Examination of Witnesses (Questions 160
- 179)
WEDNESDAY 7 DECEMBER 2005
MR COLIN
SCOINS, MR
RODNEY ALLAM,
MR NICK
OTTER AND
MR GARDINER
HILL
Q160 Chairman: Without subsidy, nuclear
comes out top?
Mr Scoins: Gas comes out best.
Mr Newmark: That is what I was asking.
Q161 Chairman: We just want a clear
position.
Mr Allam: I would say that it
depends a lot on the price of natural gas and the price of coal
and the incentive from using CO2 for the power station for enhanced
oil recovery. For example, if you take a gas-fired station, 1kW
is only producing around 40% of the CO2 of an coal-fired station.
When you work the figures out, if you can use all the CO2 from
a coal-fired station and the value of oil is high, you will find
that the coal-fired station economics start to look extremely
good and quickly pass the point at which the price of power from
that station could be cheaper than the price of the base station
on natural gas because you are recovering CO2 and using it for
enhanced oil recovery, or the price for a coal-fired station in
the sensitivity analysis.
Q162 Mr Newmark: Which innovations
could make the biggest contribution to cost reduction in the next
10 years? What are the prospects for technology development resulting
in a significant reduction of the cost and energy penalty associated
with CCS?
Mr Otter: I will try to answer
some of these questions. I would point you to the Carbon Abatement
Technology Strategy that the DTI published. There is in there
a comparison showing that CCS is comparable with other carbon
abatement approaches. There are a lot of uncertainties in those
calculations, clearly, but they are a good set of calculations.
They give you an indication but they clearly need to be re-done
in the light of much higher gas prices, for example. These fuel
prices make the calculation extremely sensitive. As an example
and trying to address the reduction of CO2 capture issue, I think
it is generally accepted that 70 to 75% is encaptured, if you
look at the whole process. That is a clear target for reduction
if you want to get to lower costs. Even though technology will
develop good cost reduction and bring costs down, clearly the
work that has done under CCP has indicated that certain technologies
can make substantial reductions in cost with technological development.
Gardiner can tell you what different technologies are because
he is actively involved in the project. I would also say that
if you just used the example of FGD and the penetration of the
technology into the marketplace, we know as we supply FGD equipment
that over a 10-year period the cost of FGD went down by a factor
of 4. That is due to market penetration; that is not technological
development; that is just the market driving the costs down as
you get the benefit of scale. I can imagine that happening with
CO2 capture. It is driving it down but that is not answering your
technical question. Perhaps Gardiner can have a go at that?
Q163 Mr Newmark: Specifically on
the innovations, I am curious what the innovations are going to
be in driving costs down.
Mr Hill: In the pre-combustion
technologies there are some very exciting innovations which really
look at different membranes and catalysts. There are membranes
that also reform. Effectively the number of steps to make hydrogen
can be reduced down to one step as compared to two or three steps
today. We are working on a range of technologies, including membrane
reforming technologies, which could make a big different and reduce
the costs by as much as 50%. We are very excited. There are some
problems with the technology. I think the key thing, as Nick said,
is that we need the marketplace to create a pull on technology
whereas investment in R&D is trying to create a push. I think
we are now at the stage where we really need a pull and you have
people wanting to develop technology because they see a marketplace
for it. You can get the cost reductions by putting the technology
in the marketplace, by just using the scale of technology, deployment
and operating technology.
Chairman: We will return to R&D shortly.
Q164 Mr Newmark: The next question
has to do with the cost of installing the new infrastructure.
It is pretty expensive to install structures for the transfer
of CO2. What are the costs on entry for these CCS projects?
Mr Hill: As Nick said, the rule
of thumb is that 70-75% of the cost is on capture. The storage
part turns out to be quite low, perhaps $2 to $5 per tonne. Transportation
is mainly a function of distance, quite frankly. Pipelines cost
around $1 million a mile or whatever it happens to be in a given
region. Really infrastructure will be key to joining up these
things.
Q165 Mr Newmark: Just so that I understand
the maths, and I just want to make sure I am not missing something:
on the 50% cost reduction, does 25% remain or is that the overall
cost?
Mr Hill: No, the 50% I am talking
about is the cost of capture, which is the biggest part of the
whole cost.
Q166 Mr Newmark: That is what can
drive it—50%?
Mr Hill: Yes. We are working on
both pre-combustion and post combustion technologies and that
can drive that down by a half; it is the biggest cost lever.
Q167 Adam Afriyie: You all have amazing
technologies. I have seen some of them. I am sure you must be
looking to the developing markets—China, India—as
was mentioned by Gardiner earlier, to develop your markets and
sell your products. Is it realistic to expect China and India,
in your view, to be able to afford these technologies? Are they
interested? Are they asking questions? Is there a market there?
