Memorandum by The Confederation of UK
Coal Producers
The Confederation of UK Coal Producers (CoalPro)
represents member companies who produce over 90% of UK coal output.
CoalPro is not opposed to the development of any form of energy.
CoalPro is pro-coal. CoalPro is opposed to an over-reliance on
any single form of energy.
CoalPro is pleased to be able to respond to
the Committee's Call for Evidence in relation to their inquiry
into the revision of the EU's Emissions Trading System. CoalPro
is concerned to ensure that the Committee understands the inter-relationship
between the Commission's proposals for the revision of the EU
ETS and other existing and proposed community environmental legislation.
The combined and cumulative effect of this legislation will have
a major detrimental effect on investment in both existing and
new coal-fired generation resulting in a potentially massive over-reliance
on gas-fired generation with serious implications for security
of supply both in the UK and across Europe. To an extent, this
is a timing issue, the critical date being 31 March 2016.
The existing Large Combustion Plants Directive
(LCPD) means that from eight to 11 GW of coal-fired generating
capacity will have to close by 31 March 2016. Over that period
a further five GW of nuclear plant is also likely to close as
it reaches the end of its life.
The LCPD also requires further investment in
the abatement of nitrogen oxides (NOx) at all remaining coal-fired
plant if it is to continue to operate after 31 March 2016. There
is no guarantee that such investment will be forthcoming.
In addition, the proposed Industrial Emissions
Directive envisages further reductions in NOx emissions that will
require yet further investment at ongoing coal-fired plants if
they are to continue in operation after 31 March 2016. There is
even less guarantee that such additional investment will be forthcoming.
As if this were not enough, DG Environment are
proposing a revision of the National Emissions Ceilings Directive
(NECD) involving draconian overall national reductions in emissions
of sulphur dioxide (SO2), NOx and particulates (approximately
50%, 70% and 50% respectively) by 2020. This proposal is at present
undergoing Inter-Service Consultation. It should be noted that
the UK will be unable under any reasonable scenario to meet its
legal obligations for 2010 for NOx emissions under the existing
NECD. It is not alone; a number of Member States are in the same
position.
To meet these proposed further NECD limits on
emissions will require an enormous investment in NOx abatement
and retrofitting of more effective SO2 abatement equipment.
Against this background, further closures of
coal-fired generating plant by 2016 are likely unless there is
a benign investment climate. Taken together with the likely closure
of nuclear plant, a generation gap of 20 GW or more could emerge
by 31 March 2016, representing over a quarter of all existing
electricity generating capacity. This is less than eight years
away.
This gap of 20 GW or more by 2016 cannot be
closed by new nuclear capacity (not available in time) or by renewables
or energy conservation given the already demanding targets for
these technologies. It can only be met by coal or gas. Without
investment in new or uprated coal-fired plant, the UK will be
60% or more dependent on gas for its electricity supplies by 2016.
I apologise for this lengthy introduction but
it is important to recognise the impacts of other European environmental
legislation before considering the possible effects of the proposed
revision of the EU ETS. The point is that there will be a massive
over-dependency on gas-fired power generation unless there is
a benign investment climate for coal-fired generation.
The proposal for 100% auctioning of carbon allowances
from 2013 will impact severely on coal-fired generation, the costs
of which will increase sharply. This does not represent a benign
investment climate. The combined effect of other European environmental
legislation and 100% auctioning of carbon allowances under the
EU ETS is thus likely to lead to an excessive overdependence on
gas. As similar trends are also probable throughout Europe, the
implications for electricity prices and security of supply are
obvious.
If the Committee, and indeed policy-makers generally,
are content with this emerging situation, then fine. If they are
not, then the proposal needs very careful consideration.
CoalPro accepts that it is difficult to dispute
the intellectual rationale for 100% auctioning, particularly given
the windfall profits made by all electricity generators under
Phases I and II of the scheme. However, 100% auctioning will not
prevent windfall profits which will continue to accrue to all
forms of electricity generation other than coal.
I now turn to the individual questions on which
evidence is sought.
