APPENDIX 25
Memorandum from the Sussex Energy Group,
SPRU, University of Sussex
1. ABOUT THE
SUSSEX ENERGY
GROUP
There is growing awareness that a transition
to a sustainable energy economy is one of the main challenges
facing us in the 21st Century. Although climate change is a significant
factor, there are many other reasons why we need to address the
energy transition, including security of supply, fuel poverty
and the attractions of innovations such as renewable energy resources,
distributed generation and combined heat and power. Critically,
the energy transition needs to be designed in such a way that
maximises economic efficiency. An effective response requires
technical ingenuity, behavioural change and virtually unprecedented
political commitment. The complexities and uncertainties involved
are similarly great.
These are the challenges that the Sussex Energy
Group is addressing. We undertake academically excellent and inter-disciplinary
research that is also centrally relevant to the needs of policy-makers
and practitioners. We pursue these questions in close interaction
with a diverse group of those who will need to make the changes
happen. We are supported through a five-year award from the Economic
and Social Research Council from April 2005, but also have funding
from a diverse array of other sources.
One of our early projects is looking at the
role of fossil fuels in the energy transition. It is investigating
the rationale for UK government support for cleaner fossil fuel
technologies, including those for carbon capture and storage (CCS).
It is also examining what role the UK can play in the context
of international R,D&D initiatives and an increasingly global
power plant equipment industry.
2. SUMMARY OF
EVIDENCE
The Committee's inquiry into the viability of
CCS technologies and the UK government's role in supporting these
technologies is timely. During the past few years, CCS technologies
have emerged as a key part of several national strategies for
dealing with climate change and other energy policy goals. A number
of international initiatives such as the Carbon Sequestration
Leadership Forum (CSLF) have also been established, and CCS technologies
have been discussed in the context of the UK's G8 Presidency.
The UK government has joined this international
trend with the recent development of a strategy for Carbon Abatement
Technologies (DTI, 2005). As the Committee's terms of reference
for this inquiry suggest, the implementation of this strategy
requires the government to think carefully about its role. This
response draws extensively on a recently published paper by one
of the authors (Watson, 2005) and a report to inform the new DTI
strategy which was written by the authors and a number of colleagues
(NERA, 2004). It highlights the following main points:
— There is a strong rationale for UK
government support for CCS technologies because the market value
of carbon emissions is well below their full social cost, and
the full economic benefits of innovation cannot be captured by
private innovators.
— Although CCS technologies are often
considered as a way to reconcile the use of coal with the government's
low carbon objectives, it is likely that many attractive opportunities
for CCS will focus instead on natural gas.
— The task of estimating timescales
and costs of implementing CCS is inherently difficult since full
scale implementation has yet to happen. The government should
take into account the "appraisal optimism" that can
affect estimates for such complex technologies.
— UK Government support for carbon
abatement technologies should focus on incremental technologies
for cleaner fossil fuel use as well as full blown CCS. This is
particularly the case if UK initiatives are to have an effect
in China and India.
— A UK programme of support for CCS
is essential to build industrial capacity. This is the case even
if those technologies that are ultimately deployed in the UK are
imported.
— When implementing the UK programme,
it will be important to distinguish between R&D, demonstration
and deployment of CCS technologies. Different but related policy
instruments are required to support these distinct activities.
3. VIABILITY
OF CCS IN
THE UK
CCS technology has two distinct major components:
capture at energy conversion plants and storage in suitable underground
repositories. The connecting stage of pipeline or other transportation
is not technically challenging and is relatively inexpensive.
For storage technology the fossil fuel from which carbon is captured
is immaterial. However, to the extent that some R&D will likely
be into variants of capture technology, there are significant
issues about the precise fossil fuel that is subject to R&D—in
particular whether it is coal or natural gas. Furthermore, the
choice of capture technology depends on the power generation/energy
technology that is being considered. For example, one route for
carbon capture from coal is to do so pre-combustion as part of
an Integrated Gasification Combined Cycle (IGCC) plant. An alternative
is post-combustion capture from the exhaust gases generated from
a conventional or supercritical power plant.
