Motion to Consider
My Lords, the regulations before the Committee today are the implementing secondary legislation for the emissions performance standard. The EPS was introduced by way of the Energy Act 2013 and constitutes one of the measures that collectively make up the Government’s programme of electricity market reform.
Noble Lords will be aware that substantive EPS policy—including its application to any new or existing fossil fuel plant—is established by way of the Energy Act 2013. The regulations before us today are limited to making the practical arrangements associated with the EPS legislation contained in the Act. They set out the application of the EPS in cases permitted by the underlying legislation, and, for England alone, put in place the practical arrangements for implementing and enforcing the EPS. We expect that the devolved Administrations will also soon bring forward legislation implementing the enforcement provisions for the EPS.
By way of reminder, the EPS acts as a regulatory backstop to the amount of carbon dioxide emissions that new fossil fuel plants can emit. To clarify, a “new plant” is an electricity generating station that secures development consent after the EPS came into force on 18 February 2014. The EPS is part of the Government’s strategy to transition to a low-carbon electricity system at the lowest cost to consumers, while maintaining security of supply. It works to complement our existing planning policy, which prevents any new coal-fired generating station being approved unless it is equipped with full-chain carbon capture and storage technology. In combination, these measures ensure that any new coal plant will be equipped with, and must use, CCS.
The power to make these regulations is contained in the Energy Act 2013. Part 1 of the regulations establishes their extent and application. Part 2 makes provision for the additional application of the emissions limit duty, which is the legal duty to conform to the requirements of the EPS, and the modification of that duty in specific circumstances. It will apply throughout the United Kingdom. Part 3 sets out the monitoring and enforcement arrangements that will apply in England. I will now describe the operation of these parts in more detail.
As an exception to the EPS applying only to new fossil fuel plants, Part 2 of the regulations clarifies the limited circumstances in which the EPS will be applied to an existing coal plant. The regulations provide that where an existing coal plant installs or replaces a main boiler—so effectively extending the life of the plant by a period comparable to the operating life of a new plant—that plant is treated as if it were a new plant and is therefore subject to the EPS. This is consistent with the approach set out in the Act.
Part 2 also sets out the circumstances in which a plant’s annual emissions limit will be modified. Where a plant commences or ceases operation part of the way through a year, the emissions limit is amended for that year to take into account the portion of the year to which the EPS applies. Similarly, if the installed generating capacity of a fossil fuel plant changes, its emissions limit is to be adjusted to reflect the new situation.
Part 2 also establishes arrangements associated with the three-year carbon capture and storage exemption from the EPS, provided for in Section 58(1) of the Act, the purpose of which is to provide plants adopting CCS with some flexibility during the commissioning of the full CCS chain. The regulations clarify that the exemption applies only to those generating units of the fossil fuel plant equipped with a full CCS chain.
Part 2 also sets out the methodology for calculating emissions arising from qualifying combined heat and power plants, which provides that the emissions associated with the production of useful heat are not taken into account for EPS purposes. This is to ensure that the EPS does not become a barrier to the development and deployment of good-quality combined heat and power. Finally, Part 2, together with the relevant provisions in the Energy Act 2013, provides that where a power plant uses fuel derived from fossil fuel that is gasified off-site, the associated emissions will be taken into account when the relevant power station’s total emissions are calculated. This is to avoid possible circumvention of the EPS.
Part 3 establishes the process by which the monitoring, reporting and enforcement of the EPS will take place in England. Outside England, the monitoring and enforcement obligation will fall to the relevant authority within the territory. These arrangements have been developed in close co-operation with the Environment Agency, which will act as the enforcement authority in England. In designing this framework, we have sought to minimise any regulatory burden by basing it on and tying it to the arrangements already in place for the EU’s Emissions Trading System, which is also administered by the Environment Agency.
