Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by 2Co Energy
Summary
2Co Energy owns the Don Valley Power Project (DVPP), one of the most advanced and highly regarded carbon capture and storage (CCS) projects in Europe.
Timely and successful commercialisation of CCS technology in the UK is a vital component of the Government’s current energy policy and will play a critical role in meeting policy objectives in energy security and CO2 emissions reductions, as well as providing significant economic benefits.
2Co Energy welcomes the provisions for a FID enabling process within the draft Bill. That this measure is implemented with success is critical: projects such as DVPP that reach FID will provide a substantial contribution to the realisation of the UK Government’s ambition for Electricity Market Reform.
2Co Energy recommend that, in conducting pre-legislative scrutiny, the Energy and Climate Change Select Committee seek to ensure that the Energy Bill provides parameters that balance affordability with the importance of securing timely and successful CCS commercialisation.
Specifically, 2Co Energy offer three clear recommendations:
That further clarity is provided on the precise process and timeline for securing bankable CfD’s via the FID enabling process prior to EMR implementation.
That the term of enabling CfDs for projects supported under the CCS Commercialisation Programme is commensurate with the economic life of the power generator/capture facility.
That further clarity is provided at an early stage on risk sharing in regard to the CCS Commercialisation Programme as part of the FID enabling process, and that that consideration is given to the cost benefits of the UK Government underpinning technology risk until operations are stable.
In the following document we seek to set out the context and case for these recommendations.
1 About 2Co Energy
1.1 2Co Energy Ltd is a UK-based company committed to delivering substantial CO2 emissions reductions through carbon capture, use and storage (CCUS) projects. The company was founded on two highly experienced teams; one with two decades of CO2 transportation and Enhanced Oil Recovery (EOR) operations experience, and the other with a background in developing two of the world’s most advanced CCS projects. This provides an unparalleled wealth of experience.
1.2 In May 2011, 2Co Energy acquired Powerfuel Power Ltd and the Hatfield CCS project at Stainforth in South Yorkshire, via its wholly owned subsidiary 2Co Power Ltd, and renamed the project the Don Valley Power Project (DVPP).
2 About the Don Valley Power Project
2.1 DVPP is one of the most advanced CCS projects in Europe. The power plant received its planning permission in February 2009 and the company is working towards a final investment decision in mid-2013. It was the only UK project to win funding (€180 million) under the European Energy Programme for Recovery (EEPR) and is being assessed by the European Investment Bank (EIB) for further EU funding under the NER300 programme.
2.2 The net power output is planned to be 650MW of incremental low carbon electricity in 2016: enough to power one million homes just as security of supply becomes a real issue. In addition, EOR linked to DVPP could double remaining recoverable oil reserves in the North Sea.
2.3 The design of the plant includes CO2 capture from a coal gasification plant and uses hydrogen rich gas for power generation from which the principal emission is water vapour. From the outset, the plant will capture 90% of its entire output of CO2—up to five million tonnes per year. This would be a significant boost to the UKs emissions reduction targets.
2.4 Captured CO2 will be sent via the proposed National Grid pipeline to the North Sea and stored securely and permanently in oil fields, in addition to being used for EOR. National Grid Carbon is working on the routing and permitting of both the onshore and offshore parts of a pipeline that would take the CO2 to the target storage location.
2.5 EOR linked to DVPP could generate £5-£6 billion of oil production taxation revenue for Government. This could reduce the cost of CCS to the UK by nearly 50%, aligning UK energy and fiscal policy. The oil fields under consideration are approaching the end of their life, and would otherwise be decommissioned at substantial cost to HMT.
2.6 Total investment in the integrated CCS project is expected to be almost £5 billion. It will create new jobs and drive major investment in parts of the UK that need it most: the power plant project would employ over 2,000 people at the peak of construction and around 200 when in operation; the offshore project would create some 800 jobs during construction and 300 during operations.
3 Delivering CCS in the UK
3.1 The UK Government has committed to ambitious objectives in CO2 emissions reduction, while recognising the energy security agenda as increasingly urgent. Yet economic recovery remains a primary focus. Investing in low carbon energy infrastructure has been identified as a key opportunity to deliver and align Government objectives. Specifically, CCS is in a unique position to help.
