Legal Briefing

Carbon capture and storage: next steps for the UK

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Projects, energy and natural resources | 01 November 2014

Carbon Capture and Storage (CCS) has great potential as a means of achieving dramatic reductions in the carbon dioxide (CO2) produced by combustion. The real questions about CCS remain over the technical viability of CCS and storage at scale, and the commercial and other barriers to its wider deployment.

CCS involves:

  • capturing CO2 from power plants or industrial facilities and compressing it to a liquid
  • transporting the CO2 by pipelines (or ships) to deep geological storage sites, which may be deep saline aquifers or depleted oil and gas fields
  • storing the CO2 at these sites.

The Department for Energy and Climate Change (DECC) issued a new policy document Next Steps in CCS in August 2014. Once again the prospects for wider commercialisation of the technology in 
the UK seem finely balanced outside of the government’s continuing Commercialisation Programme, with its two major preferred bidders in the White Rose and Peterhead projects, and with a general election in prospect for 2015 only adding to political uncertainty.

Meanwhile, in Canada, Saskpower has inaugurated its landmark Boundary Dam project, a first of its kind coal-fired power station with post combustion CCS – the commercial scale coal-fired power plant CCS operation that many CCS advocates have been waiting for. Boundary Dam unit number three is attracting worldwide attention. The government of Canada is reported to have invested C$240m and SaskPower C$1.3bn towards the costs of its development, and much of the interest will focus on how these high costs can be reduced with the experience gained from first of a kind projects.

This article reviews the UK’s progress in its efforts to deliver comparable results.

UK BACKGROUND

The UK government was one of the first to identify the potential for CCS as of real value in achieving dramatic and long-term reductions in CO2 emissions, and a number of fundamental steps were taken to facilitate its deployment.

In 2007 the UK’s Labour government announced its first CCS funding competition for a full-scale CCS demonstration plant, although several promising candidates for participation in this competition failed to maintain their bids.

EU CCS DIRECTIVE AND LEGAL FRAMEWORK FROM THE UK ENERGY ACT 2008

The EU Directive 2009/31/EC on Geological Storage of CO2 (the CCS Directive) introduced an EU-wide legal framework for the environmentally safe geological storage of CO2. It set out rules for the selection of storage sites, and introduced requirements for exploration permits and storage 
permits. It introduced operation, closure and post-closure requirements for storage sites, and there was provision for transfer of responsibility for storage sites from operators to government, subject to strict conditions.

Following EU Directive 2009/31/EC all new power stations in the UK of at least 300 MWe capacity and of a type covered by the EU Large Combustion Plant Directive must be designed and built to be carbon capture ready so that CCS technology can be retrofitted at a later date.

In the UK, the Energy Act 2008 anticipated the CCS Directive and set out provisions allowing for its implementation. This was promptly followed by the Storage of Carbon Dioxide (Licensing etc) Regulations 2010 and by the development of carbon dioxide appraisal and storage licences. Crown Estate leases were developed, and early engagement in the first competition led to a better understanding of practical contractual issues involved.

Some critical legal issues remained needing further work, including Article 18 of the CCS Directive on the transfer of responsibilities to the competent authority of a member state, Article 19 on financial security, Article 20 on the financial mechanism and especially the issue of liabilities, both those of the operator, and as between the parties to full chain CCS. There were uncertainties as to the operator’s liability under the EU Emissions Trading Scheme in the event of unanticipated releases of CO2, and other uncertainties over post-closure transfer, and what exactly was to be transferred. However, at this point it should be said that major steps had been taken towards providing a legal framework for the development of CCS, and many commentators were agreed that this was an area which should be led by the viability of the technology to deliver the results claimed, with legal frameworks to facilitate rather than lead it. Attention then moved to the commercial arguments for and against CCS deployment.

