Industry sounds warning: interest of key players will be lost if no firm action is taken

CCS in Europe under serious threat

Carbon capture and storage (CCS) is facing strong headwinds in Europe. EU member states have so far failed to translate an EU CCS law into national legislation. In the UK, a prestigious demonstration project has been cancelled. The European Commission still supports CCS, but sees an important role for it only after 2030. Too late, say beleaguered industry representatives. They fear that the momentum for CCS will be lost and key players will desert their CCS activities if policymakers don't take firm action soon. "The moment to push is now."

 Graeme Sweeney, Executive Vice-President for Future Fuels & CO2 at Shell
“The next 18 months will be make-or-break for carbon capture and storage”, announced Graeme Sweeney, Executive Vice-President for Future Fuels & CO2 at Shell, at a CCS event in Brussels last week, organised by the Scottish European Green Energy Centre. The man who also chairs the Zero Emissions Platform (ZEP), an industry-led consortium representing the European CCS industry, knows carbon capture and storage (CCS) is at a crossroads. There is a strange mix of emotions at CCS conferences these days: one by one, its supporters stand up and make their case, with defiance, conviction... and bewilderment. The defiance and conviction stem from continued belief that CCS has a future. The bewilderment comes from a dawning realisation that this is far from guaranteed.

The European Commission seems unwavering in its support for CCS. At ZEP’s General Assembly in Brussels in October, Philip Lowe, Director-General for Energy at the European Commission said: “We need very much to include CCS in the most favourable pathways to 2050. It’s faster and cheaper if CCS is used, not only on coal but also on gas and for industrial applications.” Thirty gigawatts of CCS must be operational in the EU by 2035, he added.

Nevertheless, according to a leaked draft of the Commission’s much-awaited 2050 Energy Roadmap, CCS will not really get going until after 2030. Due to be finalised in mid-December, the Energy

"We will lose the momentum, and all we've learned now. We will lose the interest of key players"
Roadmap sets out different decarbonisation scenarios for the European energy sector. It foresees a maximum of just 2% CCS in the power sector in 2030, rising to between 7% and 32% by 2050. “CCS, if commercialised, will have to contribute significantly in most scenarios with a particularly strong role of 32% in power generation in the case of constrained nuclear production”, the document says. The key sticking point is “if commercialised”. Today, it is still not certain whether CCS will be commercialised. And industry representatives say that expecting a delay in commercialising the technology to after 2030, as the Commission is doing, does not improve its prospects. “We need to deliver widespread deployment by the early 2020s”, insists Sweeney. “The moment to push is now.”

2030 is too late, agrees Mike Farley, Director of Technology Policy Liaison at Doosan Power Systems. “We will lose the momentum, and all we’ve learned now. We will lose the interest of key players.” The recent cancellation of the Longannet CCS demonstration project in Scotland, which had been promised £1bn from the UK government, is a case in point. This did not only end a potentially important demonstration project but closed down a whole CCS R&D team along with it, Farley points out. Other energy companies are reportedly also shutting down CCS R&D facilities, putting at risk the technology’s future development.

Vital improvements

ZEP published a study this summer that predicts CCS will be cost-competitive with wind, solar and nuclear, in terms of power generated, from the early 2020s. It estimates that post-demonstration CCS will cost €70/MWh for coal and €95/MWh for gas, plus carbon costs for the 10% or so of emissions evading capture. This would render electricity produced by a fossil-fuelled power station with installed CCS competitive with that produced by wind, solar or nuclear, according to IEA calculations, says ZEP. It has calculated the costs of complete CCS value chains, from capture to transport to storage, for new coal- and gas-fired power plants in northern Europe. Unlike most analyses, it uses private, not scarce public, data.

But there are several important assumptions underpinning ZEP’s conclusions. One is a successful demonstration programme; two is a handful of large-scale CCS plants built after the demonstration programme that enable vital technological improvements to further bring down the cost. The former is also clearly a pre-condition for the latter.

The EU’s CCS demonstration programme is delayed and short of cash, however. Back in 2008, European leaders pledged to build up to 12 CCS demonstration plants by 2015. The goal was indeed to have the technology ready to go commercial by 2020. Earlier this year, industry representatives spoke about 5-8 demonstration plants by 2016-17. Last week, they said 4-6 was probably a more realistic estimate. “We should focus on the vital few that need to get done”, Sweeney explained. Eight would have been needed to test all the different technological options, he added, but if the 4-6 that deliver are bound to share their knowledge, the whole industry will benefit. Here the critical importance of the knowledge-sharing requirement coupled to EU funds and creation of a CCS Network.

