Emissions Performance Standard Briefing for House of Lords consideration of

Energy Bill, Amendment 105

Recommendation

Existing coal plants should be included under the Emissions Performance Standard (EPS) if

they seek to extend their operating life, as proposed by Amendment 105. This would close

a loophole in the original EPS proposals and provide a timetable for phased reductions in

emissions from the oldest and most inefficient coal power plants over the next decade.

Summary

At report stage, the House of Lords voted to include existing coal plants within the scope of

the EPS if they were to upgrade to meet air pollution requirements, thereby enabling

operation at high load factors beyond 2016 and throughout the 2020s.

In a vote on 4th

December, the House of Commons rejected this amendment by 318 votes to

236. The House of Lords must therefore reconsider whether this issue should be returned to

the Commons for a second time. Annex 3 below provides details of the arguments made

against the amendment by the government. These are seen to be contradictory.

There is a significantly increased risk that existing coal plants will upgrade to meet the air

pollution requirements of the Industrial Emissions Directive (IED). 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 any existing coal plant that undertakes 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.

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Affordability1

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. Analysis by Simon Skillings (formerly Director of Policy and Strategy for E.ON UK)

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.” 2

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.

> 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

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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. Simon Skillings’ analysis states 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.”

Achievability3

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.

Rationale for amendment to the Bill

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

> 3 Source: Committee on Climate Change, 2013 Progress Report to Parliament

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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.4

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, for at least the next

10 years, thereby providing a backstop regulation in support of the carbon price support

mechanism. If plants seek to upgrade to operate at higher load factors into the 2020s it is

appropriate that this is in line with emissions reduction requirements that already apply to

investors in new coal plants, requiring the use of carbon capture and storage technology.

Operational and investment impacts

If the EPS is confirmed as proposed by the House of Lords, existing coal plant operators

would have two options:

1. 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 40-45% load factor. This is in line with previous

government analyses that predicted higher carbon prices would reduce running hours.

2. 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 mainly during winter to reduce costs and maximise earnings and

would thereby contribute to maintaining security of supply for the next 10 years.

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 5 to 10 years of plant operation. This investment case would best be

assisted by limiting the use of old coal plants as described above. The continued base load

operation of existing coal plant is currently the biggest barrier to investment in new gas

plant.

> 4 http://www.businessweek.com/news/2013-06-10/eu-should-move-beyond-carbon-market-to-shut-coal-

power-iea-says / http://www.iea.org/newsroomandevents/pressreleases/2013/june/name,38773,en.html

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International EPS developments

Emissions Performance Standards (EPS) have been successfully used worldwide for decades

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 CO2.

EPS regulations for CO2 have been in place in California and other US states since 2006.5

Canada put in place a Federal EPS policy in 2012 that covers both new and existing power

plants.6 In June 2013, 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 2014.7 The World Bank and European Investment Bank now apply EPS

requirements in their assessment of financing for new power plants, while 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 CO2 from fossil fuel power

plants, including via the accelerated deployment of CCS.

Questions and answers

Why is the EPS needed?

The government claims that the EPS is not needed as carbon pricing will provide a sufficient

means of limiting coal use over the coming decade. This view is not shared by the

International Energy Agency, which has recommended that European governments should

use non-price measures to ensure the prompt retirement of existing coal power stations.

The fact that existing coal plants are currently considering upgrades that would enable them

to operate through until the late 2020s demonstrates that the signal to investors of potential

future high carbon prices is not sufficient. This situation runs contrary to previous advice

from the Committee on Climate Change, which has repeatedly highlighted that there should

be no unabated coal generation in the UK from the early 2020s.

Even in the case that carbon prices do prove to be sufficient in future, the inclusion of

existing coal plants under the EPS now provides an appropriate backstop measure that

confirms the intention of policy and guards against further lock-in to high carbon electricity

generation assets. The inclusion of existing coal plants under the EPS will therefore send a

valuable signal of the UK’s commitment to pursue power sector decarbonisation, enabling

cost-effective investment in low-carbon technologies including a combination of unabated

gas and carbon capture and storage.

> 5 http://www.raponline.org%2Fdocs%2FRAP_ResearchBrief_Simpson_EPS_Updated_2010_08_12(2).pdf

6 http://www.globalccsinstitute.com/insights/authors/davidhanly/2012/12/04/emission-performance-standards-

old-option-new-incentive-ccs 7 http://www.whitehouse.gov/the-press-office/2013/06/25/fact-sheet-president-obama-s-climate-action-plan

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Will the inclusion of existing coal plants under the EPS require them to close in the next

few years? Will this impact on security of supply before 2020?

