Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by the Confederation of UK Coal Producers
1. I am writing to you on behalf of The Confederation of UK Coal Producers (CoalPro) to provide written evidence to the Committee’s inquiry into the draft Energy Bill.
2. CoalPro represents member companies who produce over 90% of UK coal output. UK coal production in 2011 was about 18.5 million tonnes, the great majority of which was supplied to the electricity generating industry and coal produced in the UK generated over 10% of the UK’s electricity supplies. CoalPro therefore takes a close interest in the developments affecting the future of the electricity generating industry, including the proposed Energy Bill, and is therefore pleased to be able to provide written evidence to the Committee’s inquiry.
3. By way of background, coal, indigenous and imported, supplies around 30% of the UK’s electricity supplies, but this proportion increases to over 50% at peak periods in winter. In recent months, coal-fired generation has increased significantly compared with the position twelve months ago and coal-fired generation reached a peak of 52% in the 2011/12 winter. The prime reason for this has been the high price of gas.
4. In fact, coal-fired generation has continued at a high level throughout the spring and even in the recent period of very warm weather was generating over 40% of UK electricity. Again the prime reason was the continuing high price of gas but a contributory factor in the warm spell was a very low level of wind generation in still, anti-cyclonic conditions.
Inter-Relationships With other European and UK Legislation
5. There are complex inter-relationships with other European and UK legislation and CoalPro urges the Committee to carefully consider these and their effects on the Government’s objectives lying behind the proposed Energy Bill. The European Industrial Emissions Directive (IED) will require major investment in the existing fleet of coal-fired power stations, and to some extent the older gas-fired power stations, if they are to continue. If this investment does not take place, there is a real risk of a capacity gap in the latter part of this decade and in the early 2020’s before the transition to low-carbon generation is completed. The Energy Bill should contain provisions to support this necessary investment.
6. A fundamental element of Government energy policy is the introduction of Carbon Price Support (CPS) to ensure a Carbon Price Floor (CPF) with effect from 2013 and with a rising trajectory thereafter. CPS is introduced via Finance Bills and does not form part of the Energy Bill. However, its impact will be so dramatic that the provisions of the Energy Bill cannot be considered in isolation from it. In particular, a rising CPF will make it extremely challenging to justify investment decisions in the existing fleet of coal-fired power stations to meet the requirements of the IED and may lead to widespread premature closures with major security of supply implications. It is essential that the Energy Bill contains robust measures to address this issue.
Measures Other Than Those Related to Electricity Market Reform (EMR)
7. In meeting the Committee’s timetable for the Submission of written evidence, I have not had the time to scrutinise the provisions of the draft Energy Bill in detail. I therefore provide only general evidence in respect of most of the provisions of the Bill. CoalPro’s main area of concern relates to the Emissions Performance Standard (EPS) within the EMR provisions. CoalPro has no particular comments to make on the introduction of a Strategy and Policy Statement, the creation of the Office for Nuclear Regulation, the Government Pipeline and Storage System, or the technical change to the Electricity Act 1989 in relation to offshore transmission.
The EMR Measures—Contracts for Difference
8. At the heart of the Bill is the EMR package of measures. CoalPro strongly favours the proposal to introduce Contracts for Difference (CfD) to support investment in low-carbon generation in order to remove long-term exposure to electricity price volatility. However, in relation to Carbon Capture and Storage (CCS) projects, it is important to have measures in place to also limit exposure to fuel prices which can also be subject to extreme volatility. Beyond that, consideration needs to be given to the need for a Government guarantee for the possibility of leakage, however unlikely, from CO2 stores. Without such measures to cover these risks, projects may not be bankable.
9. CoalPro understands the requirement to put in place long-term instruments to enable early investment in advance of the CfD regime coming into force and recognises the need for Conflicts of Interest and Contingency Arrangements and Renewables Transitional arrangements.
Capacity Market
10. The introduction of a Capacity Market is vital to ensure the security of electricity supply during the transition to low-carbon electricity generation. The Capacity Market provisions must be carefully designed to support investment to extend the lives of existing fossil fuel power stations beyond what they might otherwise be. In particular, a properly designed Capacity Market can play an essential role in providing an income stream which will support the investment necessary to meet the requirements of the IED.
