter 3 of “Towards a bright future: Transforming the electricity market”, Green Alliance (November 2010), http://www.green-alliance.org.uk/grea_p.aspx?id=5266 .

[9] See our response to question 9 for more detail.

[10] See the joint submission by WWF-UK and Greenpeace to the ECC enquiry on emission performance standards, September 2010.

[11] The arrival of new entrants also clearly requires improving liquidity in the electricity wholesale market and in that regard the liquidity review carried out by Ofgem is very important.

[12] See in particular Chapters 2 (Professor Steve Thomas) and 3 (Nick Eyre) of “Towards a bright future: Transforming the electricity market”, Green Alliance (November 2010), http://www.green-alliance.org.uk/grea_p.aspx?id=5266 .

[13] Building a low-carbon economy: the UK ’s innovation challenge, Committee on Climate Change, July 2010, http://hmccc.s3.amazonaws.com/CCC_Low-Carbon_web_August%202010.pdf , page 23. See also the rest of Part 3 from page 18 to 24.

[14] Building a low-carbon economy: the UK ’s innovation challenge, Committee on Climate Change, July 2010, http://hmccc.s3.amazonaws.com/CCC_Low-Carbon_web_August%202010.pdf , Part 2, pages 13 to 17.

[15] Revised Overarching National Policy Statement for Energy (EN-1), paragraph 3.3.2, page 23.

[16] The Offshore Valuation Report: A valuation of the UK ’s offshore renewable energy resource, 2010, http://www.offshorevaluation.org/downloads/offshore_valuation_exec.pdf

[17] Roadmap 2050: A Practical Guide to a Prosperous, Low-Carbon Europe, European Climate Foundation, April 2010, http://www.roadmap2050.eu/downloads . See Executive Summary to Volume 1

[18] A recent study by National Grid suggested that designing a co-ordinated offshore grid could reduce the amount of offshore assets to be built by 20%, the amount of onshore lines by 70% and reduce the capital costs of building offshore transmission infrastructure by around 25% (this does not take into account other savings that could be made, such as cost savings from reduced planning applications).

[19] Roadmap 2050: A Practical Guide to a Prosperous, Low-Carbon Europe, European Climate Foundation, April 2010, http://www.roadmap2050.eu/downloads . See Executive Summary to Volume 1

[20] WWF-UK’s Full Response to HM Government and Ofgem E-Serve consultation “Offshore Electricity Transmission: Further consultation on the Enduring Regulatory Regime” (24 September 2010)

[21] The Electricity Market Reform Consultation Document, 16 December 2010, paragraph 56, page 64.

[22] Proposed Corporate Strategy and Plan for 2010 – 2015, Ofgem, January 2010, http://www.ofgem.gov.uk/About%20us/CorpPlan/Documents1/Proposed%20Corporate%20Strategy%202010%20to%202015.pdf , page 8.

[23] The World Nuclear Industry Status Report 2009 ( http://www.nirs.org/neconomics/weltstatusbericht0908.pdf ), commissioned by the German Federal Ministry of Environment, Nature Conservation and Reactor Safety, points out in particular that “while many industries experience declining costs as they move out of their technological learning curve, the nuclear industry continues to face steadily increasing costs on existing construction and future cost estimates” . In particular, the same report refers to the May 2009 nuclear investment cost estimate update by the Massachusetts Institute of Technology (MIT), which doubled an earlier estimate from $2,000 to $4,000 cost (excluding financing) per installed kilowatt. It is also estimated that the flagship EPR project at Olkiluoto in Finland is more than three years behind schedule and at least 55% over-budget.

[24] Building a low-carbon economy: the UK ’s innovation challenge, Committee on Climate Change, July 2010, http://hmccc.s3.amazonaws.com/CCC_Low-Carbon_web_August%202010.pdf

[25] See in particular Part 2 (pages 13-17).

[26] See section 1 of our response, under the heading “Providing sufficient innovation support to renewables and CCS”.

[27] Roadmap 2050: A Practical Guide to a Prosperous, Low-Carbon Europe, European Climate Foundation, April 2010, http://www.roadmap2050.eu/downloads . See Executive Summary to Volume 1 .

[28] The Offshore Valuation Report: A valuation of the UK ’s offshore renewable energy resource, 2010, http://www.offshorevaluation.org/downloads/offshore_valuation_exec.pdf

[29] Up to 100% of the baseload generation mix according to the ECF report.

[30] See Section 1 of our response, under the heading “Improve investment certainty for the renewables and CCS industries”.

[31] This goes back to our point on the importance of reducing energy demand in our response to question 1.

[32] In the case of an EPS set at 600gCO2/KWh, the government estimates in the EMR consultation document that CCS would only need to be installed on about 400MW gross capacity of a new supercritical coal plant sized at 1600MW (gross).