Carbon Capture and Storage (CCS) is the only technology available which enables the continued use of fossil fuels for power generation whilst reducing green-house gas emissions. The UK government sees CCS as an important element of its energy policy alongside renewables and nuclear to enable the country to meet its carbon emissions reduction targets, but slow progress in the UK threatens the future of this critically important technology.
Progress in CCS within the UK is slow:
- The 2nd UK CCS Demonstration Competition is now a year behind schedule;
- The earliest UK CCS projects are now unlikely to be on stream before the early 2020s;
- Under the Electricty Market Reform (EMR) it is likely that different flavours of Contract for Difference (CfD) will be required for nuclear, CCS and renewables;
- The future of CCS in the UK is now in the balance.
None of this is new. Little real progress has been made with CCS in the UK, although when questioned, UK government routinely quote the £1 billion subsidy available as evidence of progress that simply isn’t there. As time passes, the carbon reduction requirements and targets loom large. So what is really happening with CCS in the UK and is the window for timely deployment closing?
Between 2004 and 2007 BP and Scottish and Southern Energy worked together on a full chain CCS development called DF-1 (Decarbonised Fuels -1). The first of a series of such concepts developed by BP, it involved the construction of a new power plant at Peterhead. This was to use hydrogen as a fuel. The hydrogen was to be manufactured onsite from North Sea gas. The byproduct of this “reforming” process is CO2. This was to be collected and sent offshore where it was to be injected into the Miller oilfield to extend its life and safely store the CO2. This project was a ground breaking concept enabling fossil fuels to generate electricity with almost zero emissions at the power plant. It was scheduled to start commercial operations in 2009, but was cancelled in 2007 after the UK Government chose not to support it with the key incentives required to enable it to be commercially viable and compete with more polluting plant.
In 2007 the UK government launched a competition to select a CCS demonstration project, known as ‘Demo1’. The programme was limited to post combustion capture on coal to encourage development of technology that could be retrofitted to coal plant around the world. Four years later in 2011 after major delays in each step of the procurement process, the competition came to an end after two FEED studies were completed but with no construction contract award when DECC and preferred bidder, ScottishPower, failed to reach an agreement. The selected project at the Longannet coal fired power station on the Forth Estuary would have captured 1.8 MT/y of CO2 for a period of ten years. It was to be stored permanently over two kilometres below the seabed of the North Sea in a depleted gas field. To many the loss of 4 years and a government spend of £60m without a construction contract was a second critical missed opportunity to get CCS underway. At the start of the process there were 7 competing projects each with supporting corporate bidders. During the process these corporate entities each invested considerable sums of money, all in good faith and at their own risk. As a result of the process and its outcome many organisations lost the appetite to invest in critical CCS developments under the UK government’s programmes. For most, it is simply not worth the risk.
In 2013, still committed to CCS, the UK government launched a second competition for a CCS “Commercialisation Programme” – the title acknowledging that the time for “Demonstration” had passed. Even so, this is known by many as ‘Demo 2’. A key difference in this programme was that projects were competing for a share of a capital subsidy for FEED and Construction up to £1 billion. In addition, along with all other low carbon power projects they would qualify for a Contract for Difference to help de-risk investments in low carbon technology. Following a National Audit Office review of Demo1, which highlighted various lessons from Demo 1, the second “Commercialisation Programme” was to be run on the basis of defining and adhering to a strict procurement schedule. On this timetable, following bids from interested parties, DECC could select projects with which to negotiate FEED contracts. According to the initial timetable at launch these FEED contracts, based largely upon those already negotiated in Demo 1, were to be in place by early 2013. In March 2013, DECC announcements suggested that the process had slipped further with FEED contracts expected to be concluded in ‘the Summer’ of 2013. In December 2013 as the snow fell, a single FEED contract was awarded. So despite the findings of the NAO report on Demo1 the procurement is now running 12 months late only 24 months after the start of the programme. How will this impact when projects come online?
Given the likely 12-18 month FEED study and the subsequent 6-12 months of contract negotiations, it is unlikely that any project will get the go-ahead for construction before early 2016 (Of course it is also possible that Demo 2 goes the same way as Demo 1 and an agreement cannot be reached). On this basis and assuming a 5 year development timeline, it would be 2021 before a project was on stream. This is some way behind current government and industry expectations.
Why does Timing Matter?
Timing is everything. Early demonstration of CCS is required to prove the regulatory and financial aspects of project developments. If the first demonstration projects are not until the early 2020s, it will be the late 2020s before the next generation of projects are built. This would limit the benefit CCS can bring to meeting carbon reduction targets over a critical period. Possibly even more fundamental is the risk of a forthcoming shortfall in electrical power generation as older coal plants reach the end of their lives under the European Large Combustion Plant Directive . If we are to avoid such a shortfall it is likely that new thermal plant will be required in the next 10 years whether it be coal or gas. Since any new coal plant must fit CCS because of the UK Emissions Performance Standards introduced in the recent Energy Bill, it is very likely that any shortfall would have to be met largely by building new gas fired plant. Whilst gas fired power plant have only 40% of the emissions of equivalent coal plant, they are certainly not “clean”. Building such plant now, without CCS, would ensure the continued release of the CO2 emissions of those plants for the next 20-30 years.
Electricity Market Reform (EMR)
Under the EMR, it is intended that all low carbon technologies are treated in the same way, providing a mechanism to enable value for money to be obtained. However it is likely that at least 3 flavours of Contract for Difference (CfD) will be required, at least initially to accommodate the different maturity of each technology. Arrangements for nuclear, such as Hinkley Point, will be different to those for CCS and different again to those for renewables. Key areas of difference are likely to be the term of contract, technology maturity, risk allocation and of course the strike price. The Feed-in Tariff element of the package “tops-up” any shortfall between the amount the generator receives per unit of electricity and the pre-defined “strike price” in the long-term CfD. Once the strike price is exceeded, the generator is required to pay the surplus back. The result is that generators are cushioned from the risk of price volatility which should encourage investment.
If both of the preferred bidders within the Demo2 programme (White Rose and Peterhead) sign a FEED contract then both may be considered for a capital subsidy towards construction in 18-24 months time. They will also need to negotiate a CfD. The timetable for the two reserve bidder projects, namely the Captain Clean Energy Project and Teesside CCS Project and also for the previously down selected Don Valley Project to negotiate a CfD outside the Demo2 competition is unclear. Unless DECC proceed with some urgency in this matter, it appears likely that these projects may be joining a growing group of CCS projects that never quite made it.
There are uncomfortable parallels emerging between the delays observed during Demo 1 and those now being experienced in Demo 2. The earliest UK CCS projects are now unlikely to be online until the early 2020s (DF-1 was scheduled for 2009). CCS projects outside the competition do not have a clear timetable to negotiate a CfD from DECC and cannot make much progress. Under the EMR it is likely that different flavours of CfD will be required for nuclear, CCS and renewables. The future of CCS in the UK is now in the balance at a time when ambition, momentum and action are all required. We congratulate the White Rose project on the award of its FEED contract and wish anybody working to develop CCS projects good fortune and continued patience for 2014. Without a significant shift in ambition and acceleration or change in the way CCS is being managed in the UK then it is our view that there is a significant risk that all the UK CCS projects currently being contemplated might fall away. This will leave the UK with no operational CCS projects in the foreseeable future.