FUTURE OF U.K.’S DON VALLEY CCS PROJECT UNCERTAIN AFTER GOV’T BACKS AWAY

Tamar Hallerman
GHG Monitor
11/2/12

The future of 2Co Energy’s Don Valley carbon capture and storage project remains uncertain after the U.K. energy ministry said this week that it would not financially back the venture in its own demonstration contest or a similar competition being held by the European Union. While 2Co Energy officials stopped short this week of saying that the company would shelve or end the project, they said the venture could not move forward without government support. “We’ve got to discuss the situation with a lot of people and we’ll let people know what the outcome of that is as soon as we have those conversations, but at the moment it’s too early to speculate,” 2Co Energy Policy and Communications Director Jane Paxman told GHG Monitor.

The U.K.’s Department of Energy and Climate Change (DECC) shocked many in the industry this week when its short list of preferred projects for its £1 billion ($1.6 billion) CCS demonstration competition failed to include Don Valley. The new-build 650 MW integrated gasification combined cycle plant planned for eastern England was the top seed selected by the European Commission in July for its own CCS competition. However, in order to receive EC funding, all candidate projects must have the financial backing of their member states. DECC said that based on criteria such as deliverability, affordability and ability to help kickstart a domestic CCS industry by the 2020s, Don Valley did not make its short list. DECC did not respond to requests for comment.

Paxman said that while 2Co Energy decides how to move forward, project officials will wrap up Don Valley’s front-end engineering and design work and complete the knowledge-sharing component of the project, required under a grant it received from the European Union’s energy stimulus program in 2009. She added that there is only a “remote chance” that the project will be able to find an alternative source of funding without backing from the U.K. or the EC.

Omission Surprises Project Officials

2Co Energy officials said they were surprised by the news. “We are trying to come to terms with how the U.K.’s most advanced project that has twice been selected by the EU for funding and is currently sitting as Europe’s top ranked project has not even made it to the U.K.’s shortlist,” company CEO Lewis Gillies said in a statement. “We’re very disappointed,” Paxman said “Although we weren’t complacent, we were very strong believers that ours was the best project around. We just need to take some time to reflect on why it didn’t feature on the list that the government published yesterday and work out what its future is.”

Others in the British CCS industry said they did not expect the decision either. “It is a definite surprise that 2Co Energy isn’t even considered on the short list,” Kieron Stopforth, a CCS analyst at Bloomberg Energy Finance, said in an interview. “Overall it was a solid project, especially since it had the European Investment Bank and Korean export credit agency lined up to provide up to £1.5 billion in debt. It was one of the most advanced projects in the U.K. in project development and financing terms.”  

Large Price Tag Could Have Played a Role

While DECC officials would not comment on why the department specifically did not fund Don Valley, perhaps the project’s largest criticism in the past surrounded its price tag. The project—which would have captured roughly five million tons of CO2 annually for storage in a deep saline aquifer and depleted oil well in the North Sea—was one of the costliest CCS ventures under development worldwide. 2Co Energy previously estimated that the onshore portion of the project would cost roughly £3 billion ($4.8 billion), and the offshore infrastructure, including a 250-mile pipeline, would cost another £2 billion ($3.2 billion). Paxman acknowledged that Don Valley’s cost could have played a role in its omission from DECC’s short list. “The project cost had been the subject of some speculation of the media here that maybe it was too big that total cost over life of project was a factor,” she said. “We’re still trying to think this through, but per unit of electricity we believe that it is a highly competitive project.” 

Paxman, though, said that despite Don Valley’s large price tag, 2Co Energy had assembled a project financing scheme that would have easily buoyed the venture, relying on £1 billion ($1.6 billion) in grants from the U.K. government and the EC and £1.5 billion ($2.4 billion) in government-backed debt. She added that the balance of the project could have been paid for with outside equity, a large amount of which the project had already secured. Last week, Bloomberg reported that an unidentified South Korean utility was planning to provide £1 billion ($1.6 billion) in financing for the project. Samsung Construction & Trading and Linde AG had both claimed 15 percent stakes in the project earlier this year.

Stopforth speculated that Don Valley’s cost and size were likely a large factor in the project not being shortlisted by DECC, especially when considering the new objectives of the U.K.’s CCS program. “The U.K. government’s main goal here is to establish a commercial CCS industry through demonstrating two or more projects. Don Valley may have been too big and too costly. If the government fully funded Don Valley, then it could have meant that it couldn’t fund another one or two projects elsewhere,” he said. “The government’s choice may allow more projects to get built and deploy a greater range of CCS technology in the country.”