As governments around the world look at various solutions to ensure low carbon growth, the development of commercially viable Carbon Capture and Storage (CCS) has become a pressing concern for many.
Whether due to the low carbon price or a lack of immediate start-up funding, it is taking much longer than many potential investors and developers had hoped for to demonstrate that CCS works as a technology and delivers the necessary returns. But what is the current state of play? In Europe, whilst there are several projects demonstrating elements of the CCS chain in the development phase, there is still much to be done on the regulatory side in order for CCS to realise its potential. In this article, we discuss where we are with CCS in the UK and Europe and look at the available financing mechanisms and the regulatory challenges which exist in relation to CCS development.
The high costs of developing CCS are well known mainly due to the need, as part of the process of capture and compression of CO2, to increase the fuel needs of coal fired electricity plants. It is recognised that, if the penalty price for emitting CO2 is sufficiently high, then the development of CCS facilities will become more economical. Currently, the carbon price is considered to be a long way below an amount adequate to incentivise CCS. Whilst not universal, it has now become an expectation in many jurisdictions that governments need to provide some form of subsidy in order for CCS projects to be developed at the relatively fast pace being demanded by some.
In Europe, there are two main funding mechanisms currently available. Around eight eligible projects (which must consist of varying technologies including at least one, but no more than three of each of post-combustion, pre-combustion, oxyfuel or other industrial applications) are expected to be given a share of proceeds from the sale of 300 million Emissions Unit Allowances (EUAs) set aside from the New Entrants’ Reserve under the revised EU Emissions Trading System (EU ETS) Directive. The New Entrants’ Reserve is designed to set aside carbon dioxide allowances for new installations and extensions to existing permitted installations. This financing mechanism has been dubbed the “NER300” and will be shared with up to 34 renewable energy projects.
Member States must provide a shortlist of qualifying projects to the European Investment Bank (EIB) who will carry out technical and financial due diligence on those projects and make recommendations to the European Commission which will eventually decide on the successful projects. The NER300 EUAs will be sold on the carbon market by the EIB and the value will depend on the carbon price when they are sold. For example, the European Commission estimates the sale will raise between €4.5 billion (at a carbon price of EUAs at €15 per allowance, approximately today’s prices) and €9 billion (at a carbon price of €30 per allowance).
There will be two calls for project proposals in respect of the NER300. The first will be during 2010, for project selection at the end of 2011 (for around 200 million EUAs). The second will be in 2012, for project selection at the end of 2013 (for around 100 million EUAs). The EIB is due to publish a plan setting out more detail as to how and when it intends to sell the allowances. Projects which are selected for support through the NER300 mechanism will have 50 per cent of their “relevant costs” funded which are defined to mean “additional costs”, being those costs that are net of operating costs and benefits, arising during the first 10 years of operation.
In addition, the European Economic Recovery Programme has around €1 billion to allocate to CCS projects including Powerfuel Power Ltd’s demonstration of offshore CCS from a new 900 MW IGCC plant in Hatfield, England and Endesa’s demonstration of the full CCS chain using Oxyfuel and fluidised bed technology on a 30 MW pilot plant (to be upscaled in 2015 to a demonstration plant of more than 320 MW).
In the UK, the new coalition government has recently restated its commitment to fund up to four commercial-scale CCS projects and is attempting to dovetail the application process with the NER 300 to maximise the chances of developers of UK projects receiving funding. The funding will be raised through a levy on electricity suppliers per unit of electricity supplied. As a longer-term means of underpinning the carbon price in order to incentivise CCS (and other technologies such as nuclear power), the UK coalition government is also proposing to introduce what it describes as a floor price for carbon. This mechanism will work on the basis that if EUA prices fall below a set level, utilities producing carbon-intensive electricity would be forced to pay an additional levy to the UK government up to an as yet undefined cap.
There have also been calls for CCS to be classified as a project falling under the Kyoto Protocol’s Clean Development Mechanism (CDM) which would allow credits to be generated for the carbon abated. However, this remains some way off considerable uncertainty lingers over the future of CDM as a mechanism post-2012, due to the lack of political agreement over what should replace the Kyoto Protocol.
Although uncertainties persist, there has been some progress in developing projects in recent years. Many of the energy majors in the UK are now investing significant resources to developing CCS. The UK government sees CCS as a key area of economic growth (despite the rather stuttering progress of its commercial-scale demonstration competition). Since April 2009, all new coal-fired plants applying for an operating permit have had to prove that they are “CCS ready”, that is, that the relevant technology could easily be retrofitted to the plant, once that technology comes on stream.
Developments and initiatives are being carried out around the globe. For example, the European Union is also co-operating internationally on the Zero Emission Fossil Fuel Power Plant Technology Platform which is a coalition of industry stakeholders in support of CCS and which provides advice and recommendations based on its research with a view to promoting CCS in Europe. The CSIRO, an Australian research organisation, has also recently announced a US$10 million joint demonstration project with China United Coalbed Methane Corporation Limited to store 2000 tons of CO2 underground, extracting methane as an energy source.