11. In general, we do not support capacity market payments being made available to generation plant which will benefit from CfDs. This would seem to be unnecessary if CfDs are properly designed. However, if capacity payments were made available to CCS stations, this would be one way of offsetting the risk of fuel price volatility.
Emissions Performance Standard (EPS)
12. CoalPro fundamentally disagrees with the introduction of an EPS for CO2 at the level of 450g CO2 per kWh. The stated intention is to limit carbon dioxide emissions from new fossil fuel power stations but, in practice, this will only apply to new coal-fired plant. It will prevent the construction of any new coal-fired plant without CCS on a significant proportion of its capacity whilst permitting new gas-fired plant to be built unabated. Combined with the extraordinarily generous arrangement to grandfather this EPS through to 2045, this represents an enormous incentive for a new dash for gas. In effect, gas is given a free ride.
13. Elsewhere in Europe, the progression to low-carbon generation will be achieved for coal-fired plant by the replacement of the existing fleet by new, high efficiency plant, followed by the subsequent retrofit of CCS.
This incremental approach guarantees progressively lower carbon emissions whilst maintaining a balanced portfolio of plant and a mix of fuels. The EPS in the UK means the elimination of this middle stage of high efficiency coal-fired plant. As a result, no new coal-fired plant, other than separately funded CCS demonstration plant, will be built in the UK until CCS has been demonstrated on a commercial scale and proven to be commercially viable (with an appropriate CfD regime). No other country is following this approach. A huge amount of state-of-the-art, high efficiency coal-fired plant has recently been built, and is presently under construction, across the globe. This plant will be capable of being retro-fitted with CCS. All new fossil fuel plant in the UK will be gas-fired.
14. At the same time, CPS will make it very difficult to justify investment in modernising the existing fleet to meet the requirements of the IED and will drive generation from coal to gas on a large scale. It may be that the whole of the existing fleet will close by the early 2020’s. It follows that there will be very little coal-fired plant on the system in the early to mid 2020’s.
15. CoalPro is of the view that this will pose huge security of supply risks. By that time, much of the existing nuclear fleet will have closed and there may be very little new nuclear replacement plant. One can envisage a nightmare scenario at peak demand period on a cold, still, winter day—little or no wind, little or no coal, limited nuclear capacity. Dependence on gas may be 70% or more at the very time when gas demand for industrial, commercial and residential use is also at its highest. This is likely to result in extremely high and volatile electricity and gas prices.
16. It would be easy to scaremonger and say that the lights will go out. No doubt they can be kept on if, as a nation, we are prepared to pay to get the gas we need. But security of supply and price are merely two sides of the same coin. If the fuel poor (by then perhaps a significantly larger proportion of the population) are unable to afford to adequately heat their homes, or if gas and electricity prices force the closure, or relocation overseas, of businesses, then, to them, this has precisely the same effect as a supply interruption.
17. If there is doubt that such a scenario might apply, then one only has to look at events over recent months when gas was, and still is, unable to compete with coal. Coal is presently generating about 40% of the country’s electricity and at peak periods over last winter, this proportion exceeded 50%. CoalPro submits that it would be folly to lose the contribution of this uniquely flexible, abundant and affordable fuel, ideally suited to complement and back up the inevitably variable and intermittent nature of renewable generation, and still greater folly to replace it with gas. But that is where the proposed EPS, together with CPS, will lead.
18. This might be acceptable if it were to lead to a genuinely low-carbon electricity future. It will not. A new dash for unabated gas, permitted to continue to generate unabated until 2045, will lead to long-term carbon lock-in.
Conclusion
19. CoalPro strongly supports the Government’s objective of a secure, affordable, low-carbon electricity future. Most of the measures in the proposed Energy Bill will help this to be achieved, particularly the introduction of CfDs for low-carbon technologies and the development of a capacity market. However, the proposed EPS, together with the impact of a rising Carbon Price Floor, risks largely eliminating coal from the generation mix and incentivising a massive over-dependency on gas, particularly at peak periods and times of low availability of renewable generation. These measures will increase security of supply risks, result in high, perhaps extremely high, prices and lead to long-term carbon lock-in. They will achieve the exact opposite of what the Government intends.
June 2012