Electricity Market Reform – Emissions Performance Standard
The package of reforms outlined in the Electricity Market Reform will set the framework for some of the most significant changes in the UK market for many years. The Government published details of the first of four Electricity Market Reform proposals in the 2011 budget and is currently discussing implementation. Implementation requires fundamental changes in many parts of the existing arrangements and the exact details of how these will be enacted are currently under discussion.
The reforms are wide ranging and therefore I have decided the split them across a number of blog posts. The first – this post -looks at the emissions angle (EPS) with the Feed-In-Tariff Contract for Difference (FIT CfD) and Capacity Mechanism being covered in the future posts.
Emissions Performance Standard
The White Paper confirmed the introduction of an emissions performance standard (EPS) to limit the amount of carbon dioxide emitted from new power stations. Notably the standard will apply to all fossil fuel fired power stations and not just coal stations as had been indicated in the initial consultation papers. On the crucial question of grandfathering the EPS level applicable to a particular station, the White Paper confirms that the level in place at the time a station consented will apply for a period linked to the economic life of that asset.
The stated objective of introducing the EPS is to ensure that fossil fuels continue to meet the requirements of security of supply whilst also to do so against the backdrop of decarbonisation. Expanding the scope of the EPS was part of the commitment made in the Conservative/Liberal Democrat coalition agreement. Concerns have been made by a number of generators that the EPS duplicated existing legislation, regulations and control processes, and not provide any addition incentives for low carbon investments.
Limits on the amount of Carbon Dioxide
In terms of scope, the EPS will only apply to generation stations of at least 50MW and has been set at a level equivalent to 450g of CO2 per kWh. The consultation process asked for views upon what level of C02 to set and received suggestions ranging from between 300g to 600g and was apparently split of the level to adopt. Before the election, the Conservative Party had supported a level of 400g.
Whilst there is focus and broad consensus of the level for existing assets, the level of EPS applicable to new plant build is not as fixed and leaves open the potential for a more stringent EPS in the future.
Grandfather period needs further analysis
The Electricity Market Reform consultation proposed grandfathering the level of EPS in place at the time a station is consented for a period linked to the time that investors would expect to see a return on their capital investment. An examination of the consultation responses indicates that whilst some strongly supported the idea, many considered that it would discourage investment in CCS or other low carbon technologies by prolonging the attractiveness of unabated gas generation.
It should be clear that an appropriate grandfathering period is crucial to this section of the White Paper. The Paper suggests a period of 20 years but confirms that the Government will seek to keep this period under review as the market evolves.
Now with added gas and CCS exceptions
Citing the importance of unabated gas stations in transitioning the market to low carbon generation, the White Paper confirmed that the EPS will apply to all new-fossil fuel power stations. This was a change in direction from the precursory consultation documentation which had indicated that it would only apply to coal-fired stations only.
Supporters of CCS had expressed concerns over the impact of the proposals upon planned (and existing) schemes. There was relief therefore that the paper made specific exemptions from the EPS for stations partaking in the CCS Demonstration Programme. Indeed, the Government has expressed its intention to use the EPS to supplement its CCS policy in that any new combustion plants over 300MWmust be built must be built carbon capture ready.
In terms of Biomass and co-firing, the paper intends to zero rate emissions when calculating the overall emissions from carbon dioxide from a generation asset. The Government will establish the EPS in a way that does not act as a disincentive to invest in combined heat and power (CHP) but, as with a number of aspects of the paper, does not expressly state how this will be achieved.