Benchmarks to be used for power allocation

The Government is planning to move to "benchmarking" to determine allocation to power stations in the next phase of the EU emissions trading scheme. Controversially, it will use fuel-specific benchmarks which will favour coal-fired plant over gas stations.

The Government is expected to consult on a draft national allocation plan in early 2006, in order to meet the 30 June deadline for submitting a plan to the European Commission.

In late November, it set out some interim decisions following a consultation in the summer (ENDS Report 367, pp 35-36 ). Crunch decisions on the overall cap, sector caps, treatment of new entrants and plant closures, and treatment of combined heat and power (CHP) have still to be taken.

Interim decisions include:

  • Allocation methodology: For most sectors, DEFRA plans to retain a two-stage approach, in which a sectoral cap is carved up between individual installations based on historic emissions.

    Historic emissions will be determined on the average of 2000-03, dropping the lowest year's emissions to allow for unusually low emissions because of plant shutdowns or planned maintenance.

    The choice of years differs from the 1998-2003 period used for the first phase. Some operators had called for DEFRA to include 2004 in the baseline period, but this was rejected because it would require further data collection. DEFRA has also dropped its rule on commissioning of new plants and will no longer require data from the year of start up.

    However, an alternative benchmarking approach is being considered for the electricity generation and brewing sectors.

    Benchmarks for other sectors are not considered feasible in the time available.

    The Department of Trade and Industry and energy regulator Ofgem have been working with the power sector to draw up benchmarks - details of which are expected shortly.

    However, DEFRA confirms that separate benchmarks will be applied to: gas-fired stations; coal-fired stations which have "opted in" to the large combustion plant Directive by the end of 2005; opted-out stations; CHP plant; and "other". A standard load factor would be applied to each sector.

    The decision to set fuel-specific benchmarks is controversial because it is likely to blunt the incentive for fuel switching from coal to gas under the ETS. Not for the first time, the detailed implementation of environmental policy appears to have been set up so as to favour coal-fired generation.

  • Expansion of scope: DEFRA confirms that the rock wool and gypsum sectors will be brought under the scheme - although this is expected to catch fewer than a dozen sites.

    The Government also plans to bring in additional activities in the glass industry, which is likely to affect about 30 sites, and flaring in the offshore oil and gas sector. The latter could bring an additional 3.5 million tonnes of CO2 under the scheme each year.

    The inclusion of additional activities at petrochemicals plants and integrated steelworks is still being considered. DEFRA says there are "credible arguments" for not expanding to foundries, but a final decision will depend on guidance from the European Commission which may place additional obligations on all member states.

    DEFRA is seeking data from all sectors where decisions are outstanding to allow discussion on potential allocations.

  • New entrants: The Government has decided to retain a new entrant reserve to issue allowances free to new entrants in Phase II. However, it has not decided the level of allocation to new entrants - and repeats that its "long-term aspiration" is to move away from free allocations.

    No decisions have yet been taken on other issues surrounding the treatment new entrants and plant closures.

  • Stakeholder views on EU ETS: The European Commission has released highlights of a stakeholder consultation on the future of the EU ETS.

    The survey attracted over 300 responses, half from industrial companies and a quarter from trade associations.

    A large majority of industry respondents called for allocation periods of ten years or more, with decisions on national allocation plans to be announced two to three years before the start of each trading period. They want a stable investment climate, reflecting typical asset lifetimes in capital-intensive industries of 20-60 years.

    However, most government bodies are happy to continue with the current five-year allocation intervals - presumably to give them flexibility to control progress towards national emission targets.

    Most respondents ranked long-term issues as the most important but there was little consensus on allocation methods. Benchmarking is widely seen as feasible, although the paper and oil refining sectors are sceptical. However, there is much concern over the detail, and many industries want scope for correction factors for national circumstances and expected production levels.

    Unsurprisingly, most industry bodies are opposed to auctioning, while governments, market intermediaries and NGOs are keen on the option.

    The exercise, along with other work by consultants McKinsey and Ecofys, will inform the Commission's review of the scheme, which is due to report by 30 June.