The Chancellor’s decision to axe carbon capture and storage (CCS) funding will backfire when the UK’s heavy industry relocates to other parts of the world, taking GDP percentage points with them.
MPs were also warned by the CCS industry this morning that the UK could not afford to wait for other countries to de-risk the technology. Investment is required in the infrastructure – the transportation networks and storage facilities – more than the capture element. Failure to develop that infrastructure will cost the UK “up to 1% of GDP per annum, between £30bn and £40bn” according to the head financier of the now defunct White Rose project.
The Capture Power consortium aimed to capture CO2 from the nearby Drax coal-fired power station and transport it via a network of pipes to an undersea storage site. Since the surprise decision to axe the ring-fenced £1billion CCS fund in the Autumn Statement, the consortium is now winding up. The developers say they did not know about the funding cut until the day of the announcement (although Drax bailed out some weeks earlier). Whether there is any government support route for CCS left, such as through the contracts for difference regime, is an unknown with the industry left in limbo.
“Grant funding and the customised contract for difference (CFD) were the pillars that made the economics of the project work”, Richard Simon-Lewis, financing director of Capture Power told the Energy and Climate Change Committee. He said 15 investors had been willing to back the project – including the Green Investment Bank and the European Investment Bank. But George Osborne’s u-turn had created investor uncertainty that would return to haunt Treasury when UK industry relocates, the panel warned.
“Energy intensive industries that are not insulated from [a rising] carbon price will basically leave the UK,” said Simon-Lewis. “CCS gives them a route to stay in the UK.”
The EU carbon price has been low for some years, but key decisions about the post-2020 EU ETS will be taken this year. Energy intensive firms may find themselves more exposed to carbon leakage – and significant cost increases – as a result.
Meanwhile, although the government has committed to protecting energy intensive companies from the cost of subsidising renewable power, only a few will benefit in reality. That is because while European State Aid rules provide a framework for governments to decide how to protect industries, the UK government is introducing a very strict electro intensity test for firms to claim the exemption. Many intensives will not meet the high bar set by Treasury. CCS, if it could be successfully developed, was seen as a solution to rising carbon costs. The UK also has the storage reserves and North Sea expertise to capitalise on the rest of Europe’s need to decarbonise.
While CCS is seen as expensive and commercially unproven – and the Prime Minister said last week that he did not think the technology worked – the panel retorted that Cameron had been “badly advised”. They said the funding cut was at odds with the Treasury’s dash for gas and cited Vattenfall’s 30MW Schwarze Pumpe CCS pilot and the 115MW Boundary Dam project in Canada as examples of working technology. Vattenfall, however, is no longer investing in CCS research and did not build a transportation pipe network. Meanwhile Boundary Dam has encountered capture reliability issues. Such “teething problems” were “normal in any process industry”, according to Carbon Capture and Storage Association chief Luke Warren.
The panel urged the government to consider CCS infrastructure as a national priority to enable industry to create commercial risk structures for the transportation and the storage of CO2. They said doing so meant the UK could retain its heavy industries, press ahead with new gas generation and still stand a chance of meeting carbon targets.
It was suggested that the National Infrastructure Committee may be a more appropriate avenue than Decc to re-start the industry.
Watch the session here.