The interest in CCS in the UK has two origins:
a Government desire to continue to give at least modest public
funding to R&D into advanced coal-based technologies; and
a more recent and pressing need to explore alternative ways of
moving towards the 60% carbon emissions target for 2050. While
the rise to prominence of the second of these objectives probably
accounts for the more generous funding now in prospect for the
new carbon abatement technology (CAT) programme than for its predecessor
(the Cleaner Coal Technology Programme), it may also give rise
to a potential tension between coal-based and gas-based capture.
The Cleaner Coal Technology Programme focused on reducing emissions
from the use of coal, but did not include very much support for
CCS technologies.
Much of the publicity surrounding CCS in the
UK has tended to assume that successful commercialisation of CCS
will automatically relate to coal-based energy sources. This in
turn might help boost the UK coal industry, which may be politically
attractive and might arguably improve energy security. But CCS
can equally well be applied to gas-based energy conversion and
will probably be a cheaper option than coal-based CCS. If the
climate change objective predominates this would be an argument
for concentrating resources on gas-based CCS, especially as achievement
of the 60% target will almost certainly depend on substantially
reducing carbon emissions from gas use as well as coal use. A
significant issue for the UK programme is therefore the balance
between the "help coal" objective and the "cut
carbon" objective.
Resolution of this balance also depends on the
extent to which the government's CAT programme has international
objectives. Countries like India and China will continue to be
heavy users of coal for the foreseeable future and development
of coal-based CCS could play an important long-term role in reducing
carbon emissions from those countries. This incidentally—as
discussed below—is also a major reason for believing that
the CAT programme should support incremental "cleaner coal"
technologies as well as CCS, because such technologies could in
the shorter term help reduce carbon emissions in India and China,
though not nearly so radically as would CCS.
It is inherently difficult to predict timescales
and costs for CCS technologies. There are a number of detailed
assessments that attempt to do this, but all are hampered by a
lack of commercial experience in implementing CCS at a full scale
fossil power plant. Where CCS aims at carbon storage without enhanced
oil recovery (EOR), it is inevitable that costs will be higher
than using the same CCS technology with EOR. In cases without
EOR, Government financial incentives will always be needed to
induce CCS investment. Where carbon is used in EOR schemes, high
enough prices for oil could make CCS technology economic without
government incentives.
A number of cost studies exist for the UK and
a number of other countries (eg Herzog and Golomb, 2004; DTI,
2003). Some suggest that if current oil prices persist, EOR CCS
could be financially attractive now. But while in the USA and
Norway there are already large projects or activities using some
parts of CCS technology, there is currently no commercial experience
anywhere of "full-blown" CCS. The likelihood is that
current cost estimates will tend to be under-estimates of actual
costs. CCS is large-scale, untried technology, and its successful
implementation will depend on resolution of legal, planning and
public acceptance issues. Further, the prospective developers
of large-scale new technology like CCS will generally be the main
source of basic engineering data that enters cost estimates. Experience
in other large and complex technologies is that pre-commercial
cost estimates tend to be serious under-estimates. This has been
the case in the past for nuclear power, and it is probably the
case for advanced cleaner coal technologies such as IGCC (Watson,
2005).
This "appraisal optimism" is not random:
supporters of new technology, besides a natural enthusiasm, also
face incentives that will systematically tend to produce low cost
estimates.
This asymmetry of incentives arises because
optimistic cost estimates will tend to help approval of projects,
but if costs do over-run the bill will generally fall to be paid
by other parties (Governments or consumers). Cost estimates need
therefore, in advance of real commercial experience, to be treated
with caution.
4. THE UK GOVERNMENT'S
ROLE IN
FUNDING CCS TECHNOLOGIES
The new UK strategy for carbon abatement technologies
(CATs) appears to fit well with international trends. Support
programmes in many countries are now focused on carbon capture
and storage. In some cases such as the EU Framework Programmes,
this support appears to have replaced previous support for cleaner
coal combustion and gasification technologies. This is partly
due to a perception that coal was being replaced by cleaner gas—a
perception that might seem premature now that gas prices have
increased sharply in line with oil prices. In others, particularly
the US Department of Energy programmes, both elements are being
pursued together. There are also various other national programmes
such as COORETEC in Germany and Coal21 in Australia, as well as
international initiatives such as the Carbon Sequestration Leadership
Forum (CSLF).
