Electricity Market Reform - Energy and Climate Change Contents

8  Emissions Performance Standard (EPS)

203. An Emissions Performance Standard (EPS) is a way of setting a benchmark for the maximum amount of greenhouse gas emissions that can be emitted for a certain amount of electricity generated. The consultation document sets out two options for an EPS:

  • Option 1: an annual limit on the amount of CO2 a plant can emit, equivalent to 600 gCO2/kWh for plant operating at baseload.
  • Option 2: an EPS as an annual limit on the amount of CO2 a plant can emit equivalent to 450 gCO2/kWh for plant operating at baseload. Plant forming part of the UK's Carbon Capture and Storage (CCS) demonstration Programme or benefiting from European funding for commercial-scale CCs (which would be likely to exceed the limit) would be given exemptions.

204. The Government's consultation envisages an EPS that would act as a "regulatory backstop" that will "[play] a role in a package of reforms to prevent the construction and operation of new unabated coal-fired power stations".[245] The proposals would require all new coal-fired power plants to have a partial level of carbon capture and storage (CCS) operating in order to reduce emissions intensity from the current level of around 800 gCO2/kWh. Option 1 is consistent with a typical new, supercritical coal-fired power station demonstrating CCS on 300MW net of its capacity. Option 2 would require a new, supercritical coal plant to use CCS on around 700MW (gross) of its capacity.[246] Gas-fired plants, which have emissions intensities of around 400 gCO2/kWh, would not be affected by either of the two proposed options.

205. There is already a requirement in England and Wales that all new coal-fired power stations must demonstrate CCS on at least 300 MW (net) of total capacity as a condition of planning consent, with an expectation that they will fully install CCS by 2025.[247] New gas-fired plant must be "CCS-ready". In addition, the proposed carbon price support measure will discourage investment in new fossil-fuel generating capacity.

206. In this context, it is difficult to see what additional benefit either of the EPSs proposed by Government would bring. We received a great deal of evidence to this effect, with many witnesses suggesting that neither of the proposed standards would have any positive impact on investment and therefore were unnecessary.[248]

207. While the current EPS proposals seem unlikely to restrict the amount of high-carbon generating capacity on the system, evidence to us suggested that they could in fact undermine policy certainty and credibility, thus introducing a negative impact on investment in low-carbon capacity. There was concern among some witnesses that there was no clarity about whether and how the EPS might be tightened in future—for example, whether the level might be made more stringent, or whether it might be extended in future to apply to existing plant or oil- and gas-fired plant. This in turn would create uncertainty for investors.[249] The Welsh Power Group told us:

    WPG is concerned that the EPS principle will be applied to large plants initially and then to smaller plants later. If this is the Government's intention, then it needs to say so now [...] While there is debate around what emissions levels of all plants should be that creates uncertainty for investors.[250]

208. RenewableUK pointed out that investors would receive a mixed message if the level of an EPS was not consistent with the UK's carbon targets and the Committee on Climate Change suggested emissions reduction pathway. This could increase uncertainty.[251]

209. Our recent inquiry into Emission Performance Standards concluded that an EPS could be more than just a backstop and could provide a transparent framework for regulating carbon emissions from the electricity sector. An EPS that set out a series of emission intensity milestones over time would make the Government's expectations for the electricity sector clear to all.[252] By signalling an anticipated decarbonisation pathway long in advance, an EPS would give certainty to investors about what types of plant will be acceptable in the future.[253] The pathway should be in line with recommendations from the Committee on Climate Change on decarbonising the power sector.

210. We conclude that neither of the Emissions Performance Standard options proposed in the Electricity Market Reform consultation would promote decarbonisation of the power sector and that introducing regulation in the form proposed would not only be pointless but could even create uncertainty among investors.

