Emissions Performance Standards

Regulation plays a role only indirectly in the European power market, mainly by regulating air quality, spatial planning, nature, etc. It is not the intention in the actual European power market to enforce specific clean investments by regulation, as this would contradict the idea of a market and particularly the idea of emissions trading. A contradiction between market instruments and regulation is not self-evident, however. In the US, some states plan to combine Emissions Performance Standards (EPS) with regional emissions trading systems, as the EPA (the federal environmental regulator) has introduced an EPS for new installations. The UK, too, has decided to apply EPS for new generation in combination with the ETS.

The UK EPS will act as a regulatory backstop on the amount of CO₂ emissions from new coal-fired power plants (DECC 2013). The EPS will support the existing planning policy requirement (not existent in e.g. Germany or the Netherlands) that any new coal-fired power station must have at least 300 MW of generating capacity equipped with CCS demonstration as a condition of its consent. The statutory limit on annual CO₂ emissions due to the EPS is 450g/kWh at base load. A plant is allocated a total tonnage of CO₂ within which it has to remain each year. In this way it does not limit back-up capacity. The EPS implies that the plant must either have considerable co-firing of biomass (up to 40-50%), capture some 40% of the CO₂ emissions or generate only in times of peak load. If the consent has been given, this is ‘grandfathered in’ until 2045. This implies that a change of the EPS level in future will not apply retrospectively. The EPS is set at a level that will not impact gas generation. The UK Energy Bill provides flexibility to lower the EPS level in future. The EPS for new plants will be reviewed every three years. EPS also applies to existing plants that upgrade boilers to extend plant life.

Another approach could be the result of a suggestion by the IEA, e.g. in its in-depth review on energy policy of the Netherlands (IEA 2014a), namely to consider regulation as a way to enforce the closing of old coal-fired power plants. This could be done by an EPS or in other ways, as has been done recently in the Netherlands. A closure of five old coal-fired plants (see next paragraph) could not be implemented voluntarily, due to the application of competition rules by the regulator ACM, and had to be enforced by the government in a combination of air quality regulation and the national coal tax (Ministry of Economic Affairs, 2014). Because existing plants have a permit to produce, it will not be easy to implement an EPS for existing plants quickly. However, if announced in a timely way and connected to the timing of revisions which are necessary once in a while and implemented technology-neutrally, or if implemented differently, it is a policy measure worth considering as a ‘backstop’ of the EU ETS.

The fundamental issue of interaction with ETS will be an issue in the public debate. Indeed, CO₂ emissions have already been capped by the ETS. The role of an EPS could be additional, and in the coming period the impact of this regulatory approach has to be taken into account in the periodical ETS assessments of expected emissions decreases. Indirectly, the wholesale price would slightly increase, as some capacity would have to be withdrawn. In the Dutch case, the closure of five old coal-fired plants (2.6 GW, 10% of national capacity) as part of the National Energy Agreement would lead to an increase of the wholesale price by roughly 1 percent (ACM 2013). What could be the benefit of an EPS, and why might it be easier to implement this policy instrument as compared with the ‘first best’ option of improving ETS?

• An EPS can be introduced in a smaller region (such as the UK alone).

• It is possible to introduce different standards for both new and old plants in different member states, to convince those countries that have the largest problems with higher climate policy ambitions about the gradual phase-out of coal and lignite. For example, as a first step NW Europe could introduce a standard of 450g CO₂/kWh (comparable to the UK standard) for new plants, but Poland could be allowed to start with 600g for new plants.

• An EPS does not have the ‘carbon leakage problems’ ETS has. The fiercest opponents of a strengthening of ETS are some heavy industry spokesmen, which is understandable, as they feel competitive disadvantages with other continents. This problem does not fully arise in the power sector, although a number of energy-intensive industries have to pay a high electricity bill. Another option to solve this problem is to divide ETS into two parts, one for the power sector and one for heavy industry.

However, to introduce EPS or other regulation without taking the (negative) effects on the CO₂ price of ETS into account would seem to be counter-productive. If 450g CO₂/kWh for new plants would suffice, this effect would depend on the number of coal-fired power plants that would have been installed with ETS alone and cannot be built because of the EPS. This probably will be small. An EPS for existing plants does not seem to be feasible before 2020 due to legal restrictions, but could eventually have substantial impact. Other regulation could be introduced more quickly, depending on national circumstances.

Observers will continue to ask what relation could exist between an EPS and ETS. • In theory, EPS is unnecessary with a well-functioning ETS, yet it is doubtful

whether this will be feasible in the near future;

• It cannot be expected that the chances of EPS preventing new coal-fired and lignite plants by 2020 will be large: EPS would mainly have symbolic value;

• This would be slightly different if EPS were valid as of 2015 and if it would look at all substantial refurbishment as well;

• Whether EPS is a valid option only for new coal or lignite, or whether it is a first step to phase out all fossil fuel without CCS (if one has accepted an EPS of 450g CO₂/kWh, it is relatively easy to change the figure to 300 and even beyond) depends on the interaction one foresees with ETS. As long as an improvement of ETS is the first policy option and EPS is only a bridge towards a higher CO₂ price, it does yet not make sense to consider a further strengthening of EPS. Therefore, the incentive for innovation will be small;

• The introduction of EPS seems to be feasible in the European legal context.