No. If a coal plant decides not to upgrade, then it would be able to run for a maximum of

17,500 hours out to the end of 2023 – a full decade from now. Even if operators chose to use

this allowance quickly by running at ~55% load factor, plants would still be operational until

2020. Given the introduction of the capacity mechanism, it is likely to be beneficial for plant

operators to phase availability of plant over the period to 2023.

What happens if a plant upgrades to meet pollution controls?

At present, any plant upgrading to meet the air pollution requirements of the IED would be

able to run at high load factors. Over time the government believes that this will be reduced

due to the increasing impact of carbon pricing. However the current combination of the EU

ETS and the UK’s Carbon Price Support are not sufficient to trigger fuel switching from coal

to gas. Under the EPS, a plant would still be able to upgrade to take advantage of greater

operational flexibility, however it would be limited to a load factor of around 40-45%. This

would position it in line with the emissions permitted for new coal plant under the EPS,

improving the business case for investment in new low-carbon generation assets.

Is this retrospective regulation?

No. Decisions are still to be taken as to whether coal plant operators will chose to opt in to

the Industrial Emissions Directive. An initial indication is required by 31/12/2013, but does

not need to be confirmed until 31/12/2015. Operators are currently waiting to see what

support will be offered under the capacity mechanism before confirming their intentions. It

is therefore clear that government decisions on the EPS and provision of financial support

are the key determinants for whether plants will seek to upgrade. One plant (Ratcliffe, E.ON)

has already invested to meet IED pollution control requirements. If necessary, the detailed

secondary regulations for the EPS could confirm whether this plant is excluded or included

under the EPS.

What about CCS?

It is unlikely that existing coal power stations will retrofit CCS given underlying plant

inefficiencies. However a number of plants are ideally located for the rapid deployment of

CCS in the early 2020s on either new units or alongside boiler refurbishment, assisted by the

development of CO2 transport infrastructure under the UK CCS Commercialisation

Programme:

> Drax is host to the White Rose Oxyfuel CCS project, which is participating in the

Commercialisation Programme. This will provide a CO2 transport and storage

infrastructure that can subsequently be utilised by additional units of CCS on the same

site.

> Eggborough and Ferrybridge sites have both been identified as potential candidates for

future deployment of CCS as part of a Yorkshire and Humber CCS network. Such a

network would also likely include the proposed new coal-fired CCS power station at Don

Valley.

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> Longannet already has a CO2 transport solution available, and both the plant location

and the CO2 pipeline have been identified as National Developments in the Scottish

Government’s National Planning Framework. A CO2 network in Scotland would also

include the proposed new CCS power station at Grangemouth, and could also

incorporate the existing Cockenzie site.

> An additional CCS project is proposed for Teesside, which would provide additional

opportunities for CO2 network development in the North East of England.

The deployment of CCS in the early 2020s on these sites is achievable as part of the UK’s CCS

strategy, and would provide a sustainable long-term future for power generation in these

locations. A proactive strategy would use the next 5 years to prepare firm plans for

investment via Contracts for Difference and associated infrastructure support, enabling the

construction of new CCS power stations at these locations by 2023.

What would happen if the UK doesn’t extend the EPS to include existing power stations?

The immediate impact would be to further incentivise investment in upgrades to enable

extended operation. This would negatively impact on the investment case for new gas plant,

and increase costs under the capacity mechanism. Beyond the policy framework, global

campaigns against coal power stations are likely to continue over the coming years. The UK

has already seen direct action opposition to new and existing coal-fired power stations.

There would therefore be an increased risk of direct action opposition in the event that

multiple coal plants seek to upgrade to extend operating lifetimes.

What international influence would this have?

Acting now to prevent lock-in to unabated operation from existing coal power plants will

provide a clear signal that the UK is acting domestically to limit the impacts of coal use, just

as it is restricting international funding for coal power stations elsewhere. The inclusion of

existing coal plants under the EPS would therefore send a valuable signal of support to

efforts underway in the USA and Canada to also address CO2 emissions from existing power

stations. It would also increase the pressure on EU member states to address emissions from

coal more proactively in their domestic climate policies. The review of the EU CCS directive

in 2014-15 will also provide an opportunity for re-consideration of whether an EU EPS would

be possible as a means of addressing emissions across the internal energy market.

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.

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

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Annex 1: Amendments introduced in the House of Lords

Now confirmed in the Energy Bill are amendments to the EPS introduced by the government

to provide additional flexibility for new CCS power stations during an initial 3-year

commissioning window. This addition is time-limited and provides greater clarity on the

required operation of CCS, in line with power sector decarbonisation objectives.

At report stage in the House of Lords, peers voted in support of an amendment that

incorporates existing coal plants into the EPS regime if they undertake pollution control

upgrades as a means of extending operating lifetimes. This provides improved consistency,

as the government already intended to include under the EPS any plant undertaking major

improvements (such as boiler upgrades).