211. The Government proposals suggest that an EPS would not be applied retrospectively to existing plant and would be "grandfathered". That is, the level of the EPS in place at the point that a power station is consented would remain the level which is relevant for the economic life of that power station and would not be tightened in the future. This suggestion has been welcomed by the industry, who argue that grandfathering arrangements would reassure investors who might otherwise perceive a risk that future tightening of an EPS would lead to stranded assets.[254]

212. However, "grandfathering" arrangements could lead to high-carbon "lock-in". Once built, power stations have lifetimes of several decades, so a coal- or gas-fired plant built under the initial EPS regime would be permitted to continue emitting high levels of CO2 well into the 2020s and 2030s. As the environmental NGOs pointed out, introducing subsequent requirements to limit operating hours, fit CCS or apply early retirement for these plants if emissions from the power sector were later found to be too high would involve moving the goalposts.[255]

213. If there is a perception among investors that the level of the EPS may be toughened in the future, there will be an incentive to build unabated gas-fired plant now. Gas-fired plant would not be affected by the proposed EPS levels and grandfathering would guarantee that the plant would not be required to reduce its emissions in the future. This has one advantage in that the proposals will not discourage investment in the gas plant that is needed to make up capacity in the short-term. However, there is also a risk that it could encourage a new "dash for gas", which would lock the UK into a high-carbon power sector in the long-term. Joan MacNaughton (Alstom Power) told the Committee:

    It [the proposed EPS] will drive a lot of unabated gas—grandfathered under the current detail of the proposals—which means that you're going to have higher emissions in the late 2020s than you would without it. […] I think it is quite a risky proposal.[256]

214. These problems could be avoided by using a different form of EPS; for example, one which applied to all the plants operated by a company and which applied progressively tighter emission limits over a pre-stated timetable.

215. We recommend that if the Government is to introduce an Emissions Performance Standard, it should be used to provide an early indication of the desired emissions intensity trajectory for the power sector, in line with recommendations from the Committee on Climate Change.

216. The Government's proposals to grandfather an Emissions Performance Standard at the low levels set out in the Consultation Document risk encouraging a "dash for gas" which could lock the UK into high carbon emissions for years to come. If the Government is concerned about investor certainty, a better way to achieve this would be to signal Emissions Performance Standard levels in advance by setting out a clear long-term Emissions Performance Standard trajectory.

217. We note that active conversion of elements of existing coal fired power stations to run on biomass feedstock are being undertaken and that installation of biomass capacity in one or more burners of future coal power stations would have an effect on overall emission levels, if levels are calculated on a unit basis. We were surprised to see no argument in the consultation on the effect partial use of biomass in future coal-fired power stations might have on the achievability of proposed EPS emission levels.

218. We recommend that the government produces argued proposals on the use of biomass in future power stations and their effect on Emissions Performance Standard targets at an early date.

245   DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 69 Back

246   DECC, Electricity Market Reform Consultation Document, Cm 7983, December 2010, p 71 Back

247   Carbon Capture and Storage, Standard Note SN/SC/d086, House of Commons Library, March 2011 Back

248   Ev 126 (Carbon Capture and Storage Association), Ev 139 (RWE npower),Ev 147 (Drax Power), Ev w10 (CHPA), Ev 153 (International Power), Ev 195 (Greenpeace), Ev 197 (ScottishPower), Ev 211 (Centrica), Ev 216 (RenewableUK), Q 88, Q 89, Q 93 [Ms Cary], Q 95 [Mr Skillings], Q 275 [Mr Chapman], Q 146 [Dr Riley] Back

249   Ev 143 (E.ON UK), Ev 162 (WWF-UK), Ev w23 (AEP), Q 199 [Mr Atherton] Back

250   Ev w26 (Welsh Power Group)  Back

251   Ev 216 (RenewableUK) Back

252   Energy and Climate Change Committee, First Report of Session 2010-11, Emissions Performance Standards, HC 523, para 40 Back

253   Ev 162 (WWF-UK), Ev 191 (EDF Energy), Ev 195 (Greenpeace), Ev 203 (Friends of the Earth), Ev 218 (RSPB),  Back

254   Ev 197 (ScottishPower), Ev w19 (ESB International), Ev 214 (SSE), Q 200 [Mr Atherton], Q 201 [Mr Hunt] Back

255   Ev 169 (WWF-UK, Greenpeace, Friends of the Earth and RSPB) Back

256   Q 249 [Ms MacNaughton] Back

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Prepared 16 May 2011