Memorandum submitted by Carbon Capture and Storage Association (EN07)

1. In addition to the oral evidence to be given by Dr Jeff Chapman & Dr Christopher Mansfield on 19 February, the Carbon Capture and Storage Association (CCSA) is pleased to make the following supplementary written submission.

2. The Carbon Capture & Storage Association (CCSA) exists to represent the interests of its members in the business of capture and geological storage of carbon dioxide (known as Carbon Capture and Storage, or CCS) as a means of abating atmospheric emissions of carbon dioxide and potentially, as a means of enhancing the production of fossil hydrocarbons. From its base in London the CCSA brings together 54 organisations including specialist companies in manufacturing & processing, power generation, engineering & contracting, oil, gas & minerals as well as a wide range of support services to the energy sector such as law, banking, consultancy and project management.

3. The Association welcomes the offshore carbon dioxide (CO2) storage licensing provisions of the Energy Bill, as an essential precursor to CCS investment in the UK. The Bill will position the UK to make significant progress towards its greenhouse gas emissions reduction targets whilst safeguarding the diversity and security of energy supplies. Taking an early lead in the regulation of CCS will also put the UK is in a position positively to influence the development of CCS regulation in Europe and elsewhere. Nevertheless, the Association believes that the UK's proposed arrangements for regulating offshore CO2 storage risk falling short of industry's requirements in a number of key areas. Specifically, the competence of the regulator; the requirement for investment security and the key role that planning processes will have in ensuring effective and value-for-money infrastructure.

4. The Regulator - The Energy Bill provides for a dual 'lease' and 'permit' system, with the former issued by the Crown Estate and the latter by an as yet unidentified 'regulatory authority'. The CCSA is concerned that a commercial lease payable to the Crown Estate will add to the already significant costs of CCS projects, whilst splitting responsibility for, and authority over, such an important area between separate organisations risks confusion and misunderstanding. Recognising that offshore CO2 storage will have many technical and operational parallels with current hydrocarbon exploration and production activities, for which substantial regulatory expertise already exists within the Department for Business, Enterprise & Regulatory Reform (BERR), the Association would strongly favour a comparable 'one stop shop' licensing arrangement for CCS projects over which BERR has singular responsibility.

5. Financial Provision - The Association understands that in the course of offshore CO2 storage operations both operational and long-term liabilities will arise for which the provision of financial security may be necessary if the financial standing of certain licensees suggests their ability to meet their obligations may be at risk. However, we do not agree that there should be an automatic presumption of financial provisions during CO2 storage operations. Such a requirement can place an onerous obligation on the balance sheet of companies, and can tie up significant capital, with the result that this puts the economic viability of projects beyond the reach of many medium and smaller market players. Rather, a risk-based monitoring regime within a clearly defined framework of site handover criteria and Operator responsibilities should mitigate much of the risk that might otherwise require cover from financial security. In the limited circumstances in which financial security is required we offer the following remarks:

6. The impact of the requirement for financial security depends on both the type and the amount that the Competent Authority is prepared to accept. Letters of Credit or on-demand performance bonds typically impose significant additional project costs, and we therefore strongly encourage:

The acceptance of Parent Company Guarantees (subject to the parent company being of an acceptable financial standing).

Exclusion of any requirement to provide financial security to cover the (highly unlikely) risk of leakage following handover of the storage facility to the State, and the subsequent cost of emissions under the ETS. This requirement could otherwise make the provision of financial security unaffordable.

The amount of any security required to be tailored to the changing risk profile during the project life-cycle (e.g. increasing in line with the volume of CO2 stored).

That financial security need not be in place prior to the submission of the permit application, as this risks incurring significant financial security costs for Operators during a potentially lengthy permit application procedure and at a time when there are no risks to be covered. A more workable alternative would be to require this security before construction or storage operations commence.

7. Infrastructure Access - Whilst we support the principle of transparent and non-discriminatory access to CO2 infrastructure we also recognise that offshore storage Operators face a significant investment risk for which they need the contractual freedom to safeguard an adequate return. The Operators of onshore CO2 sources also need the long-term certainty of access to sufficient storage capacity, or risk compromising the associated electricity generation or other associated industrial activity. Therefore, the requirement to accept CO2 streams from different sources on a non-discriminatory basis should not prejudice the ability to strike long-term contractual agreements over access to transport and storage capacity. Under this type of regime, third-party access may still be facilitated through the provision of Use It Or Lose It (UIOLI) arrangements, that sees contractually committed capacity released to the market, under transparent and pre-agreed rules, where that capacity is not being used.

8. Carbon Price & Incentives - The Association is pleased to note, in proposals recently published in the EU Commission's Climate & Energy package, the inclusion of CCS in Phase III of the EU's Emissions Trading Scheme. This will be an important first step to providing the essential foundation of long-term funding for CCS projects. However, in common with other new technologies, substantial costs and risks are associated with the early deployment of commercial scale CCS. Long-term, stable incentive structures are needed to stimulate early investment and begin the process of development and cost reduction that result from learning-by-doing. However, besides the recently announced UK Competition to build the first CCS demonstration project, Government policies do not presently provide for the introduction of a tranche of early projects. Thus current fiscal policy is at variance with energy policy and climate change objectives. Incentives must be put in place with all speed. These incentives should allow project cash flows that are sufficient to provide appropriate risk adjusted returns to the investors in each part of the CCS value-chain. This support may be revenue neutral from the Government's viewpoint if revenues from the ETS auction are utilised in support of CCS, as recommended in the draft EU ETS Directive.

9. Co-ordination & Planning - The provisions in the Energy Bill for an offshore CO2 storage licensing regime are an important first step towards realising commercial CCS projects in the UK. However, this represents only one part of a value chain that also includes onshore capture and (onshore & offshore) pipeline transportation. We expect that a number of major sources will need to feed into common infrastructure, that these sources will become available at different times over a number of years, and the plant and infrastructure required will involve significant spatial/development planning issues (pipelines carrying CO2 at above 110 bar). Government will therefore need to ensure that the Planning Bill delivers a fit-for-purpose regime that avoids national climate and energy policy being driven by local planning considerations.

February 2008