Mr Otter: That is a very good
question because if you are really going to attack global climate
changes, you have to be engaged with these countries and they
are going to use fossil fuels. Somehow or other, you have got
to engage them in taking these sorts of technologies. I go to
China. We have operations with China. Clearly there is a huge
development of power going on at the present time. The economics
are driving the process. They are looking at very efficient plant.
I think one of the things that we in the West or in developed
countries are going to have to do is to set up some mechanism
by which we can encourage them to take on capture, be it in a
phased sort of way or a capture-ready approach. For example, if
they are putting in 1GW a week for new power stations, what can
you do to make that capture-ready so that that can subsequently
be made capture capable and you are not locking in the carbon?
At the moment, their drive is very much on economics. Interestingly,
through the Carbon Sequestration Leadership Forum, and China is
a member of that, they are starting to engage in the process.
They are not blind to these issues. Interestingly, at the last
meeting we had in Berlin in September, it was very clear that
CCS (capture and storage) issues are now being embraced in their
eleventh fifth-year plan. It was not on the top of their plan
but it as a priority in their plan. The worry would have been
if it was not even in the plan because then they were not even
going to address it. Part of it is capacity-building there. There
want to understand the issues. That is certainly how they see
the CSLF and certainly how they see the UK-China science and energy
agreement that has just been signed. I have been privy to some
of the development of that. We would certainly look to see how
we can start to engage them so that they can understand, but their
current drivers are economic and air pollution or clear air.
Q168 Adam Afriyie: Perhaps in your
answer you could mention a particular technology for which you
think there probably is a market, and maybe it is from your own
company, particularly in the area of technology and where you
think the Chinese or the Indians would be able to write cheques
or consider writing cheques to buy that technology?
Mr Hill: I think today the answer
is that China is not prepared to invest money on reducing CO2
emissions. We have a number of relationships with China. We are
keen to try to develop that with China but it is just not there
today. I think the Defra initiative of clearly trying to work
with China is very important to get them interested in what is
possible. Technologies that are useful to China are, quite frankly,
technologies that will promote clean coal. China is concerned
about energy diversity and utilising the huge resource of coal
it has to provide energy and electricity in China and also fuels.
My sense is that there will be an appetite for some post-combustion
technology. Primarily it will be the pre-combustion technologies
that will enable chemicals from coal to really underpin the Chinese
economy so they can convert coal to fuels; they will want to convert
coal to hydrogen; and they will want to convert coal to electricity
without any impact on the environment. Pre-combustion technologies
and what they call poly-generation technologies are of particular
interest to China. We have a programme with Princeton University
working on poly-generation technology for the Chinese market and
China are building some demonstration plants.
Mr Allam: The Chinese actually
have quite a reasonable number of gasification systems which work
on coal and petroleum residues, such as bitumen. They have a lot
of experience in operating pre-combustion systems, mostly or almost
entirely for chemical manufacture. For technology in the future,
the one thing that will improve the economics of the pre-combustion
system is much cheaper oxygen supply systems. These are based
on high temperature surroundings rather than biogenic distillation.
It is one of the technologies that is coming along very fast now
and we are hoping that that will be implemented in the US FutureGen
project, which is scheduled to be in operation by 2012. That will
be a full size oxygen separation module supplying oxygen for that
project. That is our hope.
Mr Otter: If I can go back to
the technologies, I agree entirely with Clean Coal, that they
will continue to use coal. The %age might go down, but actually
the absolute size of the cake is going up, so there will be substantial
uses of coal, so clean coal is an issue. Clearly, therefore, there
is a need for efficiency improvement; also I go back to the capture-ready
approach which is firmly on our route maps, but I agree with Rodney
when he talks about the gas to liquids issue. That may be the
soft route for the start of these technologies and then they could
well move into more of the power generation side. I think, therefore,
again it is different solutions for different applications. Gasification,
that is pre-combustion capture, whereas on the coal plant, if
it is existing coal plant and they continue to go down that route
as they undoubtedly will, then it is a retrofit issue. It is then
back-end clean-up or maybe refurbishment through oxy-fuelling,
but that is going to be unattractive to them, I think, because
they have already put these high-efficiency plant in, so actually
they need a back-end clean-up which is very cost-effective.
Mr Allam: Perhaps I could add
briefly just by saying that the best thing we could do to ensure
that we had a future market in China was for us to have a large-scale
demo on a pulverised fuel power station in the UK. That would
really give us the world-leading position in terms of supply of
this technology into such a market as well as giving us the ability
to do it here in the UK.
