My Lords, I was pleased to add my name to Amendment 74, and I support the other amendments in the group. At the start of this process way back in 2010, the Government said in a consultation document:
“The objective of the EPS is to ensure that while coal continues to make an important contribution to security of supply, it does so in a manner consistent with the UK’s decarbonisation objectives”.
The way that the EPS is drafted does not achieve that aim. The EPS was a response to the Kingsnorth protests against the building of a new, unabated coal plant. It was borrowed, but not fully, from similar regulations in California. The Minister, Greg Barker MP, can take credit for introducing this policy. However, in California they are clear that the limits that are placed on coal stations apply in the event of a coal station seeking a life extension. That is what this amendment is designed to do: to complete this process by adding that important missing element.
New coal was never the most carbon-intensive source of electricity; old coal is. The world has moved on since Kingsnorth. Low coal prices and high gas prices have caused higher operating levels at coal stations
now than ever before. As a result, as the noble Lord, Lord Teverson, mentioned, we have seen UK emissions going up, not down, and our carbon intensity increasing last year, not decreasing. How are we going to hit decarbonisation targets if we do not have a tool in our armoury to do something about this issue? We could have a policy of carbon pricing, as the noble Lord, Lord Stern, has mentioned. However, carbon pricing policy has not addressed this issue, and will not. We need regulation.
Turning to the security of supply, 8 gigawatts of old coal capacity has recently shut. This has brought down our historically high overcapacity to a more modest level, yet our carbon intensity is stubbornly high, at around 500 grams per kilowatt hour. This is because the 12 coal stations that are still operating, representing 15 gigawatts of power, are base-loading. They are no longer providing back-up power in the winter peaks but are operating throughout the year and making their owners a considerable amount of money. The Committee on Climate Change has been clear that were we to get the merit order of existing plants right, we could shave almost 200 grams off that figure overnight without having to build a single brick or power station.
The 12 stations that I have mentioned have tightening air quality regulations in front of them, which will affect their operating post-2016. However, they have a range of options for what to do in the face of those tightening regulations. One is not to refurbish; they will then be required to close by 2023. Another option is to convert to biomass. The final option is to fit the filters that would enable them to comply with the air quality standards. They could then remain open indefinitely. In that situation, they would certainly wish to continue base-loading, since they would have made new capital investment on which they would want to seek a return.
The new air quality standards start in 2016. I am sad to say that Defra, the lead department, is in danger of not complying with those regulations because it is failing to provide enough detailed information about what these power stations are planning to do. This can be only because it is intent on giving the maximum flexibility while the details of the Bill are worked out, because the Bill contains another very important element that changes the fortunes of coal: the capacity mechanism payments. The capacity mechanism will give existing coal plants an up-front cash injection just at the time they need it to make those refurbishment decisions. Plants will be eligible for three-year contracts. We cannot be certain how much those contracts will be worth, but it will certainly be in the range of £80 million to £100 million or more over the three years. The cost of fitting the filters is a surprisingly similar number of around £100 million for a 1 gigawatt plant.
If they decide to make these capital investments and tip into this compliant state, this will reduce their thermal efficiency even further. Are the department and the Minister aware of how inefficient these stations are and quite how much of the heat is escaping as lost energy into the atmosphere? That is quite apart from the carbon load that is also being added. Fitting these
filters would also increase the operating costs of these plants. The chemical plants necessary do not operate for free.
The Government’s policy is not to support the application of an EPS to coal seeking life extensions, and no doubt we shall hear some of the reasons from the Minister. Other noble Lords have touched on the security of supply issue. As long as this question over 15 gigawatts of coal is allowed to remain unanswered, how can any investor in replacement capacity move forward? If you are not sure how many plants will be operating and whether they will be base-loading, you will find it very difficult indeed to make the case for investment in new capacity and to bring mothballed capacity back on. I will not go into too much detail on this but we have all had representations from gas investors saying that they support this amendment. We should just remember that, in a carbon-constrained world and under a carbon-budgeting system, every coal station that remains on the system displaces two gas stations because gas can operate with half the emissions of coal
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The Government may also try to argue that the introduction of this EPS would create regulatory uncertainty but that is not at all the case. We have made it clear that it is needed now. Only those defending the status quo and continuing to profit from the use of their existing assets will claim that this is changing the rules for them. The owners of these stations ought to be fully aware that, as we move forward to a low-carbon economy, their stations will be the first to go. It is far and away the cheapest and most efficient way of reducing emissions, as the UK found during the 1990s when we did exactly this and transitioned out of coal and into gas. I am very hopeful about the next decade. This EPS does not mean that we will not see investment in coal. We will see investment in coal, which will come through in carbon capture and storage projects. The arguments that have been made today about investor certainty when it comes to gas equally apply to CCS. It is in the coal industry’s best interests to see this amendment passed so that it, too, can invest in its future. Coal has a future, but only with CCS.
The final reason that the Minister may offer for not supporting this amendment—which would be very regrettable—is that it is not needed because we have a carbon floor price. No one can really say, with all honesty, that there is any political certainty that the carbon floor price will survive. We have had comments recently from the Prime Minister and others that have very much cast doubt on whether that carbon floor price will still be around. You cannot roll back green levies, or even review them, without seriously looking at the carbon floor price again. Even if it were to be maintained, it would need to be at a very high level, around £40 a tonne, in order to achieve the sort of fuel switching that this amendment would instigate.
The Government will no doubt say that everything is fine in their models and that these coal stations will close, as the cost of fitting the filters is too great and the benefits are not there. During my time at Scottish and Southern, I saw it go through the investment decisions that needed to be taken to comply with
sulphur limits. The benefit of having an asset in an existing, connected station, with all the staff that you need, is enormous. A bird in the hand is always worth two in the bush, and these companies are very likely to make these decisions to invest. I would go as far as to say that we will see Scottish and Southern, the owners of Fiddlers Ferry, making that decision if we do not get this policy right. EDF, which owns West Burton and Cottam, will do the same, as will Scottish Power, owners of Longannet. There may be others. There are certainly 12 stations that could do this and we need to see none of them do it.
The final point that I am sure will be raised is that this is somehow going to push up the cost for consumers. The noble Lords, Lord Teverson and Lord Oxburgh, have already eloquently explained that it is gas prices that set the wholesale price and therefore we are not seeing the benefit of the very reduced price of coal. It is true that, upstream, the generators are making in the region of 20% profit, a large part of which comes from these coal stations. However, it is far from clear that they are handing it on to the consumer.
If we do not take this most obvious, easy and simple way of reducing our carbon emissions and we are serious about our decarbonisation—the Minister has reiterated the Government’s commitment to our decarbonisation targets—we will be forced to adopt more expensive subsidies. This policy will deliver us carbon reduction quickly and at least cost. Supporting this amendment is an indication that we are serious about climate change but, more importantly, that we are serious about achieving our objectives at the least cost for the consumer. This is an amendment that supports the consumer and I hope that the Government will find that they can support it.