Memorandum submitted by Carbon Capture
and Storage Association|
1. The Carbon Capture and Storage Association
welcomes this opportunity to respond to the Committee's inquiry
into Electricity Market Reform (EMR).
2. The CCSA brings together a wide range of specialist
companies across the spectrum of CCS technology, as well as a
variety of support services to the energy sector. The Association
exists to represent the interests of its members in promoting
the business of CCS and to assist policy developments in the UK
and the EU towards a long term regulatory framework for CCS, as
a means of abating carbon dioxide emissions. In the power sector.
3. The CCSA notes that meanwhile DECC have now
launched a consultation on EMR and welcomes it. The CCSA intends
to respond in detail to the consultation. This paper presents
higher level statements of principle in advance of detailed comment
on the proposals.
4. The CCSA recognises the challenges that are
faced in the UK in respect of investment in the power sector.
There will need to be a massive inflow of capital to provide low
carbon power generation and to guarantee continuity of supplies.
EMR must, as a matter of urgency, provide a robust and reliable
market with adequate returns to ensure that generators have long
term confidence in their investment.
5. The CCSA recognises the myriad of different
financial mechanisms currently in place for different low-carbon
technologies and the need for EMR to streamline this. However
we strongly urge consideration that a "one-size-fits-all"
approach will not be applicable to all technologies, particularly
in the short-term. The Government is committed to supporting a
mix of energy sources to enhance UK energy sector resilience.
To ensure the appropriate mix of technologies can be built in
the required timescale to meet climate change targets, it will
be necessary to retain some specific financial mechanisms for
certain technologies for a period. The proposed DECC policy recognises
this through "grandfathering" arrangements.
6. The CCSA has welcomed the publication of the
Government's Climate Change Committee's (CCC) report "The
Fourth Carbon Budget" and fully supports its conclusions.
In particular that the average emissions intensity of the power
sector should be reduced from its current level of around 500gCO2/kWh
to 50 gCO2/kWh by 2030 - in line with the existing
recommendation from the CCC that the power sector should be nearly
decarbonised by 2030. The CCSA also notes that the Committee expects
30-40 GW of low carbon plant to be built during the 2020s and
suggests that the required capacity is likely to be at least at
the top of this range taking account of other CCC recommendations
regarding electric vehicles and electric heating.
7. The CCSA recognises that a wide range of low-carbon
power generation technologies will need to be employed to achieve
the decarbonisation objective above and wider climate change targets.
In particular, the EMR should be designed such that investment
conditions are favourable in all technologies.
8. To the extent that there will be evidence
from other associations representing nuclear and renewable power
the CCSA is de-facto representing fossil power generation with
CCS. The CCSA does not take a position on the type of fossil fuel
used to generate power and recognises the need to capture CO2
from gas as well as coal fired plant. Furthermore, the role of
biomass co-firing with CCS as a means of carbon-negative generation
offers an opportunity which should also be incentivised.
9. The CCSA understands the need to reform the
electricity market at this time, however we would stress the need
to minimise the transition period between the current structure
and the EMR as this has the potential to cause significant uncertainty
for investors with potentially severe consequences in delaying
investment in new electricity generation.
& STORAGE - EARLY
10. Carbon capture & storage is developing
rapidly. Some commercial scale technologies for capture exist
and there are already a few commercial scale CCS projects. However
for many technologies and for power generation in particular the
industry is in the demonstration phase in the UK and elsewhere
in the world. There are many difficult issues of policy and of
integration along the full capture, transport and storage chain
that remain to be solved. In consequence, the capital and the
operating costs of the early plants will be greater than when
CCS technology is more mature with widespread commercial deployment
(as with all new low-carbon technologies).
11. For early stage CCS projects it is accepted
that there needs to be a special incentive regime that reflects
these first-of-a-kind costs and uncertainties. The first-of-a-kind
costs broadly fit into two categories. Firstly, sub-optimal technical
design and the commercial risk profile associated with interdependencies
along the complete CCS chain may require recognition in initial
projects. Secondly, the first projects must bear the full costs
associated with the establishment of a CO2 transportation
and storage infrastructure. Subsequent projects will be able to
use the transport and storage infrastructure put in place as part
of the early projects and hence will have considerably lower costs.