Before commencing operation, a plant’s operator will be required to declare its emissions limit—calculated in accordance with Section 57 of the Energy Act—to the Environment Agency. The operator will then be required to provide emissions data where the plant’s total annual carbon emissions, as measured and reported under the EU ETS, exceed the plant’s EPS emissions limit. This approach removes for many plants the need to do significant extra regulatory work, as carbon emissions data already have to be compiled for the EU ETS. Where the reported EU ETS emissions for a plant exceed the plant’s EPS limit, the plant operator will be required to provide a further breakdown of carbon dioxide emissions, identifying those that are relevant for EPS purposes and those that are not. This information will allow the Environment Agency to verify whether the emissions limit for the plant has been breached in any particular period.
Power plants throughout the UK have a strong track record of compliance with their regulatory responsibilities, and many of them took part in our consultation on these regulations last year. We therefore do not expect that there will be breaches of the emissions limit duty. However, in the event that such a breach were to occur, these regulations provide the Environment Agency with the ability to take strong, proportionate enforcement action, ensuring that no plant breaching its emissions limit can benefit commercially from that breach. The Secretary of State may issue enforcement guidance under the regulations that can set the parameters of any penalties to be applied by the Environment Agency in cases of breach by a plant operator. An appeals route is also provided.
My department has worked in close consultation with the devolved Administrations in designing the monitoring and enforcement regime set out in this instrument with a view to ensuring that, consistent with the government policy, a standardised approach to administration of the EPS is applied throughout the UK. I commend these regulations to the Committee.
My Lords, I am grateful to the Minister for introducing the regulations for debate this afternoon. They are implementing regulations that relate to the part of the Energy Bill where an emissions performance standard was to be set for new build of fossil fuel generation. We had a lengthy debate during the passage of the Bill about the EPS regulations and the role that they need to play. It was clear that the Government had decided that the only role that EPS could play was for new build and would not consider the role of an EPS for existing power stations.
We have raised this on several occasions, and we will continue to raise it, because the context for the regulations is that there is very little appetite for the building of new coal-fired power stations in the UK—in fact, there is very little appetite for building any new power stations in the UK if they do not have a contract for difference, which comes from another part of the Energy Bill. So there is potential for a lock-in to existing thermal assets for some time to come. We have always understood that the EPS is a backstop measure to underline and further support other interventions that the Government are planning to try to meet challenging carbon budgets and decarbonisation targets that we expect to be set for 2030.
The crucial question to consider on whether the Government have got the EPS regulations right is the extent to which that back-up—that belt and braces approach—is also needed on existing plant. I say that for a number of reasons. Partly, it is because in the recent capacity market auctions, a large number of plants bid for those capacity contracts and a large number of existing players won contracts, including a significant amount of capacity of old coal. Nine gigawatts of old coal received a contract through that mechanism. That meant that a large number of potential new build, more efficient gas stations, did not receive a contract, so the net effect of that intervention into the market has been to consolidate the existing plant in the market and to squeeze out investment in potentially cleaner, more modern, more flexible and more efficient stations.
We think that that is regrettable and that the situation needs clarity. We have cross-party support. On 4 February, all three leaders of the major parties signed up to a cross-party recommendation that we should take bold action on climate change,
“to accelerate the transition to a competitive, energy efficient low-carbon economy and to end the use of unabated coal for power generation”.
That is a welcome statement. From our side, we do not see a role for unabated coal going forward and we are committed to decarbonising our electricity system by 2030. Within that, we absolutely want carbon capture and storage to play a big role.
We have to look at how the combined elements of the energy market reforms that were accepted in the Energy Bill work together to deliver that aim. That is the crucial question. We must view these EPS regulations in that light. The truth of the matter is that the Government have insufficient levers at their disposal to ensure that we see a steady move away from unabated coal towards carbon capture and storage and cleaner gas generation. The EPS provided one potential lever, but the Government have chosen not to use it. The regulations highlight that it continues to apply just to new build and not to existing plant.