Schedule 4 of the Energy Bill was amended by the House of Lords to read:

Application and modification of emissions limit duty

Application of duty: changes to main boilers

1 (1) Regulations under section 57(6)(b) may provide for the emissions limit duty to apply

(with or without modifications) in relation to fossil fuel plant in cases where—

(a) immediately before the day on which section 57(1) came into force, the

electricity generating station in question was the subject of a relevant consent,

and

(b) on or after that day—

(i) any main boiler of the generating station is replaced,

(ii) an additional main boiler is installed for the generating station, or

(iii) substantial pollution abatement equipment dealing with oxides of sulphur,

oxides of nitrogen, heavy metal emissions or particles is fitted to the generating

station.

The introduction of this amendment can therefore be seen to match the original intent of

the government to include existing plant under the EPS when undertaking technical

upgrades to extend operating life.

Upgrades to pollution control equipment to meet the IED have the same outcome of

extending operating life, as they would enable plant to operate beyond the 2023 end date

for opted-out plant. Additionally, such upgrades would enable plant to operate at much

higher load factors prior to that date than possible under the 17,500 hours limitation of the

IED.

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Annex 2: Status of coal-fired power plant in GB8

Coal-fired power plant opted out under LCPD provisions

Station Owner Capacity (MW) Status

Ironbridge EON 972 Converted to biomass but will

close by 2015

Kingsnorth EON 2000 Closed

Didcot RWE 1920 Closed

Tilbury RWE 1050 Converted to biomass and

recently decided not to re-

license so will close by 2015

Cockenzie Iberdrola 1200 Closed

Ferrybridge (units 1&2) SSE 980 Due to close March 2014

Total capacity 8122

Coal-fired power plant opted in under LCPD provisions

Station Owner Capacity (MW) Status

Eggborough Eggborough

Power Ltd

2000 Considering biomass conversion

– no apparent plans to opt-in to

IED

Uskmouth SSE 360 120MW closed, future of

remaining 240MW to be

decided by early 2014 but

unlikely to be opted in

Drax* Drax Power 3960 3 units to convert to biomass

and still to confirm future of

remaining 3 units

Cottam* EdF 1948 Yet to decide

West Burton* EdF 1924 Yet to decide

Ferrybridge (units

3&4)*

SSE 980 Yet to decide

Ratcliffe* EON 2000 Has already undertaken work to

comply with IED

Rugeley GdF 996 Considering biomass conversion

Aberthaw* RWE 1386 Yet to decide

Longannet* Iberdrola 2400 Yet to decide

Fiddlers Ferry* SSE 2000 Has received planning

permission for necessary works

Total capacity 19954

* Those stations most likely to consider opting in to the IED on the basis of public statements by the

owners

> 8 Source: The future of existing coal plant in GB and implications for security of supply and

affordability, Trilemma UK, October 2013. Note: There is also a small coal-fired power station in Northern Ireland that is expected to opt-out of

the IED

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Annex 3: Government arguments against extension of EPS

Quotes taken from Hansard report of Energy Bill debate, 4th December 2013

Government argument, as expressed by Michael

Fallon MP, Minister for Energy E3G comments

First, the Government do not consider that power to

be necessary. Secondly, the measure risks deterring

any investment in equipment needed to comply

with the directive, the consequences of which could

be detrimental to consumers.

The government claims that the

power is not considered necessary as

carbon pricing believed to be

sufficient – contrary to

recommendation of IEA. Yet

Government fears EPS could prevent

plant undertaking upgrades, which

would suggest that carbon pricing

won’t be sufficient.

Coal is being removed from the system due to a

number of factors, including the old age of some of

the plants, the impacts of environmental legislation,

the increasing penalty on high-carbon generation

applied under the carbon price floor, and increasing

levels of low-carbon generation as we introduce

more renewables.

Given all of these reasons, it seems

strange that the government would

seek to extend plant lifetimes rather

than clarifying the timetable for new

investment.

The coal fleet is old, having mainly been built in the

1960s and ’70s, with only one plant, Drax, under 40

years old. Most of these ageing power stations are

now expected to retire completely between now

and the mid-2020s. As I have explained, if a station

is not to face restrictions and/or closure under the

directive, it will need to invest in clean-up

equipment. That would require a multi-year

programme of investment in the order of several

hundred million pounds. Over time, with the carbon

price floor and a strengthening emissions trading

scheme, the economics of coal generation will

deteriorate further compared with gas.

Furthermore, as more low-carbon generation comes

on to the system through new nuclear and

renewables, it will result in higher-carbon coal

generation being increasingly displaced. The

combined effect is that the economic outlook for

coal generation is poor.

