APPENDIX 37
Supplementary evidence submitted by BP
INTRODUCTION
1. At the oral evidence session on 7 December,
BP was asked to provide further information regarding our R&D
spend in the UK and for our view on the creation of a specific,
statutory authority to oversee Carbon Capture and Storage (CCS).
Several questions were also raised during the session concerning
the mechanism and level of incentives required to stimulate investment
into Carbon Capture and Storage in general, and in BP's DF1 Project
in particular. The purpose of this supplementary memorandum is
to address these points.
RESEARCH AND
DEVELOPMENT EXPENDITURE
2. In terms of technology R&D alone,
BP spent £88.4 million during 2004 in the UK. This covered
the whole spectrum of our business, divided as follows:
— Exploration and Production 23%
— Refining and Marketing 43%
— BP Group and Gas Power & Renewables
6%
STATUTORY AUTHORITY
3. There is a good case to be made for having
a single focus within government with the authority to act as
an umbrella organisation for encouraging CCS in the UK. Such a
body could:
— promote and exercise the overall
accountability for enabling CCS in the UK and UK Continental shelf
— take the lead in coordinating input
and support of other UK government departments and agencies needed
in the process of facilitating CCS
— take the lead in coordinating HMG
effort on CCS matters with Norway and other European countries
that may connect with the UK CCS industry
— provide the regulatory framework
for CO2 storage
4. However, rather than establishing a brand
new government authority to undertake this role, we believe this
could fall under the remit of whichever part of Government has
responsibility for energy.
THE NEED
FOR INCENTIVES
5. BP believes that a market-driven (preferably
global) carbon price—created by a Cap and Trade system—is
the most efficient way of internalising the climate externality,
at least for large emitters. But while the European Union Emissions
Trading System (EU ETS) should remain the core of future climate
policy—and should therefore be extended to include CCS—it
is insufficient to incentivise the deployment of new technology.
6. This is because the EU ETS focuses upon
encouraging the efficient use of existing large emitters, and
the marginal addition of new commercially competitive technology,
such as fuel switching from coal to gas. It is not designed to
deal with the much higher costs associated with developing new
technology. It would clearly be unwise to raise the cost of all
generation to the marginal price of current renewable or CCS generation.
Additional policy is, therefore, needed to focus upon accelerating
the introduction and cost reduction of new technology, including
renewables and CCS.
7. Three key questions need to be addressed
in the creation of new policy:
— What is the appropriate level of
technology incentive for a particular technology, given the range
of maturity of different technologies?
— How does one establish some degree
of inter-technology comparison? It is neither sufficient to leave
it to the EU ETS market mechanism, nor would it be right for government
to pick winners. There is a need for a new hybrid system where
perhaps a single over-arching policy encourages technologies to
compete, despite their differing state of maturity.
— It would be unwise to assume that
policy makers yet fully understand all the relevant issues necessary
to design a better more integrated common policy. Understanding
will improve year on year, but the aim of all should be to ensure
a policy framework is in place which evolves, converging towards
a single economy wide system as the state of knowledge improves.
8. We are in disagreement with those who
suggest that a price of £20 to £40 per tonne CO2
may be sufficient in the near future. This number is used by many,
but it only covers the cost of capture and does not include
transport and storage. Significant cost reductions can be expected
as the level of knowledge improves; but in BP's view there is
little doubt that, for the moment, the technology incentive required
for a project like DF1 is closer to double the figure of £20-£40
mentioned in the oral session. As stated previously, DF1 requires
an ongoing incentive similar to that received by wind via the
Renewables Obligation—approximately $60 per MWhr, which
in terms of sterling is about £30-40 per MWhr.
9. It should also be noted that capital
grants would not provide an appropriate incentive. Without a coherent
policy in place to reward low carbon electricity, no amount of
short-term "subsidy" of a specific project would guarantee
the creation of a fully operational business and industry sector,
including plant availability and adequate revenue management.
10. A number of mechanisms already exist
to promote the low-carbon energy sector, and these can be learnt
from and developed, balancing the need to introduce policy that
meets the three objectives above with the need to make progress.
At present, none of these meets fully the needs of the moment,
but the following existing policies each have their own strengths
and weaknesses. Whichever policy is ultimately designed and implemented,
care should be taken to ensure that it is the delivery of decarbonised
electricity—rather than the amount per tonne of CO2
removed—which is the yardstick of success. This will enable
the decarbonised electrons to be compared directly with other
forms of clean power.
11. Options to develop are as follows:
— One way of creating the necessary
life-of-project assurance would be to create a mirror of the RO—the
Decarbonised Electricity Obligation, which would enable decarbonised
electricity producers via traded DOCs (Decarbonised electricity
Obligation Certificates).
— A further possibility would be a
feed-in tariff similar to those used by Germany to develop its
wind and PV industries. Such a mechanism would encourage early
movers.
— A fourth possibility could be the
introduction of US style tax credits for investors.
CONCLUSION
12. BP has never argued that there is a
single solution to the climate change problem. Given, however,
the obvious desire of Government to meet its CO2 targets
in a way that neither damages economic growth nor security of
energy supplies, it is very difficult to see how these environmental
and energy objectives can be achieved simultaneously without a
large role for Carbon Capture and Storage. The Miller Project
offers a unique and early opportunity to put this technology to
the test, which is why policy choices are urgently necessary.
December 2005
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