UK ADVANCES BILL THAT COULD ACCELERATE CCS BUISNESS CASE

Tamar Hallerman
GHG Monitor
6/7/13

The U.K. Parliament’s lower chamber advanced comprehensive energy legislation this week that could significantly boost the business case for carbon capture and storage in the United Kingdom, but also rejected a proposal that would shore up decarbonization targets two years early. The U.K. House of Commons voted 396-8 in favor of advancing the coalition government’s energy bill, which would spearhead the largest restructuring of the country’s electricity sector since the early 1990s by transitioning the grid away from fossil fuels and generating an estimated £110 billion ($170 billion) in clean energy investment by 2020.

Introduced in Parliament late last year by Energy and Climate Change Secretary Ed Davey, the bill would provide new long-term support to the developers of clean energy projects, including units outfitted with carbon capture and storage. The centerpiece of the massive bill, which has been years in the making, is the introduction of feed-in tariffs with contracts for difference (CFD) for CCS, nuclear and renewables. That approach would provide long-term operational support for projects, with the government negotiating a long-term rate, or ‘strike price,’ with project operators for the price of power generated per MWh from fossil fuels installed with CCS or other low-carbon technologies. Project operators would then sell their electricity to the market, with government paying the developers the difference between the going rate on the market and the strike price.

Performance Standards for Future Plants

The legislation would provide additional support to CCS by enacting a greenhouse gas emissions performance standard for future fossil fuel-fired plants similar to the proposal being promulgated by the U.S. Environmental Protection Agency. Such a standard would essentially bar unmitigated fossil generation and require plants to install CCS capacity or switch to another low-carbon fuel. The measure also includes a gradually increasing carbon price floor, in an effort to combat nose-diving prices on the European Union’s Emissions Trading System. The bill now heads to the House of Lords, which is expected to consider the measure through the summer and into the fall.

In a speech earlier this week, Davey said energy diversity is the legislation’s key goal. The country in recent years has relied increasingly on natural gas to fuel its energy needs. “We need to tap into all the viable low-carbon technology available and help to drive its commercial viability. We cannot afford to turn our back on a technology that can contribute to the overall goal of emissions reduction—nuclear, for instance, or carbon capture and storage or on-shore wind,” Davey said. “None of these alone represent a single silver bullet, we need them all to contribute.” Davey, however, warned that it was “extremely dangerous” to “rely on a single immature technology” like CCS to limit the country’s carbon pollution.

Decarbonization Amendment Fails

Ahead of the main vote June 4, members of the House of Commons voted on a tight 267-290 margin to reject an amendment that would have required the coalition government to set a legally-binding target for reducing the power sector’s carbon intensity by 2030. Government officials had previously said they would set a target in 2016, but the amendment would have required leaders to hammer out a target by April 1, 2014. The goal of such a mandate would be to reduce CO2 emissions 50 percent below 1990 levels by 2030, as the U.K. moves to meet its legally-binding commitment to reduce emissions 80 percent below the 1990 benchmark by mid-century.

Clean energy advocates had pushed hard for the 2030 amendment, arguing that any implementation delay would stall investment in low-carbon technologies like renewables and CCS due to political uncertainty. “Unfortunately this could mean that urgently needed investment in our energy infrastructure will be slower and the risk of a capacity crisis greater. The continuing uncertainty that will result increases the perceived risk of investment and will therefore raise capital costs, meaning that consumers may ultimately pay more for the new power plants that need to be built,” Tim Yeo, the member of Parliament who proposed the amendment, said in a statement following the vote. “Perhaps more worryingly, failure to introduce a clean energy target now could make it harder for the U.K. to meet its long-term carbon reduction targets, forcing future governments to take more costly action to curb emissions later when the impacts of a changing climate become more acute.”

U.K. lawmakers are mulling a target that would essentially decarbonize the country’s power sector by 2030 and all but bar unmitigated gas by the end of the decade. The major proposals being considered there would set a target of 50 grams to 100 grams of CO2 per kilowatt-hour, which roughly translates from 110 lbs to 220 lbs of CO2 per MWh. The more stringent requirement would essentially allow only renewables and nuclear for power generation, as well as CCS on efficient gas plants that achieve at least 90 percent capture (more efficient natural gas combined cycle units emit about 1,000 lbs per MWh of CO2 unmitigated), essentially squeezing out coal even with CCS. The looser target could allow more efficient coal units to run with 90 percent capture, depending on the unit.

