I could not agree more. These dirty dozen plants have very low efficiency and very high carbon intensity. They have been made more carbon-intensive by the fitting of scrubbing equipment to meet the requirements of the large combustion plant directive, so these are some of the worst possible sources of electricity when it comes to carbon.
The assumption was that those plants would be closing under the next round of air quality standards. However, the world is moving quite quickly and gas prices are at such a level and coal prices so low that it is now increasingly likely that these plants will refurbish, fit filters and seek to carry on.
I am sure there will be many arguments in the Minister’s notes that will tell him that closing the plants is something that the Government could not possibly do and there are too many risk associated with it. The first will probably be, “Oh, well, the lights will go out”. That would absolutely and categorically not be a result of the amendment. The amendment would merely place a carbon constraint on plants that are seeking a significant life extension beyond the period for which we currently anticipate them to operate. This would put us much more in line with the Californian legislation that we have based the EPS on. The Californian
provisions apply if a company makes a significant investment in an existing plant that would seek to extend its life beyond five years. That is an important provision that is missing here, in our interpretation of the EPS.
It is not a question of the lights going out. As we have discussed, the EPS is drafted in such a way as to allow flexibility. It is an annual limit that is averaged out, so these plants would not necessarily close but they would not be able to base-load. That is the significant difference. Plants investing in life extensions today must accept that they cannot base-load indefinitely through the 2020s and into the 2030s.
Another note that I am sure the Minister will receive will say: “Well, they’re old plants; they’re reaching the end of their lives”. I would just point out that Uskmouth power station, owned by SSE and built in 1961, will be 60 years old in 2020. These plants can and do operate for very long periods, and they do not need boiler replacements in order to do so. They could replace every other element of the station and still be allowed to operate without being required to reduce emissions under the EPS.
I am sure that the other question that will be raised is that the amendment is not needed: “We do not need this to apply to old coal because we have other mechanisms designed to force coal off the system”, and among them I am sure the carbon price will be listed. I would just say that the carbon price is not a credible policy when it comes to investors making decisions on the lives of their coal plants, for a number of reasons: it is a financial Bill measure, it has no longevity and it has no future path beyond two years. I have heard from former generators that they cannot even sell their power on a PPA two years in advance from thermal plant because of the degree of uncertainty about carbon pricing. That is not going to force these plants to close.
Even if the price were maintained, the reason why they will not close is that these dirty dozen are equally distributed among the existing vertically integrated companies. The reason why that is significant is that if one of them opts one plant in, they may as well all opt them in because the companies can all just pass the cost of carbon through to their customers. As we have previously discussed, there is no genuine competition, so as soon as one opts in the other five may as well follow. Actually, it is five out of the six; Centrica has no coal. The other five, though, can all safely opt in a plant and pass on the costs without fear of competitive distortion. So, even with a price, that is not going to work with regard to ensuring that they are constrained.
People will say, “Well, you’re simply going to push up the costs to the consumer. Coal is cheap and we need to keep it running”. Actually, this is the cheapest way of staying within our carbon budgets. I have mentioned it before but the climate change committee has identified that we can save between 200 grams and 250 grams per kilowatt hour by doing nothing other than reversing the merit order of gas and coal. That is exactly what we are seeking to do. People say this will push the costs up but it in fact it is much cheaper than overinvesting in new capacity if it is not necessary.
It is also true that the carbon floor price is already pushing up the price. The difference between the two is that with the carbon floor price you have to pay the money irrespective of what happens; there is no guarantee that the carbon floor price will deliver any new investment or indeed any switch in the merit order. With the EPS, though, the price would go up only if coal was being driven off, so you would pay only if something was actually being delivered.
I am sure that there will be notes saying, “Well, the regulatory risk that this will create means that investors will never invest in Britain again because the rules have changed”. I am afraid that if you own one of these dirty power stations and you have been sweating this asset for so long, and then you think that you will never invest in Britain again because you are asked to comply with a carbon constraint, you are not living on the same planet as I am, or indeed as the majority of people are.
You must expect to face a constraint on carbon. You cannot operate these inefficient coal stations and expect to be immune from carbon regulations. This back-stop power is exactly what you would expect to be introduced, especially as this is how it is currently enforced in America, where this idea came from originally.
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As I have said before, these clauses were not really discussed in detail in the Commons. What little the Minister, John Hayes, did say included that we did not want to discourage investment in air-quality filters, and that this would effectively do that. However, Britain is well behind in its compliance with air quality. The best way of meeting air quality standards would be to see these stations closed. Fitting of filters is just a temporary measure. It takes emissions down but it does not remove them altogether.
Didcot power station, one of our most iconic power stations and perhaps our most readily seen, just outside Oxford, has closed. The people around Oxfordshire are delighted. Not only has the microclimate around it changed, but the air quality has now improved. Not only do coal stations produce NOx, SOx, particulates and carbon, they are also a source of low-level ionising radiation. These stations should not feature in a modern power system, certainly not in a country with legally binding carbon targets which we have to meet. Every one of these stations which stays open displaces two gas stations. They are twice as emitting as gas, if not more. If you want a future with a greater role for gas, you have to accept that you cannot have that and have, certainly, around 8 gigawatts and up to 15 gigawatts of coal, depending on the decisions that are made; the numbers range, and there is no certainty at all as to how many coal-fired power stations will carry on.
Finally, the amendment would introduce greater certainty to this market. As an investor, if you have a question mark over 7, 8, 9 or 10 gigawatts of coal carrying on—which may not carry on, because you simply do not know what they are going to do—that increases risk and pushes up the cost of capital. It is not a good way of going forward. That uncertainty has been created by the Government. Under the IED
regulations we are required to report in our transitional national plan what these stations are going to do. We have not done that. We are failing to comply. It is likely that the Commission will reject our plan because the certainty is not provided. This is a known unknown that could easily be sorted out. If the amendment were accepted, and if the Government were to comply properly with the IED and provide information to the market about who was closing and when, we could all move forward with greater certainty that investment in low carbon, including gas, has a much greater role to play in the market.
On that basis, I strongly support the amendment of the noble Lord, Lord Teverson. I hope that the Minister will have something positive to say, or I might be as disappointed as I was about the earlier rejection of the gas amendment.