Dwindling numbers

A similar tale of dwindling numbers marks the story of money to finance the demonstration plants. So far, as part of its economic recovery package, the EU has split €1bn among six demonstration projects. The next round of EU funds is due from the sale of 300 million carbon allowances set aside from Europe’s carbon market specifically to raise money for CCS and renewables. But, points out Chris Davies, the British Liberal MEP who has led the European Parliament’s work on CCS, the 300 was 600 before political negotiations whittled it down and the carbon price at the time of the proposal (2008) was twice what it is today (less than €10 per tonne).

At best, today, the CCS industry can hope to gain €1.4bn from the first batch of 200 million allowances, which will start being sold in the coming months. This is assuming it gets about two-thirds of the total,

"It is not the CCS industry, but the world that has changed since 2008"
with the rest going to renewables. No more than 3-4 projects are expected to benefit from this first sale. Twelve projects (taking into account the cancellation of Longannet) have been put forward by member states for these funds, including the six that have already benefited from economic recovery money. They are currently being assessed by the European Investment Bank. Eligible projects will be announced in May 2012. Then, national governments are also expected to announce financial backing for those projects selected.

The hope is that sufficient public backing will draw in private investors. So far, these have been reluctant to invest in CCS. A lawyer says investment banks still say “we do not see how we’re going to make enough money quickly enough”.

It is not the CCS industry, but the world that has changed since 2008, says Sweeney. We have had the economic crisis, Fukushima, the hype around shale gas, the Arab spring, the warmest year ever (2010), the EU under unprecedented pressure (through the Euro-zone crisis) and a €10 carbon price. Some of these factors make life more difficult for a fledgling CCS industry seeking funds to develop a large-scale, capital-intensive new technology. Others, such as Fukushima and the discovery of shale gas, bolster it by strengthening the case for a long-term future for fossil fuels.

CCS with gas

“The platform believes Europe can still make a case for CCS”, says Sweeney. He points to what has already been achieved: an EU directive setting up a regulatory framework for storage, a €1bn investment from EU economic recovery funds, the promise of carbon market funds to come, and a strong base for knowledge sharing in the form of the CCS Network. “We want to get on with it”, says Farley.

The climate arguments for CCS still stack up, its supporters argue. In 2009 the International Energy Agency calculated that the cuts in global greenhouse gas emissions to limit global warming to two degrees Celsius would cost 70% more without CCS. The European Commission does not foresee a long-term future for gas or coal without CCS. “For all fossil fuels, CCS will have to be applied from around 2030 onwards in the power sector in order to reach the decarbonisation targets”, says the draft of the 2050 Energy Roadmap. Gas is increasingly expected to take over from coal as a less polluting, more flexible partner to balance out renewables.

At ZEP’s recent General Assembly, Philip Lowe suggested that industry and policymakers should perhaps concentrate less on CCS with coal plants and more on CCS with gas-fired power. In practice, this could mean revisiting the main criterion for handing out EU carbon market funds to demonstration projects. This is currently cost per unit of CO2 stored, which favours coal over gas. Gas would fare better if it was cost per unit of energy. The question policymakers must answer is: is the final goal to store the maximum amount of CO2 or to provide low-carbon electricity at lowest cost?

Feed-in tariff for CCS

Today’s main incentive for the EU-wide deployment of CCS is the price of carbon allowances in the EU’s emission trading scheme, or carbon market, says ZEP. But, based on current trajectories, it adds: “This will not be a sufficient driver for investment after the first generation of demonstration plants is built.”

Even if the troubled demonstration programme is successful, there will need to be fresh support from policymakers to bridge the gap between this and the carbon price being high enough to make CCS commercially viable. This would require an EU carbon price of €34 per tonne for lignite, €37 per tonne for hard coal and €90 per tonne for gas-fired power plants, ZEP has calculated. Crucially, this assumes a first post-demonstration handful of large-scale CCS plants to enable rapid technological learning – without them, the commercialisation price for CCS would be much higher, some €100 per tonne.

Policymakers in Brussels are now starting to discuss how to ratchet up the carbon price. Energy and oil companies are getting interested in an idea that has been promoted mainly by NGOs and parts of the

"The transposition has been delayed to the point that we face a situation where the lack of commitment to CCS in German politics endangers our demo project" 
Commission to date: it is the idea of taking out (“setting aside”) carbon allowances from the pot for 2013-20 and legally cancelling them. “We need a set-aside and we need it now,” says Sweeney. The logic behind it varies depending on whom you speak to: it could be to take into account the recession (less production has led to lower emissions and hence a larger supply of allowances), proposals for a new energy efficiency directive (more efficiency also means lower emissions and therefore more allowances) or a belief that the EU should increase its overall emission reduction target for 2020 from 20% to 30% to lead the world in decarbonisation.

