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Energy and Climate Change Committee MPs SAY EMISSIONS PERFORMANCE STANDARDS VITAL BUT COULD RAISE PRICES
Coalition plans to introduce an Emissions Performance Standard (EPS) — to limit emissions from power stations — are necessary to meet the UK’s carbon budgets and develop new technology but are likely to increase energy prices, according to a new report by MPs on the Energy and Climate Change Committee.
The committee warns that existing policies will not deliver adequate investment in new low-carbon electricity generating capacity for the 2020s–2030s and risk locking us into a costly high-carbon energy system.
Emissions Performance Standards can provide certainty to investors that there will be a future market for low-carbon electricity, helping to lower the cost of capital investment in green technology and stimulating the development of Carbon Capture and Storage (CCS) systems.
Tim Yeo MP, Chair of the Energy and Climate Change Committee, said:
“A change in the law to require cleaner power stations is needed to ensure the UK doesn’t get left behind with an antiquated, expensive and highly polluting energy system.
“Energy prices may rise in the medium term as a result of a new emissions performance standard, but it will help Britain blaze ahead with world-leading low-carbon technology.
“Meeting our climate change targets will become a lot more expensive in future if we don’t act to decarbonise our electricity market now.”
The report raises concerns that a poorly designed EPS could have a range of unintended consequences. A badly structured EPS — including gas power stations too early on, for instance — could undermine investment in new capacity needed between now and 2020, potentially leading to a generation gap.
Alternatively, if emissions limits were too lax the EPS could spark a new ‘dash for gas’, encouraging large-scale deployment of unabated gas power stations with long-term negative consequences — reducing energy security and making our climate change targets higher to meet.
The MPs conclude that the policy framework as it currently stands is grossly inadequate and will not deliver adequate investment in new low-carbon generating capacity for the 2020s and 2030s.
Reforms to the electricity market are urgently required in order to ensure sufficient investment is made now to deliver infrastructure for the 2020s.
The government must not delay in conducting its consultation and delivering a White Paper in spring 2011. Any slippage of the timetable will jeopardise climate change and energy security objectives.
The conclusions of the report
Background
1. The Coalition Agreement contained a commitment to establish an Emissions Performance Standard (EPS). This will prevent coal-fired power stations being built unless they are equipped with sufficient carbon capture and storage to meet the required standard. In July 2010, the Secretary of State, Rt Hon Chris Huhne MP, announced that the electricity market reform project would hold a consultation in the autumn of 2010 to consider, among other things, the role that an EPS could play in delivering an energy system that delivers secure, low-carbon and affordable electricity for the 2020s and beyond.
2. For our first inquiry, we decided to look at emissions performance standards, focusing particularly on the potential impact on energy markets and investments and examining whether they could encourage the deployment of Carbon Capture and Storage (CCS) technology. We also looked at the consequences and opportunities at an international level, especially with regard to international climate change negotiations.
3. We announced our inquiry on 21 July 2010 and sought evidence on:
• The factors that ought to be considered in setting the level for an EPS, what an appropriate level for the UK would be and whether it should be changed over time
• The benefit an EPS would bring beyond the emissions reductions already set to take place under the EU Emissions Trading System (ETS)
• The effectiveness of an EPS in driving forward the development of CCS technology
• The possible threats posed by an EPS to the UK's long-term energy security and climate change agendas
• The likely impact of an EPS on domestic energy prices
• Whether any other European countries are considering an EPS and, if so, whether standards should be harmonised
• Whether unilateral action by the UK to introduce an EPS could contribute towards global climate negotiations in Cancun in November 2010
• Whether greater use of EPSs internationally could help to promote agreement on global efforts to address climate change.
4. We received written evidence from 35 individuals or organisations and held two oral evidence sessions in which we heard from: Lord Turner and Dr David Kennedy of the Committee on Climate Change; Professor Jon Gibbins of the University of Edinburgh; Nick Molho of WWF; Simon Skillings of E3G; Chris Littlecott of Green Alliance; Dr John McElroy of the Association of Electricity Producers; Matthew Farrow of the CBI; Dr Jeff Chapman of the Carbon Capture and Storage Association; Charles Hendry MP, Minister of State at the Department of Energy and Climate Change (DECC); and Jonathan Brearley, Director of Energy Markets and Infrastructure, Energy Strategy and Future, DECC. We are very grateful to all those who have assisted us during the inquiry.
