This week, the Prime Minister laid out a Ten Point Plan (TPP) for “Building back better, supporting green jobs, and accelerating our path to net zero”. The policy paper published after the announcement provides more detail than was initially announced. This note briefly considers its implications for the nascent Carbon Capture Usage & Storage (CCUS) industry. In this case, building back better means more public money to do more, more quickly. We have written another post about the rest of the TPP.
Background: The Chancellor’s March 2020 Budget speech committed “at least £800 million” of public funding in a CCS Infrastructure Fund for CCUS. It also set targets of delivering an operational CCUS cluster by the mid-2020s, and a having a second cluster, as well as an electricity consumer-funded CCS power station, operational by 2030 (2020 Budget Deliverables). It is important to understand that this £800 million is almost certainly intended as capital funding, i.e. support for the capital cost of developing CCUS facilities. The considerable volume of emerging policy material published by BEIS since 2017 – most recently its business models publication in August 2020 – is clear that the government is also fully expecting to establish revenue funding mechanisms which, ultimately, will inevitably provide industry with many £billions of operational funding.
Some may have speculated that the anticipated squeeze on public spending as a consequence of the huge spending on the government’s response to the COVID-19 pandemic might have delayed or hampered its ability to fund CCUS. BEIS’s August 2020 publications – which confirmed the budget funding and deliverables and explained how policy will unfold over the next period – suggested that perhaps such speculation was unfounded. So too did the Prime Minister’s recent speech in which he confirmed his recent conversion to become “a complete evangelist” for the CCUS cause.
However, history in relation to major public spending shows, and in relation to Carbon Capture & Storage in particular, that “it isn’t over until the fat lady – in this case the resident of Number 11 Downing Street – sings”. What can be committed in one Budget speech can be taken away in the next.
The Ten Point Plan: Well, history also shows that “there’s no zealot like a convert”. The Prime Minister’s TPP broadly doubles the 2020 Budget Deliverables, albeit with only a 20% increase in committed public funding. This personal commitment would seem to assure the committed funding and so the early stage development of UK CCUS (at least until the next election). The TPP also promises an energy White Paper in 2020, so detailed policy is to be made rapidly to start implementing the plan.
As with policy, so with the lingua franca. Goodbye CCUS clusters, hello “SuperPlaces” (“hubs where renewable energy, CCUS and hydrogen congregate”).
The new CCUS TPP Deliverables are to meet the stated ambition “to capture 10Mt of CO2 a year by 2030”. They are to:
- “invest £1 billion to support CCUS in four industrial clusters, creating SuperPlaces in places such as the North East, the Humber, North West, Scotland and Wales”;
- establish CCUS in two industrial clusters by the mid-2020s; and
- aim for four of these sites by 2030.
In addition, the TPP:
- confirms the CCS Infrastructure Fund, now at £1 billion;
- confirms that there will be a revenue mechanism for industrial carbon capture and hydrogen projects, presumably those foreshadowed in the BEIS 2019 publications and the more recent August 2020 ones;
- broadly confirms the approximate timetable published by BEIS in its August 2020 publications for policy finalisation on the business models for CCUS (in 2022); and
- reconfirms the ever-present mantra, “subject to relevant value for money and affordability considerations”.
Commentary: In 2020, we have developed around 100 pages of analysis of the law and policy surrounding CCUS. We have speculated that the 2020 Budget Deliverables were challenging, requiring the government to implement rapid and overlapping processes of policy development, law making, investor-selection and transaction execution. We posed around 60 key questions to be answered by those processes before CCUS would become investable and, where desired by the government, bankable.
The TPP does not answer any of these questions – it is not that sort of document – but they will need answering soon. Even if a doubling of ambition may not double the BEIS workload, it will increase it significantly. Finalising policy, making law to create powers and regulatory frameworks, starting work to establish new, or repurpose existing, institutions, establishing and applying selection/investment criteria, running a process to due diligence and receive proposals from individual projects and negotiation transactions to closing by around end 2023, to allow operation of two clusters in 2027 is a big ask. We also speculated that the government might be expected to develop some form of competitive process to select the project(s) to be funded for mid-2020s operation, and would be very likely to do so for the project(s) to be developed by 2030. While, in principle, we would expect the government to be keen to use competitive tension to secure value for money for its investment in the initial projects, it may be that the doubling in the TPP of the 2020 Budget Deliverables will reduce the focus on this aspect of the process for the first two clusters to be funded. First, there may be relatively few projects that are capable of being sufficiently “shovel-ready” within this timescale. Second, a competitive process is likely to be slower, and more labour intensive, than simply negotiating with selected projects.
However, this may not be straightforward for BEIS. If the process will involve choosing winners and losers (i.e. if more project(s) seek funding than are awarded it), BEIS will need to be able to justify objectively how it separates the winners from the losers, or risk its decisions being challenged by the losers. And public policy about how the government commits public funds militates strongly in favour of using competition to assure value for money where possible. One method of mitigating this perceived risk to value for taxpayer money would be to structure the initial projects largely on an emerging costs basis, where most of the cost risk and all of the market risk inherent in developing and operating the projects sits with the government. However, this would also imply a much lower level of return, reflecting that risk allocation, for the investors in those projects than they may expect.
The position is further complicated by Brexit. The “level playing field”, still very much a live issue between the UK and the EU in the trade negotiations, relates in part to what, if anything, will replace the current “state aid” rules. The public funding for CCUS projects will need to go through whatever subsidy control process applies in the UK in place of EU state aid rules and, until a long-term competitive process for allocation of CCUS funding is established, this would be on a per project basis. One of the factors that can smooth the process of securing necessary approvals is to demonstrate that an open competition was used to select the investors/projects to be supported.
Whatever the outcome of the ongoing UK-EU trade negotiations, the CCUS funding arrangements will benefit from EU consent, or at least acquiescence. If there is a deal, it may include the UK at least making some commitments acceptable to the EU about the principles on which its authorities will authorise subsidy schemes, even if they are free from the requirement to seek European Commission approval for such schemes. Even if there is no UK-EU trade deal, under the “WTO terms” which would apply in that situation, the EU and others would be able to challenge certain kinds of subsidy (including those that are contingent on the use of domestic over imported goods), within the framework of the WTO Agreement on Subsidies and Countervailing Measures. Subsidy for clean energy technology has been a highly contentious subject in international trade for some time.
If BEIS does deploy a degree of competition in its selection process, the doubling of ambition in the TPP presumably doubles the prospects of success for each project that can meet BEIS’s selection criteria. Whether or not there is competitive process, BEIS will need to implement a highly collaborative process, as one that is not collaborative will not deliver the ambition.
It will also be necessary for the CCUS (and hydrogen) funding arrangements to be harmonised with UK fiscal policy. Very shortly, the UK government has to decide whether to adopt a UK version of the EU Emissions Trading System (EU ETS) or a Carbon Emissions Tax to replace the EU ETS as the primary instrument for the pricing of greenhouse gas emissions in the UK after the EU ETS ceases to apply to GB (participation in the EU ETS will continue in Northern Ireland because of the all-Ireland Single Electricity Market). For any business in a SuperPlace, the decision to participate in CCUS will be based on avoidance of greenhouse gas emissions costs as well as any government financial support, and so certainty about the mode and levels of future carbon prices is essential.
Clearly, the TPP is a very positive development for industry. CCUS professionals in both the public sector and industry can expect to be busy for the foreseeable future.