This week I attended the quarterly review meeting of the European Technology Platform for Zero Emission Fossil Fuel Power Plants (ZEP), a coalition of stakeholders united in their support for CO2 Capture and Storage (CCS) as a key technology for combating climate change. ZEP serves as advisor to the European Commission on the research, demonstration and deployment of CCS. Many topics related to CCS and the underpinning technology set are discussed at the quarterly meetings, as well as various overview presentations to look at the current status of deployment. It is this latter aspect that is in trouble.
Over the last five years the EU has put great effort into promoting CCS. The Commission has led this, creating a legislative framework for the technology to exist in the field, agreeing on the need for a 10-12 project demonstration programme, supporting that programme with funding mechanisms and of course institutionalizing a carbon price within the industrial economy to act as the principal driver for implementation and longer term deployment.
With such an effort and so much political capital spent, one would expect to see a burgeoning CCS industry, or at least the beginnings of it, appearing across the EU. Unfortunately this is not the case. With the possible exception of the UK, it could be that by 2020 there will not be a single large scale CCS project operating across the 27 member states. This was certainly not the plan.
Looking forward, CCS is clearly going to be required in the EU. The region continues to burn it’s considerable coal and gas resources for power generation and more recently, with the exception of France and the UK, there has been some trepidation with regards further deployment of nuclear for power generation. Renewable energy use may be growing and there have been some remarkable, albeit brief, instances of near 100% power generation from renewables in some parts of the EU, but overall renewable energy growth remains modest (see below).
The first barrier to CCS implementation is a simple political one. Progress on member state transposition of the EU CCS Directive remains stubbornly slow with some member states seemingly less enthusiastic than they first appeared. In particular and despite a wealth of R&D activity and small pilot projects, German interest with regards CCS implementation now appears very low, despite its significant coal capacity. Rather, the focus is on renewable energy. Of the 27 countries required to transpose the directive, only 9 countries are acting. However, these do at least make up the key locations for potential demonstration projects.
The next barrier is a tough one. Public acceptance of on-shore storage has weakened considerably. This has always been a concern, but more recently this concern has resulted in the termination of projects. A Shell project in the Netherlands is one example. The alternative is off-shore storage such as the Sleipner project in Norway, but the cost of this for on-shore produced CO2 is higher.
But the real problem rests with the economics of CCS. In the middle of 2008 the picture looked relatively robust.
- The ETS CO2 price was in the high €20’s and even broke through the €30 barrier.
- The Energy and Climate package making its way through the EU Parliament included a provision to set aside allowances as a funding mechanism for the demonstration programme (now called NER300 – short for 300 million allowances from the ETS New Entrant Reserve). The Directive describes the support mechanism as follows and the Commission has established a website to allow bidders and other interested parties to follow the process:
Up to 300 million allowances in the new entrants’ reserve shall be available until 31 December 2015 to help stimulate the construction and operation of up to 12 commercial demonstration projects that aim at the environmentally safe capture and geological storage (CCS) of CO2 as well as demonstration projects of innovative renewable energy technologies, in the territory of the Union.
The allowances shall be made available for support for demonstration projects that provide for the development, in geographically balanced locations, of a wide range of CCS and innovative renewable energy technologies that are not yet commercially viable. Their award shall be dependent upon the verified avoidance of CO2 emissions.
Projects shall be selected on the basis of objective and transparent criteria that include requirements for knowledge-sharing. Those criteria and the measures shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 23(3), and shall be made available to the public.
Allowances shall be set aside for the projects that meet the criteria referred to in the third subparagraph. Support for these projects shall be given via Member States and shall be complementary to substantial co-financing by the operator of the installation. They could also be co-financed by the Member State concerned, as well as by other instruments. No project shall receive support via the mechanism under this paragraph that exceeds 15 % of the total number of allowances available for this purpose. These allowances shall be taken into account under paragraph 7.
The mechanism, in combination with a robust underlying carbon price, meant that a viable demonstration programme could emerge. The 300 million allowances could conceivably generate €9 billion in funds, which meant up to €1.35 billion for some projects (i.e. the 15% limit). With potential Member State co-funding adding additional support, a 500 MW end-to-end CCS power station was even feasible and some of the projects originally submitted to the Commission for consideration were on this scale.
