Carbon Capture and Storage Contents

1The competition for supporting carbon capture and storage

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Business, Energy and Industrial Strategy (the Department) and from the Treasury on their role in supporting deployment of Carbon Capture and Storage (CCS) in the UK.1

2.The Department has lead responsibility for addressing the UK’s energy ‘trilemma’: ensuring a secure supply of energy that is affordable for consumers and helps the UK to meet its statutory target to reduce carbon dioxide emissions in 2050 by 80% compared to 1990 levels. CCS formed an important part of the Department’s plans to reduce carbon dioxide emissions. It expected CCS to enable existing and new fossil-fuelled power stations to produce low-carbon electricity. In 2015, the Department estimated that it would cost the UK £30 billion more to meet the 2050 target without CCS in the power sector because a more expensive mix of low-carbon technologies would be required. Once established, CCS could also potentially help to decarbonise heavy industry and domestic heating systems.2

3.Like other low-carbon power technologies, CCS is currently too expensive in the UK to be commercially viable for private developers without public support. There are no working examples of the technology in this country. The Department has tried twice to help developers get CCS off the ground with competitions for government support, but it has not reached a successful conclusion on either occasion. The second competition ended after the 2015 Spending Review, when the Treasury withdrew the £1 billion that had previously been available for it. This was just before the two projects involved were due to submit their final bids for support.3

A missed opportunity

4.The Department launched its first competition for government support for CCS projects in 2007, but cancelled it in 2011 before awarding funding as it could not agree a deal with the one remaining bidder that would represent value for money.4 In April 2012, the Department launched a second competition as the first major part of a new long-term CCS programme. It wanted the competition to demonstrate the commercial operability of CCS in the UK and to establish the transport and storage infrastructure that subsequent projects, including those in heavy industry, could share.5 Before it was cancelled, the Department had spent £100 million on its second competition, of which £81 million was to support the two preferred bidders’ engineering design phase. It paid £29 million to Shell and £52 million to Capture Power Limited to cover 75% of their costs during this phase. The remaining amount was used to pay for advisory services. This is in addition to £68 million it spent on its first competition between 2007 and 2011.6

5.The Department told us that its second competition did achieve some value. For example, the Department and its commercial partners learned lessons about the technical and commercial challenges of deploying CCS in the UK. The Department required the developers of the two shortlisted projects to distil this learning into ‘key knowledge deliverables’, which it intends will provide useful learning for CCS developers in the future.7 At the end of the competition, the Department and other stakeholders conducted separate lessons-learned exercises, which could inform a future CCS programme. However, some of this learning will be lost as it was project-specific, such as the appraisal of storage sites, or because project teams have disbanded since the competition was cancelled.8

6.We pressed the Department on whether cancelling the competition means losing an opportunity for the UK to be at the forefront of CCS’s development globally. Several other countries have developed successful projects utilising CCS technology whilst the Department has presided over its two unsuccessful competitions. There are now over 20 such projects either operational or due to come online this year around the world.9 The UK may now have lost any competitive advantage to export CCS technology to countries that are seeking options to reduce their own carbon dioxide emissions, which could have created engineering and R&D jobs in this country. This is reminiscent of government decisions in the 1980s not to develop renewables, meaning the UK lost its position as the world leader in emerging technologies such as wind power.10 Neither the Department nor the Treasury evaluated the potential benefits for the UK’s economy of having a globally competitive CCS sector prior to the competition being cancelled.11 The Department told us its main motivation for running the competition was decarbonising the UK economy at the lowest cost. It also told us that experience gained during the competition is currently being exported and applied in projects abroad.12

Risk allocation

7.In its first competition, the Department did not articulate the commercial risks involved in deploying CCS or develop a commercial strategy to manage them.13 For the second competition, the Department attempted to identify and understand the risks in developing the first CCS projects at the outset.14 The Department opted to shift risks, as far as possible, to the private sector so that the competition aligned with the wider energy policy for supporting new generating technologies. However, it did not fully consider the merits of alternative approaches to allocating risks.15

8.The Department told us that at the outset it discussed with developers how to allocate risks, and continued this discussion with its two preferred bidders throughout the programme. The Department was willing to share risks specific to the untried nature of the technology, such as risks associated with long-term storage of carbon dioxide. When the competition was stopped, the Department was negotiating the share of CCS-specific risks the government would bear.16 The Department expected the developers to carry risks associated with routine business operations (business as usual risks). This included requiring the developers to bear the ‘full chain’ risk of their projects. A functioning CCS project is made up of a ‘chain’ of different operations: capture; transport; and storage, each of which could have a different investor. Under the Department’s risk allocation, if any part of the chain stopped working, the investors in other parts of the chain could lose income. One of the Department’s preferred projects, which was backed by a consortium of investors, could not resolve this issue in a way that was commercially viable. It is unlikely that this project would have submitted a bid that complied with the Department’s terms for the competition.17

9.There are additional risks to deploying CCS in the UK compared to other countries, which amplify the ‘full chain’ risks. CCS projects in other countries often have a commercial use for the carbon dioxide captured, such as for injection into wells to recover more oil, or for some chemical and manufacturing industrial plants.18 We asked the Department whether it had considered examples of other CCS projects around the world, which have been more successful because there is not a requirement for developers to manage the same full chain risk.19 The Department told us that the difficulties of allocating risks between the different parts of the chain is one of the main lessons it is taking forwards in its future CCS strategy.20 The Department also told us that it had to balance taxpayers’ interests in designing the competition with the risk appetite of the developers, as any additional sharing of risk by the government could have exposed taxpayers to losses.21