Aside from pushing up the carbon price, there are other options open to policymakers to promote CCS, says the industry. “You need to be offering some sort of revenue for electricity generated from a CCS plant, a feed-in tariff just like for renewables”, says Giles Dickson, Vice President for Government Relations at French engineering firm Alstom. The UK is the first EU member state to be introducing such a tariff through its electricity market reform proposed in July. One or two other member states are reportedly also looking into it.

A CCS feed-in tariff could be coupled with a deployment target, Dickson adds. This is what Farley argues for. “We need a 2030 [CCS] target and it must not be too modest”, he says. A CCS target could take the form of a percentage of fossil fuel-fired power generation that must be fitted with the technology, for example, or a gCO2/KWh target. This could prove more palatable than a feed-in tariff, one policymaker suggests. Others, such as Sweeney, argue for a more general decarbonisation target for 2030, without specifying what the contribution of different technologies would be.

Clock is ticking

But economics is only half the story. The other half is public acceptance. And here CCS faces, if possible, an even higher mountain to climb. “If you do not have a reservoir, you do not have a project”,

"If you believe in a Europe entirely relying on nuclear and/or renewables, CCS will not be needed. Otherwise it is a dire necessity"
as Sweeney succinctly puts it. He admits that the industry has perhaps underestimated the role of storage so far, to its peril: politics and public opposition have held up the transfer into national law of the EU directive on CO2 storage in Germany. After being rejected by the German parliament’s upper house (the Bundesrat) in September, a proposal is currently being discussed by a Conciliation Committee. A verdict is due by the end of the month.

 CCS-installation at Schwarze Pumpe, Germany (photo: Vattenfall)
Germany is not the only country to have missed this summer’s deadline for turning the EU directive into national law – only one country, Austria, had done so by early October. The problem for countries that are hosting CCS demonstration projects, like Germany, is that these projects will not be eligible for EU funds if the directive is not transposed. Wolfgang Dirschauer, Head of Climate Policy at Vattenfall Europe, which is the only utility still leading a CCS project in Germany, says: “The transposition has been delayed to the point that we face a situation where the lack of commitment to CCS in German politics endangers our demo project.” Further delay and the shortcomings of the draft law put all EU funds for the project at risk, he adds, because “it might not be feasible any more to comply with the strict EU timeframe for the demo plants.”

Public acceptance is top of the list for the CCS industry right now and it is looking to successful examples, in Spain for example, where local communities have been brought on board through a diligent engagement campaign. A second priority is to develop a transport infrastructure. A consortium of companies and research institutions has just published a detailed report on what it takes to build a European CO2 transport infrastructure, showing that it is technically and economically feasible but difficult to organise.

A third important question is how to implement CCS in the industrial sector. For industries such as steel, CCS offers the only way of cutting emissions substantially, as they will be required to do. The capture costs could be comparable, if not lower than, for coal, ZEP says. The fact that the EU ETS exempts most industries in Europe from paying for most of their carbon emissions for the time being – out of concern that they might move their production abroad – explains their low interest in CCS so far. But the IEA predicts that by 2050 half of all CCS will be applied in the industrial manufacturing sector.

Meanwhile, for the CCS industry the clock is ticking. The Commission says it will issue policy proposals for a fresh push for CCS next year, which will analyse a potential role for targets, and will look at funding to take demonstration projects to completion, and for infrastructure development. Dirschauer says: “If you believe in a Europe entirely relying on nuclear and/or renewables, CCS will not be needed. Otherwise it is a dire necessity. The alternative is: no ambitious climate policy.”


Offshore options

The industry is studying options for offshore storage of CO2, as this would probably lead to less public antagonism than onshore. The problem is that offshore storage is more expensive. ZEP is calling for a risk reward mechanism from policymakers to explore deep offshore saline aquifers. Scotland has half of all EU-27 offshore storage capacity, says David Rennie, Director for Oil, Gas, Thermal Generation and CCS at Scottish Enterprise. He says Scotland should start marketing this storage capacity as an asset.

One variation on the offshore option is to pump captured CO2 into depleted oil and gas fields for Enhanced Oil Recovery (EOR). This is already done in the US, but has gained little traction in Europe so far, because offshore is more expensive than onshore EOR. But at least one company, 2Co Energy, which is running the Don Valley CCS demonstration project in the UK, is looking into this. Based on the US experience of one of its two co-founders, Gareth Roberts, the company believes it could recover enough oil to generate some £5-6bn in tax revenues for the UK government. This could halve the cost of CCS to the UK, 2Co says, and create jobs and expertise.