14 October 2019

Back in July 2019, BEIS published a consultation on Business Models for Carbon Capture Usage and Storage (CCUS), which has closed recently. With the announcement of the Government’s Net Zero ambition, CCUS is now back on the agenda, having had a few false dawns. The Committee on Climate Change’s Report, which advocated Net Zero, described CCUS as a necessity, not an option, in reaching UK Net Zero targets.

Why might that be the case?

It is widely thought that we are going to need more “baseload” power in years to come and if some of that baseload power comes from gas, some form of carbon capture will be essential. 

Hitting Net Zero will mean a renewed effort to de-carbonise our industrial manufacturing base so a solution as regards capturing the carbon given off in industrial processes and safely storing it is essential. The Government sees the development of hydrogen as important over the coming years and if the blue hydrogen supply is to develop then CCUS needs to sit alongside it. The Government has also recognised the potential opportunities that CCUS represents in terms of jobs and technology exports when it published the Clean Growth Strategy.

The renewed push for CCUS is also helped by the UK being blessed with significant storage capacity for carbon through, among other things, decommissioned, or soon to be decommissioned, oil and gas fields. It has been estimated that potential storage for 78 billion tonnes of carbon dioxide is available in the UK.

Tried and failed

For all the needs and desires above, the Government has not managed to stimulate CCUS in any material scale. Yes, there has been the odd demonstrator, but it is interesting that the Consultation refers to the CCUS Challenge Taskforce identifying the need for long-term supportive policy environment and viable business models as essential if this technology (CCUS) is going to flourish. This is what has been missing over the last decade.

Whether the Government can bring itself to provide that stable policy over a consistent period of time is still open to debate. If one looks at the current state of UK energy policy, stable is not necessarily a description you would apply. The Net Zero move certainly helps. Previous governments have run CCS competitions, but the Conservative Government’s decision in 2015 to pull its CCS competition and funding lives long in the memory. The reality of that competition and the way it was designed meant that the CCS demonstrators had significant challenges quite apart from the early technology. The Government wanted full CCS chains, which meant that the members of the various consortia bidding for funding had to try to address what would happen if a constituent part of the CCS chain, be it storage, transport or power generation, went offline and, therefore, who was liable for the consequences.

Pulling those full CCS chains together proved very difficult with each constituent party not necessarily prepared to stand behind all of the risks associated with another part of that chain falling over. CCUS projects also have to find a solution to low probability but high impact events such as CO2 leaking from where it is stored. Some form of Government coverage and backing off against these risks in a nascent sector could be important. One other thing that may also have contributed to the lack of progress on early CCUS was the fact that, until recently, getting the oil and gas sector to concentrate on CCUS was a challenge with all sorts of other more immediate concerns. Things may have changed now.

A new dawn

This Consultation is the beginning of new efforts to stimulate CCUS. There is £50 million worth of innovation funding already announced and a whole range of other programmes, but this Consultation seeks views on the right business models for various constituent parts of the CCUS chain. It is important that the Government has now realised that different incentives and different risk profiles attach to different areas of the CCUS chain be that energy production with CCS, the whole transport and storage of carbon, hydrogen production linked to carbon capture or the de-carbonisation of UK industry by using CCUS.

A number of different business models are advocated in order to get various parts of the chain operating. For the transport and storage of carbon, which is largely viewed as the most high-risk area, there are clearly large upfront capital costs needed to install the necessary infrastructure, however, once installed the Opex is predicted to be substantially lower. So with that, the Government is considering a form of RAB (Regulated Asset Base) model akin to what it is proposing for the nuclear industry. The RAB model of funding has been used before on infrastructure assets, such as on the Thames Tideway Tunnel sewerage project. It is seen as a way of facilitating much cheaper infrastructure finance from the likes of pension funds.

As mentioned above, at the same time as this consultation the Government has been consulting on a RAB model to support the development of new nuclear in the UK and it is clearly in the mind of the Government that with nuclear at least, the RAB can incentivise the deployment of low cost capital if investors are given some form of Government backed protection against remote, low probability but high impact risk events. In nuclear that could mean unexpected construction delays but this might apply to CCUS and unforeseen carbon leakage. Under the RAB model a project receives a licence from an economic regulator which grants the project a right to charge a long term regulated price to users. To prevent abuse, the model comes with an independent regulator which makes sure that the project expenditure stays within bounds.

For CCUS linked to industrial facilities there is a wider challenge in the sense that each industry will have a different profile. As a result, the Government discusses a number of different models such as a contract for difference and even carbon capture certificates (akin to the green certificates which we’ve had for many years under the Renewables Obligation). These certificates would be tradeable and therefore would act as an extra revenue stream for the decarbonising of industry. Other business models have included the Cap and Floor mechanism (a maximum/ minimum revenue regime that the project can earn) such as that connected with incentivising electricity interconnectors in the UK and just open book operational payments made for particular types of industrial facility.

It is clear however that the RAB model is getting traction as a potential solution for CCUS alongside what is viewed as the more traditional incentivisation method – a contract for difference. Whichever business model is adopted, there is the prospect of a new regulator being established to monitor and award a RAB model or possibly even CCUS contracts for difference. It will be interesting to see how these models play out with other decarbonisation technologies since, logically, there ought to be some consistency.

Key contact

Ross Fairley

Ross Fairley Partner

  • Energy and Utilities
  • Head of Renewable Energy
  • Environment

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