Mr Scoins: I think we could expect
to sell the knowledge. I think ultimately we will find that China
and India will build their own equipment very quickly.
Q169 Adam Afriyie: There is clearly
a market here and the question is: what is going to enable that
market? For example, is there going to be pressure from international
agreements or are there going to be standard commercial pressures
to produce energy? In terms of that, what potential barriers do
you see to this market opening up for British companies? Is it
IP, is it trade agreements, and again what about world competition
because surely there must be other countries that can also pick
up this demand, so what would you consider to be the single biggest
barrier to this market opening up for British companies?
Mr Allam: No perceived value for
the CO2 that is separated at the moment. Once there is a perceived
value either internationally traded in some way or due to global
regulations which govern CO2 emissions, that is when the incentive
will be there.
Mr Hill: I think it is some grand
alliance between Europe or Britain and China where there is perceived
value in making the investment in China to reduce the emissions
and for other countries to make the investment or deploy technology.
Q170 Margaret Moran: Gardiner, you
seem to be suggesting in the reply to a previous question that
the Chancellor's largesse in a demonstration project would have
little or no impact or is not necessary because the issue is around
coal. Can you clarify whether that is what you were saying and
what you think the impact of the £25 million would be?
Mr Hill: I think there will be
a huge impact from more technology investment and I think there
is a great opportunity to reduce cost and there is a real need
to demonstrate the technology at scale because today you could
say the thing that is missing is the confidence in the technology
at scale. However, I think an equally important player in this
game of making CCS real is a marketplace that it will play into,
so I will paint two futures for you: one is a future where we
invest in R&D where there is no market for the technology;
another is where we continue to invest in R&D and there is
a market. I would suggest that the second picture would actually
produce more rapid development of technology and more rapid reductions
in cost than just investment in R&D. That was my point.
Q171 Margaret Moran: Is that view
shared?
Mr Scoins: Yes, we need a market
in carbon. That is what will drive the technology and its deployment.
Mr Allam: I would add that if
a demo on a large scale is funded, it has to be funded by commercial
interests primarily, and the Government or the EU may contribute
funds, but there have to be guarantees to allow such a large investment
to be made. It cannot be made with no guarantee, for example,
on the benefit of CO2; there has to be a cost put somewhere which
enables the investment to be recovered if it is funded commercially.
Chairman: We will return to the issue
of incentives in just a second.
Q172 Margaret Moran: In terms of
the UK investment, do you think that we are maximising the opportunities
for investment in linking up with the EU or in the international
context? Is there more we could do to attract more R&D into
this area?
Mr Otter: That is a very interesting
question because I am particularly involved in trying to set the
new Framework 7 programmes in Europe at the present time and energy
clearly is a highly important element of that. In order to try
and set the future agenda for Europe, and of course the UK is
part of Europe, then last week a new initiative was launched only
last Friday at ministerial and commissioner level, and I can supply
this to the Committee, trying to set the agenda for a zero-emission
fossil-fuel power plant. Now, interestingly, I am particularly
heavily involved, so is Gardiner Hill, with setting that agenda,
so it is driven quite a lot by the UK, so actually if we are going
to have a series of demonstrations, which is what this strategy
will define because it is setting a strategy for the next 30-plus
years within Europe and that is addressing the longevity issue
of the investment necessary because these plants will be 25 years
plus, you need not only the technological development, but you
actually need the deployment mechanisms and this initiative is
addressing both of those. The Commission are now firmly in line
with that which is quite a change, to be truthful, over the last
sort of year, so this is now a very high-profile initiative where
we here in the UK can take a very positive, proactive position,
as we are trying to do, certainly industry is trying to do that,
and I think backed up to a certain degree by the UK Government
in that process. Clearly if there is going to be a serious demonstration
plant, we would like to see something here in the UK and it would
be complementary then to what else is done in Europe and worldwide,
and that takes you back to the CSLF because these demonstrations
are expensive, they will be expensive, so there are likely to
be not too many of them and you will want to make them complementary
in the style or the process with different storage regimes, different
capture technologies and different places. Therefore, what the
UK will need in order to play a very significant role is a robust
programme here on a national basis. Now, the Carbon Abatement
Technology Strategy that was written by the DTI with the help
of industry is an excellent strategy, let's say that, but what
it needs is a programme which is commensurate with that strategy
and the Advisory Committee that I chair, we recommended a certain
value and we got a quarter of that. Now, I do not think—
Q173 Chairman: Could you give us
those figures?
Mr Otter: Well, we were recommending
of the order of £100 million.
Q174 Chairman: And you got £25
million?
