Emissions Performance Standard Briefing for House of Lords Report Stage consideration of Energy Bill Recommendations 1. Existing coal plants upgrading to meet the IED should be included under the EPS. 2. The proposed grandfathering period should be reduced from 2044 to 2029. Overview of amendments proposed as of 01/11/2013 Amendments 1. The EPS should also apply to existing plant undertaking substantial investment in pollution control technologies to extend operating lifetime. Amendment 74 Schedule 4, Page 130, line 3, at end insert (iii) substantial pollution abatement equipment dealing with oxides of sulphur, oxides of nitrogen, heavy metal emissions or particles is fitted to the generating station. 2. The proposed grandfathering period for newly consented plant should be amended to end in 2029. Amendment 72 Clause 50, Page 49, line 1, leave out 2044 and insert 2029 Comments Incorporates existing coal plants into the EPS regime if undertaking pollution control upgrades, in line with the inclusion of plants undertaking major improvements (such as boiler upgrades) to extend operating lifetimes. Would allow existing coal plants to operate for peaking or winter periods but not for yearround baseload operation, thereby providing a backstop regulation in support of the carbon price support mechanism. Encourages investment in new gas plant and CCS to replace existing coal plant. Improves investor confidence by providing a credible and politically sustainable grandfathering period. Encourages early investment in new gas plant to come into operation this decade. Is compatible with existing capture-readiness requirements.
Summary Existing Coal life extensions: There is a significantly increased risk that existing coal plant will upgrade to meet the air pollution requirements of the Industrial Emissions Directive (IED). This would enable plant to operate at high load factors beyond 2016 and throughout the 2020s. The investment case for the life extension of existing coal plants is being encouraged by current government policy: it proposes that these plants would be exempt from the proposed emissions performance standard (EPS) and able to lock-in three years of receipts from the capacity mechanism. In addition to its negative impact on power sector decarbonisation, this will also result in adverse outcomes for security of supply and affordability, by: Disincentivising investment in new gas plant and continued mothballing of existing gas generation assets, with increased dependence on old coal plant. Requiring higher capacity payments to support gas generation, without any positive impact on wholesale prices, which currently provide high returns to coal plant operators. The government already accepts that plant undertaking major technology upgrades to improve operating efficiencies and extend plant lifetimes should be included under the EPS. This same principle should be consistently applied to any plant that upgrades pollution control equipment in order to meet the IED, which also extends its working life. If introduced as proposed, existing coal plant operators would have two options: Existing coal plant that upgrades to opt-in to the IED would fall under the EPS, but would still be able to run at around 40% load factor. This is in line with previous government analyses that predicted higher carbon prices would reduce running hours. Existing coal plant that decides to opt-out and not upgrade would not fall under the EPS, but would instead be limited to running 17,500 hours through until 2023. This plant would likely operate during winter peak to reduce costs and maximise earnings and would thereby contribute to maintaining security of supply for the next 10 years. New gas investment: In an attempt to make the investment case more attractive for new gas plant, the government has proposed that the EPS should be grandfathered out to 2044, thereby exempting new gas plants from any regulatory emissions controls to meet decarbonisation objectives. This has provoked direct action opposition to new gas plants. Importantly, the investment case for new gas plant (and the use of existing mothballed assets) centres on operators being confident that they will be able to secure significant load factors during the first years of plant operation not via the provision of an extended grandfathering period at the end of plant lifetimes. This investment case would best be assisted by limiting the use of old coal plants as described above, enabling a reduction in the grandfathering period. This would provide increased confidence in the compatibility of gas investment with decarbonisation objectives. 2 Emissions Performance Standard: Energy Bill amendments
Achievability 1 Achievable emissions intensity is the carbon intensity of electricity supply that would be achievable if power plants were dispatched in order of least emission rather than least cost, while still maintaining security of supply to keep the lights on. This indicator shows that there is scope to reduce current emissions intensity by over 200gCO2/kWh (41%) within existing capacity through fuel-switching, primarily from coal to gas. This is achievable while maintaining security of supply at minimal cost to the consumer, being available today without any requirement for new investment, and given that the market electricity price continues to be set largely by gas plant. Security of Supply The IED incorporates long lead times and flexibility mechanisms in order to provide sufficient time for new investment and avoid impacts to security of supply. The inclusion of existing coal plants under the UK s EPS would use the same timetables that are already in place and there is no immediate cliff edge threat to security of supply. In the event that plant operators decide not to upgrade (and therefore not fall under the EPS) the IED will permit opted out plant to undertake 17,500 hours of operations between 01/01/2016 and 31/12/2023. Analysis by Simon Skillings (formerly Director of Policy and Strategy for E.ON UK) finds that system security in the UK is likely to be increased rather than reduced if existing coal plant opts out of the provisions of the IED, as the operating potential for new and existing gas plant would be improved, while sufficient coal plant would remain available for winter peak operations beyond 2020. 