Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyAdditional written evidence submitted by the Carbon Capture and Storage Association (CCSA)

Introduction

The Carbon Capture and Storage Association welcome the opportunity to provide further input to the Energy and Climate Change Committee call for evidence for pre-legislative scrutiny into the draft Energy Bill. The CCSA’s provided an initial response on 6 June to the Electricity Market Reform (EMR) package contained in the draft Energy Bill. This submission contains further thoughts on the draft bill.

The CCSA brings together a wide range of specialist companies across the spectrum of Carbon Capture & Storage (CCS) technology, as well as a variety of support services to the energy sector. The Association exists to represent the interests of its members in promoting the business of CCS and to assist policy developments in the UK and the EU towards a long term regulatory framework for CCS, as a means of abating carbon dioxide emissions.

Summary

The investment signal from the EMR for CCS projects developers is currently extremely weak. The 2013 Delivery Plan should contain the Government’s CCS objectives for the UK electricity market, the price setting process for CCS CfD contracts and details on the allocation of CCS CfD contracts.

The proposed investment instruments appear to be appropriate for early CCS project developers although there is still a concern over the likely timing of Royal Assent for the Bill.

The legal framework underpinning CfD must be robust. There is concern that the proposed payment model is not an investable proposition. Regulatory risk must also be addressed through robust change of law provisions.

More consideration is needed on the reference price for baseload contracts.

The Emissions Performance Standard should be based on an annual limit and exemptions provided to CCS demonstration plants only for the purposes of assisting the early stage development of this emission reduction technology.

Detailed Comments

EMR Delivery Plan

1. The CCSA noted in its first submission (para. 2 & 4) that the investment signal from the EMR for CCS projects developers beyond the current CCS Commercialisation Programme is currently extremely weak. It is critical that this is addressed in order to send a clear signal to CCS developers, investors and the supply chain so that CCS investments can be planned in a timely manner. The key instrument to provide the signal on the Government’s CCS objectives is the 2013 Delivery Plan which will cover the delivery period 2014–18. The CCSA believes that the 2013 Delivery Plan needs to contain the following details:

(1)The Government’s CCS objectives for the UK electricity market.

(2)Price setting process for CCS CfD contracts.

(3)Allocation of CCS CfD contracts for CCS.

UK CCS objectives

2. The 2013 Delivery Plan must provide a credible, strong and clear signal on the Government’s CCS objectives in order that CCS developers and investors are able to respond and undertake the large pre-investments necessary to develop projects for the first delivery period. The signal needs to provide a degree of confidence equivalent to that provided to other technology classes. The CCSA looks forward to working with the Government on determining what the appropriate signal should be.

3. The Government has outlined it intention to establish the CfD budget envelope as part of the levy control framework during summer 2012 and identified three proposed options for the management of the financial exposure to the CfD. Each of the options proposed would be an important constituent of the signal that is provided to the CCS industry. During the first delivery period the first option, establishing funding envelopes for each of the technology classes, would provide the maximum clarity to the CCS industry on the future prospects for the sector and should help to incentivise efficiencies and synergies amongst developers.

Setting CfD strike price for CCS projects

4. The CCSA believes that given the relatively early stage of CCS technology that the negotiation of CCS CfD strike prices on a project-by-project basis is appropriate. Many of the issues that warrant a bespoke negotiation process—technologies differences, location specific costs, etc—are expected to persist over the near to medium term and that the CCS strike prices for the first delivery period should still be set on the basis of negotiation.

Allocation of CfD Contracts

5. There is currently a reasonable degree of competition between prospective CCS project developers and, with the right EMR arrangements, this competition should be maintained and deepened in the future. This suggests that CCS CfD contract allocation rounds to allow project developers to come forward with their projects should be run on a periodic basis over each delivery period. For renewables it is proposed that the allocation rounds occur every six months. Given the inherent larger size and complexity of CCS projects then this period is too short and a longer gap is required. Phasing the allocation of CCS CFD contracts has a number of advantages to a more “lumpy” allocation of CfDs, including:

A more even demand on Government resources during the CfD allocation process.

The development of a more predictable and sustainable CCS industry and supply chain.

Increased “learning by doing” for both Government and industry from the ability to incorporate learnings into subsequent allocation rounds.

Investment Instruments

6. The ability of CCS project developers to take a Final Investment Decision on a project requires that long-term, legally enforceable contracts, clearly establish the funding arrangements for the duration of the project have been signed. The CCSA was concerned that the concept of offering “comfort” to operators outlined in the EMR Technical Update would fall short of this requirement. The CCSA is pleased that the draft bill does provide the option of issuing investment instruments which could meet the requirements of project developers as described above. An outstanding issue of concern though relates to the timing of when an investment instrument might be available (see below).

