CCS legal and policy - UK competition

2012-06-06 10:22 by Anja Reitz

Following an astute amount of well designed consultation with industry, DECC launched its CCS Commercialisation Programme (the Programme) around the beginning of April. Through the consultation, the proposed procurement process was communicated to the various stakeholders and their views actively sought. This should have engendered industry buy-in to the Programme and appears to have yielded a process for project selection which gives DECC the best possible chance of finally kick-starting the development of a viable CCS industry in the UK.

One of the key reasons that the first CCS demonstration competition had the tortured life that it did was that the policy drivers at its inception were ill-conceived. The status of Government policy and its effect on the new competition has therefore been of much interest to those watching the competition process develop. This interest was well directed and the Programme that has emerged tells a lot about how policy has changed in the five years or so since the first project was launched.

The overarching policy aim that comes through most strongly now is that the Programme is not simply to procure a few projects, but is intended to create the basis of a CCS industry in the UK. This may seem an obvious and unnecessary statement to make, but its explicit pronouncement, and the increment of confidence it gives to those considering investing, is very important. Cynical observers may take a suspicious view with regard to the sincerity with which this particular policy is espoused; nevertheless it resonates reassuringly through many of the foundation stones of the Programme.

By way of example, the central stated aim of the Programme is to achieve the CCS Commercialisation Outcome. The ‘Outcome’ is rapidly achieving the status of a mantra for the faithful and I therefore repeat it here in full:

"As a result of the intervention, private sector electricity companies can take investment decisions to build CCS equipped fossil fuel power stations, in the early 2020s, without Government capital subsidy, at an agreed CfD Strike Price that is competitive with the strike prices for other low carbon generation technologies"

The statement clearly and undeniably looks to the future and the role of CCS industry as a means of allowing ongoing fossil-fuelled power generation within a diverse, low-carbon, energy mix. This appears to support the claim that industry development is central to the Programme and the Outcome includes other aspects with the same message: the need for a CCS industry, and the way it will develop, is now primarily driven by a need for energy security, not simply environmental imperatives, and there is a recognition that this must be paid for, on a sustainable basis, by energy consumers as part of the cost of the energy that they consume.

Environmentalist purists may bemoan this alteration in the source of impetus for CCS development and it may indeed lead to some perverse outcomes; reductions in CO2 emissions from industrial emitters, for example, is unlikely to receive the proportion of attention it deserves. Nevertheless, a pragmatic advocate of CCS is likely to view the linking of the industry’s development to energy security as a strong factor in increasing the likelihood of it attracting investment.

Other key messages from the consultation process are encouraging for those who want to believe that there is a genuine policy to see CCS flourish in the UK. The frustrations that have bedevilled those trying to obtain state support for shared CCS infrastructure and clustered capture (and storage) projects, via procurement processes that ostensibly supported such outcomes but in practical terms made them impossible to achieve, have been addressed in the Programme by the acceptance of part-chain proposals which will be enabled, by a sufficiently flexible and well designed, competition process, to amalgamate into cluster projects as the process progresses.

The potential of EOR to bring an additional revenue stream to the CCS commercial equation, and the importance this might have in supporting the development of CCS has also been explicitly recognised. Similarly, there is early cognisance that there are limitations on the amount of finance that can be provided by Government and a concomitant desire to create a project selection process that encourages the investment of private finance into the projects in order to bolster the funding from the national accounts.

So there is much to be positive about as we embark on this latest exercise, but those who read this column regularly will know that it rarely contains a wholly roseate viewpoint. And this edition is no different, there are some concerning issues with the potential to scupper the Programme: the following three are probably the most significant.

Firstly, and most obviously, is the current uncertainty with respect to the detail of the proposed Contract for Difference (CfD) as an instrument of long term support for the costs associated with CCS. At the moment this uncertainty makes it difficult to assess whether the proposed CfD is fundamentally suited for application to CCS, but, from what we do know, it does seem that its designers are faced with two potentially significant difficulties: fuel price risk and system demand (or usage) risk.

The former of these hinges upon the problem of establishing a CfD strike price (or strike price mechanism) that allows for the vagaries of fossil fuel price whilst the latter is based the problem of the amortisation of fixed development and operational costs over a variable, and highly uncertain, number of zero-carbon megawatt-hours exported to the grid. It is certainly possible for these issues to be satisfactorily addressed in the final CfD design, but this will be difficult and may require concessions that Government is not willing to make.

The question in potential developers’ minds will be whether it will be clear which way things will go in time to make final investment decisions with regard to CCS demonstration projects. What is currently clear is that the timings of the electricity market reform process (of which the CfD is a component part) and the Programme seem woefully out of sync; with the EMR lagging considerably.

The second concern is with the Outcome. The Outcome’s central purpose is to achieve a reduction in the cost of the next generation of CCS projects and an increase in confidence in both the accuracy of the estimate of those costs and the technical feasibility and operability of CCS. It is very likely, of course, that the projects supported via the Programme will achieve these aims to some degree; every project brings learning and experience. But the Outcome requires that this learning and experience be of a level sufficient to meet a quantified goal, viz: to enable future projects to be commercially viable without state capital subsidy.

This seems a peculiar thing to ask of a project developer. Ask it to meet a technical specification, yes, to bring a project in on time and in budget, certainly, but to ensure that the economics of the projects to follow are within certain parameters? It is difficult to see how a project developer could achieve this, or, within the context of its current project, why it would want to. For example, driving down the cost of the equipment one is procuring today is one thing, but how would one require one’s supplier to sell to its next customer at some fixed percentage less than it was currently selling? The aim of the Outcome is a laudable aspiration but it seems unwise to make it the yardstick by which the demonstration projects will be judged to have succeeded or failed.

The final concern is the least easily perceived and perhaps the most threatening. It is whether the Government and the various industry stakeholders value CCS highly enough to share between them the risks involved with getting the first projects, and therefore the industry, off the ground. With regard to the Government’s aims, the current level of the carbon price demonstrates that carbon emission driven climate change remains a societal cost to which the ETS does not ascribe a high enough value to meet the UK’s emission reduction targets; direct support for CCS has the potential to address this problem.

From potential investors’ and developers’ points of view, CCS (and, in the context of the Programme, low-carbon fossil-fuelled electricity generation especially) has the potential to be a profitable industry into which to develop but there remains many uncertainties and potential bear traps. The question is then, whether the value of CCS to these parties, in aggregate, is sufficient to persuade them to collectively shoulder the risks and move forward and whether, in seeking to attain the best deal, those risks can be divided up in a mutually agreeable manner. Whether they can or not will only become apparent once serious contract negotiations are underway and by that time a lot more money will have been spent.

These issues are disquieting but the well-considered fashion in which the Programme has been developed to date provides good grounds for hope that, in the final analysis, they will prove surmountable.

Source: Feature Articles, Apr  21  2012 (Carbon Capture Journal)

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