2Reactions to the Government announcement
An unexpected decision
12.The 25 November announcement, on the same day as the Spending Review and just days before the start of COP21, led to strong reactions in the press. The Financial Times said that the decision “spell[ed] the death knell for a four-year-old contest to build carbon capture and storage systems on power plants”.29 Richard Simon-Lewis, Financing Director of Capture Power, called the decision “a huge disappointment” for both his company and DECC.30 He added that:
Clearly, it is disappointing, because we had worked jointly with DECC on this commercialisation programme for a number of years [and] we were on track. [ … ] In terms of the efforts expended by the sponsor group, our management team, the employees within our company, it was a huge heavy lift over the past couple of years to take this first-of-a-kind technology to the point of market acceptance.31
Shell, who were leading on the Peterhead project and had only a month before opened a CCS plant on an oil refinery upgrader in Alberta, Canada, told us they were also disappointed at the withdrawal of funding:
We were committed to the Competition which in our view represented a valuable joint programme between industry and Government to develop CCS in the UK. [ … ] If approved, the Peterhead project would have been the world’s first CCS facility fitted to an existing gas-fired power plant. It had the potential to bring huge value, placing the UK at the forefront of this vital technology, and developing knowledge for the benefit of a wider industry.32
Andrew Koss, CEO of Drax Power (who had until recently been involved in the White Rose project) also told us that Drax was “surprised and disappointed” and had “felt there was still support for CCS to go ahead”.33
13.While both Capture Power and Shell recognised that the Government’s decision was made in the context of a particularly difficult spending review,34 it became clear to us that the industry and investors had had little warning regarding this major decision and were only made aware of it “very late in the process”.35 Richard Simon-Lewis explained that the first indication Capture Power had been given that a major change could be taking place was as late as the evening before the announcement, when a Financial Times article “seemed to indicate that there was a view within Government that CCS was expensive and, as such, the grant might be exposed to reduction”.36 He added:
On the following day, the 25th [of November], after I had spent three days engaging with our funding group [ … ] we were called across by DECC at 3 o’clock and our chief executive was informed by a DECC representative of the decision. [ … ] In terms of formal communication, that was the 3 o’clock meeting with DECC that our chief executive attended, followed by the stock exchange announcement, which from memory I think came through just before 4 o’clock.37
Neil Kenley, Director of Business and Investment at Tees Valley Unlimited (who was awarded £1m funding by DECC to develop a business case for deploying industrial CCS), told us about the immediate questions that this unexpected announcement had raised:
The first we knew was the day of the announcement; and it was within hours that the phone started ringing from the private sector companies that we have on board, trying to understand what the implications were, going forward.38
14.The process by which industry was made aware of the decision was also criticised. Luke Warren, CEO of the Carbon Capture and Storage Association, explained that his first indication that a big change was coming was a sudden lack of engagement from DECC:
It was really around the Monday, Tuesday of the spending review—the 23rd, the 24th [of November]—that we suddenly started getting a bit nervous. That was partly due to our interpretation of how officials in DECC were reacting. It was very hard to get in contact with people, so we sensed that something might have been going on at that point.39
While the Secretary of State told us that DECC had been “very careful to communicate it as clearly and as early as possible, given the fact that it was part of the Spending Review”,40 Richard Simon-Lewis explained that the decision had been even more of a surprise given the absence of a mention of CCS in the Chancellor’s Spending Review speech:
When we got through the speech and nothing had been mentioned about CCS, we unfortunately—or rather naively—thought that CCS was in reasonable shape.41
15.This lack of communication seems to have continued in the wake of the announcement, with Mr Warren explaining that there had been “radio silence from DECC and from the Government in general about the next steps”,42 and that the CCSA was “trying very hard to engage with the Department”.43 He acknowledged however that the Energy Minister had attended an emergency meeting of the development forum requested by industry.44 Chris Littlecott, programme leader for fossil fuel transition and CCS at E3G (a climate change think-tank “working to accelerate the transition to a low carbon economy”), added that no rationale had been provided by the Government, and that “the closest we have had to [rationale] is the Secretary of State’s letter to the Committee” (see paragraph 9).45
16.Reports from stakeholders regarding the cancellation of the competition raise serious questions about the manner in which this decision was handled by Government. It is disappointing that companies that had committed years to a Government-led competition were only informed of its cancellation on the day of the announcement, when there had been consistent statements by Government that it was committed to the commercialisation programme as late as a few weeks prior to the decision.