Careful consideration is needed in the selection of the first
tranche of projects to ensure maximum benefit is achieved in terms
of promoting follow on projects.
12. The initial projects will require a special
funding mechanism although it is important to note that early
stage CCS demonstration plants will be operational during the
lifetime of the reformed electricity market, in power plants that
will be governed by it. CCS is expected to be a cost effective
contributor to the low carbon energy mix, requiring less support
than most renewable energy technologies.
13. The UK Government commitment to fund
four CCS demonstration projects and the EC, NER300 commitment
to provide up to 50% funding for possibly eight CCS projects are
crucial to enable the testing and introduction of near term commercial
CCS technologies. The arrangements introduced under the EMR must
be tested against their ability to underpin the continued operation
of the demonstration projects beyond the demonstration support
period and to enable investment in further CCS projects.
14. Design of the reformed electricity market
must effectively address the three cornerstones of affordability,
security of supply and environmental integrity (essentially climate
mitigation through carbon abatement).
15. In terms of affordability an essential feature
of the market should be competition in relation to whatever market
mechanisms are adopted. The market should be constructed so as
to avoid any cross subsidies and to seek out best value for money
for the consumer in the provision of the principle products, electrical
supply and electrical energy. It is noted that this can be achieved
by competition between tranches of generation if Government chooses
to influence the market to provide a generation technology mix
which meets the overarching requirement of affordability security
of supply and environmental integrity. It is noted that the proposals
aim to ensure that competition will remain a market driver.
16. Security of supply means "keeping the
lights on" in both the short and long term. Over-dependence
on any one technology can be managed should Government wish to,
rather than being left to the market alone. There is a strong
case that such intervention is justified to ensure that new capacity
is built in a timely manner and over-dependence on any one fuel
or technology is avoided.
Should Government aspirations of a very large tranche
of wind generation be achieved then this will require an equally
large tranche of flexible plant to manage the associated intermittency.
It is to be expected that this standby plant will need to receive
capacity payments in order for the investment to be justified
as no capital intensive plant with CCS would otherwise be built
to meet this need.
17. Hence a system of payment by available capacity
will need to be incorporated into the reformed market. The emphasis
here will be on availability, not just capacity. Power plants
that operate with sufficient flexibility should be paid a premium
for providing this back-up service. There needs to be an established
measure of quantity and time of response to demand and some measure
by which availability can be verified in order to qualify the
plant for payment. Payment should be time related and this may
be broken down into relatively small intervals but the contract
to provide available capacity should have long term, say 15 years
to provide a solid basis for investment.
18. The above argument is aimed at "mid-merit"
plant that will be expected to operate for a substantial proportion
of their time. For peaking plant, in the absence of sufficient
pumped storage or other storage technologies, there does appear
to be a case for open-cycle gas turbines to provide short term
back-up. A similar logic applies but a special exemption could
be made on carbon intensiveness reflecting their low total emissions
and ensuring value-for-money for consumers.
19. The Government has proposed a targeted capacity
mechanism; the detailed operation of this mechanism has yet to
be established. Potentially the mechanism could be very appropriate
as it will substantially target fossil generation.
20. Assuming the cost of providing the capacity
margin will be averaged over the market it will be important,
in the presentation of market statistics, to apportion the cost
between demand variation and intermittent generation.
21. At the present time, all power generators
are paid a market rate for "brown" electricity no matter
what the source. Renewable generators are paid a premium for "green"
electricity through the Renewable Obligation and, at a smaller
scale, through feed in tariffs. A reformed electricity market
should be designed to recompense all generators of low carbon
electricity. A market mechanism needs to be established that rewards
all generators at a premium rate for this premium product. Ideally,
this market mechanism should not distinguish between technologies
although it is apparent that existing policies will take time
to work out of the system. Departure from this principle should
only be considered to obtain the desired mix of technologies to
meet security of supply requirements or hasten the achievement
of decarbonisation of the complete electricity sector.
22. In the longer term all power (except perhaps
for derogation for peak-lopping mentioned above) will be generated
with low carbon. CCC, referred to above, recommends that this
should be achieved by 2030. At that time the market will therefore
be for premium grade electricity (ie carbon-free) and there will
be no need for a distinction between "green" and "brown".