3.2 CCS technology is vital to achieving carbon emissions reduction targets with minimal economic impact—the IEA estimates this would cost 70% more without it.
3.3 Successful CCS demonstration would provide a pathway to clean coal and gas, allowing fossil fuels to be a part of the energy mix in a low carbon future where energy security is a concern.
3.4 CCS will enable power intensive industry to continue to operate in a carbon restrained future, sustaining jobs that would otherwise disappear. In addition, by increasing the lifetime of North Sea oil production, EOR linked to CCS would sustain well-paid, highly-skilled jobs offshore, and in UK regions dependent on the oil economy.
3.5 It is vital that the technology is deployed as soon as possible in order to ensure the environmental, energy security and economic benefits on offer. Producing one of the first commercial-scale end-to-end CCS demonstration projects in the world would position the UK at the forefront of the global CCS industry and create an international centre of expertise, with all the export opportunities that engenders.
3.6 Globally today only two CCS power projects have made their final investment decisions. Both are linked to EOR due to the increased economic viability of such projects. If the UK wants to compete on an international level with this pioneering technology, we must look at CCS linked to EOR.
3.7 2012 is seen as many in the industry as the “make or break” year for UK CCS. Any obstacles to successful deployment risk missed opportunity to achieve key objectives in economic recovery, energy security and carbon emissions reduction.
4 CCS and the Energy Bill
4.1 Successful and timely commercialisation of UK CCS is tied to the implementation of Electricity Market Reform, as provided for within the draft Energy Bill. It is essential that the Bill provides for parameters that balance affordability with the importance of securing timely and successful CCS commercialisation.
4.2 2Co Energy welcomes the provisions within the draft Bill for Investment Instruments to enable early investment, in advance of the CfD regime coming into force. The success of this measure is essential if the UK is to achieve CCS projects that are able to be operational by 2016–2020, or earlier: a requirement for eligibility for the Commercialisation Programme as set out in the CCS Roadmap, April 2012.
4.3 The precise workings of the FID enabling process will further impact the price to the consumer of power generated with CCS.
5 Recommendations
5.1 The Secretary of State for Energy and Climate Change states in the foreword to the draft Bill that the purpose of EMR is to reduce the risk and cost of capital for low carbon technologies. With this in mind, and with a specific view to ensuring the CCS-related outcomes Government is committed to achieving, 2Co Energy offers three clear recommendations for consideration within the pre-legislative scrutiny process:
5.1.1 Developers must place at risk tens of millions of pounds in funds in order to produce the definition needed to commit to a CfD. It is critical that investors have confidence that a CfD will be provided in a predictable timeframe to align a financial investment decision. 2Co Energy recommends that further clarity is provided on the precise process and timeline for securing bankable CfD’s via the FID enabling process prior to EMR implementations.
5.1.2 Currently the draft Bill proposes a CfD length of 10 years for CCS projects supported under the CCS Commercialisation Programme. Yet CCS infrastructure is capital intensive with a minimum lifespan of 15 to 20 years. The 10 year scenario would risk increased cost being passed on to the consumer. In order to result in a more affordable power price for the consumer it is vital that the CfD length offered is carefully considered. 2Co Energy recommends that the term of enabling CfDs for projects supported under the CCS Commercialisation Programme is commensurate with the economic life of the power generator/capture facility.
5.1.3 The transportation of CO2 and injection into geological formations for EOR purposes and permanent storage has supported successful commercial operations in the United States, where EOR technology has been proven for over 30 years and accounts for some 5% of oil production. However, this was catalysed by naturally occurring CO2 formations: the capture of CO2 from power stations has yet to be proven at scale. As such, traditional sources of finance are uncomfortable with the technology integration risk. To ensure the lowest cost option in regard to the CCS Commercialisation Programme, it is essential that flexibility is offered in relation to the period where the consumer/developer underpins new technology risk. 2Co Energy recommends further clarity is provided at an early stage on risk sharing as part of the FID enabling process. We further recommend that the lowest cost option with regards to the CCS Commercialisation Programme is for the UK Government to underpin technology risk until operations are stable.
June 2012