LEVEL OF
EMISSIONS REDUCTIONS
1. The emissions reduction targets are demanding
but the 20% target is achievable. The 30% target will be very
difficult to achieve. However, under the proposal as it stands,
taken together with the impact of other existing and proposed
European environmental regulation, achievement of the target will
not be met by technological innovation but by large scale fuel
switching from coal to gas.
Whilst this may result in interim targets being
achieved, it will make it all the more difficult to achieve the
60% (or more) reduction in carbon emissions required by 2050.
Gas is also a relatively high carbon form of generation and there
is a real risk that large-scale investment in new, unabated gas-fired
capacity will result in a high level of carbon emissions being
locked in as well as all the attendent price and security of supply
implications.
It is accepted that the future of coal-fired
generation requires the application of carbon capture and storage
(CCS) technology. But the same must apply to gas if large reductions
in carbon emissions are to be achieved by 2050.
SCOPE AND
OPERATION
2. No comment.
3. No comment.
4. The Scheme will not encourage technological
innovation. It is far more likely to lead to fuel switching from
coal to gas on a large scale.
This will lock in a relatively high level of
carbon emissions making attainment of the 2050 objective even
more difficult. Windfall profits will continue to accrue to gas-fired
generation. Other low carbon technologies (nuclear, coal with
CCS) may be locked out.
The proposal to allow CCS as an abatement measure
in the EU ETS will, other things being equal, stimulate investment
in CCS. However, other things are not equal. CCS cannot be retrofitted
to the UK's existing coal-fired fleet. This is relatively inefficient
and the energy penalty of CCS is too great. It can and should
be applied to new/replacement high efficiency coal-fired capacity.
Investment in such high efficiency capacity is thus a pre-requisite
for CCS.
CCS will not be demonstrated at commercial scale
until about 2014. This is too late to build new coal-fired capacity
with CCS before the critical date of 31 March 2016. New coal-fired
capacity can be built "carbon capture ready" prior to
that date but will be penalised by having to purchase 100% of
their carbon allowances prior to the retrofit of CCS. There is
a serious risk that unabated gas-fired plant will be constructed
instead.
5. No comment.
ALLOCATION AND
AUCTIONING
6. The position in Member States varies
widely, not least in the proportion of electricity generating
capacity which is coal-fired. Decisions should be taken by Member
States.
7. The rationale for sectors receiving a
proportion of their emissions for free relates to international
competitiveness and the potential for "carbon leakage".
100% auctioning is proposed for electricity generation because
it is assumed the cost can be passed on. CoalPro believes this
fundamentally underestimates the effect on the competitive position
(and hence carbon leakage) of electricity-intensive industry sectors.
Electricity prices will increase not only because the cost of
carbon will be passed on but also because of the likely extremely
high price of gas in a Europe increasingly dependant on gas-fired
power generation.
8. No comment.
THE INTERNATIONAL
DIMENSION
9. The effect on the competitiveness of
European industry will be offset if operators are allow to utilise
the CDM to the greatest possible extent.
10. No comment.
CoalPro recognises that it would be appropriate
to put forward an alternative proposal to 100% auctioning for
the electricity sector designed to stimulate investment in new
technology and to avoid large-scale, and ultimately counter-productive
fuel switching. This is set out below:
(i) Gradually increase the proportion of allowances
which is auctioned, starting at, say, 20% in 2013. This will not
penalise new, high-efficiency, "CCS ready" coal-fired
generation in its initial operating period, thus militating against
fuel switching, but will stimulate CCS retrofitting once CCS has
been proved.
This will also stimulate investment in replacing
the UK's existing coal-fired fleet with the high-efficiency plant
which is a pre-requisite for CCS.
(ii) Recirculate the auction revenues to investment
in low-carbon electricity generation, including CCS. It is simply
unacceptable that such, potentially huge, revenues disappear into
the Treasury pot in all Member States. This is not a normal revenue-raising
measure. It is a specific environmental measure and the revenues
should be devoted to that purpose.
CoalPro will be pleased to discuss the evidence
set out above with the Committee should the Committee consider
that appropriate.
June 2008
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