17.The lack of engagement by DECC prior to, and since, the announcement has damaged Government’s relationship with the very stakeholders it will depend upon to develop CCS technologies. DECC must now work to mend bridges and proactively engage with industry in a consultative way to discuss the next steps for businesses involved with the development of CCS in the UK, whether through workshops, meetings or consultations.
Immediate implications of the decision
18.As a result of the competition being cancelled, neither CCS project will go forward. Shell told us that “in the absence of the Competition and potential funding, we reluctantly concluded that there is no longer a future for the Peterhead project in the near term”.46 Shell’s partner on the project, SSE, also confirmed that they were “unlikely to proceed further with the proposed project at Peterhead power station”.47 Regarding the White Rose project, Richard Simon-Lewis also confirmed that “regrettably, [their] sponsors have had to make the decision to wind down the business.48
19.We also heard that DECC could face financial penalties as a result of the cancellation of the competition,49 through cost-recovery claims by the two bidders. While Shell told us that they had had “no conversations with Government about cost-recovery related to the cancellation of the CCS Commercial Competition”,50 Capture Power explained that:
We are currently preparing the final invoice under the FEED [Front End Engineering and Design] contract with DECC following the notice of termination that we received in December last year. The mechanics of the contract in cases of termination are quite clear including in some cases the potential for cost recovery where DECC instigates termination. Our discussions with DECC on the close out of the FEED contract are still ongoing and we do not anticipate any legal issues at this stage.51
20.Richard Simon-Lewis told us that Capture Power had had to put an end to conversations with a number of funding bodies:
When we were running our process, we had engaged with the funding community, so we had 22 institutions within our funding group: 15 commercial banks, four export credit agencies, the multilaterals, the European Investment Bank, the Green Investment Bank, and Infrastructure UK. We brought the great and the good of the funding market with us. We have had to stand them down off the back of the cancellation of the process.52
He explained that additional funding that would have been secured for the projects, in particular from the European Union, runs the risk of being lost from the UK:
The NER 300 funding that had been awarded by the European Commission through work done by the EIB [European Investment Bank] is now probably going to go back. [ … ] It was €300 million. That will not be deployed.
[ … ] If we had been given more notice of what was coming down the track in relation to the cancellation of the process, one could envision us having, alongside DECC, a discussion with the European Commission and the EIB about availability in the Juncker plan53 to get this off the ground. [ … ] On the basis that we are dismantling the structure that constitutes the special purpose company, giving notice to our staff, and writing lessons, reports and key knowledge deliverables for DECC, it is fair to say that the horse has bolted. [ … ] To go back to the Juncker plan with the confidence that’s been lost by the signal that the Government’s provided is incredibly difficult.54
He added that CCS was “a huge opportunity for Europe” and that “the most literate CCS institution in Europe is the European Investment Bank”:55
If I were in DECC’s shoes, I would be engaging with the European Commission and the EIB to see what could be done around liquidity and the Juncker plan. If the UK is saying that it cannot afford to bring CCS forward, frankly it is a collective burden that needs to be carried by Europe, if Europe wants CCS.56
The Secretary of State confirmed in December 2015 that she was having discussions with the European Commission and that “our EU Commissioner was saying [ … ] how committed he is [to CCS] and how interested he would be to look at projects”.57
21.We also heard that the decisions to cancel the competition had had a detrimental impact on the investment community as a whole, who were now “looking slightly quizzically at what is being done”.58 While Professor Jon Gibbins (UK CCS Research Centre) acknowledged that new investors could come forward in the future if the market was attractive, Luke Warren warned that inconsistencies in government CCS policy meant that this investment may be difficult to bring back in the future.59 Chris Littlecott judged that the decision “reflect[ed] very badly on the UK Government’s [ … ] ability to drive long-term investment”.60
22.The decision has also had an impact on other projects outside the competition. We heard that second-phase CCS projects might be affected:
There were a set of projects that were at an earlier stage of development and wanted to come through as part of what was known as phase 2. [ … ] These were the products that would have seen the big reductions in costs and would have been cost-competitive.61
23.Beyond projects seeking to apply CCS to power generation, there have been wider impacts on industrial CCS projects. Neil Kenley explained that the Teeside industrial CCS cluster had also been “put [ … ] back a bit”.62 He added that “without the infrastructure in place, it puts our whole project back two, three, maybe even five years, and increases costs”.63 However, he was positive going forward:
Since the announcement, we have had other organisations approach us to join the collective, which is a positive step. We still strongly believe that it is the only way we can maintain and keep the businesses we have in the long term, because the two issues around the whole CCS question are maintaining what you have while being able to attract new companies. It is still a live project, and we continue to push it with DECC and our partners. The private sector at this moment in time is still 100% behind us and wants to see this happen.64
24.Richard Simon-Lewis emphasised the huge pool of knowledge that had developed over the course of the past four years:
The value of what we have done is not lost in its entirety. [ … ] What we have been doing over the last couple of weeks post the cancellation of the process is working on key knowledge deliverables and the lessons learnt suite of documents. There is an enormous amount of information that both ourselves and Peterhead will be providing to DECC in the form of, in our case 45 key knowledge deliverables, together with a suite of lessons learnt across consenting, permitting, financing, and derisking in terms of technology. That documentation has enormous value for Government in terms of the way we look again at the CCS roadmap and how we reflect on the new narrative for CCS in the UK.65
25.It is disappointing that the White Rose and Peterhead projects will end as a result of the cancellation of the competition. This decision is but one of a number of recent policy announcements that are damaging investor confidence in the UK energy sector. Pulling the plug at the last minute is likely to have led to the loss of significant amounts of foreign investment, which could have been retained if developers had had more warning of the decision. There are also worrying wider impacts on phase 2 projects and potential delays in industrial CCS projects. The lessons learned documents from the White Rose and Peterhead projects will provide valuable information for future CCS development projects.
26.We recommend that DECC collects and compiles the lessons learned information as soon as possible, preferably in the first quarter of 2016, and makes it publically available so that a wide group of stakeholders can benefit. DECC should urgently facilitate discussions between UK developers, the European Commission and the European Investment Bank to keep the NER 300 or other European funding in the UK. It should continue to work with the Commission to identify potential future funding opportunities for CCS projects in the UK.
29 Financial Times, ‘Autumn Statement: £1bn carbon capture storage funds scrapped,’ accessed 22 January 2016
30 Q6 [Richard Simon Lewis]
31 Q6 [Richard Simon Lewis]
33 Oral evidence taken on 1 December 2015, HC (2015–16) 542, Q68 [Andrew Koss]
34 Letter from Shell to the Energy and Climate Change Committee (January 2016), Q6 [Richard Simon-Lewis]
35 Q2 [Luke Warren]
36 Q2 [Richard Simon-Lewis]
37 Qq2-3 [Richard Simon-Lewis]
38 Q7 [Neil Kenley]
39 Q2 [Luke Warren]
40 Oral evidence taken on 16 December 2015, HC (2015–16) 614, Q20 [Rt Hon Amber Rudd MP]
41 Q4 [Richard Simon-Lewis]
42 Q31 [Luke Warren]
43 Q32 [Luke Warren]
44 Q32 [Luke Warren]
45 Q12 [Chris Littlecott]
47 SSE, ‘SSE plc trading statement,’ accessed 28 January 2016
48 Q9 [Richard Simon-Lewis]
49 Q17 [Chris Littlecott]
52 Q14 [Richard Simon Lewis]
53 The European Commission’s Investment Plan for Europe, or “Juncker Plan” aims to address market gaps and mobilise private investment by supporting strategic investments in areas such as infrastructure, education and research and innovation. It was announced by European Commission President Jean-Claude Juncker in November 2014.
54 Qq9-10, 13, 26, 28-29 [Richard Simon-Lewis]
55 Qq13, 29 [Richard Simon-Lewis]
56 Q29 [Richard Simon-Lewis]
57 Oral evidence taken on 16 December 2015, HC (2015–16) 614, Q22 [Rt Hon Amber Rudd MP]
58 Q15 [Richard Simon Lewis]
59 Q18 [Jon Gibbons, Luke Warren]
60 Q6 [Chris Littlecott]
61 Q33 [Luke Warren]
62 Q40 [Neil Kenley]
63 Q30 [Neil Kenley]
64 Q40 [Neil Kenley]
65 Q11 [Richard Simon-Lewis]
© Parliamentary copyright 2015
Prepared 4 February 2016