10.The failure to understand what private investors can feasibly deliver, for both competitions, suggests a lack of skills from the Department at key stages of its programmes. The Department managed to sustain negotiations so that it gained some technical and commercial knowledge about how to deploy the competition projects.22 But the problems with both competitions indicate the Department did not have sufficient skills to initiate them successfully by understanding the risks that developers were able to bear. We asked the Department whether it thought it had the necessary skills following recent machinery of government changes to manage similar projects in the future.23 The Department stated that it is investing in developing the right skills internally, but acknowledges that for projects this complex it needs external support, which it secures through inward secondees and by working closely with experts teams in government, such as Treasury and the Infrastructure and Projects Authority.24

The role and influence of the Treasury

11.The Department began the competition without agreeing with HM Treasury on the amount of financial support available for CCS projects, once up and running, through consumer-funded contracts for difference.25 The Department and the Treasury told us that, while funding through contracts for difference was agreed in principle, it was not possible to determine the exact amount to be funded through energy bills due to the uncertainty of how much support the projects would require.26 The Department’s estimate of payments through contracts for difference increased from up to £6 billion at the start of the competition to £8.9 billion in 2015, as it learned more about the competitions through its negotiations.27 The Treasury told us they were regularly informed on the progress of the competition and its expected costs.28

12.The lack of agreement between the Department and HM Treasury on a limit to the support through contracts for difference meant the Department could not tailor its approach to the competition in a way that matched an agreed affordability constraint.29 The Department’s competition approach increased the projects’ unit cost by design. For example, plant size was limited, meaning investors could not fully exploit economies of scale; developers were funding infrastructure for subsequent projects to share, which increased costs; and investors required high returns to bear the majority of project risks. This approach meant the Department expected the projects to need a contract for difference ‘strike price’ that would be relatively high compared to its contracts to support other low-carbon technologies.30 A recent report by the Parliamentary Advisory Group on CCS showed how upfront costs could have been lower if the Department had taken a different financing and risk sharing approach.31

13.The Treasury told us that the decision, as part of the 2015 Spending Review, to withdraw the £1 billion was a matter of affordability, not only of the capital support but also of the contracts for difference to be awarded at the same time.32 Its assessment drew on an expected strike price for the contracts for difference of £170 per MWh, which is higher than for other low-carbon technologies with similar contracts. For the contracts already awarded for offshore wind farms, the strike prices range from £114 to £150 per MWh, while the contract for the Hinkley Point C nuclear power station is £92.50 per MWh (2012 prices).33 However, the strike price measure does not reflect the full value of the CCS projects, such at their potential long-term benefits for the industry, heat and transport sectors, or the additional costs to meet our statutory carbon targets that would result from any delay to CCS deployment.34

14.We asked the Department and the Treasury whether this demonstrated they had different bases for assessing the value of energy projects.35 The Treasury replied that it was natural for it to care about costs for consumers, while the Department was waiting for the bids before forming its view on whether the projects were affordable.36 The Department also said that it will work closely with the Treasury on future methodologies for looking at the value of long-term projects, considering a range of factors and not just the strike price.37

15.We noted that there had been several other instances in recent years where Treasury decisions seemed to have compromised long-term departmental strategies, for example: cutting feed-in tariffs for solar and onshore wind; scrapping the zero-carbon homes regulation; withdrawing the grandfathering support policy for biomass projects; privatising the Green Investment Bank; and cutting subsidies for low-emission vehicles.38 We asked the Department whether these show that key decisions are taken by HM Treasury, even though the Department is responsible for energy policy. The Department told us much of its activities are big projects, which carry uncertainty, making it more likely for the Treasury to have an influence compared to other departments with ordinary day-to-day expenditure.39

2 C&AG’s Report, para 2

3 C&AG’s Report, paras 2.2–2.9

4 C&AG’s Report, para 2.2

5 C&AG’s Report, para 2.3, 2.4

6 C&AG’s Report, para 2.7

7 Q1

8 Q88

9 Qq21, 97

10 Q93

11 Qq25, 27, 28

12 Q18

14 C&AG’s Report (2017), para 3.8

15 Q6; C&AG’s Report, para 17

16 Q14

17 C&AG’s Report, para 15

18 C&AG’s Report, para 1.10

19 Qq42–43

20 Q42

21 Qq15, 17, 87,

22 Qq88–90; C&AG’s Report, para 22

23 Q111

24 Q111

25 C&AG’s Report, para 18

26 Qq35–36

27 C&AG’s Report, para 4.3; Q24

28 Q37

29 C&AG’s Report, para 4.4

30 Q67

31 Parliamentary Advisory Group on Carbon Capture and Storage, Lowest Cost Decarbonisation for the UK: The Critical Role of CCS (September 2016)

32 Q36

33 C&AG’s Report, para 4.8

34 Q77

35 Q37

36 Qq38–39

37 Q55

38 Q62

39 Qq56–57

25 April 2017