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?
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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.