1.After two competitions costing taxpayers £168 million, the UK is no closer to establishing CCS. The UK has now missed opportunities to be at the forefront of a growing global industry. In 2012 the government launched a second competition for supporting CCS projects. The competition was cancelled in 2015 after Treasury decided, as part of the Spending Review, to withdraw the £1 billion of capital funding it had previously committed to the programme. The Department had spent £100 million of this on the second competition before it ended, having already spent £68 million on the first competition that was cancelled in 2011. As part of the competition process, developers and government gained some technical and commercial knowledge. But much of this knowledge is project-specific and will be lost, unless the same projects are resurrected. Since 2007 when the first competition was launched, other countries have been developing CCS projects successfully, and more projects are due to come online in 2017. There is a risk the UK will now miss out on the chance to lead the way in this technology, much as it did with wind power in the 1980s.
Recommendation: The Department should set out in its Industrial Strategy the role that CCS can play, recognising the potential economic value of being a world leader in a globally expanding technology.
2.It is now highly likely the UK will have to pay billions of pounds more to meet its decarbonisation targets. In 2015, the Department’s own calculations showed that it would cost the UK £30 billion more to meet the 2050 emissions target without CCS in the power sector. The Committee on Climate Change recently reported that the total costs to the UK of inaction on CCS in power, industry, heat and transport would be higher still: £1 billion to £2 billion per year in the 2020s, rising to between £4 billion and £5 billion per year in the 2040s, if the UK is to achieve its carbon emissions targets. However, neither the Department nor the Treasury quantified the impact of the delays to deploying CCS that would inevitably result from cancelling the second competition.
Recommendation: By the end of 2017, the Department should quantify and publish the impact across the whole economy of delays to getting CCS up and running, and of it not being established at all.
3.Without CCS, there is a gap in the government’s plans for achieving decarbonisation at least cost while ensuring a secure supply of electricity. CCS was a key part of the government’s Electricity Market Reform programme, along with renewables and nuclear power, for establishing a low-carbon power sector. The Department expected its competition to lead to the deployment of CCS technology at scale. This would allow low-carbon, flexible gas power to complement intermittent renewables and inflexible nuclear power in a diversified generating mix. It also expected the competition to establish the infrastructure and commercial arrangements that would support decarbonisation of heavy industry, heat and transport in future decades. The Department has not yet set out its next set of detailed plans for decarbonising the economy and the role it expects CCS to play, saying it will do this in its delayed Emissions Reduction Plan by the end of this year.
Recommendation: The Department’s Emissions Reduction Plan should set out a clear, joined-up strategy for deploying CCS in the sectors where it is needed to achieve decarbonisation at least cost.
4.Once again, the Department did not allocate the risks appropriately between the government and developers, meaning at least one of the two projects was likely to have been unviable. The Department made good progress compared to its first competition in understanding the risks in deploying the first CCS projects. However, it is unclear whether the Department tested at the outset of the competition which risks the private sector could feasibly bear. Instead, the Department opted for its prevailing approach to energy policy, of shifting risks as far as possible to the private sector, without properly considering the merits of alternative approaches. In particular, it asked developers to bear the ‘full-chain’ risk, which created problems for sharing risks between investors in different parts of a CCS project, making one of the competition projects unviable. It remains to be seen whether the Department will have sufficient commercial skills to avoid this problem repeating in the future, particularly following the recent machinery of government changes.
Recommendation: When designing future energy policies, the Department should assess and explain the viability of different options for allocating risks between the government and developers.
5.Establishing CCS is now likely to cost taxpayers or billpayers more in the future because of the damage to investors’ confidence caused by aborting two competitions. In the most recent competition, matters were made worse by the timing of the cancellation: the Treasury withdrew the funding just before developers were due to submit their final bids for government support. The Department expected at least one of the bids would have met its criteria for support and been a viable project. Throughout this Parliament, several energy policy decisions have similarly damaged investors’ confidence. These include cuts to demand-led green tariffs and sudden changes to low carbon support prompted by the failure to forecast an overspend on the Levy Control Framework. Investors are now likely to require greater incentives to engage with the government again on CCS and other low-carbon projects, which will mean higher costs.
Recommendation: HM Treasury and the Department should ensure they fully agree on the Emissions Reduction Plan from the outset, and quantify the negative impact on investors’ confidence before making any sudden changes.
6.The Treasury seems to be determining energy policy, often with detrimental impacts on the government’s long-term energy objectives. The Treasury did not appear committed to CCS from the outset, as demonstrated by the fact it did not make clear the total funding available to the projects, through consumer-funded contracts for difference. The Treasury’s decision to withdraw funding was based in part on it expecting the projects to require a ‘strike price’ of £170 per megawatt hour, which it considered to be too expensive compared to other low-carbon power generation technologies. But this measure neglects the potential long-term benefits of the projects, such as building infrastructure for subsequent facilities to share and the value of CCS to other sectors of the economy, or the additional costs that would result from any delay to CCS deployment. This is reminiscent of other energy policies which HM Treasury has cut across in recent years, driven by short-term considerations. We are concerned that the Treasury has had undue influence on energy policy in recent years.
Recommendation: Given our concerns about HM Treasury’s undue influence on energy policy, the Department and HM Treasury, as part of their work on the replacement for the Levy Control Framework, should agree a way of appraising the costs and benefits of energy policies, which reflects the potential impact across sectors and over the long term, rather than relying on the strike price measure.
25 April 2017