By Samuela Bassi
Policy Analyst, Grantham Research Institute
on Climate Change and the Environment,
London School of Economics and Political Science
Carbon capture and storage (CCS) can play a considerable role in tackling global climate change. By capturing CO2 and storing it underground, CCS allows coal- and gas-fired power stations to produce low-emissions electricity. Furthermore, it is the only technology that can reduce carbon emissions from large industrial installations, such as steel and cement plants. If successfully applied to bio-energy generators, CCS technology could also result in “negative emissions”, that is, it could actually remove CO2 from the atmosphere.
For these reasons CCS is included in a wide range of authoritative energy models forecasting future low-carbon energy portfolios, including models developed by the International Energy Agency (IEA)1 and those included in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC).2 Most analysts agree that it may be much more expensive, if not infeasible, to limit warming to 2°C without CCS.
The case for CCS is also strong in the European Union. All the scenarios developed in the EU’s Energy Roadmap 2050, which aims to reduce emissions by 80–95% below 1990 levels by 2050, involve using CCS.3 According to these scenarios, CCS should be applied to between 7 and 32% of electricity generation in the EU by 2050.
To achieve the emission reductions outlined in the Energy Roadmap 2050 scenarios, CCS must be deployed in Europe from 2020 onward. However, momentum for CCS on the continent appears to have dwindled, and progress has been painfully slow.
A recently published study by the Grantham Research Institute at the London School of Economics and Political Science and the Grantham Institute at Imperial College investigates the barriers to CCS development in the European Union and recommends a European-wide strategy to speed up investment.4 This article shares key findings from that study.
SLOW DEVELOPMENT OF CCS IN THE EUROPEAN UNION
Although no explicit target has ever been enforced, the European Council did once aspire to have up to 12 CCS demonstration projects operating by 2015.5 Despite this, the pace of CCS development in the European Union has been very slow. Not a single CCS plant is even in construction in the EU. By comparison, North America already has 13 CCS installations in operation and six under construction (see Figure 1).
This does not mean that efforts have not been made by some EU member states. Six CCS plants are now at various stages of planning, five of which are in the UK with the other one being in the Netherlands. It remains unclear how many of these projects will secure enough financing to be fully realized. At the moment only two of them—the White Rose and Peterhead projects in the UK—are relatively close to a final investment decision, but the outcome is not certain. Notably, last September the White Rose project lost the support of one of its three commercial bakers, Drax Group PLC, allegedly due to a recent cut in low-carbon energy subsidies in the UK.
WHY IS CCS LAGGING BEHIND?
High upfront costs present the biggest barrier to the widespread use of CCS. While the technology is well understood, it is still far too expensive to be commercially competitive with unabated coal- and natural gas-fired power stations.
Based on the current cost of CCS technology, between €18 billion and €35 billion may need to be invested by 2030 in the EU to deliver the 10 GW of CCS power plants with CCS envisaged by the Energy Roadmap 2050. Just €1.3 billion of public European funding, coupled with some private investment, has been allocated to CCS to date—just a fraction of what is needed to make CCS technology commercially viable.
The costs associated with CCS are expected to decrease over time thanks to technological innovation, economies of scale, and increasingly efficient CO2 transport and storage infrastructure. However, realizing these advancements would require investment in fully operational plants as soon as possible.
There is already much being learned from existing projects. The developers of the world’s first operating CCS power plant, the Boundary Dam project in Canada, claim that they could save up to 30% of the costs building an identical CCS plant today, thanks to the knowledge gained in the course of the project. Other, more theoretical, estimates suggest that costs could decrease by 15–40% by 2030, especially through improvements in CO2 transport and reductions in the cost of financing projects.
The financing of CCS projects is particularly important. Currently, perceived risks surrounding first-of-a-kind CCS projects impair access to suitable finance, raising the cost of capital. UK estimates suggest the cost of capital faced by CCS developers could be in the order of 12–17% (mid-point 14.5%).8 By comparison, the cost of capital faced by more established low-emissions technologies, such as solar photovoltaic or offshore wind projects, is between 6 and 9%.
A simple financial model based on publicly available information from the Boundary Dam CCS power plant shows how different costs of capital can affect the average cost of electricity from a CCS power plant, measured in terms of levelized cost of electricity (LCOE). With a cost of capital of 9.5%, the LCOE would be around £180/MWh. For a cost of capital at 14.5%, the LCOE increases to £240/MWh (see Figure 2).
