Emissions Performance Standards – A Good Thing?

Emissions Performance Standards – A Good Thing?

CategoryArticles Author Stephen Tromans QC Date

The world is a long way from weaning itself off fossil fuels. In Europe, one result of Germany’s renunciation of nuclear energy is a dramatic rise in the construction of coal-fired power stations burning lignite coal, which will not be abated in terms of carbon capture and storage, but using technology which enables them to run much more flexibly, more akin to gas.[1] It is not always appreciated how seriously German industry has been affected by energy costs resulting from the drive towards renewables, and the current massive project for orientating Germany’s energy supply back to coal is perhaps an inevitable reaction to these problems, now that nuclear energy is no longer politically an option. Forbes magazine commented as follows this summer:[2]

“No one thought Germany would be insane enough to shut down their nuclear plants, without a reason and without backup, when it was producing the cheapest energy in Europe. In fact, Germany’s nuclear production was the only economic way to implement the EEG [its renewables law], even if nuclear was to be phased out early as the new mix matured. And they could still be restarted relatively quickly and cheaply. But it better be quick, because all German industrial and manufacturing sectors – steel, aluminum, paper, cement, plastics, chemical – are migrating to countries with cheaper electricity as energy and carbon-costs are eating up to 50% of their expenses. Almost one in five German industrial companies plans to, or already has, shifted capacities abroad. ThyssenKrupp, Germany’s largest steelmaker, expects 5,000 job losses because of high electricity prices, and recently sold its Krefeld stainless steel mill to a Finnish competitor, devastating a little town on the Rhine. The Düsseldorf-based conglomerate GEA closed its zinc plant in nearby Datteln. Europe’s largest copper producer, Aurubis of Hamburg, announced plans to move some operations abroad, especially to Asia and South America, where energy is cheaper. Aluminum manufacturer Norsk Hydro substantially cut back production in its Neuss plant, having shut down two production lines completely, and forcing the plant’s 450 workers to reduced hours.”

The UK of course has nowhere near the amount of heavy industry as Germany to lose, but what we have will be equally vulnerable to energy price rises. Nia Griffith, the Labour MP for Llanelli, was therefore correct in the Commons Second Reading debate on 19 December to stress the need for giving appropriate assistance in protecting such industries in the UK. Tata Steel for example will be paying £26.4 million in renewables obligations and feed in tariffs in 2013, at risk to its competitiveness internationally.

The lack of any decarbonisation target in the Energy Bill is naturally an area of prime concern and, as discussed by James Burton in the last posting on this Blog, was really the main focus of the Commons Second Reading debate. However, at the end of the day, as former Minister Charles Hendry pointed out in debate, it will be profoundly damaging to investors to have a debate in which people can be pro-renewables only if they are anti-gas, and pro-gas only if they are anti-renewables: this would introduce the serious problem for investors of political risk and increase markedly the cost of borrowing.

Against this background, what about the provisions in the Bill on emissions performance standards (EPS)? The Coalition Agreement contained a commitment to establish an EPS that would prevent coal fired power stations being built unless equipped with sufficient carbon capture and storage to meet the required standard. There are of course other schemes to discourage such development, for example the EU emissions trading scheme. However, the overall cap on the EUETS is much too high, and it is always possible in any event to purchase allowances to emit. An EPS therefore has the potential to force faster emission reductions than might otherwise occur, to prevent decisions on new build “locking in” high carbon generation, and providing clarity as to the Government’s expectations.

Chapter 8 to Part 1 of the Bill seeks to impose a duty on the operator of any fossil fuel plant constructed pursuant to a consent given after the provision comes into force, to secure that CO2 emissions attributable to the use of fossils fuels do not exceed an annual tonnage calculated by multiplying the installed generating capacity (in megawatts) by a fixed “statutory rate of emissions” of grammes of CO2 per kilowatt/hour, and applying a factor of 7.446. Why 7.446? This represents a load factor of 85% (85% of the possible 8760 hours in a year, divided by 1000 so as to convert kg to tonnes). Up to and including 2044, the statutory rate of emissions is 450 g/kWh. The detail of how this works will be spelt out in regulations which will interpret this “emissions limit duty” and may extend it to other situations or modify it. Provision is also made for its suspension if the Secretary of State considers there is a shortfall in electricity supply to meet demands, or a significant risk of such a shortfall.

Why the figure of 450 g/kWh? In the 2011 energy White Paper, Planning our Electric Future it was noted that the figure was about that of average emissions intensity across power stations in 2010. It would require a coal fired station to abate emissions by around 40%, so specific exemptions will be needed if a new generation of coal fired stations with carbon capture and storage is to be built. An advanced supercritical coal plant would emit around 790 g/kWh. On the other hand the EPS will not inhibit new gas fired stations. The UK is not alone in this approach. In September 2012 the Canadian Federal Government made regulations on EPS with a figure of 420 kg/MWh,[3] based on anticipated emissions of new natural gas combined cycle plants, with a proviso allowing deferral until 2025 for coal plants which commit to developing CCS. In April 2012 the US EPA made draft regulations for new fossil fuel generation with an EPS of 1000 lb of CO2/MWh, equating to 454 kg in metric terms, again based on natural gas combined cycle technology.

Why 2044 as the date until which the 450 g/KWh standard is fixed? According to the Government’s impact assessment of May 2012, it is intended to provide a sufficient period of investor certainty while allowing a five year period preceding 2050 in which the EPS could be applied to all plant, providing flexibility to meet the legally binding target of an 80% emissions reduction relative to the 1990 baseline. Provisional analysis on project finance by the Government suggests that a new CCGT station becoming operational in the 2020s would need a period of around 20 years’ operation to break even in terms of paying off all debt.

As with so much in the Bill, the devil will be in the detail, but plainly the likely result will be to incentivise early development of gas fired stations, in order to take maximum advantage of the period of investor certainty on offer. If certainty for investors is a good thing (and most people would agree it is) then the EPS should hopefully deliver this.

[1] See http://www.spiegel.de/international/germany/new-coal-fired-plants-could-be-key-to-german-energy-revolution-a-854335.html
[2] http://www.forbes.com/sites/jamesconca/2012/08/31/germany-insane-or-just-plain-stupid/
[3] 420 kg/MWh equates to 420 g/kWh.

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