2The implications of cancelling the competition
The additional cost of decarbonisation without CCS
16.CCS has a central role to play across the UK economy to achieve this country’s emissions reductions target at the lowest possible cost to consumers.40 The Committee on Climate Change, which advises the government on reducing greenhouse gas emissions, recently reported that a 10-year delay to CCS’s deployment across the UK economy would cost an additional £1 billion to £2 billion per year in the 2020s, rising to between £4 billion and £5 billion per year in the 2040s.41
17.The Department’s own analysis during the 2015 Spending Review showed that it would cost £30 billion more in the power sector alone to achieve the UK’s climate change target without CCS. This is because a more expensive mix of low-carbon technologies would be required to decarbonise the power sector.42 The Department’s analysis during the 2015 Spending Review indicated the competition would lead directly to some of this benefit, generating an overall return of £4.50 per £1 invested. However, the Treasury told us it had questions about the Department’s modelling in its bid because it did not take account of the costs to consumers through contracts for difference, which would be in addition to the £1 billion capital grant.43
18.Neither the Department nor HM Treasury calculated the financial impact of the delay to CCS’s deployment that would inevitably result from the decision to cancel the competition.44 The Department told us this was because it did not have time model the impact of a delay in time for the Spending Review and because it did not know what length of delay it should model.45 The costs to deploy CCS later could be higher as oil wells that were potential storage sites could be decommissioned requiring new ones to be built, and the burden on the supply chain could be greater to deploy CCS in a shorter timeframe.46
A gap in long-term plans for decarbonisation
19.CCS was a key part of the government’s plans for decarbonising the economy. In 2012, the Deparment launched the Electricity Market Reform strategy. This set out how it would secure investment in new generating capacity to achieve the 2050 target while meeting the challenge posed by increasing demand and plant closures in the 2020s and beyond. Along with renewables and nuclear power, CCS formed an important part of the Department’s plans. Applying CCS in the power sector could also have had strategic benefits for energy security, as it could have enabled flexible gas power to be part of a low-carbon generating mix, complementing the intermittency of renewables and the inflexibility of nuclear power.47 The Department also expected CCS to decarbonise the industrial, heating and transport sectors. Added to the power sector, this means CCS has potential to decarbonise sectors making up around 83% of the UK’s total carbon dioxide emissions.48
20.The Department’s long-term aim was to enable investment in CCS projects in the early 2020s without government support and at a price competitive with other low-carbon generating technologies. In 2012 the Department published a ‘CCS roadmap’ which set out five strands of government support to achieve this objective, of which the second competition was the main strand.49 The Department intended that its CCS competition would be the first step towards widespread deployment of the technology. We asked the Department whether HM Treasury’s decision to withdraw funding showed the government lacks a long-term view for CCS, with it being difficult to secure commitment from Ministers when the benefits only accrue over the long-term and are difficult to see, in contrast to other areas of government spending such as schools and hospitals. The Department told us the government has had a long-term view for making CCS work, but both competitions have been unsuccesful because their costs were unsustainable.50
21.The cancellation of the competition means there is now a significant gap in the Department’s plans for achieving decarbonisation while ensuring energy security. Without CCS there is no viable way to achieve emissions reductions in the industrial sector in the near future.51 The Department and the Treasury both told us that they still consider CCS will have an important role to play in decarbonising the UK.52 We asked the Department when it would set out its future plans for CCS, and whether this would include taking action to secure deployment of CCS across the economy.53 The Department told us that it would set out its plans in its Emissions Reduction Plan by the end of this year and that bringing industrial policy and energy within the same government department means it can look at the impact of CCS across both of these sectors.54
Damage to investor confidence
22.The decision to cancel the competition has had a negative impact on investors’ confidence to engage with the government. The Department designed the competition in a way that meant it could withdraw from negotiations early without incurring significant cancellation costs. But this was at the expense of damaging investors’ confidence when HM Treasury withdrew the competition’s funding, particularly as this was shortly before the Department was due to decide which projects it would support.55 The Department told us it expected at least one of the projects would have met its criteria for receiving support.56 HM Treasury told us that it understood its decision to withdraw funding for the competition would affect investor confidence.57
23.The decision is the latest in a series of decisions on energy policies that have potentially impacted on investors’ confidence. In another recent evidence session, we asked the Department and HM Treasury about decisions to cut schemes under the Levy Control Framework after poor forecasting led to delays in the Department identifing an overspend.58 We noted the apparent pattern of increases in government support followed by sudden changes to dampen down demand.59 Last year, the Energy and Climate Change Committee identified six factors that in combination were damaging investors’ confidence, including a lack of transparency or a long-term vision, inconsistency of approach and sudden changes to policies.60 HM Treasury told us that the government had learned collectively from its experiences and was moving away from demand-driven schemes.61
24.The negative impacts on CCS investors’ confidence could increase costs or risks for taxpayers or consumers in deployments of the technology in the future. It is the government’s policy that the private sector should, as far as possible, finance and build new generating capacity. But investors will require a higher rate of return on projects where they perceive the risks of dealing with the government to be greater.62 We asked the Department whether it believed investors would be willing to invest in CCS again in light of the experiences of the competition. The Department told us that it did not know whether the same companies would engage again with the government, but that this is something it would explore. It also told us that it felt the overall investor environment in the energy sector has been strong, as demonstrated by the recent capacity auctions, a new round of contracts for difference, and the deal for the Hinkley Point C nuclear power station.63 HM Treasury told us that successfully deploying CCS is likely to require the government to consider ways of making the technology more affordable to investors. It cited a recent Parliamentary advisory committee report, which suggested a new delivery model whereby the government would carry more of the risks associated with CCS projects.64
40 Q29
41 Q63; The Committee on Climate Change, Letter to Rt Hon Amber Rudd MP: A strategic approach to Carbon Capture and Storage, (July 2016). The CCC was quoting analysis by the Energy Technologies Institute.
42 Q32; National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), para 4.9
43 Q47; National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), para 4.9
44 National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), para 4.12
45 Q63
46 National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), paras 4.16–4.17
47 C&AG’s Report, para 1.6 to 1.7
48 Q18; C&AG’s Report, 1.4
49 C&AG’s Report, para 2.3
50 Q71
51 NAO report, para 4.17
52 Qq45, 86
53 Qq91, 104–108
54 Qq85, 108
55 Q63; C&AG’s Report, paras 11, 14; National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), para 4.16
56 Q90
57 Q79
58 Q99; Committee of Public Accounts, Thirty-ninth Report of Session 2016–17, Consumer-funded energy policies, HC 773
59 Q102
60 Energy and Climate Change Committee, Third Report of Session 2015–16, Investor confidence in the UK energy sector, HC 542
61 Q102
62 National Audit Office, Briefing: Sustainability in the Spending Review (July 2016), para 4.16
63 Q98
64 Q80; Parliamentary Advisory Group on Carbon Capture and Storage, Lowest Cost Decarbonisation for the UK: The Critical Role of CCS (September 2016)
25 April 2017