A government-commissioned study has settled on two options as the best support mechanisms for of a first-of-a-kind bioenergy with carbon capture and storage (BECCS) plant.
The report prepared by Element Energy and Vivid Economics for the Department for Business, Energy and Industrial Strategy recommended either a standalone Contracts for Difference (CfD) mechanism for carbon prices or negative emissions payments combined with the existing CfDs for low-carbon electricity generation.
Under the first option, the plant would receive payments to top-up the prevailing price for carbon emissions – for example, in the UK Emissions Trading Scheme – to a contractually agreed strike price for captured carbon dioxide (£/tCO2).
Under the second, the plant would be supported by a traditional CfD for electricity generation (£/MWh), whilst also receiving negative emissions payments – fixed subsidies for each unit of carbon dioxide captured (£/tCO2).
The study estimated that a first-of-kind retrofit BECCS plant would require a carbon CfD with a strike price of £107/tCO2 (today’s prices) or a negative emissions payment of around £92/tCO2 (assuming an electricity CfD strike price of £75/MWh).
It said the price paid for negative emissions would be “high compared to today’s carbon prices” but lower than the decarbonisation costs for hard to abate sectors and forecast carbon prices over the assumed 15-year contracts.
The estimates also assume the plant would be run as baseload, with a utilisation rate of 60% in the first year of operation and 90% thereafter. The report said running the plant at a lower rate would significantly increase the average cost per tonne of negative emissions.
Cost and revenues under the two models
The study additionally assumed that the carbon CfD would be linked to the UK ETS and would therefore have the benefit of shifting some of the costs of BECCS onto emitters and adhering to the “polluter pays” principle. It said this model has greater potential to be directly applied to BECCS outside the power sector.
The downsides would be that developers would be exposed to electricity price risk, potentially increasing the required returns for investors, and that integration with the UK ETS might make it slower and more difficult to implement. The emissions cap in the ETS might need to be adjusted to avoid creating deflationary pressure on permit prices.
The paper said the second model would likely be quicker and easier to implement for a first-of-a-kind project as it would be based on the “well-established” electricity CfD and would not require integration with the UK ETS. Valuing low-carbon power and negative emissions separately would allow the costs to be distributed separately as well.
The negative emissions payments could be determined through auctions for subsequent projects but an innovative mechanism would be required to allow them to make joint bids for both contracts. The cost to the government would be high without a link to the ETS or offset markets and the model would need to be adapted to be applied to BECCS in other sectors.
The report said the preferred model will depend on whether the government wants to link negative emissions to a “wider economy-wide carbon market” or create a separate market for greenhouse gas removal; how it intends to distribute the costs of BECCS; and how quickly it wants to reach a final investment decision on the first project.
It called for further research into how the existing carbon market can be used to fund BECCS, including detailed work on how the ETS would need to be adjusted; whether negative emissions markets should be linked to the ETS; and the distributional impacts of the proposed models.
The study was one of a number of documents released alongside the government’s Net Zero Strategy last week.
The government also announced the selection of the first two net zero industrial clusters it is aiming to get up and running by the mid-2020s, one being the East Coast cluster combining the originally separate Zero Carbon Humber and Net Zero Teesside schemes.
Drax is planning to fit carbon capture and storage (CCS) to two biomass units at its power station in North Yorkshire that would be connected to the CCS pipeline for Zero Carbon Humber. The company announced last week that it will commence a public consultation on the proposals in November.