But the collapse of the CO2 price in the EU throws a huge question mark over the viability of the programme. So far the European Investment Bank (charged with monetizing the 300 million allowances) have sold over a 100 million allowances at a price of around €8.10 each. That’s a good effort in the current market, but it substantially changes the economics of a project. Now the maximum grant that any given project can collect is €360 million and it will be operating in a €6 CO2 market. Even with matching funds from the relevant member state, now much more challenging due to EU financial circumstances, a large scale project looks very unlikely. Large scale early CCS projects require a CO2 price in the range €60-100, not €20-25 (assuming €6 ETS price, maximum NER 300 financing and some member state co-financing).
The selection process for projects will proceed over the balance of this year with an announcement expected in December, but at least for the CCS part of the NER300 (innovative renewable energy projects are also supported) one wonders how this will pan out.
An exception to all this is the UK, which has taken matters into its own hands and which I have written quite a bit about in the past. A new UK CCS competition has been announced with £1 billion in funding and the UK is implementing a CO2 floor price for facilities operating under the EU ETS. In addition a clean energy CfD (Contract for Differences) construction will provide further support. A single viable CCS project (at least) should emerge from this approach.
Back in the rest of the EU, organizations like ZEP are stepping up their advocacy for a revised package of EU measures to ensure that at least some part of the demonstration programme is delivered. Without it, there will be real problems commercializing and gaining experience with CCS in the limited time available before much wider deployment is actually needed. The ZEP proposals should be available for a posting in the next week or so.
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Not so long ago, CCS was considered as a bridge to low carbon economy. However it now seems a bridge too far. Partly due to political, societal and economic barriers that have are pointed out in David’s blog. But yet another reason is lack of innovation in the field. While the commission demonstrated some vision on demonstration projects, which unfortunately is fading, there is no vision set out on fundamental research on CCS. Innovation is needed to drive the cost down. Yes, “doing and learning” will drive the cost down but we also need lot of work in laboratory to develop new capture technologies which are simplier, less capital intensive and easier to deply
Although I see ETS as waste of money there could be side benefit. CCS on its own consumes more fossil fuel than just power generation without CCS (by 30%). It means that CCS would increase price of fossil fuel and profit of miners and Oil&Gas companies. While this scenario is David’s and Shell’s dream this can also bring great benefit to nuclear power. Today, nuclear power is somewhat more expensive than today fossil but it is far cheaper than fossil + CCS. If fossil power needs to pay for carbon emissions and the price/consumption of fossil fuel will raise this would make nuclear power more competitive.
Obviously, nuclear power is already very attractive for countries not self-sufficient in coal and gas as the money for power generation is spend in local construction industry rather than foreign mining or oil&gas industry. As UK is increasingly unable (incapable or unwilling) to explore and exploit more fossil fuels it should focus on nuclear rather than fossil fuel based power generation. CCS is very bad for fossil fuel exporters and it is a suicide for importers. I believe that ETS would benefit more nuclear power more than CCS.
The recession is very good time for this sort of capital projects. One way out of recession is massive investment into nuclear infrastructure rather than LNG or Norwegian gas imports. Renewable energy obviously doesn’t count as it is the most expensive option.
Isn’t it strange that I work in Oil&gas and promote nuclear power? Don’t worry; I don’t really believe that UK politicians are good in math.
Do you have a source for the 9 EU members who have acted? Trying to confirm which members have acted, and it can be difficult to find a source to confirm. I enjoy your writing and appreciate your point of view.
Looks like the story is slightly different, but not much. The EU were pursuing 26 infringement cases for non-transposition of the Directive (the 27th Member State being the UK). 9 of the 26 infringement cases related to the CCS Directive have been closed as a result of complete transposition. The 9 Member States in question are the following: Denmark, Netherlands, Italy, France, Lithuania, Malta, Portugal, Romania and Slovakia. The conformity check of the transposition in these Member States is on-going. I also found this website list, but it is a bit out of date now (http://www.ucl.ac.uk/cclp/ccseutransposition.php).
Hope this helps.
I understand that it is Spain who didn’t enter the infringement procedure for the CCS directive and that UK is still on the infringement procedure. Isn’t it right?
You may be right. I only had the list of those whose cases had been cleared and assumed that the other one was the UK. It could indeed be Spain.
Many thanks for your prompt clarification. I have just come up with a web site which shows 25 members including UK (but not including Spain and Romania) entered the infringement procedure: http://ec.europa.eu/eu_law/eulaw/decisions/dec_20110718.htm. Romania got into the procedure later by the way.