More recently, on 5 August 2010, the UK secretary of state for Business, Innovation and Skills announced £4.6 million in funding from the Tees Valley Industrial Programme (TVIP) to support 14 projects in the North East region for the deployment of low carbon technologies where £1.3 million has been specifically set aside for CCS development. The TVIP includes awards to Progressive Energy and Rio Tinto Alcan for two CCS projects. The funds will enable Progressive Energy to develop its plans for pre-combustion CO2 capture on an 850MW IGCC power plant at Eston Grange and Rio Tinto Alcan to explore retrofit technology for its existing Lynemouth Power Station.
Apart from financial incentives required to make CCS operations economically viable, there are still a number of legal and practical issues to resolve going forward. For instance, the development of pipelines for CO2 transportation could put pressure on land use resources and could lead to challenges from local stakeholders. One approach from the UK is to encourage CCS development in organised “clusters”, capitalising on existing industrial infrastructure and land use and achieving economies of scale. However, this approach would still, for example, require the development of consistent planning guidelines and laws governing pipeline operator liabilities. This would inevitably require the enactment of new laws or regulations, or the amendment of existing laws to accommodate and provide for CCS specifically. This is true of many existing laws governing mining, petroleum, waste and the environment.
European Member States are required to implement Directive 2009/31/EC on the geological storage of carbon dioxide by 25 June 2011. The Directive sets out a framework for the storage of CO2 in geological formations in the EU and sets down requirements covering the lifetime of a storage site to apply alongside existing EU legislation. Much of the detail is still to be finalised. The Commission is currently consulting on draft guidance documents (addressing areas such as the developer’s obligation to provide financial security, site characterisation and the criteria for transferring responsibility from operators to the Competent Authority). Many of these issues are controversial. For example, while it is proposed that Member States will take on all responsibilities and liabilities for storage from an operator once certain criteria are met, it has been argued that the scope of financial contribution that must be made in order to effect a “handover” of responsibility is unclear and open-ended, therefore not providing operators with a sufficient degree of certainty. There are still a number of areas where regulation has yet to be finalised, such as details of the permit required for CO2 transport and the permit for storage of CO2 which in respect of offshore storage in the UK, will be modelled around the existing petroleum licensing regime and cover intrusive exploratory activities as well as the final carbon storage activity.
An issue flagged by industry is the duplication of operator liabilities arising from different legal regimes. For example, under the EU ETS, CO2 that is safely stored will be regarded as “not emitted”. However, in the event of a leakage, EUAs must be surrendered to compensate for the fact that the stored emissions had been originally credited as such. Notwithstanding the view held by industry that major leakages are unlikely to occur, in the event that such a leakage does arise, operators will potentially be liable to finance remedial action under the Environmental Liability Directive, to purchase EUAs in circumstances where the price of EUAs at the time of injection will have been unknown, and to establish financial security under the CCS Directive in respect of its obligations under the EU ETS. The result is that operators, investors and their potential lenders are at present, far from being able to have a sufficient clarity or certainty on potential contingent liabilities in order to make informed investment decisions. Despite progress on regional CCS frameworks and the removal of barriers under key international conventions, the regulatory piece is still in development.
Formulating the regulatory framework for CCS requires that roles and associated liabilities are accurately identified including properly defining the “operator” to the extent the operator of a CCS facility is made ultimately responsible. The vexed question of transboundary issues persists, with uncertainty over how CO2 leakage across international borders might be addressed or recognised. Particular inroads have, however, been made by the CCS Directive as regards the treatment of CO2 as “waste” where relevant EU legislation governing the treatment and shipment of waste were amended to exclude “carbon dioxide captured and transported for the purpose of geological storage’” and “shipments of CO2 for the purpose of geological storage” from their respective application. Importantly, this means that CO2 which is stored, or intended to be stored, is not regulated under EU waste legislation.
Finding support mechanisms, at least in the short term, are an important part of ensuring that CCS can scale-up into a commercially viable proposition for developers and investors. The NER 300 is a significant step in the right direction. However, as with many low carbon developments, its real success will be closely linked with the price of carbon and observers are sceptical that CCS will, at least in Europe, fulfil its potential whilst the carbon price remains at the levels we have seen over the last five years.
Notwithstanding this, recent developments in CCS demonstrate the strength of will to succeed both nationally and internationally. There has been a significant amount of legislative development over a relatively short period of time in a number of countries. However, until a balance can be struck in respect of the agreed allocation of liabilities for operators of CCS facilities having regard to new and existing legislation, there will be limited incentive to develop and fund these projects.
All stakeholders, whether governmental or private sector, developers or regulators, will need to remain focussed for the long-term if the promise of CCS is to be fulfilled and continue to work closely to ensure that the regulatory response to CCS develops in line with, and at the same pace as, the financial incentives being introduced.