In 2009, DECC announced support for a full-scale demonstration project. Then, in 2010, the government awarded money for two front end engineering and design (FEED) CCS demonstration projects at Kingsnorth (E.ON) and Longannet (Scottish Power Consortium). Both of these subsequently gave up the struggle to maintain their bids, Kingsnorth in 2010, Longannet in 2011.

In 2010, and again in 2011, the government announced and maintained, as part of DECC’s funding, the availability of up to £1bn of investment to establish a commercial scale CCS demonstration plant. The National Audit Office issued a critical report about the planning that had gone into the first competition, and urged DECC to learn the lessons.

By November 2011, the Treasury was signalling that although £1bn remained available for a CCS competition, it could take longer than planned to commit the money. There was also concern at the time that the UK’s funding arrangements were out of step with EU plans to commit funds from the EU New Entrant Reserve (NER), as in practice viable CCS projects needed all the combined funding they could raise.

In April 2012, DECC published their CCS roadmap. This focused on developing CCS as a commercially viable technology, both in terms of making it cost competitive as against other low-carbon technology and by tackling non-cost barriers to deployment (such as by creating an enabling regulatory framework and developing a storage strategy to ensure sufficient capacity is available as necessary).

The new competition, or Commercialisation Programme, was announced by the coalition government on 3 April 2012. This, it was claimed, would deliver:

  • lower costs by supporting practical experience in the design, construction and operation of commercial scale CCS with £1bn capital funding;
  • £125m for a four-year research and development programme and a £13m UK CCS research centre;
  • long-term contracts for difference as part of the government’s Electricity Market Reform (EMR) to attract investment in CCS; and
  • government support for industry on supply chain, storage and infrastructure issues.

UK ERC ASSESSMENT IN 2012

In April 2012 the UK Energy Research 
Centre (UK ERC) issued a report at the conclusion of its two-year study into challenges to the commercial viability 
to the deployment of CCS, in the same month that the government announced its long-term strategy for CCS and its relaunched competition.

The UK ERC report was important in representing the combined work of academic specialists, regulators and government. It identified four key areas for policy choices for government which it summarised as follows:

  • ‘Deciding whether to keep options open or close them down. The French government focused on one technological variety early on for its nuclear programme. Doing this for CCS may help speed up development, but there is a risk of picking inferior technology. The authors caution that it is too early for government and industry to close down on a particular variant of CCS technology. They welcome the plans for several substantial demonstration projects which will help to identify which variants of CCS technology can be scaled up successfully.
  • Designing financial support for effective CCS demonstration and deployment. A regulatory approach that makes CCS compulsory for all fossil plants will only work if the technology is more advanced, and the additional costs can be passed on to consumers. CCS technologies are not yet at this stage. In the meantime, the government should ensure that industry maximises efficiency and minimises costs of new CCS plants. History shows that not all demonstrations will perform as expected, and government should ensure that lessons are learned from successes and failures.
  • CCS deployment is a marathon, not a sprint. Developing new energy technologies can take a long time, and the process is often far from smooth. The report shows that costs do not necessarily fall in the way supporters hope – and can rise for several years before they come down, as technologies are scaled up. This requires patience. Government also needs to ensure it has an independent capability to assess costs to inform future decisions about whether to continue with public funding for CCS or to divert resources to other low carbon options.
  • Dealing with storage liabilities. The report highlights lessons from UK nuclear waste management policy to show how complex liability arrangements for CO2 storage could be. For CCS, a balance needs to be struck between limiting liabilities for investors and protecting the interests of future taxpayers. Agreements will be needed on where the balance should lie, and what arrangements are needed to fund and insure against potential liabilities.’

EUROPEAN FUNDING

With the deterioration of carbon prices, a funding route linked to the EU Emissions Trading Scheme under the NER ‘NER300’ made no allocations at all to CCS projects 
in its first round.

