U.K. GOVERNMENT HOPES TO BOLSTER CCS BUSINESS CASE WITH ELECTRICITY MARKET REFORM PACKAGE

Tamar Hallerman
GHG Monitor
05/25/12

The U.K. government this week continued its rollout of policies intended to usher the country’s power industry away from traditional fossil fuel-fired electricity generation and more towards carbon capture and storage and other cleaner-burning sources of power. The Department of Energy and Climate Change (DECC) released a draft version of its electricity market reform (EMR) package May 22, kicking off Parliamentary consideration of the sweeping  measure, considered the largest restructuring of the U.K. electricity sector since privatization in the early 1990s.

The highly-anticipated reform package is intended to incentivize low-emitting sources of electricity, including CCS, renewables and nuclear, onto the grid to help replace some of the decades-old coal and nuclear-fired generation that is expected to retire over the next decade. Government leaders said that if passed, the EMR package would ensure the U.K.’s transition into a clean energy-based economy and help the country get closer to its goal of decarbonizing its power sector by 2030. “The reforms will ensure that low-carbon generation is sufficiently incentivized to ensure new plants are built, which will be crucial if the U.K. is to meet its obligations to reduce carbon emissions and increase the use of renewables,” a government policy brief stated. While the EMR must gain Parliamentary approval, its passage is considered all but inevitable given the size of the ruling government coalition and the relative level of consensus surrounding climate change, experts said. DECC said the reform package could attract £110 billion ($172 billion) in clean energy investments by 2020.

DECC Moves to Boost CCS Development

As promised in a government white paper released last summer, DECC included CCS in the list of low-carbon technologies that would be incentivized under the legislation. In particular, the U.K. government proposed a trio of policies meant to bolster the long-term business case for the technology:

• Feed-in Tariff with Contracts for Difference—DECC would negotiate a long-term rate, or ‘strike price,’ with project operators for the price of power generated from fossil fuel units with CCS. 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;
• Carbon Price Floor—DECC would set a minimum price of £13 ($20) to be paid by emitters for CO2 allowances under Europe’s Emissions Trading Scheme in a move set to combat the backsliding of the price of carbon offsets in recent months. That amount would rise each year, DECC said, to £30 ($47) per credit in 2030; and
• Emissions Performance Standard—DECC would mandate that all new coal-fired power generation needs to emit less than 450 grams of CO2 per KWh (roughly 992 pounds per MWh—nearly the same as the U.S. Environmental Protection Agency’s proposed standard for new fossil fuel-fired generation), effectively requiring all new units to use CCS technology in order to comply.

DECC said all of the regulatory provisions would incentivize CCS in the long-term, helping cover some of the operational costs for project that are often considered a roadblock to development. The EMR package represents the second round of incentives introduced by the U.K. government to catalyze the CCS industry in as many months. The provisions are meant to complement the CCS commercialization program relaunched by DECC last month, according to the department. That plan—considered one of the world’s most robust commitments to the technology by industry experts—aims to make the U.K. a leader in the field by the end of the decade by allocating £1 billion ($1.6 billion) towards demonstration-scale projects and, £125 million ($196 million) for smaller applied R&D projects.

Stakeholders Appear Optimistic, But Gaps Remain

Stakeholders interviewed by GHG Monitor said that the EMR proposal could overall be a positive step for CCS development in the U.K. “We need electricity market reform, and we need the contents of this reform bill to support CCS just like other low-carbon technologies,” U.K. Carbon Capture and Storage Association CEO Jeff Chapman said. “This seems to put CCS on an equal footing with other technologies, but there’s still a lot of detail that’s missing, and it’s the detail that will make or break the policy.” Many details of the plan, particularly the contracts for difference component, are not expected to be released until early next year. 

CCS project developers in Britain have cheered the plan—particularly the contracts for difference component—ever since the idea for long-term operational support was initially floated last summer. “The CFD is the critical item—capital ‘t,’ capital ‘h,’ capital ‘e’—for us in the new CCS program,” Peter Whitton, managing director of Progressive Energy, the company spearheading the Teesside CCS project, told GHG Monitor earlier this spring. “Essentially, the CFD determines the cash flows for the project, and the level and terms of that CFD will determine whether the project is bankable,” he added. Jane Paxman, director of policy for 2Co Energy, the operator of the Don Valley CCS project, offered a similar opinion. “The CFD would make the cost of electricity generated at [Don Valley] competitive, especially compared to other low-carbon renewable alternatives,” she said in a previous interview. Paxman said this week that 2Co is expecting its Don Valley project to receive an early one-off contract for difference before the EMR package is passed by Parliament. “It would be a very positive development for us,” she said.

But despite DECC’s seeming willingness to increase the stakes for CCS development in the U.K., some said it is still unclear whether the EMR proposal will actually be able to incentivize CCS technology development in the long term. “The takeaway is that it’s a great start but it’s not enough,” said Dustin Benton, a senior policy advisor at the U.K.’s Green Alliance, in an interview. He said DECC needs to more formally spell out its goals for how many additional tons of CO2 emissions it wants to mitigate and how many GW of CCS-fired generation it wants online by a particular date in order to spur real investment in the technology. “We’ve got a set of mechanisms which could deliver the financial support and the market push needed to get CCS off the ground, but someone has yet to say what the aim will be. Without that sense of what we’re aiming to achieve, the mechanisms could be [useless],” he said.