The rationale for UK Government intervention
to support these technologies is that such intervention will correct
market failures. There are two market failures that can be used
as a rationale in the case of CCS. First, despite the new European
carbon emission trading scheme, the market value of carbon is
well below its full social cost[19].
This is the classic environmental externality argument: the private
market will provide too little carbon-reducing technology without
public support. The second market failure is that the full economic
benefits of innovation cannot be captured by private innovators
because they cannot prevent third parties from benefiting from
the results of successful innovative activity. R&D will therefore
be under-provided by the private market and Government support
can raise R&D activity to socially and economically more beneficial
levels.
The UK Government's role in funding CCS technology
under its strategy should take a number of issues into account.
The first of these is the technology needs of the UK and of potential
export markets. It is tempting to believe that the main challenge
for power generation from fossil fuels (particularly coal) is
the development of CCS technologies. Such developments are crucial
if coal is to make a significant contribution to a low carbon
energy future, especially in OECD countries. However, this does
not mean that core combustion and gasification technologies should
be neglected. These technologies are essential building blocks
for fossil fuel power generation systems with CCS. A lot of work
is still required to make IGCC technology economic and reliable
enough for commercial investment—let alone IGCC with pre-combustion
carbon capture. Despite the consensus that has emerged about IGCC's
superiority over other options, this perception is often based
on theoretical advantages rather than practical experience (Watson,
2005).
A second, related, issue is that the increasing
emphasis on CCS should not crowd out more incremental technology
supported by public R&D (NERA, 2004). One of the most important
rationales for continuing to pursue R&D on cleaner fossil
energy technologies is the rapid expansion of coal-fired power
plant capacity that is driving up greenhouse gas emissions in
China and India. Whilst the ultimate goal is for these countries
to implement advanced technologies including carbon capture, this
will not happen in the short to medium term. In the meantime,
incremental improvements can deliver significant economic and
environmental benefits. Large numbers of existing power plants
and industrial facilities in China have very poor efficiency by
international standards, and can be upgraded (Watson, 2002).
Furthermore, new plants that are built can be
"future-proofed" to some extent by making them "capture
ready" (Gibbins et al, 2005).
The transfer of the necessary technologies from
OECD countries such as the UK to China and India will be a complex
process. This is confirmed by the past experience of transferring
cleaner coal technologies from international companies to their
Chinese counterparts (Watson, 2002). There are serious barriers
to this process, such as the high cost of imported equipment,
a lack of technical and managerial capacity within China, and
insufficient economic and environmental incentives for Chinese
firms to install them. For these reasons, the efforts of successive
US Administrations to transfer advanced IGCC technology to China
have failed. By contrast, less ambitious initiatives to aid incremental
improvements in Chinese technology have been more successful.
A third issue that arises is the extent to which
the UK government needs to support domestic development of CCS
and other carbon abatement technologies. Due to the climate change
rationale for developing them, CCS technologies are even more
international than the cleaner coal technologies that were supported
under the previous UK programme. The new UK strategy emphasises
the gains that could follow from international R&D collaboration
through initiatives such as the US-led Carbon Sequestration Leadership
Forum (CSLF) (DTI, 2005). This emphasis is partly due to a political
desire to work with the US government as an alternative to its
participation in the Kyoto Protocol. However, such collaborations
could also lever additional benefits from limited UK R&D budgets.
Alongside such initiatives, it is crucial to maintain a domestic
CCS R&D programme whether or not the technologies that are
deployed in the UK are indigenous or international. Research supports
the view that a UK skills base in complex technology areas such
as this is vital if the UK is to retain the capability to absorb
and utilise CCS technologies effectively (Martin et al, 1996).
A fourth issue for the UK CAT strategy is whether
the UK should fund domestic demonstration projects and the transition
from these to commercial deployment. The UK equipment industry
has called for technology demonstrations to receive government
support for many years (NERA, 2004; APGTF, 2004). Whilst the DTI
has traditionally been wary of trying to compete with US and EU
demonstration activities, some limited support is now available.
