Forever playing catch up on carbon capture
Energy Blog, 2 August 2023
Industrial Carbon capture and storage is a good idea in theory and the UK has the highest potential storage capacity in Europe but exactly how we will pay industry to do it and what will it cost the taxpayer per ton of Co2 captured ? Despite this week’s announcement by the PM and preceding 3 years of Government consultation papers, we still don’t really know the answer to either.
For those of you who missed the news whilst sitting on a beach, the UK Government recently announced two new Industrial Carbon Capture and Storage (ICCS) projects, the Acorn project in Scotland and the Viking project in the North East. This brings the number of UK ICC projects being developed to 4 and safely puts us as world leaders in commercializing this nascent but exciting technology. To my simple understanding, the Acorn project will collect millions of tons a year of Co2 per annum from a collection of industrial producers, pressurize this gas and pump it out 2.5 miles to under the North Sea to old gas and oil caverns where in theory at least it will remain forever. The initial project will capture 300,000 tons per annum of Co2 from an existing gas terminal but there are plans to expand this to local industry so by 2030 up to 5 million tons per annum could be captured.
The Viking project works in a similar way but on a larger scale whereby they plan to capture 10 million tons a year of Co2 from local industries and they claim their cavern, which is 2,700 meters below the sea bed, can hold up to 300 million tons, again hopefully forever or at least for a very long time before it unexpectedly bubbles back up to the surface.
The UK government are super excited by the potential for these projects because the legacy of North Sea oil and gas extraction is that are now lots of big empty caverns under the sea and we probably have more potential storage sites available to us than any other country in Europe. The Government think that these caverns could safely store 78 billion tonnes of CO₂, which is the equivalent of 200 years of the UK’s annual CO₂ emissions. This sits along the fact that we are also the windiest country and Europe and have the most potential for tidal energy so all in all the UK is probably a good place for developing renewable energy at least in theory.
The Government is supporting both projects with the much heralded £22 billion carbon capture fund but the exact mechanism for support remains unclear and herein dear reader lies the problem. The original paper on potential Government support for ICCS was published in 2020. The latest update was issued in February 2022 but despite the intervening two years, the mechanism for supporting projects still remains unclear though the key part of the text acknowledges in civil service speak that the 4 ICCS projects will be loss making initially;
“The ongoing costs to business of ICCS deployment include operational expenses fees and repayment of capital investment. As outlined, these costs will not be met by a corresponding increase in revenue.” This is code for the initial projects will lose a lot of money without Government support.
“Ongoing revenue support to Industrial Carbon capture (ICC) projects via the ICC Contract will be funded by the Exchequer” which is civil service code that the Government will initially pick up the tab then pass it on to the taxpayer or industry or both.
The form of this ‘ongoing revenue support’ for ICCS is still being developed and hard on the back of the 2022 paper, there was another consultation paper on the revenue support mechanisms published earlier this year so a lot of work but still no real detail of what will actually happen in practice.
This single policy is a good example of why the UK will struggle to reach the net zero target by 2050. We know the technology works, we know the UK has more than enough storage sites but despite this being a cornerstone of our net zero strategy, the consultation process on how to pay for it has gone on for 3 years and will probably reach 4 or even 5 years before legislation is actually enacted.
To be fair to the civil servants, designing revenue support mechanisms for early stage technologies is a fiendishly tricky business and history tells us there are two obvious elephant traps to avoid. First technology prices often fall much quicker than Governments anticipate so early projects tend to be rewarded with much higher levels of subsidy than seems sensible in hindsight. For example, the UK Feed in Tariff (FiT) for exporting electricity into the grid from domestic solar was for a brief period in 2018 about £150 per MW compared to the wholesale electricity price at the time of about £64 and against a backdrop of rapidly falling solar panel prices. The Government eventually reacted, the FiT rate went down but the people who locked in at the £150 per MW price with the then much cheaper panels have been generously supported ever since and will be for another 13 years.
This predictable price behaviour is of course the point of revenue support schemes, early projects get Government support, technology prices fall as the process become widely deployed and eventually Government support is no longer needed. This narrative arc has successfully played out in solar and to a lesser extent with wind and I expect the Energy Minister is hoping something similar will happen with ICC.
The problem for civil servants is they are forever playing catch up with market conditions and I expect that the price per ton of captured Co2 that will eventually be paid for the 4 announced ICC projects will seem very expensive in a few years’ time as the technology matures. This issue is compounded by the problem of ‘discovering’ the “correct” capital cost. The developers of the Viking project say the total cost of their scheme may be as high as £7 billion and given this is a world first of ICCS who knows if this is too high or actually too low ?
This risks of paying too much in support for early projects is however the price of the raffle and unless Government swallows hard and accept the seemingly high early prices then technologies either don’t get deployed or at much slower rate than required.
Secondly revenue support scheme based on something being either generated or in this case produced then captured are always vulnerable to perverse incentives. The Northern Irish Government found this to their costs when their spectacularly badly designed Renewable Heat incentive (RHI) scheme generously rewarded participants for heating empty semi derelict warehouses and the deep flaws in the scheme eventually led to the NI Government being suspended for a number of years.
There is an obvious risk any revenue support scheme for carbon capture incentivises the industrial producer to actually produce more Co2 in order to claim the subsidy and we are sure the civil servants working on the drafting are very mindful of this risk.
In conclusion, the announcement of the Acorn and Viking schemes is clearly welcome news but without corresponding detail on how the revenue support scheme will work or how much will be paid per ton of captured Co2, it doesn’t really move us much further forward. We know that ICC will probably happen in the UK with some form of Government support but despite 3 years of Government work, we don’t know the support process or the unit cost to the taxpayer per ton of Co2 captured. This uncertainty doesn’t really help other schemes trying to get investment so until there is a lot more clarity developers and the capital markets are still in wait and see mode. The UK has huge potential for carbon capture and it will go a long way to getting us to net zero but as ever the devil resides in the as yet unpublished details.