In 2013, a report by the ENGO Network on CCS noted that:

‘… in mid-2013, the EU is still without any new commercial scale CCS projects under construction. Two different funding mechanisms have failed to secure projects able to take position on final investment decisions…

… only Rotterdam’s ROAD project continues to sit in the starting blocks, but is waiting for partners to engage to share some of the funding gap…’

Weaknesses in EU funding mechanisms in failing to deliver the full amounts of funds anticipated, and poor co-ordination of support between EU and national funding mechanisms have all contributed to the lack of real progress to date. A further promising candidate for CCS development, 2Co Energy’s Don Valley project, failed to attract NER300 funding in the first round, despite being the leading CCS contender across Europe. Some progress has now been made, in that the White Rose project has won an award of €300m under the second round of the EU’s NER300 funding completion.

PREFERRED BIDDERS IN THE COMMERCIALISATION PROGRAMME

Two projects have been selected for FEED contracts and as preferred bidders in the Commercialisation Programme.

The White Rose project in Yorkshire is a joint venture known as Capture Power Ltd between Alstom, Drax Power, BOC and National Grid. It aims to capture 90% of the CO2 from a new coal-fired power station at Drax, and to store it in a saline aquifer site beneath the Southern North Sea seabed. If built it would be the UK’s first coal-fired power station with CCS.

The Peterhead project in Aberdeenshire, Scotland, would capture 85% of the CO2 from part of an existing gas-fired power station before transporting it for storage in the depleted Goldeneye gas field beneath the central North Sea seabed.

Both projects are expected to take final investment decisions ‘towards the end of FEED, around the end of 2015’.

DECC’S AUGUST 2014 NEXT STEPS IN CCS DOCUMENT

The Carbon Capture and Storage Association, reviewing the government’s August 2014 paper Next Steps in CCS: Policy Scoping Document was very critical of its failure to indicate plans for commercialisation of CCS beyond these 
two bidders. Its chief executive Luke 
Warren commented:

‘The CCS industry was anticipating a clear indication from government on how it planned to deliver on its stated outcome of commercialising CCS in the early 2020s. Having now reviewed this document, we are extremely disappointed that government has not taken this opportunity to outline how CCS projects outside of the competition can be developed… this document fails to provide the necessary certainty for investors and significantly jeopardises the government objective of commercialising CCS in the 2020s.’

Overall, it is easy to understand the CCS industry’s frustration at the lack of new developments in the government’s August 2014 policy document.

On financial incentives and EMR, this 
re-iterates that the government’s long-term aim is to move towards open competition on price between low carbon technologies. For the initial two Commercialisation Programme candidates, bilateral negotiation of Contracts for Difference (CfDs) will be allowed. If possible, the government will move to competitive project selection thereafter, with bilateral negotiation of CfDs as a fall back if that does not work. Government will work with developers on the design of a generic CfD for CCS.

It is fairly clear that government sees actual delivery on one of the first of a kind projects as the best way to identify and bring down costs. It wants to scale back support wherever possible on second and third phase CCS projects. There is discussion in the paper, but little in the way of substantive conclusions on key areas, such as alternative means of financing, development of wider transport and 
storage infrastructure, the possibility 
of part chain investment, options for Enhanced Oil Recovery (where a pilot 
study continues to investigate options). Industrial CCS, bio-CCS, carbon capture and utilisation and the supply chain are almost ticked off as necessary to mention without much analysis.

A current review of the EU CCS Directive may offer somewhat more scope to address issues of practical difficulty, such as transfer of liabilities and liabilities generally.

CONCLUSIONS

Advocates of CCS must hope that the government will press on and conclude a successful outcome to the present Commercialisation Programme and competition. If that does not survive the next general election, prospects for the wider deployment of CCS in the UK are bleak indeed. However, if one or both of the preferred bidders manage to conclude the competition successfully and embark on deployment of the first full chain CCS project at commercial scale in the UK, there is still hope that the UK can follow Saskatchewan in Canada and take a lead in Europe on deployment of this technology.