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Utility Week 7th March

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UtILItY WEEK | 7th - 13th March 2014 | 13 Policy & Regulation Analysis I t would be my worst nightmare to build a one-of-a-kind," says Bill Spence, rep- resenting the Peterhead carbon capture and storage (CCS) project. "What I hope to build is the first of a kind." He produces an accompanying slide showing an artistic mas- terpiece on one side and a brick-like early mobile phone on the other. The point is well made. If in 20 years, only one or two CCS projects have been built, they will look very expensive. If these are the first in a wave of progressively cheaper projects, they will be hailed as trailblazers. That is why, as Peterhead and White Rose are confirmed for a share of £1 billion gov- ernment funding, talk turns to phase two. In a sector that has been through more than its fair share of false starts, there is a sense of renewed optimism. Speakers at a Westminster Energy, Envi- ronment and Transport Forum event in Lon- don talk up the long-term benefits of CCS. However, hard figures on the immediate costs are in shorter supply. Why do we need CCS? Jeff Chapman, emeritus director of the CCS Association, lays down some uncomfortable truths. We have used up two-thirds of the carbon emis- sions budget needed to keep global warm- ing below 2°C. That budget is supposed to stretch to 2050, but if we keep decarbonising as slowly as we are now, we will blow it in two decades. Meanwhile, known fossil fuel reserves are roughly three times what we can afford to burn. UK politicians are as keen as any to keep the oil and gas industry alive, and if the appetite to extract fossil fuels continues undimmed, something has got to give. "Only by having a very large amount of CCS in the mix can you maintain a chance of arresting climate change while having a secure energy supply," says Chapman. The Energy Technologies Institute esti- mates it would cost £32 billion more a year to achieve a low-carbon mix in 2050 with nuclear and renewables alone, compared with including CCS in the mix. The govern- ment accepts that analysis and is aiming for 13GW by 2030. In the short term, however, the costs can look astronomical. The Peterhead and White Rose projects are in line for a share of £1 bil- lion, but they do not expect that to cover the full costs. They will also be looking to the contracts for difference (CfD) regime for sup- port on operating expenditure. The developers of two other projects elim- inated from the £1 billion competition, Cap- tain Clean Energy and Don Valley, have their eye on phase two. Undeterred by the absence of capital support, they are in talks with the government to get early approval for a CfD. "The project is alive, it is reasonably well and there is a reasonable prospect it will pro- gress at least close behind, if not in parallel with the projects in the competition," says Ian Phillips, director at CO2 Deep Store, of the Captain Clean Energy project. Phillips has "considerable confidence" of securing a CfD in the next 12 months, at a price "directly competitive with offshore wind". Offshore wind, the most expen- sive large-scale renewable technology, gets £155/MWh under the subsidy regime, drop- ping to £140/MWh in 2018/19. With energy bills coming under intense scrutiny, it is difficult to imagine the gov- ernment signing off on a more expensive contract for CCS. Getting that politically acceptable headline figure will depend on the government accepting certain liabili- ties, however. In the worst-case scenario, an earthquake ruptures the store and all the car- bon dioxide is released, wiping out the ben- efits. The developers simply cannot afford to underwrite that kind of risk. That deal will be critical for investment. Allan Baker, head of power at Société Géné- rale, says there is growing interest in CCS from the finance community, drawn by a "supportive environment" in the UK and the prospect of a CfD in particular. If the technology is to take off, it will have to cut costs fast, because it already lags a couple of decades behind renewables in the development stakes. Spence says: "We are going to have to get down the cost curve and up the learning curve faster than renewable technologies." The industry target is to bring costs below £100/MWh for projects taking a final invest- ment decision in 2020. The good news is that there are some opportunities for substantial savings. The first projects will bear the full costs of cre- ating a network to deliver carbon dioxide to storage sites. Subsequent projects may be able to tap into that network. For example, other heavy emitters around Humberside could piggyback on the White Rose infra- structure. Eventually these could become regulated networks in the same way as gas and power grids, slashing finance costs. At the storage end, it may be possible to boost revenues by selling the carbon diox- ide for enhanced oil recovery. At the cap- ture end, there are high hopes CCS could be developed more cheaply on industrial appli- cations. Current efforts focus on power gen- eration, mainly because it is easier to recover costs from customers. There are still many unknowns, however. "It is important not to be too optimistic about what CCS will achieve in terms of cost trajec- tory," warns Jim Watson, research director of the UK Energy Research Council. It is a tough climate, both to attract investment for risky projects and to ask the public to pay for expensive forms of genera- tion. Government and industry have a lot of work on their hands if Peterhead and White Rose are not to end up as museum pieces. Trailblazer or costly mistake? The first two CCS projects in the UK have secured government funding, but a second phase will be critical to develop the sector, says Megan Darby. " CCs: The big numbers government target for CCs 13gW by 2030 industry target for cost of CCs £100/mWh by 2020 government fund for building CCs demonstration projects £1bn strike price for offshore wind £155/mWh CfD for CCs ?

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