Conclusions and recommendations
The UK power sector: trends and targets
1. We believe that the policy framework as it currently stands is grossly inadequate and will not deliver adequate investment in new low-carbon generating capacity for the 2020s and 2030s. The government has acknowledged this fact and plans to consult shortly on a number of reforms to the electricity market. Reforms to the electricity market are required urgently in order to ensure sufficient investment is made now to deliver infrastructure for the 2020s. The government must not delay in conducting its consultation and delivering a White Paper in spring 2011. Any slippage of the timetable will jeopardise climate change and energy security objectives.
The role for an emissions performance standard
2. We welcome the government's decision to consider an EPS alongside a wider package of market reforms, rather than in isolation. However, we are concerned that interactions and overlaps with existing policies as well as proposed new market reforms are insufficiently understood. We, therefore, recommend that the government commissions an independent review of regulations and market reforms in the electricity sector. The review should investigate the combined impact of new and proposed policy measures on energy costs, greenhouse gas emissions, energy security and the cost of compliance and should be conducted alongside the government's own consultation.
3. We conclude that it would not be sensible to introduce an EPS if its sole aim is to drive immediate emissions reductions from the power sector as the EU ETS already exists to do this. However, we also note that the EU ETS cap needs to be significantly tighter than its current and planned future level if it is to be effective in achieving reductions.
4. An EPS will not result in any additional global savings to carbon emissions if they are offset by other participants in the EU ETS. It may also lead to a reduction in the price of carbon. In order to avoid these outcomes, the government should consider retiring an equivalent number of EU allowances to those saved through the EPS. We recognise that there is some uncertainty about the legality of this option, and the government should seek to clarify this situation.
5. We note that at this stage, CCS has not yet been proven to work at scale. Even if it is proved to work technically, there are still questions about how much it will cost and whether it would be economically viable to build and operate in the future. An EPS could help ensure that the UK does not become reliant on high-carbon electricity in the event that CCS does not work at scale or proves too costly.
6. We conclude that an EPS offers a more certain and predictable way to prevent lock-in to high carbon infrastructure than other means. This goal itself provides adequate justification for implementing an EPS.
7. We conclude that an EPS could play a role in providing a transparent framework for regulating carbon emissions from the electricity sector by making clear the government's expectations in terms of emission reductions from this sector. This would be an additional justification for its introduction.
8. An EPS has the potential to provide certainty to investors that there will be a future market for low-carbon electricity. However, it is important to design an EPS that avoids the risk of undermining investor confidence by increasing policy and political uncertainty. We conclude that an EPS is more likely to be successful in encouraging the development of CCS technology, and, indeed, other low-carbon electricity generation, if it is introduced as part of a package of measures rather than in isolation. This should include some form of financing help in order to help reduce risk for investors. This could be an extension to the CCS levy, beyond the initial four demonstration plants, or some other mechanism.
9. We are not convinced that generators will use CCS as a matter of course once the technology has been proven. This is because the current fiscal and regulatory framework does not currently provide a strong enough incentive to do this. In particular, the carbon price under the EU ETS is not high enough to make the roll out of CCS technology economically viable. We, therefore, believe that there is a role for an EPS in ensuring the deployment and operation of CCS in the future.
10. There is clearly some ambiguity about why the government intends to introduce an EPS. The rationale must be made clear in the forthcoming consultation on electricity market reforms.
11. An EPS could be introduced for a number of different reasons, including: to reduce the UK's greenhouse gas emissions; to avoid ‘lock-in’ to high-carbon infrastructure; to provide greater clarity about the expected level of emission reductions from the power sector; to stimulate the development of CCS technology; and to ensure the deployment and use of CCS technology. We believe that an EPS would be most usefully employed in providing a transparent emission-reduction framework for the power sector, in avoiding lock-in to high-carbon infrastructure and in helping to stimulate the development and deployment of CCS and other low-carbon technologies. It is clear to us that an EPS by itself will not deliver CCS, but it could play a useful role as part of a package of wider measures that address the other barriers to its introduction.
