Testing times for CCS in UK and Europe

Apr 13 2013

There is still time to secure CCS projects in Europe, but a repeat of recent efforts won’t be good enough, says Chris Littlecott, Senior Policy Adviser at E3G, and a Policy Research Associate with Scottish Carbon Capture and Storage.

It should all have been so different. Four years ago, collaborative advocacy from industry and NGOs helped the European Parliament and member state governments to secure an innovative funding mechanism for CCS. The ‘NER300’ scheme would sell allowances from the EU’s Emissions Trading System (ETS) to create a funding mechanism to support a suite of CCS demonstration projects. Soon afterwards, the European Energy Programme for Recovery (EEPR) selected six projects to receive fast-track assistance. The future looked bright.

In late December 2012, the future at last arrived. European Commissioner for Climate Action Connie Hedegaard did her best to play Santa, but could only award €1.2bn to 23 innovative renewables projects across Europe. Not one CCS project was funded. This is hugely embarrassing for European efforts to address climate change. Originally intended as a CCS-specific instrument, the inclusion of renewables in NER300 was a late addition to secure agreement. But in this first funding round, renewables have eaten the CCS sector’s lunch.


So what went wrong?

Let’s start with a comparison. Projects are moving forward in the USA and Canada thanks to a combination of tax incentives, grants, and revenues from CO2 used for enhanced oil recovery. Governments on that side of the Atlantic have worked intensively to select workable projects and agree the deals necessary to bring them to the point of a positive Final Investment Decision. But industry has played its part there too, by actively developing business models that can function even in the absence of a policy commitment to reducing carbon emissions.

In Europe, however, the collapse of the carbon price under the ETS has undermined the business case for CCS demonstration projects over their 15 to 20 year lifetime as well as reducing the funds available for the NER300 pot. The economic crisis has similarly reduced demand for electricity and further damaged the balance sheets of the utilities set to be the early sponsors of CCS projects. As a consequence, neither of the European Commission’s funding approaches has been able to cope with changed circumstances. But the blame must be shared beyond Brussels.

The EEPR funding provided by DG Energy has failed to secure a single project yet able to move forward, with technical delays by some and an absence of member state support in others combining to thwart progress. Rotterdam’s ROAD project continues to sit in the starting blocks as the lead candidate, but it is waiting for partners to emerge to share some of the funding gap. Its utility sponsors are unwilling to absorb on their own a financial hit anticipated to be in the region of €100m. This is understandable from an individual company perspective, but mind-blowingly short-sighted from the energy sector as a whole. Other industrial players need to step up in support.

In respect to the NER300 funding process, it is primarily member states that failed to deliver on the agreed milestones. They were asked to confirm which projects they would support, together with the level of co-funding they would contribute.

The Italian economy is struggling and its project is behind schedule: no wonder its government couldn’t commit funding now. The Romanian government had taken positive steps by introducing a feed in tariff for CCS, but was unable to commit funding given an impending election and a fight with the European Commission about EU budget spending. Poland meanwhile has been staying close to its broader obstructive approach to climate policy and holding out for more funding to defray the operational costs of CCS.

Only the French government confirmed co-funding, for the proposed steel mill CCS project at Florange, and €275m was assigned by the European Commission. Bizarrely, ArcelorMittal then withdraw at the last minute, citing technical problems. It is clear that the Florange plant had become a political football being kicked between company and government, but it was supposed to be the host CCS location for a wider consortium of European steel producers. ArcelorMittal’s withdrawal has done a huge disservice to the rest of the steel sector and European process industries more widely. Early deployment of CCS offered the prospect of job retention and a value-added, low-carbon product. The unions are right to be furious.

The Dutch government came close, but was unfortunately too late with a revised offer to support its proposed Green Hydrogen project. A combined solution for both of its linked Rotterdam projects might yet be possible with the unspent NER300 monies. This must be a priority for 2013.


A promise unfulfilled

That leaves us with the UK: the EU member state best-placed to deliver CCS, and the driving force behind the original NER300 agreement. Furthermore, the UK had submitted 7 of the original 13 CCS projects, while as late as October 2012 the UK still had 4 projects out of the 8 vying for funding. The UK has plentiful offshore CO2 storage options, the technical and engineering skills required, an urgent need for investment in low-carbon power generation, and a commitment to decarbonisation. With so much promise, the failure to secure European co-funding has been a slow-motion car crash.

Let’s rewind to the closing months of the last Labour government. The then Secretary of State Ed Miliband had recognised that there would be ‘no new coal without CCS’ and Energy Act 2010 was enacted with cross-party support, creating a dedicated levy for CCS. This was projected to raise around £11bn over 15 years to support a programme of 4 CCS demonstration projects.

