27.The greatest barriers to the development of CCUS in the UK are commercial, rather than technical, issues. CCUS has been technologically proven at large-scale facilities abroad, but the very substantial capital requirements and investment risks have so far prevented deployment in the UK. In 2017 the National Audit Office concluded that “[i]t is currently inconceivable that CCS projects will be developed without government support”, a view shared by the National Infrastructure Commission. Industry groups, CCUS developers and research institutions all highlighted the lack of a route-to-market for CCUS in the UK at present.
28.This situation points to a need to reduce CCUS risks, since deployment and potential reductions in cost (and capital expenditure) are considered interdependent. The UK CCUS community has been readying itself for demonstration projects since 2007, and the potential to increase efficiencies through R&D is limited without large-scale facilities to evaluate. Professor Stuart Haszeldine, Director of Scottish CCS, explained that universities are “running on the spot… we have done as much as we can” and that “real projects” are needed to enable further progress. This viewpoint was echoed by Ian Temperton, former member of Lord Oxburgh’s Parliamentary Advisory Group and the Government’s Cost Challenge Taskforce, who emphasised the importance of demonstration projects to enable economies from ‘learning by doing’. Further, The Grantham Institute has estimated that moving CCS from a ‘high risk’ to ‘low risk’ investment would be twice as effective as halving equipment costs, in terms of its impact on overall cost reductions.
29.Evidence to our inquiry highlighted many areas of risk, and in particular focussed on cross chain default risk (the risk that one part of a project—capture, transport or storage—might fail or be delayed, incurring costs for the remaining parts); liability for the long-term storage of carbon dioxide; political/policy uncertainty; and lack of revenue certainty. Witnesses proposed diverse policy options to alleviate these concerns, such as public-private risk-sharing (e.g. Contracts for Difference, inclusion on the Regulated Asset Base), fiscal incentives, higher carbon prices (via taxes or trading), capital funding, and the creation of markets for low carbon products (e.g. through certification schemes, or setting requirements on the carbon footprint of homogenous goods such as steel and cement). Many focussed on the need to separate the business model for carbon capture from that for transport and storage, which we explore further below. It should be noted that the great variation between alternative CCUS projects in terms of technology, cost and risk means there is unlikely to be a ‘one size fits all’ policy solution. For example, we heard that Contracts for Difference could be well suited to CCS at power stations, with potential to replicate cost-reduction successes in offshore wind; a Regulated Asset Base might be appropriate for the transport and storage of carbon dioxide, similar to models used for gas and water pipelines; and that some industries might require capital support to install capture technology, as projected carbon prices will not be sufficient to recoup costs.
30.The Government’s two previous CCS competitions were designed to bring forwards ‘full chain’ projects, covering the capture, transport and storage of carbon dioxide in a single venture. However, CCUS developers, industry groups and academics agreed CCUS costs could be substantially lowered by separating the business model for capture from that for transport and storage (T&S), due to the stark differences in the investment profile of these two activities.
31.Carbon capture technologies are already deployed in the UK in some industrial processes (e.g. ammonia production), and can involve relatively low additional expenditure. In contrast, the development of T&S infrastructure will entail the construction of long-distance pipelines and the preparation of large geological sites to receive carbon dioxide for long-term storage, in first-of-kind projects for the UK. T&S infrastructure is expensive to build, but once constructed a single facility could receive carbon from multiple capture sites. Steve Murphy, Finance Director of Pale Blue Dot Energy, estimated that T&S costs could reach £100–£150 per tonne of carbon dioxide stored if shouldered by a single capture site, but that this figure could be reduced by 90% if the infrastructure costs were shared across multiple capture points.
32.Development of capture and T&S within a single venture is also complicated by the mutual dependence of the two activities, and the impacts of this for managing the risk of delays or failure at either component. Drax Power explained that the interactions between capture and T&S had weakened the business case for the full chain White Rose project, as if either part stopped working it would have had to compensate the other.
33.As well as separating the business models, several CCUS developers and trade bodies argued that T&S should be funded in the same way as other national infrastructure projects and incorporated into the Regulated Asset Base (RAB), in order to minimise returns required by private investors. This model has also been recommended by the CCUS Cost Challenge Taskforce, but we heard that its suitability is not entirely clear, as the investment required by CCUS projects is much smaller (at around £200–£300 million) than other projects that have recently been considered for RAB, such as the Thames Tideway Scheme (£4.2 billion) and the now-suspended nuclear power station at Wylfa (£20 billion). The National Infrastructure Commission has cautioned that whilst RAB would allow CCUS to be supported off the Government balance sheet, it would also effectively require consumers to finance projects at zero interest and to assume at least some of the risks of construction, e.g. liability for cost overruns. The Commission has emphasised the importance of avoiding “any distortion through hidden costs or presentation of costs as artificially lower”, which could occur in the absence of adequate consumer protections or insufficient transparency on costs and risks.
