The Department of Energy and Climate Change (DECC) has published a consultation document setting out the Government's proposals and seeking views on the creation of a framework for coal-fired carbon capture and storage (CCS) equipped power plants. The framework is intended to encourage the development of up to three more commercial scale CCS demonstration projects, in addition to the demonstration project that will receive support under the existing CCS competition launched in 2007. This has been followed by the publication of responses to Ofgem's consultation on National Grid's participation in the UK CCS competition.

The future of coal-fired generation in the UK depends on the approach taken by Government following the DECC consultation.

DECC Consultation

The consultation paper includes proposals for:

  • financial support for up to four commercial scale CCS demonstrations in Britain, including the CCS demonstration competition that was launched in 2007;
  • requirements for all new coal power stations in England and Wales to demonstrate CCS on a defined part of their capacity;
  • requirements for all new coal power stations to retrofit CCS to their full capacity within five years of CCS being independently judged to be technically and economically proven; and

how to deal with the possibility that CCS will not be proven by 2020.

Financial incentives for up to four demonstration projects

Amongst the key proposals contained in the consultation document are the Government's preferred proposals for funding UK CCS demonstration projects.

The paper proposes that funding support will be available for up to 4 projects each demonstrating a different aspect of CCS technology. Proposed demonstration projects would be subject to a bidding process. Projects would then be shortlisted by reference to selection criteria set by DECC.

Fundraising

Two options for raising funds to support CCS are put forward:

  • placing an obligation on electricity suppliers to purchase power generated by CCS enabled plants, which would work in a similar way to the current Renewables Obligation by enabling the plant to sell a tradeable certificate in addition to its electrical output; or
  • imposing a levy on electricity suppliers per unit of electricity supplied, which would raise funds that would be redistributed to CCS plants.  

Whilst both methods of fund raising involve placing an obligation on suppliers, the Government has proposed that a levy should be used on the basis that it is a less complex and more flexible mechanism. As experience has shown with the Fossil Fuel Levy (currently set to zero), this type of levy mechanism can be adjusted as required to achieve the necessary level of funding.

One funding option not included in the consultation is the earmarking of funds raised by the UK from the sale of Phase III EU ETS allowances. The Government has consistently opposed this as a funding option despite industry pressure.

The Government hopes that further sources of funding may be made available to UK demonstration projects by the EU. Under the European Energy Programme for Recovery €1.05 billion is available for CCS, of which the UK has been assigned €180 million. The EU ETS may also be a source of support – 300 million EU ETS allowances from the New Entrants Reserve are available for demonstrations of CCS and other innovative renewable energy technologies – provided that the mechanisms implemented in the UK to promote CCS are compatible and projects are eligible to receive allowances.

Distribution of funding to CCS generators and selection of demonstration projects for funding

The Government has considered three options for distributing the funding raised by the proposed levy to developers of CCS demonstration projects, namely: a feed-in tariff; making an additional payment of a fixed amount per unit of electricity generated by CCS demonstration projects; and a payment based on a contract for differences (CfD) approach.

The CfD approach is the Government's preferred option, whereby the developers of CCS demonstration projects would receive a fixed "strike" price for the carbon they abate, measured relative to emissions from a new gas fired plant or a coal-fired plant without CCS technology, less the EU ETS carbon price prevailing at the time.

The Government's view is that the CfD approach avoids the carbon price uncertainty associated with the additional payment mechanism, whilst being more flexible than a feed-in-tariff. The mechanism could also operate as a two-way CfD such that if the carbon price exceeded the strike price generators would be required to pay into the fund.

The proposed new regulatory framework for coal plants

Requirement to demonstrate CCS on a "Commercial Scale"

The Government has proposed a regulatory requirement for all new coal-fired plants to demonstrate CCS on a commercial scale. The suggested parameters for such demonstration projects are:

  • capture and transport the CO2 emissions from the generation of at least 300 MW (net) of electricity; and
  • store at least 20 million tonnes of CO2 over a period of 10 to 15 years.