But this would still allow a plant to

upgrade now and run at potentially

higher load factors for another 12

years.

If the economic outlook for coal is

poor, then confirming a timeframe

for new investment gives greater

certainty for owners of existing plant

and potential investors in

replacement plant.

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Our analysis is consistent with that outlook and

shows that unabated coal generation will make up

just 7% of total generation by 2020 and 3% by 2025,

and probably 0% by 2030. There is no evidence at

the moment of a large number of operators

planning to upgrade their coal plants, but we should

not rule out the possibility that one or two might do

so.

Assumed that this analysis includes a

number of upgraded plants, but

details not been published.

Government approach appears to be

actively encouraging upgrades.

We have heard the argument that the amendment

would merely make available a tool for future

Governments to use, if necessary, to limit the

emissions from existing coal stations, but we believe

the very existence of such a power would create an

additional regulatory risk that could deter the small

number of our most efficient stations that might

otherwise choose to upgrade. As I have set out,

under the directive stations that do not upgrade will

be subject to limited hours and/or forced to close. If

the amendment were accepted, therefore, we

would risk more coal stations closing earlier than

might otherwise be the case.

Government would be able to define

when EPS would apply to give

forward clarity and reduce regulatory

risk.

This seemingly refers to some plants

closing by 2023 in line with IED

timetable, rather than 2025 as

claimed earlier due to carbon pricing

under government’s preferred

approach.

I have also considered the argument that the

amendment would provide greater certainty to

investors looking to build the new gas plant that we

all agree will be needed. However, the amendment

would do so in a way which could create risks for

our security of supply and increase costs to

consumers. We already face a significant investment

challenge with an estimated 16 GW of new gas

plant, and about 45 GW in total of all forms of

generating capacity, needed over the decade from

2015 to 2024. We are acting to facilitate that new

investment through other measures in the Bill,

notably with regard to the capacity market.

However, we cannot be 100% certain about exactly

when all that investment will be delivered. We need

a managed transition to a lower-carbon future, in

which our existing assets are managed prudently to

avoid unnecessary costs to consumers.

The government claims that it needs

to keep existing coal plant operating

as insurance policy against not

delivering new gas investment.

However the biggest barrier to new

gas investment is continued

operation of existing coal plant,

thereby risking the creation of a self-

fulfilling prophesy.

Analysis by CCC on achievability of

emissions reductions points to low-

cost benefits of using existing gas

generation assets rather than carbon

intensive coal plant.

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The Department has looked at a scenario in which

all our coal stations close by 2025, the results of

which show that average household electricity bills

would be about 3% to 4% higher—or about £22 to

£28 higher—in the 2020s. That would require more

gas plant to be built earlier to fill the gap—at

greater cost, ultimately, to consumers. It makes no

sense to accept an amendment that unnecessarily

creates further risks to our security of supply and

further increases costs to our consumers.

This scenario is not one that would

follow subsequent to the

introduction of the EPS. An existing

coal plant that upgrades and falls

under the EPS would be able to

operate at 40-45% load factor during

the 2020s.

If the business case for investment in

new gas is improved by limits on the

operation of existing coal plant the

costs of the capacity mechanism to

consumers may be lower.

In the end, as I said, this is a judgment. Is it right

now to accelerate the closure of coal and to force all

coal off the system by 2025? In my view, that will

add to the risks to security of supply and—I must

say this to my hon. Friends on the Liberal Democrat

Benches—will certainly add to the costs for our

constituents. We estimate that if coal disappears by

2025, there will be an increase in domestic bills of

about 3% to 4%, or about £22 to £28, and an

increase in non-domestic bills of between 4% and

6%. A large number of Members from all parties

attended the debate in Westminster Hall this

morning and complained about the costs being

imposed on energy-intensive industries, and we

estimate that their costs will increase by between

5% and 7%.

This statement is doubly incorrect, in

that it claims that it would force all

coal off the system by 2025.

Firstly, the EPS amendment would

not do this unless specified to include

a firm end date.

Secondly, it is the stated intent of the

government that carbon pricing

should itself force existing coal off

the system during the 2020s. The

minister referred to modelling that

suggests only 3% of electricity

generation would come from

unabated coal in 2025 and 0% by

2030. The difference in outcomes

between carbon pricing and use of

the EPS is thereby marginal – yet the

government seems to fear that an

EPS would be more certain in

delivering reductions in emissions.

This proposal will increase the risks to our security

of supply and add to the expense of our

constituents. I think that is too great a risk and too

high an additional expense and I urge the House to

reject the amendment.

These arguments have not been

supported by any published analysis

from DECC.