The £40 million allocated over the first four years of the
CAT programme includes hydrogen and fuel cell demonstrations as
well as those focused on coal. Support for deployment of CATs
within the programme is less clear, and is put to one side pending
the outcome of the UK's climate change programme review. There
may now be a case for a UK-based demonstration of CCS technology
with government support. There are opportunities for the UK to
contribute to international programmes such as projects under
the CSLF or the Futuregen IGCC-based zero emission power plant
in the US (US Dept of Energy, 2004). In others, there could be
scope for a particular UK-based competence to develop. Whilst
UK expertise lags behind the international state-of-the-art in
many important areas (NERA, 2004), the DTI claims that some windows
of opportunity exist (DTI, 2003; 2005). One of the most important
is the use of carbon capture and storage to deliver enhanced oil
recovery in the North Sea in the next few years. The rationale
for supporting this is contentious—some oil companies have
claimed that the main barriers to implementation are not technical
but economic (NERA, 2004). This is borne out by the recent announcement
by a consortium led by BP that they plan to build a gas fired
power plant with CCS in northern Scotland. Whilst they expect
to partly finance the project by re-injecting CO2 for
enhanced oil recovery, the project will also require what the
consortium call "an appropriate policy and regulatory framework"
that might include public financial support.
Even if the barriers to technologies such as
this are largely economic, much of the rationale for government
support that is set out earlier in this submission still holds.
One of the most difficult challenges for public support programmes
is how to facilitate the transition from technical demonstration
to commercial deployment. Many programmes simply neglect this
altogether, whilst others try to conflate these two distinct activities
(Scott and Watson, 2001). Although some cleaner fossil technologies
have already made this transition, it remains to be seen whether
the UK CAT strategy and similar international programmes will
help other more advanced technologies—including those for
CCS—to do so. To maximise the chance of success, the DTI
should ensure that funding for demonstration of CCS technologies
is implemented alongside market support mechanisms to move the
most promising technologies into commercial deployment.
October 2005
REFERENCES DTI
(Department of Trade and Industry) (2003) Review of the feasibility
of carbon dioxide capture and storage in the UK DTI publication
no 03/1261, DTI, September.
DTI (Department of Trade and Industry) (2005)
A Strategy for Developing Carbon Abatement Technologies for
Fossil Fuel Use DTI, June.
Clarkson, R and Deyes, K (2002) Estimating
the Social Costs of Carbon Emissions Government Economic Service
Working Paper No 140. HM Treasury and Defra.
Gibbins, J et al (2005) "Scope
for future CO2 emission reductions from electricity
generation through the deployment of carbon capture and storage
technologies" International symposium: Avoiding Dangerous
Climate Change Exeter, UK, 1-3 February.
Herzog, H and Golomb, D (2004) Carbon capture
and storage from fossil fuel use Encyclopaedia of Energy.
Martin, B et al (1996) The Relationship
between Publicly funded Basic Research and Economic Performance,
SPRU, University of Sussex, Report prepared for HM Treasury, April.
NERA (2004) Evaluation of the Cleaner Coal
Technologies Programme Report to DTI, May.
Scott, A and Watson, J (2001) "An audit
of UK energy R&D: options to tackle climate change".
Tyndall Briefing Note No 3. Norwich: Tyndall Centre.
US Department of Energy (2004) FutureGen:
Integrated electric Power production and carbon sequestration
research initiative US DoE Office of Fossil Energy, March.
Watson, J (2002) "Cleaner Coal Technology
Transfer to China: a `Win-Win' Opportunity for Sustainable Development?"
International Journal of Technology Transfer and Commercialisation
1(4): 347-372.
Watson, J (2005) "Cleaner Coal Technologies
for Power Generation: Can They Deliver?" Proceedings
of the BIEE Academic Conference European Energy: Synergies
and Conflicts, Oxford, 22-23 September.
19 Whilst the social cost of carbon is extremely difficult
to quantify, the government's own studies have identified a range
of £35-£140 per tonne of carbon (Clarkson and Deyes,
2002). The current price of carbon allowances in the EU emissions
trading scheme is approximately 25-30 Euros per tonne. Back
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