Amendment Failure Leads to Uncertainty for CCS

CCS stakeholders said that the Commons’ rejection of the 2030 decarbonization amendment now provides an extra layer of uncertainty for CCS and other low-carbon technology developers that could hurt investment. “A 2030 decarbonization target would have been helpful for CCS and other low-carbon sectors,” Chris Littlecott, a senior policy adviser on CCS for the London-based E3G, told GHG Monitor. “There’s an underlying fight currently going on here between interests who’d like to see a more gas-heavy sector here in the U.K. versus those who would like to see a clearer commitment toward decarbonization. The latter would generally better for people looking to build supply chains for technologies like CCS or renewables.”

Nico Tyabji, a clean energy policy analyst at Bloomberg New Energy Finance, agreed. “We could see a slowdown in supply chain investment in clean energy” if the amendment is not picked up by the House of Lords, Tyabji said. “This could hurt some proponents of this early decarbonization target, including technology suppliers like Siemens, Alstom, Mitsubishi and others.”

Lawmakers Reject CCS Exemption Amendment

Lawmakers in the House of Commons also rejected an amendment from the opposition Labour Party that would have exempted new CCS plants from the emissions performance standard in the energy bill during commissioning and start-up for a max period of three years. CCS stakeholders, including the CCS Association, had spoken out in favor of the amendment because of its flexibility for plant operators. “The commissioning of a CCS project is a lengthy and complex process and will take some considerable time and potentially even a number of years for all of the components of a new CCS project to operate to their designed limits and be completely integrated. The imposition of an [emissions performance standard] during this period places an additional regulatory restriction on the project developer which may indeed make it more difficult to complete the commissioning and integration effectively,” the London-based trade group said in a January memorandum to Parliament.

During previous debate of the energy bill during its committee stages, the Labour Party had put forward several other measures aimed at incentivizing CCS, which ultimately all failed. One amendment would have shortened the grandfathering period for unabated natural gas generation in the U.K. from 2045 to 2029, subsequently requiring all gas capacity to also be outfitted with CCS technology. Other provisions would have tightened the emissions performance standard for power generators to require CCS while cutting off a so-called “dash for gas.”

Government Hopes to Bolster CCS Business Case

The U.K. government has gone to great lengths over the last year to prove its CCS commitment to the world. The country’s Department of Energy and Climate Change has touted its RD&D program as “one of the best offers in the world for CCS” since being revamped last year. In addition to the longer-term support that would be provided through the energy bill’s CFDs and emissions performance standard, DECC is separately providing £1 billion ($1.56 billion) to fund capital costs for up to two CCS projects under its commercialization program. It has also set aside £125 million ($194 million) for smaller applied CCS R&D projects.

DECC recently named two CCS projects—a natural gas retrofit spearheaded by Shell and a new-build oxy-combustion project run by an industry consortium—as its two “preferred” bidders in its commercialization competition in March and is now negotiating 18-month front-end engineering and design contracts with both. The government said it hopes to make final investment decisions on the projects by 2015 and have them up-and-running by the end of the decade. DECC also listed two other new-build IGCC projects as “reserve” bidders, which the government said could work economically solely with CFD support, even if they do not receive funding from the country’s commercialization program.

Littlecott emphasized that the most important long-term test of the U.K.’s commitment to CCS will come when the government sets the strike price for CCS generation under the CFD later this summer. “Specifically for CCS, there’s the pressing initial question of when individual projects might be able to actually access finance,” he said. Littlecott emphasized that how the government addresses that question might have an especially significant impact on large-scale projects sitting on the cusp—projects that were initially vying for U.K. government support but didn’t make the short list like Don Valley, Summit Power Group’s Captain Clean Energy Project and Progressive Energy’s Teesside. “In the meantime, we don’t know what’s going to happen to these other projects. They’re still good projects at both a U.K. and global level, but at the moment there isn’t anything on offer for them to have confidence that they can access the CFD,” Littlecott said. “At the moment, there’s a really pressing question of whether the government would be able to give them some kind of pre-commitment.”