2 1 Source: Committee on Climate Change, 2013 Progress Report to Parliament 2 The future of existing coal plant in GB and implications for security of supply and affordability, Trilemma UK, October 2013 3 Emissions Performance Standard: Energy Bill amendments
Affordability 3 The wholesale electricity price is set by the costs of gas generation. The lower cost of coal generation results in increased returns for coal plant operators, but no positive impact on consumer prices. If little or no coal capacity were to opt in to the IED, it can be expected that the foregone additional coal generation will be replaced by additional generation from more efficient (probably new) gas plant and therefore the marginal gas plant and electricity prices will remain essentially unchanged. The continued operation of existing coal plant will also have an impact on costs to consumers. Simon Skillings finds that new gas-fired generators will demand a higher price from the capacity auctions to proceed with new build projects if significant proportions of coal plant opt-in and, given the market-wide nature of the capacity mechanism, this could significantly increase costs to consumers in delivering the required reliability standard. Context international EPS developments Emissions Performance Standards (EPS) have been successfully used worldwide to secure improvements in air quality by requiring reductions of pollutants from power plants. More recently, the concept of EPS has been extended to address emissions of CO 2. EPS regulations for CO 2 have been in place in California and other US states since 2006. 4 Canada put in place a Federal EPS policy in 2012 that covers both new and existing power 3 Source: Committee on Climate Change, 2013 Progress Report to Parliament 4 http://www.raponline.org%2fdocs%2frap_researchbrief_simpson_eps_updated_2010_08_12(2).pdf 4 Emissions Performance Standard: Energy Bill amendments
plants. 5 In June, President Obama announced that the US EPA would bring forward new source standards for power plants this year, to be followed by regulations on existing plant during 2014. 6 The European Commission has recently consulted on policy options that could incentivise carbon capture and storage (CCS), including via the use of EPS regulations. The UK s proposed EPS could therefore form part of a worldwide effort to reduce emissions of CO 2 from fossil fuel power plants, including via the accelerated deployment of CCS. Rationale for amendments to the Bill 1. Existing old coal plant fitting substantial pollution control equipment Schedule 4 of the Energy Bill includes provisions that would apply the EPS to existing plants that upgrade boilers to improve plant efficiencies and extend plant life. This same principle should also be applied to plants seeking to extend operating lifetimes via the installation of other pollution control equipment, for example to meet the Industrial Emissions Directive beyond 2023. Such investments are being actively considered by operators, and are currently attractive options due to low prices of coal and carbon that have made coal plants more profitable over recent years. The government has previously argued that the incorporation of existing plants under the EPS is not required due to the existence of price incentives that would result in a switch from coal- to gas-fired generation. However the collapse of carbon prices under the EU ETS and the perceived political instability of the UK s unilateral carbon price support mechanism mean that this is currently not taking place. As a consequence, the International Energy Agency has recommended that EU member states should actively look to non-price measures to ensure the retirement of old coal plant. 7 Existing processes require decisions by operators as to whether they intend to invest in plant upgrades to meet the Industrial Emissions Directive. These timetables provide the opportunity for existing plants to be incorporated into the scope of the UK EPS in a coherent manner without requiring retrospective regulatory measures. The approach taken by the proposed amendment is therefore in line with the original intent of government policy and consistent with currently proposed measures. It would allow existing coal plants to operate for peaking or during the winter months, thereby providing a backstop regulation in support of the carbon price support mechanism. 5 http://www.globalccsinstitute.com/insights/authors/davidhanly/2012/12/04/emission-performance-standardsold-option-new-incentive-ccs 6 http://www.whitehouse.gov/the-press-office/2013/06/25/fact-sheet-president-obama-s-climateaction-plan 7 http://www.businessweek.com/news/2013-06-10/eu-should-move-beyond-carbon-market-to-shut-coalpower-iea-says / http://www.iea.org/newsroomandevents/pressreleases/2013/june/name,38773,en.html 5 Emissions Performance Standard: Energy Bill amendments