Electricity market reform needs effectively to address the pathway
for power generation to become carbon-free. Feed In Tariffs (FIT)
applicable to CCS plants as well as renewable generation could
achieve this end. This approach reduces the market risk which
investors in capital intensive new plant face and hence reduces
costs by allowing a lower cost of capital. Mechanisms of this
sort have been very effective in a number of European countries
in allowing new technologies to be introduced cost effectively
into the generation mix. They have the further advantage of attracting
a wide range of investors rather than the smaller number who are
retail suppliers of electricity.
23. The Government has proposed to introduce
a system of FITs with a contract for differences (CfD) against
the wholesale electricity price. The CCSA broadly favours the
introduction of the FIT although at the time of writing we have
not had sufficient time to consider the implications of the CFD
especially when the market approaches decarbonisation.
24. The CCSA also welcomes the idea that fossil
as well as nuclear and renewable generation would qualify for
FIT. We would like to draw attention to the criterion for qualification
discussed in paragraph 27.
25. The CCSA welcomes the proposed introduction
of a carbon price floor to bring more certainty to investment
in CCS. At the time of writing, there has been insufficient time
to establish a view on the required level.
26. The CCSA has long held the view that Government
should hypothecate ETS auction revenues back to support demonstration
CCS projects. It has been noted that the application of Climate
Change Levy to power generation will be a supplementary revenue
source arising directly from carbon emissions (effectively a carbon
tax on fossil fuel power generation). Government should allocate
funds from this source to support an accelerating CCS investment
programme and so avoid criticism of itself for drawing on general
taxation as well as criticism of the power industry for not paying
for its own pollution.
27. Whilst the CCSA does not seek to discriminate
on fuel type we would observe that obviously this measure would
favour gas over coal and may impact on diversity and therefore
security of supply.
28. All power plants have a lifetime carbon emission
penalty including emissions associated with manufacturing, construction
and maintenance. However, fossil fuel power plant, even equipped
with carbon capture, will inevitably produce a low level of emissions.
For fossil fuel power plants to be treated as effectively emissions
free in the context of the new market there will need to be an
Emissions Performance Standard (EPS) established. A power plant
with verified emissions below the standard would qualify in the
market as low-carbon electricity. The standard may be reviewed
for new plant coming on stream in future as BATNEEC improves (for
example when CCS becomes BAT for fossil fuel power stations).
It should be stated that all generators of premium electricity
will save on having to buy EU ETS allowances but that fossil generators
will rightly continue to purchase EUAs to cover residual emissions.
29. The CCSA understands the need for an EPS
being used in the longer term in the above context to qualify
electricity for the premium payment. The CCSA is not in favour
of an EPS being used in the short term as a form of regulation
applied in an effort to force down emissions, particularly in
the next critical few years as we demonstrate CCS. This would
most likely result in perverse outcomes such as lack of investment
or an over-reliance on one specific fuel source. The case against
EPS as a regulatory instrument was laid out by the CCSA in its
submission to this Committee in September 2010 and is appended
to this submission. The proposals for an EPS of 450 or 600 g/kWh
are completely unnecessary given appropriate financial incentives
and will likely result in no future investment in coal to the
detriment of security of supply.
will be absolutely essential to underpin investment in new power
generators should be rewarded for both providing available low
carbon capacity and for kWh of low carbon electricity.
payments should be dependent on the ability of the plant to respond
to changes in demand. The CCSA broadly agrees with the proposal
for a targeted capacity mechanism.
for kWh of low carbon electricity should be paid. The CCSA supports
the proposal for FITs but has yet to reach a conclusion on CfD.
carbon electricity should be defined as below a set level of gCO2/kWh
(requiring CCS for fossil fuels)
should be the only use of an EPS; CCSA is against the use of EPS
as a regulatory instrument.
CCSA broadly supports the proposal for a carbon floor price but
recommends ring fencing the taxation revenue to support early
CCS demonstrations (as an alternative to the CCS levy).
the CCSA does not discriminate on fuel type we are concerned that
the current Government proposals on EMR will inhibit investment
in clean coal and reduce supply security.
The view expressed in this paper cannot be taken
to represent the views of all members of the CCSA. However, they
do reflect a general consensus within the Association.