Mr Otter: Yes, we got £25
million. Now, I do not knock that because it is a process and
I can understand the spending reviews and things like that, but
I see that as something to expand and bring together all the different
activities here in the UK, and they are very disparate. They continue
to be disparate even though we are attempting to try and co-ordinate
them much more effectively, but we are not doing that sufficiently.
That means addressing the research activities and we are trying
to expand the Research Council Energy Programmes led by EPSRC
in this area. The EPSRC energy programmes are set to double in
the next two years. CCS and zero emissions for fossil fuels should
be part of that and those ideas are being developed, but it is
through them to component validation and demonstration and of
course then you are into the mechanism and the encouragement of
the companies to make the investment, so they must see a deployment
route and that brings you back to the sort of fiscal/ regulatory
infrastructure that is necessary to actually deploy the technologies.
It is a big equation, but I do think that CCS has got a major
part to play in that.
Mr Hill: I think yes, we are consistent.
I think what the UK needs to do is make sure we are investing
enough so that we get the competitive advantage for UK companies
and UK plc in this technology as it is picked up around the world.
If we do not have enough investment in developing the technology,
the capability and the know-how in the UK will no longer have
that advantage but by investing in UK companies and in technology
and by supporting deployment and demonstrations of that, we will
have that competitive advantage position.
Q175 Margaret Moran: You have answered
my next question, I think, which was around competitive advantage,
but what is the competitive advantage and do we have the skills
or do we need to invest in different skills in order to take advantage
of that competitive position?
Mr Hill: A lot of it is in technology
and a lot of it will be in the skills and the know-how you acquire
through development of the technology and the demonstration at
the industrial scale. By having these plants operating in the
UK, our people, our engineers and our capability will be established
and be known and be required by these other countries, so there
is a technical aspect, but I think there is also a skills, a jobs
and a capability aspect to it too.
Mr Otter: I have concerns about
the skills capability in the UK. Colin mentioned that we are going
to have to replace half our capacity and we are looking at transmission
distribution, we are looking at some really big projects in the
time-frame we are talking about and I have really serious concerns
that there is not the capability within the UK to handle all these
things. If you throw in the Olympics and throw in all these different
things, it is a real concern because all these things are coming
over the next decade to 15 years and it is a real concern. Now,
by partly investing in the research councils, you will start to
expand the energy research activities and that will grow some
people, but we are short of time.
Mr Allam: We have to look at this
as a global problem and there is no reason why we should not be
very active in trying to collaborate with research that is going
on in the US. We can do that in a minor way and get a lot of the
knowledge that is going to be put down in the next few years on
new techniques and new areas where cost reductions could be made,
so I think we should actively try and engage with US research
projects, and I know that BP is well on the way to doing that.
Mr Otter: I would like to say
something on that because I agree with that, but in the end if
you are going to have a major demonstration, there is a pull-through
factor in whatever country it is in. If it is in the UK, there
will be a pull-through. All you have to do is go to some of the
power stations in the UK, there are actually some supplies through
German companies and most of the equipment there is German, so
there is a real pull-through factor here and the citing of it
is a key issue. If we have a serious demonstration in Europe,
we would want something in the UK because then that will bring
the pull-through through. Yes, be involved in US programmes, but
you can bet your bottom dollar that the benefit will go to the
US companies.
Q176 Margaret Moran: What are you
doing in terms of commercial investment? What is your profile
in the UK? Where are you going to be placing your R&D in the
future, as you are sitting here today?
Mr Otter: I can only speak for
my own company, but I used to run the technology centre that we
have just south of Leicester which, when I ran it five, six or
seven years ago, was 150 and it is now approaching 500 people.
The shape of the industry has changed here in the UK, our industry,
or my industry anyway. We are now focusing on high-technology
innovation and added value, service, and there is a big service
operation now also in the Midlands, and specialist manufacture,
and, shall I say, the bog-standard manufacture, without wishing
to be rude, is done elsewhere in low-cost sites, so you can see
the change and that is exemplified by what has happened to my
company.
Chairman: We would like a written note
in terms of how much R&D investment you are making in the
UK so we can actually include that within the evidence.
Margaret Moran: And the profile.
Chairman: Yes, and the profile.
Q177 Mr Newmark: Much of the evidence
highlights the need for a long-term investment framework. How
long would be long enough?
Mr Scoins: It would be good to
see 15 years beyond 2012, something of that order.
Q178 Mr Newmark: Fifteen years beyond
2012?
Mr Scoins: Yes, roughly.
Q179 Chairman: Is that the general
consensus?
Mr Otter: Yes, I think so. In
the end you have to have visibility past that and I think Colin
has already said that having visibility as a value of carbon past
2012 is a big issue.
Mr Scoins: The longer, the better.
You are talking about assets which have a 40-year life.
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