EPS design
12. There are many design options for an EPS, some of which may be more beneficial than others. We welcome the fact that the government is considering a range of options in designing the EPS. In its forthcoming consultation and review of electricity market reform, the government must consider all the alternatives set out here and analyse the potential impacts of each option on energy security, energy prices and environmental sustainability in order to avoid unwanted outcomes.
13. To ensure that an EPS acts as an incentive to new investment in low-carbon generating capacity and a disincentive to investment in high-carbon generating capacity, it is essential that the timescale for its introduction respects the investment cycle of the technology involved. It is also important that it is designed in a way that increases investor certainty and, thereby, reduces the cost of capital. An EPS must also protect the possibility that, as long as baseload generating capacity is low carbon, there may remain a role for high-carbon power stations to operate for brief periods of exceptionally high demand.
14. We urge the government to make every effort to minimise the impact of an EPS on energy prices, particularly for vulnerable groups and the fuel poor whose numbers may increase as a result. In particular, the government must prioritise the delivery of domestic energy-efficiency programmes in addition to other policies such as the Social Price Support Scheme to vulnerable groups and the fuel poor in order to keep their energy bills as low as possible.
Increasing the UK's international influence
15. The UK is an influential member of the EU, and action taken by the UK in reducing its carbon emissions could provide an example for others. Several other member states have expressed an interest in introducing their own EPSs, and a UK EPS could provide a model for others to emulate. This is a valuable opportunity for the UK to shape the EU's approach to an important area of policy, and we recommend that the government must seize it. Equally, there may be lessons for the UK to learn from others. The government must engage more closely with other member states that are considering EPS in order to share best practice and learning on EPS design and implementation.
16. We conclude that the risk that the introduction of a UK-based EPS could undermine the reputation of the EU ETS is easily outweighed by the positive leadership it would demonstrate. There is already a widespread acknowledgement that the EU ETS is not by itself delivering low-carbon investment, so any reputational damage caused would be minimal.
17. It is not clear whether a UK-based EPS would be permitted under the EU Industrial Emissions Directive. Article 9 of the directive prohibits the use of emission limit values for greenhouse gases and, although the preamble states that member states may introduce more stringent measures, it is not clear whether an EPS might in fact be considered an additional measure. There is, therefore, a risk that the introduction of an EPS may result in a legal challenge. We call on government to clarify the legality or otherwise of an EPS in its response to this report.
18. Even though the introduction of an EPS may not be as influential at the international level as a successful demonstration of CCS technology, we nevertheless believe that it could bring significant benefits. We call on the government to work with other countries to share best practice on EPS in order to facilitate global emissions reductions from the power sector.
19. The introduction of a UK-based EPS would bring a number of benefits at the international level. Within Europe, it would provide a template for other member states to follow. Other member states are considering EPSs of their own, and leadership from the UK could help to encourage the uptake of EPSs elsewhere in Europe, particularly since the UK is viewed as a leader on climate change within the EU. At the international level, the introduction of a UK EPS would demonstrate commitment to tackling climate change. Providing a model for other countries to emulate could help bring forward sectoral agreements and help to achieve global emission reductions from the power sector.
The Energy and Climate Change Committee
The committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department of Energy and Climate Change (DECC) and its associated public bodies. It has 11 members and is chaired by Tim Yeo MP.
The committee determines its own subjects or inquiry. When the committee has chosen an inquiry, it normally issues a press notice outlining the main themes of interest and inviting stakeholders to submit written evidence. The committee may also identify possible witnesses and issue specific invitations to them to submit written evidence. Depending on the subject, external deadlines and the amount of oral evidence the committee decides to take, an inquiry may last for several months and give rise to a report to the House. Other inquiries may simply consist of a single day’s oral evidence, which the committee may publish without making a report.
Members:
Tim Yeo MP — Chair (Con)
Dan Byles MP (Con)
Barry Gardiner MP (Lab)
Ian Lavery MP (Lab)
Dr Phillip Lee MP (Con)
Albert Owen MP (Lab)
Christopher Pincher MP (Con)
John Robertson MP (Lab)
Laura Sandys MP (Con)
Sir Robert Smith MP (Lib Dem)
Dr Alan Whitehead MP (Lab) |