The requirement to demonstrate CCS could be introduced through the planning system, by modifying the procedures developers have to follow to obtain consent from the Secretary of State for Energy and Climate Change under section 36 of the Electricity Act 1989 (and subsequently development consent from the proposed Infrastructure Planning Commission under the Planning Act 2008).

New plants with an electrical output of 300 MW or over already have to demonstrate a number of carbon capture ready requirements. Under the new proposals, in addition to this, operators of plants would have to show:

  • that the design and construction of the plant includes a minimum 300 MW net CO2 capture unit (and show that there is a reasonable expectation for this to operate as intended) and that the necessary consents, such as Hazardous Substances Consent, are in place;
  • how CO2 would be transported, and provide evidence that consents (for example, authorisations for the construction of a pipeline) were in place; and
  • that access to an offshore facility with the capacity to store at least 20 million tonnes of CO2 had been secured and that the operator of the facility has the requisite lease and licence (please see our Energy Bill e-bulletin of 21 January 2008 for further information on the new licensing regime for CO2 storage).  

Enforcement

One concern that has been voiced by non-governmental organisations in particular is that the CCS facilities may be by-passed during actual operation. To combat this the Government proposes mechanisms for ensuring that operators of CCS demonstration projects make all reasonable attempts to maximise the operation of the full chain of a CCS demonstration. Of the options outlined the Government prefers a requirement to cease operation – the plant would not be able to operate using coal as a primary fuel until the CCS demonstration chain was restarted.

Requirement to retrofit and contingency measures

The Government is also consulting on a proposal that all new coal power stations should be required to retrofit CCS to their full capacity within five years of the technology being independently judged to be economically and technically proven. Economically proven is likely to fall short of meaning economically viable without support and is more likely to turn on the costs being known. If this proposal is carried through it is likely to raise concerns (as with capture ready requirements), as to how consents and permits required for retrofitting can be identified, obtained or at least "secured" at the stage of initial plant development in order to limit the risk of future permitting issues.

The Government proposes that an independent review should be undertaken, reporting in 2020, to determine when CCS is likely to be proven and to make recommendations on contingency measures that could be implemented if CCS is not likely to be implemented on a large scale during the 2020s. The final decision regarding contingency measures would remain with the Government and its expectations are for substantial limits on the operation of coal plants absent CCS.

The full consultation paper is available from the DECC website. The consultation is open until 9 September 2009.

Ofgem publishes responses to proposal to sell part of the NTS

The current UK CCS competition has also returned to the spotlight. On 22 June 2009, Ofgem published responses to the consultation it launched in April 2009 on a proposal by National Grid to use part of the national transmission system in Scotland as a CO2 transportation pipeline. National Grid has proposed that the assets would be sold to a National Grid subsidiary which would participate in the current UK CCS competition, in support of the project proposed by Scottish Power.

Under the proposal, part of the existing transmission system would be used to transport CO2 from Longannet to the entry point at St Fergus. From there the CO2 would be transported through Marathon Oil's offshore pipelines and stored in a depleted gas field in the North Sea.

Whilst the responses to the consultation have been broadly supportive of the CCS competition and the idea of re-using assets to transport CO2, the proposal has caused concern for gas shippers who fear that the transfer of use would decrease the capacity for gas reception at St Fergus and place strain on other parts of the system.

The consultation also implicitly raises a number of wider issues for the development of CCS in the UK, such as the role of National Grid and the desirability for a coordinating CO2 pipeline operator. The role of transportation has been highlighted by many commentators as being key for the medium to long term development of CCS, and whereas much of the debate up to now has centred on the capture of CO2 in the context of power generation, the support and coordinated development of transport and storage infrastructure will be a crucial next step for CCS.

The consultation document and the recently published responses are available on the Ofgem website.