Utility Week

Utility Week 4th October 2013

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Finance & Investment Analysis Market view A levy on suppliers could unlock CCS Breaking shale Fossil fuel suppliers have more money and the expertise for CCS, says Megan Darby Mark Howard and Martin Griffiths explain how tax breaks should kick-start shale exploration. I T t was Norway's equivalent of "one small step for man". In 2006, Labour prime minister Jens Stoltenberg compared the country's plans for the world's biggest carbon capture and storage (CCS) venture to the effort of utting a man on the moon. p While the costs of developing CCS at Mongstad oil refinery may have been astronomical, the project has come crashing down to earth. The Norwegian Labour was ousted from government last month. Shortly after, oil and energy minister Ola Borten Moe, from the Centre Party, called a halt to the full-scale project, which had gone 1.7 billion kroner (£180 million) over budget. The government will continue to fund CCS research. "I fear that Mongstad would have been a project where we demonstrated that we're willing to spend a lot of money on one project, not that this is an example to follow for the rest of the world," he said. The world over, CCS projects have collapsed after taking longer and costing more than expected. There is a widening gulf between the costs of these big, complex projects and the funds recession-hit national and federal governments can muster. Yet advocates maintain that without CCS to allow for continued use of fossil fuels, the costs of decarbonising energy will be much higher. So who will step up to finance critical projects such as Mongstad? One idea gaining ground is to impose a levy on fossil fuel suppliers. In April this year, a European Commission paper floated the idea of a mandatory CCS certificate system. Either big emitters of carbon dioxide or those who sell the fuel would be made to buy CCS certificates equivalent to a proportion of their emissions (real or embedded). Ian Temperton, head of advisory at environmental asset management and advisory group Climate Change Capital, argues that upstream companies are better placed than utilities to finance CCS. "We have chosen the wrong agent of investment," he wrote in a recent paper. "Europe's power generation utilities have had a torrid time in recent years. They are selling assets, cutting costs, and struggling 18 | 4th - 10th October 2013 | UTILITY WEEK to fund investments in much simpler and better established parts of the sector than CCS." Suppliers are more likely to have the money, understand the risky storage part of the process and have expertise in multi- disciplinary projects, says Temperton. He proposes subjecting suppliers to a specific CCS levy that could, in time, be integrated into the European Union Emissions Trading System. Jeff Chapman, chief executive of the Carbon Capture & Storage Association, says it is a "significant option" that "needs exploring". He adds: "There are lots and lots of fossil fuel companies that would lobby against [a levy], but we have got to start thinking along these lines." Guy Newey, head of energy and environment at think-tank Policy Exchange, agrees the levy proposal is "potentially interesting", but says he believes "there would be olitical p problems getting Gazprom and others to pay". Unsurprisingly, Oil & Gas UK, which represents the upstream industry, does not endorse the plan. Energy policy manager David Odling says: "The cost of emissions should be paid where the cost is incurred, in this case by the power generator. In terms of the goal of reducing emissions, this should incentivise them to generate electricity in cleaner ways, for example by switching from coal to gas or by investing in more efficient technology." Stephen Tindale, associate fellow at the Centre for European Reform, has authored a report, due out imminently, calling on the European Commission to find new funding sources for CCS. Losing the global race to commercialise CCS would be "a major missed economic opportunity", he says. Funding CCS from taxation would be more progressive, he argues, but if a levy were to be introduced, it would spread the cost more equitably to impose it on those upstream of utilities. "It is not a bad idea and CCS needs all the help it can get. The Norwegians have just pulled the plug, so it is even worse than before." he government is embarking on a journey to introduce new tax reliefs for the shale gas sector. It published a consultation on 19 July 2013 proposing a variety of tax breaks. While shale could represent a means of extending security of supply, many have balked at likely high costs compared with more conventional techniques. The most significant of its proposals is to reduce the effective rate of tax from 62 per cent to 30 per cent on income generated from shale gas, but the proposed regime provides a number of further subtleties of interest to the broader UK oil and gas sector. This could be the start of a long and bumpy road navigating various political, economic and social issues. Currently, profits derived from conventional oil and gas extraction can be taxed at 62 per cent, which is levied through two separate charges: • n "ring fence" profits (generally all the o profits from oil exploration and production activity), at 30 per cent; • a supplementary charge of 32 per cent. In addition, some enterprises may fall within the petroleum revenue tax regime (PRT), which is charged on the profits of individual fields. Though PRT was abolished for fields given development consent on or after 16 March 1993, for those still falling within the regime the effective tax rate may be as high as 81 per cent. To counteract the prohibitively high cost of setting up shale gas operations, the consultation is proposing that similar allowances from the supplementary charge will be available for expenditure incurred in setting up shale gas "pads". Production income from shale gas will be exempt from the supplementary charge in proportion to the amount of capital expenditure on the pad site. This aims to acknowledge the disproportionately high costs involved at the commencement of activities. However, matters are not as simple as just providing an allowance within the existing legislation, because shale gas fields do not necessarily have clearly delineated boundaries, as is the case for more conventional

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