When the coalition government took office in 2010, it promised not only to be the ‘greenest government ever’, but also that it would implement an Emissions Performance Standard and be ‘First Choice for Investment in CCS’. All-too-quickly, however, these aims were undermined by decisions from Treasury and delays from the Department of Energy and Climate Change (DECC).

First, the CCS levy was pulled. Then the negotiation of the first CCS competition ended without award to the last-standing Longannet project. A year was lost before a new CCS commercialisation competition was launched. Industry momentum had been kept alive largely thanks to the EU’s NER300 process, and at last it looked like the timelines for decisions under the UK and EU competitions would align. But to great disappointment and surprise, the only decision made by DECC in October 2012 was to kick out 2CO’s Don Valley project, with neither a firm selections of projects or confirmation of funding made to the other bidders.

So when it comes to delivering on the agreed rules of the EU’s NER300 programme it is the UK government who has most visibly failed to deliver. Yes, CCS projects are different than renewables, and yes, the co-funding requirements are an order of magnitude larger. But funding was there for the taking, and the UK failed to grab it.


New year, new approach?

At EU level, there needs to be a pause for breath rather than a headlong rush into the second round of NER300 funding. As part of the review of the first funding round the Commission should reconsider the criteria for project assessment. The original approach favoured CCS projects on coal and lignite, reflecting an assumption that the ETS would incentivise CCS on these carbon-intensive fuels first. But CCS on gas and industrial emitters offers the prospect of greater added value to the economy and is an area of existing European technological leadership. It would also be cheaper in respect to capital costs and could help make CCS more palatable in the eyes of sceptical stakeholders.

Adjusting the NER300 criteria might take a few months, but the wait could be worth it. With the EU looking to strengthen the ETS in the meantime, not only would the business case for CCS be improved, but additional funds might be secured for the NER300 pot. Member states, too, need to sort out their own co-funding contributions, and many will struggle with a rapid 2013 timetable.

In the UK too, a positive approach in the new year can make all the difference. After throwing away the strong hand of cards it held just two years ago, DECC needs to craft a can-do strategy that strengthens its chances of success. At present the department appears to be stuck deep in the administrative bunker, grappling with delivering the commercialisation programme and overwhelmed by the recent efforts to secure some (limited) funds for CCS out of the levy control framework settlement with Treasury. The good news is that operational support necessary for two UK projects appears at last to be available, but there is a worrying lack of clarity on how further projects will be supported to stimulate a UK CCS sector.

With political tensions within the coalition government seeding uncertainty as to the future of UK climate policy, it is even more important for DECC to lift its eyes to the bigger picture and communicate a vision of how CCS can play a catalytic role in a low-carbon economy. It must make policy decisions that shape the political context and generate momentum. It can start by liberating the CCS sector from the blanket of silence it imposed as part of its competition rules.

Key decisions will be taken in early 2013. DECC should seize this opportunity to advance a proactive approach by:

Funding all 4 of the remaining UK projects to undertake detailed engineering studies, as a means of enabling cost reduction via investment in CO2 infrastructures and accelerated deployment on industrial emitters;

Selecting one project to bid for the last remaining UK slot in the NER300 second round, not wasting projects’ time by re-submitting multiple bidders;

Confirming how many projects it expects to take forward in the ‘£1bn’ competition, and the timescales at which this funding will be made available;

Creating a supportive package of measures to assist follow on projects seeking to bid for Contracts for Difference, including assistance from the Green Investment Bank, tax incentives and infrastructure guarantees; and

Amending the proposed Emissions Performance Standard to shorten the free pass offered to new unabated gas plant from 2045 to at latest 2030, and improving the review process so that it can be revised downwards in the subsequent five-yearly delivery plans to require CCS on both coal and gas.

An approach along these lines that combines efforts to address the long-term business case while securing support for a core set of initial projects would inject new energy back into the UK and EU CCS sector.


Industry leadership needed

Industry players must help too. Technology companies, project developers and infrastructure providers have all suffered from the seemingly deliberate slowness of some of the major fossil fuel players over recent years. At long last European utilities are supporting efforts to strengthen the ETS. This needs to receive full support from across the CCS sector.

More generally, a proactive and positive approach to CCS would win new friends. With the economic crisis continuing, it is imperative that the CCS industry offers a value proposition not simply a cost imposition. It must communicate how it can help retain jobs through early deployment of CCS on clusters of industrial emitters. It must concentrate on approaches that allow flexible CCS power plant in support of electricity generation from renewables. And it must resolutely show that it is serious about addressing climate risk, addressing its potential to enable carbon negative emissions.

We can still secure CCS projects in Europe, but we are running out of chances. The second round of the NER300 needs to succeed, but a repeat of recent efforts won’t be good enough. 2013 needs to see improved collaborative efforts to secure timely political support and ensure projects can deliver. Let’s do it.

Scottish Carbon Capture and Storage

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