I do not want to have a lengthy debate about this, but I wanted to make that context clear. We cannot consider these instruments in isolation; we must look at the net effect of how they interrelate. At the moment we have a set of policies that are allowing old coal to persist. The only mechanism that the Government have to hold back coal is the carbon price floor. Indeed, that is referenced in the supporting notes to the regulations: the EPS is seen as a back-up for the carbon price floor.
As we all know, the carbon price floor was frozen merely a matter of months after it had been introduced, so the escalator that the Government expected it to follow—the steady increase in its level—has been stopped. It will now be frozen until 2020. DECC seems to continue to believe that at some point in the future we will return to an escalating carbon price floor and that it is this that will drive unabated coal off the system. However, how politically feasible is it that that price mechanism will return to that trajectory?
In this Budget we will see a doubling of the carbon price floor and it will then stay at that level until 2020. However, DECC’s projection shows that it wants the carbon price floor to rise thereafter, reaching an eye-watering £78 per tonne in 2030. How is that going to happen? In 2021, what will the price rise to? Will it go back to the old trajectory that was foreseen when the EMR was drafted or will it step down and take a linear pathway from 2021 to 2030, when it is meant to reach £78 a tonne? Either way, I would argue that this policy is now politically, if not by any other definition, very unlikely to survive. I certainly cannot see that any Government are going to wish to see the price rise to £78 a tonne by 2030.
Is it not time that we took a more holistic approach to the other levers that the EMR created and properly assessed how an EPS could be implemented to achieve that cross-party commitment that we saw from our leaders to phase out unabated coal for a generation, and to do so in the most cost-efficient way? The IPPR recently issued a report looking at how much can be saved for the consumer by using an EPS—a regulatory intervention—on existing coal, as opposed to this rather unfeasible and, quite frankly, not believable policy of the carbon price floor. It will cost consumers more if we try to use that mechanism to achieve the same ends.
I have said that we are committed to a 2030 target, and indeed we are. Equally, we are committed to CCS playing a role in helping to achieve that goal. Therefore, I very much welcome the elements of today’s regulations that exempt CCS and enable it to be developed sympathetically, enabling it to interact sensibly with these emissions limits. I am very pleased that that can be seen in these regulations.
I have set out my concerns, which relate very much to the generality rather than to the detail of the regulations. The way that the regulations are drafted obviously follows on from what was agreed in the primary legislation, and in that sense we support them. We see that a sensible provision of enforcement is being introduced. However, I have one small question about the conditions under which an EPS might be suspended. There is talk of the EPS being lifted or suspended if there are security of supply concerns. I would like the Minister to reassure me that this would be done in a very transparent way and that the decision would indicate that our capacity market proposals were not working. What would be triggered in the event of having to suspend the EPS? Would it indeed mean that we would then have to review the capacity mechanism on the grounds that it had not delivered sufficient capacity to enable us to keep the EPS?
That was a question relating to the regulations. As I said, we hope that over time the Government will think again about their policy for phasing out unabated coal. We think that there is a role here for an EPS to help us to plan for that. That would enable investors in gas capacity to have greater certainty about there being room for them in the market. We also think that it would save consumers money and reduce our import dependency. Let us not forget that 80% of our coal for electricity generation now comes from overseas, and about 40% of it comes from Russia. That means that, when it comes to concerns about Russia’s role in energy, the UK’s exposure really relates to coal and not to gas.
For all those reasons, this is an interesting policy area that I am sure we will revisit on the other side of the election. For now, we support the regulations in so far as they implement what was agreed in the Energy Act.
My Lords, I am extremely grateful for the general support of the noble Baroness for the regulations. She is right that we did discuss it at great length at various stages of what became the Energy Act and within the Infrastructure Bill—so the debate has been well aired. It is an important backstop measure that complements the wider range of interventions that act to secure and decarbonise our electricity supplies as we work towards a low-carbon future.
