The government has released a new plan setting outs its vision for eventually creating a “self-sustaining” market for carbon capture, usage and storage (CCUS).
The Department for Energy Security and Net Zero (DESNZ) has also launched the process for further carbon emitters to connect to and expand the planned HyNet industrial cluster in the North West and North Wales following the initial anchor projects.
HyNet was one of two schemes – the other being the East Coast Cluster in the Humber and Teesside – selected in October 2021 to become the UK’s first net zero industrial clusters in track one of the government’s CCUS sequencing programme. In July of this year, the Acorn and Viking schemes were selected to become the next two clusters in track two of the programme.
The creation and expansion of these clusters represents the first phase of the government’s three-phase plan for establishing a competitive, self-sustaining commercial market for CCUS. This “market creation” phase will last until 2030.
As natural monopolies, the transport and storage networks around which these clusters will be built will be funded and regulated similarly to electricity, gas and water networks using a regulated asset base model. The arrangements will be put in place by the government before the regulator takes over.
Transport and storage companies will be subject to price controls determining the amount they can charge network users. Among other things, these revenues will cover: an allowed return on their regulatory asset value (RAV), which represents their cumulative investment in the network; the gradual depreciation of their RAV over time; and operational expenditure. The government will provide revenue support to cover any shortfalls in what they can recover before a sufficient base of users has connected.
As well as initial grant funding, emitters connecting to these networks will receive support through a series of Contracts for Difference (CfD) style mechanisms, whereby contract holders receive payments to cover the difference between an agreed strike price and a reference price.
For industrial emitters, the reference price will reflect the expected carbon price under the UK Emissions Trading System (ETS). Those in receipt of free allowance under the ETS will be required to forfeit free allowances in proportion to the share of their emissions they are capturing. They will be compensated for these allowances at the reference price. They will also receive a fixed per-tonne payment for the first five years of their contract to help cover capital expenditure.
For bioenergy with carbon capture and storage plants, the reference price will be the price they achieve for selling carbon credits, either in the ETS or a voluntary market. These generators will also benefit from a separate CfD for the electricity they generate.
The reference price for other types of generation will reflect the power price for an unabated high-efficiency combined-cycle gas turbine. These generators will also receive availability payments regardless of whether they generate electricity.
And for hydrogen producers, the reference price will reflect the expected market value of low-carbon hydrogen.
During the first phase of the government’s CCUS plan, the terms of these various contracts, including the strike prices, will be determined through assessments and bilateral negotiations.
But during the second “market transition” phase from 2030 onwards, the government said it wants to move to a “more streamlined” competitive process for allocating any necessary support to emitters.
“Where capture projects no longer require government subsidy and network capacity allows, government would look to become less involved in the process of allocating storage capacity,” it added.
DESNZ said it will launch a consultation next year to explore how to go about doing this.
Transport and storage networks will continue to be regulated under regulated asset base model. However, the department said it wants to move away from the government-led sequencing process to get new clusters up and running: “We anticipate CCUS will have been de-risked and, for this reason, the private sector will be able to take on the risk for new CCUS projects, something it is currently unable to do.”
It continued: “We envisage there being a new process for the allocation of economic licences for CO₂ transport and storage, and the ability to grant licences transferred to Ofgem, as provided for by the Energy Act 2023.”
The government said it also wants to establish an approach for the strategic coordination of transport networks and facilitate the import of carbon dioxide to allow the UK to take advantage of its large storage resources.
During the third and final stage from 2035 onwards, the government said most emitters will no longer require financial support: “In a market-led economy – in which value is attributed to capturing and storing carbon – the cost of capturing CO₂ would fall, allowing the CCUS sector to become self-sustaining and largely free of government support.”
DESNZ said the monopolistic nature of transport networks would mean they still require economic regulation but the growth of storage capacity “may lead to CO₂ stores providing competitive pricing as well as requiring adapted or reduced economic regulation.”
Energy efficiency and green finance minister Lord Callanan said: “We need pragmatic answers to the carbon challenge, and with our infrastructure, skills and geology, the UK is in pole position to take advantage of game-changing carbon capture and storage technology.
“Today we’re publishing a blueprint to deliver a world-leading UK carbon capture industry, so that we have a competitive market in this exciting new technology by the middle of the next decade.”
Energy secretary Claire Coutinho said: “Thanks to the UK’s geology, skills and infrastructure, we are in a unique position to lead the way on carbon capture technologies.
“That is why we’re making one of the biggest funding commitments in Europe on carbon capture that will cut emissions from our atmosphere, while unlocking investment, creating tens of thousands of jobs and growing the UK economy.”
Alongside the plan, the government also issued several updates on related work, including the announcement that it has agreed initial commercial terms with the Northern Endurance Partnership (NEP), which is developing the transport and storage network for the East Coast Cluster. DESNZ said it will now consider when to launch the expansion process to enable additional emitters to connect to the network beyond the initial anchor projects.
NEP general manager Chris Daykin said: “Today’s announcements mark another positive milestone in the development of the East Coast Cluster and the UK CCUS industry.
“Agreeing the key commercial principles through the Heads of Terms is a crucial step in the decarbonisation of the North East region and delivering jobs.”
Daykin said they are working to complete the final agreements in the coming months to enable NEP to make a final investment decision in September 2024.
The track two clusters will submit plans to the government for their anchor project in early 2024. The government said it will also ask the developers to provide a provisional expansion plan to help accelerate this build out phase when compared to the track one clusters.