34.The Government is investigating whether separating the business models for capture and T&S would reduce risk as part of its Review of Delivery and Investment Frameworks, due for completion by the end of 2019. It is also exploring the potential of a RAB for nuclear power, and “will consider the implications of this work for potential future CCUS power projects”, but it has neither provided a timeline for this work, nor confirmed whether it will consider its potential for T&S connected to other (non-power) industrial facilities. We recommend that the funding models for carbon capture are separated from those for carbon transport and storage. We welcome BEIS’ work to consider RAB’s appropriateness for nuclear power, and recommend that this is expanded to consider CCUS, including transport and storage infrastructure to link with industrial carbon emitters.
83 CCSA, Lessons Learned: Lessons and evidence derived from UK CCS programmes, 2008–2015, (June 2016); DBEIS, The UK Carbon Capture Usage and Storage deployment pathway: An Action Plan, November 2018; Energy Institute ()
84 NAO, Carbon capture and storage: lessons from the competition for the first UK demonstration, HC 1829, March 2012; NAO, Carbon Capture and Storage: the second competition for government support, HC 950, January 2017
85 ; ; ; Energy UK (); Grantham Institute, Imperial College London (); Institution of Chemical Engineers (IChemE) (); Institution of Mechanical Engineers (); Mineral Products Association (); Peel Environmental (); Tim Kruger ()
86 Centre for Energy Policy, University of Strathclyde (); Energy Technologies Institute (); Grantham Institute, Imperial College London (); Professor Jonathan Gibbins (); Joint submission by the UCL Institute for Sustainable Resources and the UK Energy Research Centre (); Energy Institute (); Institution of Chemical Engineers (IChemE) ()
88 Grantham Institute, Imperial College London (); Pöyry Management Consulting, A strategic approach for Developing CCS in the UK (May 2016); Sustainable Gas InstituteGrantham Institute, Imperial College London ( Imperial College London, Can Technology Unlock Unburnable Carbon (May 2016)
89 Grantham Institute, Imperial College London (); Energy Institute (); ;
90 The Regulated Asset Base (RAB) is an accounting concept which underpins many investments in UK utilities. It was developed during the process of privatisation in the late 20th century, when it represented the value of “past investments, comprising what investors paid for assets when they were originally privatised plus subsequent capital expenditure adjusted for depreciation.” RAB is akin to the Net Book Value of an asset. If a company has a large RAB, it has a large asset base against which to borrow money. Ordinarily, the larger a company’s asset base, the cheaper the rate at which it can borrow. Recently there have been discussions about using the RAB as a mechanism to help fund new investments in energy infrastructure off the Government balance sheet. SocInvest, “”, accessed 29 March 2019.
91 ; ; ; ; Mr Denis Hicks ()
92 Global CCS Institute (); Mineral Products Association (); Drax Group plc (); Progressive Energy Ltd (); Pale Blue Dot Energy (); Tees Valley Combined Authority (); Institution of Chemical Engineers (IChemE) (); Carbon Capture and Storage Association (); Energy UK (); Scottish Carbon Capture & Storage (); Cadent Gas (); CCUS Cost Challenge Taskforce, Delivering Clean Growth: CCUS Cost Challenge Taskforce Report , July 2018
94 As above
95 Joint submission by the UCL Institute for Sustainable Resources and the UK Energy Research Centre ()
96 NAO, Carbon Capture and Storage: the second competition for government support, HC 950, January 2017
99 See footnote 89.
100 Ian Temperton (); Drax Group plc (); Oil & Gas UK (); Cadent (); Joint submission by the UCL Institute for Sustainable Resources and the UK Energy Research Centre (); [Luke Warren]; ; CCUS Cost Challenge Taskforce, Delivering Clean Growth: CCUS Cost Challenge Taskforce Report , July 2018
101 ; Tideway, “Green light for £4.2bn London ‘super sewer’”, accessed 4 March 2019; “Britain on nuclear alert after Hitachi shelves £20bn plant”, Evening Standard, 17 January 2019
102 National Infrastructure Commission (); National Infrastructure Commission, Congestion, Capacity, Carbon – priorities for national infrastructure (October 2017)
103 DBEIS, The UK Carbon Capture Usage and Storage deployment pathway: An Action Plan, November 2018
104 As above
Published: 25 April 2019