The noble Baroness touched on a number of issues and I shall try to go through them—but, as with all things, if I feel when reading Hansard that I have missed something out I undertake to write to her. She asked about the capacity markets and felt that the market had squeezed out gas. We have always made it clear that the capacity markets would be technology neutral and that we needed to make sure that there is competition built in, so that we get best value for the consumer. We project that coal will eventually come off and that we will have far less dependency on it, given that we have the potential for the exploitation of shale and other technologies. We see coal playing less of a role going forward. However, it is important to ensure through the measures we are taking that we do not put such a cost pressure on the consumer and that we have security of supply because it is so necessary for us to demonstrate to the public that the Government have taken all precautions to ensure that the lights stay on. So I think that the noble Baroness was being slightly unfair. The capacity market brought on a lot of different technologies at a cost that was driven by competition, which gives the consumer better value for money.
The noble Baroness also asked us to look at the future of coal. I have just touched on that. Our analysis is very much in league with a lot of other analysis that has been given to us, which suggests that unabated is expected to account for only 1% of total electricity generation in Great Britain by 2025, and will decline even further.
I thank my noble friend for giving way. Are the Government taking a view on when they think carbon capture and storage will become viable at a reasonable price? There were attempts to put out pilot projects, one of which was Longannet in Scotland, which was found to be an uneconomic proposition. I gather that it is now proposed to close that power station.
My Lords, my noble friend may be aware of two projects that we are funding—one at Peterhead and one at White Rose. They will become the world’s first commercial-scale gas CCS projects. They are still being developed. If my noble friend will allow, I will give him a fuller response. We are demonstrating that we are leading in the world with CCS. Investing £1 billion shows our seriousness about taking CCS forward.
I shall continue with the questions raised by the noble Baroness, Lady Worthington. She referred to the carbon price floor, saying that there was a projection and a sort of wish list that it would rise. We all know that the EU ETS has to be reformed properly. None of us expected the carbon price to fall as much as it did. However, we are where we are with it. I was at a European Council meeting a couple of weeks ago where there was broad agreement that we needed to look at reforming the EU ETS to make sure that it better reflects its participatory role in ensuring that countries that do not have an extreme tendency to reduce their carbon footprints will be encouraged to do so. There is broad agreement that it has to be reformed. That will play a large part in how we respond to the discussion around the carbon price floor.
Another important point is that we must remain competitive. It has always been key that as a country we should not out-compete ourselves by driving ourselves to reduce carbon emissions at a pace while others use them to be more competitive. We need to reach a fine balance, and it is important that in pushing for reform we ensure that the measures we take, internally and domestically, give great examples for others to follow. That is my response to the noble Baroness.
Before the noble Baroness moves on to the next topic—perhaps the Minister can write to me if it is easier—to get to that projection of only 1% of electricity coming from unabated coal by 2025, what is the carbon price assumption in that model? Does it start from the current £18, where it is frozen until 2021, and rise from there, or does it go back to its original trajectory, as was published by the Treasury and others?
My Lords, I think it would be beneficial for me to write to the noble Baroness, because I do not want to give her an assumed figure that turns out to be misplaced.
My final response to the noble Baroness concerns the conditions under which the EPS would be suspended. The Government have published a policy statement that sets out the conditions that must be met for a suspension to be made. Details of any suspension must be laid before Parliament. Again, if the noble Baroness and my noble friend find it helpful to have further details on that, I would be happy to put them in the letter that I will send to the noble Baroness on the other issues.
I agree with the noble Baroness that by and large, politically, the three major parties have come to an agreement. We need to work together to reduce the carbon emissions of this country to meet our own goals, but it is important that we send out consistent messages around the policies that we are working on. The Energy Act has driven that and shown that, working together, investors have come with confidence to invest in the UK. I end by thanking noble Lords for their positive remarks, and commend the regulations to the Committee.