The policies introduced to support CCS in the European Union have so far failed to deliver the expected results. Notably, the price of carbon in the European Union Emissions Trading System (EU ETS) has been very low and is unlikely to increase to the level required to make CCS competitive with unabated fossil fuel installations.
Notably, the carbon price would need to increase from less than €8 to between €35 and €60/tonne CO2-eq if a coal-fired power station fitted with CCS is to be competitive with conventional coal-fired plants. For gas-fired power stations with CCS to be competitive, the carbon price would need to be even higher, between €90 and €105 per tonne. It is very unlikely that the EU ETS will achieve these levels for at least another decade or so.
Public funding programs have also been set up to support CCS development and deployment, such as the European Energy Programme for Recovery (EEPR) and the New Entrant Reserve (NER) 300. These too, however, failed to deliver strong results. This is partly because funds available through the NER 300 depended on the price of 300 million EU ETS allowances earmarked to CCS, and their selling price ended up being lower than expected. In addition, CCS projects were in competition with other low-emissions technologies for funding. Eventually only one of the 39 projects funded by NER 300 actually involved CCS.
In the coming years, additional financial resources are expected to become available through the new Innovation Fund (or NER 400), the Modernisation Fund, the European Fund for Strategic Investment, and the European Structural and Investment Funds. However, the scopes of these programs are much broader than CCS. It is unclear if, and to what extent, CCS projects will be financed through these channels.
Another challenge faced by CCS developers is that existing regulation imposes significant costs and liabilities on CO2 storage site operators, which discourages investment. In particular, site operators are requested to provide financial coverage for the cost of compensation in case of CO2 leakage. This financial liability is linked to the price of allowances in the EU ETS. The uncertainty over the amount of CO2 that could leak and the future EU ETS carbon price make this liability potentially open-ended.
STRONGER, BETTER COORDINATED POLICY IS NEEDED
The European Commission must provide leadership on CCS if it is to keep on course with its Energy Roadmap 2050. Europe needs an overarching strategy to stimulate much needed action to advance CCS. But what would a strategy on CCS involve?
First, such a strategy should encourage member states to assess their potential for CCS and characterize potential storage sites. It should provide policy guidance, set milestones to measure progress, and coordinate transport infrastructure planning.
Second, the strategy should identify additional market-based mechanisms to mobilize investment in the short to medium term. These would complement existing policies like the EU ETS.
These could include more direct funding for research and development, a new funding mechanism to finance early-stage CCS development projects, and financial incentives for electricity generation using CCS.
Furthermore, improvements to the existing European legislation will be required to allow the first demonstration projects to be developed in a timely manner and to create the right conditions for future investment. A key action would be to set an initial cap on long-term liability for CO2 leakage, to be reviewed as risks become better understood and private insurance mechanisms develop. This is not dissimilar to the way risk has been handled in the nuclear industry. A financial mechanism for damage remediation, such as a liability fund or private insurance, would also help spread risk across CCS site operators. Special treatment of early demonstration projects—for example, through a public liability scheme—would also be warranted, given the higher risks faced by first movers.
THE ROLE OF PUBLIC AND PRIVATE SECTORS
If CCS is to be successfully deployed in Europe, the private sector will also need to act. For instance, large, incumbent energy utilities could be well placed to develop the first CCS projects, as they have the size, experience, and capacity to undertake diversified, large-scale, and complex investments while minimizing many of the barriers and inherent risks to CCS projects.
This is not to say that large-scale energy utilities will find it easy to invest in CCS. In the current economic and political environment they are facing significant funding constraints. Furthermore, CCS project financing has a different risk profile compared to traditional capital-intensive energy infrastructure projects. In particular, the risks associated with construction of CCS installations differ considerably from the risks associated with its operation. Investors may be willing to absorb some of the risks, but the long-term nature of CCS means that risks will endure and can only be managed by private investors to a certain degree.
These complexities highlight a need for the involvement of public financial institutions. For instance, the European Investment Bank (EIB) or the European Bank for Reconstruction and Development (EBRD) could contribute convening power and know-how to attract additional private financing sources.
Upstream producers of fossil fuels—whether privately or publicly owned—should also contribute much more strongly to advancing of CCS in the EU. Ultimately CCS will increase the amount of their assets that can be potentially realized in compliance with climate change targets. It is likely that fossil fuel companies may oppose an additional tax to fund CCS development. However, I believe there is a case for encouraging the creation of a private-sector fund for CCS. These companies’ desire to lower the costs of CCS technologies could be fostered by simple agreement between key players to exploit a shared interest in developing CCS.