2. Grandfathering timeframe The central purpose of the grandfathering provision is to enable investors in newly consented gas plant to recover the costs of investment prior to potentially being subject to regulation for example via a requirement to fit CCS and / or limit running hours in order to reduce emissions. It does not indicate that they would definitely be subject to any regulatory action at the conclusion of the grandfathering period. The July 2011 White Paper Planning our Electric Future stated that the EPS would be set at 450gm/kWh, and noted that a suggested timeframe for this grandfathering was 20 years. E3G understood from discussions with regulators in 2011 that the suggested 20 years period was too long a timeframe, and that new gas plant has been able to recover their initial costs within 10 years. Regulators therefore suggested that a maximum 15 year grandfathering period would be a fair compromise position. However, on Saturday 17 March 2012, a surprise joint statement 8 from Ed Davey and George Osborne set out a position promoting the role of gas in the UK power sector. This included stating that the grandfathering timeframe for the EPS would be until 2045 equivalent to over 30 years. 9 The currently proposed grandfathering of unabated gas plant to 2045 is not credible. It is not politically sustainable in the face of continued expected domestic and international commitments to reduce carbon emissions. It is in contradiction to existing requirements for capture readiness for all new fossil plant over 300MW. It also fails to provide improved investor certainty, as alternative policy instruments could be applied within this period instead, under either UK or EU law. The 2045 grandfathering commitment instead reduces the policy tools usable by government. It would further increase the costs of bringing forward CCS in competition with unabated gas rather than as part of a coherent transition strategy, and increases the risk of direct action opposition to new gas plant, as previously experienced for coal over recent years. A grandfathering period of ~15 years would instead provide an adequate commercial timeframe, and aligns to the 2030 power sector decarbonisation trajectory. It would provide increased investor confidence as a result of being more credible than the current 2045 date. By setting a shorter grandfathering period, new gas plant will be incentivised to begin operations sooner, assisting efforts to address energy security concerns this decade. 3. CCS The government had originally proposed that CCS projects should be completely excluded from the EPS, but this led to significant concerns that CCS was being used as a figleaf for new unabated coal. The government therefore acted to include CCS within the scope of the EPS. This is a welcome change and should be maintained. 8 https://www.gov.uk/government/news/davey-sets-out-measures-to-provide-certainty-to-gas-investors 9 E3G understands that this statement followed a last-minute write-round with other government departments, which has been interpreted as an attempt to circumvent any potential opposition to the length of grandfathering proposed. We also understand that Freedom of Information requests requesting release of the write-round documentation have been refused. 6 Emissions Performance Standard: Energy Bill amendments
New government amendments 73A-B and 74A-E now propose the inclusion of flexibilities for CCS plants within the EPS framework. This follows amendments proposed at Report Stage as part of a package of measures aimed at strengthening the EPS. If the government were to accept the introduction of amendments 72 and 74 (above) then the CCS flexibilities are likely to be acceptable in the context of clear signals for power sector decarbonisation. 4. Note on Amendments 71 and 73 Amendment 71 and Paragraph (2D) of Amendment 73 would combine to remove the defined grandfathering period and replace it with an EPS level for the lifetime of any new plant. As with the government s proposed grandfathering to 2045 this may not be compatible with existing legal requirements on Capture Readiness. Paragraphs (2A) and (2C) of Amendment 73 are well-intended and seek to provide greater dynamism into the review and use of the EPS in future. At present, the EPS level is proposed to be set in primary legislation, and will require further primary legislation to change it. Paragraph (2C) would enable this to be done more flexibly, and is worthy of further consideration. Paragraph (2A) refers to the reporting process required under Energy Act 2010, but the government currently proposes to repeal this requirement as part of its introduction of a decarbonisation target from 2016. About E3G E3G is an independent, non-profit European organisation operating in the public interest to accelerate the global transition to sustainable development. E3G builds cross-sectoral coalitions to achieve carefully defined outcomes, chosen for their capacity to leverage change. E3G works closely with like-minded partners in government, politics, business, civil society, science, the media, public interest foundations and elsewhere. www.e3g.org For further information, please contact: Chris Littlecott, Senior Policy Advisor, E3G chris.littlecott@e3g.org M: +44 (0)7920 461812 T: +44 (0)207 593 2032 7 Emissions Performance Standard: Energy Bill amendments