Timing of Royal Assent

7. The CCSA is very supportive of the Government’s objectives of having the first UK CCS projects operating from 2016 and believes that this is achievable. Meeting this deadline would require investment instrument support contracts to be signed in 2013. The CCSA is therefore concerned that Royal Assent of the Energy Bill is not expected until Q4 2013. This timeline risks undermining investor confidence, delaying early investment decisions and jeopardising the Government’s goals for early CCS deployment.

Payment model

8. The CCSA shares the view expressed by numerous stakeholders that the proposed statutory CfD contract model may not be an investable proposition. There are concerns about whether a generator in receipt of a CfD contract with multiple electricity suppliers as the counterparty would be able to enforce the contract in addition there is a significant regulatory risk as any subsequent changes to the legislation could invalidate any existing CfDs. Considering the widespread lack of confidence in the current proposals the CCSA believes that the Government should come forward with alternative payment model proposals.

Change of Law/contract terms

9. There is inevitably uncertainty over the future regulatory and commercial environment within which CCS projects will be operating decades into the future. It is therefore likely that both the Government and project developers will want to include triggers that can enable the terms of CfDs to be altered. For example, in the future the project developer and the System Operator may wish to operate the CCS plant under a flexible CfD rather than the baseload CfD. In order to prevent such triggers being perceived as appreciable risks to projects they must be predictable, well defined and result in well defined outcomes that place both parties in positions that are consistent with the spirit of the initial CfD contract. Similarly it is critical that robust change of law provisions are established to prevent retrospective, unilateral changes to the CfD contracts being imposed upon project developers with adverse impacts. Failure to provide adequate change of law provisions will undermine investor confidence in the CfD.

Reference price

10. In its first submission (para. 13) the CCSA raised the concern on whether the year-ahead baseload price is the appropriate reference price due to concerns over the lack of liquidity and confidence in that market segment. Putting the issue of liquidity aside there are also legitimate concerns on the assumption that the year-ahead price is the most appropriate reference price for CCS plant, including:

(1)Generators will have to sell the power ahead to “capture” the reference price exposing them to significant credit/collateral requirements which will be challenging for independent generators.

(2)For early CCS projects selling power ahead creates a significant business risk in the event that the CCS chain is unavailable and generators are unable to meet their contracted volumes.

(3)CCS projects seeking Power Purchase Agreements may find that these trade at a significant discount to the reference price.

Investment in the CCS Chain

11. The CCSA believes that further consideration needs to be given to the effectiveness of the CfD instrument to drive the investment necessary in CCS infrastructure (the CO₂ transportation and storage infrastructure). In particular there are two issues that should be considered:

(1)Does the CfD contract issued to a generator provide enough clarity to the investors in CCS infrastructure on the revenues that they will receive?

(2)Does the mismatch between the very short CfD contract length (10 years initially) that has been proposed for CCS projects (CCSA Submission, part 1, para. 10) and the liabilities and responsibilities of the storage operator (multiple decades) create a barrier to investment?

Capacity Market

12. The Government is currently minded not to permit plants receiving CfDs to also participate in the Capacity Market. However, as noted in our first submission (para.8) the CCSA is very concerned about the market risk facing CCS plants from the inability of CCS plant to dispatch because of conditions in the electricity market. Much of the rationale on the need for a Capacity Market applies equally strongly to CCS plant. Given this the CCSA believes that at a minimum it is important that CCS plant has the flexibility to opt a proportion of its capacity for CfD support with the remaining capacity supported under the Capacity Market.

Emission Performance Standard

13. The proposal for a 450 gCO₂/kWh Emisisons Performance Standard will prohibit the construction of unabated coal-fired power plants in the UK. However, the EPS will only indirectly impact on CCS technologies as project developers will be reliant on the FiT CfD to support CCS investment in the near-term.

14. The CCSA supports the calculation of the EPS as an annual limit based on baseload operation. This has the potential to enable CCS plants to generate additional electricity during times of system stress as the capture part of the CCS chain could be “switched off”, thereby increasing the capacity of the plant dispatching electricity to the grid. During these times the CO₂ emissions from the CCS plant will increase however, the plant could be operated to ensure that annual emissions remained below the 450 gCO₂/kWh EPS.

15. The CCSA supports the exemption from the EPS requirements for CCS demonstration plants. However, the CCSA is very clear that the exemption for CCS plants should only be for the purposes of assisting the early stage development of this emission reduction technology. EPS exemption should assist the CCS demonstration programme for the following reasons:

(1)This should help facilitate the demonstration of the full range of CCS technologies if necessary. Although for some demonstration projects CCS will be fitted to a higher proportion of the plant enabling it to comply with the EPS limit.

(2)Exemption from the EPS will contribute to the de-risking of these early projects. The integration of the CCS chain to a power plant may result in unforeseen technical issues which lead to the CCS chain having a lower availability and higher emissions than anticipated. This would increase the commercial risks faced by the investor.

(3)The Government may require early CCS projects to demonstrate the flexibility of CCS in order to better understand the contribution that fossil fuel power plants with CCS will play in the future energy mix. The exemption will help reduce the risk that plant load factor has to be constrained.

June 2012