The EU and its member states must show much greater urgency and determination to develop and deploy CCS. Without action now, the EU may be unable to meet its targets for reducing greenhouse gas emissions. Evidence indicates that it will be more costly to meet these targets without CCS.
Thus, there is a strong case for stepping up ambition and action on CCS in the EU. The creation of a European Energy Union provides a timely opportunity to revamp European policy on CCS. The European Commission and the Energy Union, in particular, have a strong responsibility to engage and guide member states, helping them meet their emissions reduction targets at the least cost.
The first CCS installations will require significant public and private resources. This will likely be realized through a mix of higher carbon pricing, subsidies, and increased private investment. Further measures, however, need not be monetary in nature—these ought not to be difficult to implement in the short term. For instance, inviting member states to assess their own potential for CCS, and identifying the cost of alternative routes for decarbonization, may be a sensible first step. This could also lead to the identification of a coalition of countries willing to collaborate more closely on CCS.
At the very least, the European Union needs more certainty about which low-emissions energy technologies warrant investment. If the promotion of CCS is considered politically unfeasible, the EU’s stated expectations for CCS would have to be revised in a timely manner and alternative options should be explored immediately.
Ultimately, the public and private sectors both have a role to play. Within the private sector, the burden of investment in CCS has fallen especially on energy suppliers. However, these companies are not often in a position to invest in large multi-billion projects without sufficient public backing. Other players could be well placed to be more involved, such as upstream producers of fossil fuels. It is time to think about how to scale up investment on CCS, by improving public policy as well as further mobilizing private finance from a multiplicity of actors.
- International Energy Agency. (2012). Energy technology perspectives 2012, pathways to a clean energy system, www.iea.org/publications/freepublications/publication/ETP2012_free.pdf
- Intergovernmental Panel on Climate Change. (2014). Summary for policymakers. In O. Edenhofer et al. (Eds.), Climate change 2014, Mitigation of climate change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK/New York, NY: Cambridge University Press. Available at: report.mitigation2014.org/spm/ipcc_wg3_ar5_summary-for-policymakers_approved.pdf
- European Commission. (2011). Impact assessment, accompanying the document, Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions, Energy Roadmap 2050. Commission Staff Working Paper. SEC(2011) 1565/2 Part 1:2, ec.europa.eu/energy/sites/ener/files/documents/sec_2011_1565_part1.pdf
- Bassi, S., Boyd, R., Buckle, S., Fennell, P., Mac Dowell, N., Makuch, Z., & Staffell, I. (2015). Bridging the gap: Improving the economic and policy framework for carbon capture and storage in the European Union. London: Centre for Climate Change Economics and Policy, Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science, and Grantham Institute at Imperial College, www.lse.ac.uk/GranthamInstitute/publication/bridging-the-gap-improving-the-economic-and-policy-framework-for-carbon-capture-and-storage-in-the-european-union/
- Council of the European Union. (2007). Presidency conclusions, Brussels European Council 8/9. Brussels: Council of the European Union, www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/93135.pdf
- Massachusetts Institute of Technology. (2013). Carbon Capture and Sequestration Project database, sequestration.mit.edu/tools/projects/index_capture.html
- Global CCS Institute. (2014, 7 October). Status of CCS project database, www.globalccsinstitute.com/projects/status-ccs-project-database
- Oxera. (2011). Discount rates for low-carbon and renewable generation technologies, Prepared for the Committee on
Climate Change, www.oxera.com/Oxera/media/Oxera/downloads/reports/Oxera-report-on-low-carbon-discount-rates.pdf?ext=.pdf
This article is based on a report by the Grantham Research Institute at the London School of Economics and Political Science and the Grantham Institute at Imperial College, “Bridging the gap: Improving the economic and policy framework for carbon capture and storage in the European Union”, by Samuela Bassi, Rodney Boyd, Simon Buckle, Paul Fennell, Niall Mac Dowell, Zen Makuch, and Iain Staffell. The report is available for download from the Grantham Research Institute website: www.lse.ac.uk/GranthamInstitute/publication/bridging
-the-gap-improving-the-economic-and-policy-framework-for-carbon-capture-and-storage-in-the-european-union/ The lead author can be reached at email@example.com
The content in Cornerstone does not necessarily reflect the views of the World Coal Association or its members.
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