EU sets out to save CCS: emission performance standard or mandatory certificates?

by Sonja van Renssen | 14 January, 2013

The European Commission remains committed to carbon capture and storage (CCS) in Europe, despite acknowledging that CCS policy so far has failed to live up to its goals. This appears from a still unpublished draft policy paper on CCS that European Energy Review has seen. In this long-awaited "CCS communication" the Commission makes a number ...

Carbon capture and storage plant (c) Vattenfall

Should carbon capture and storage (CCS) be obligatory for member states that burn a lot of coal and gas? Should energy utilities and/or energy-intensive industries in Europe have to install CCS-ready equipment for all new investments? Should the European Commission propose fresh legislation to push CCS from its current early demonstration phase to commercial viability?

And if new legislation is needed, what should it consist of: emission performance standards that cap greenhouse gas emissions from power plants or mandatory CCS certificates that force large emitters or fossil fuel suppliers to source a share of their power from "clean" fossil fuels?

These are some of the questions in a draft policy paper under preparation by the Commission - and seen by European Energy Review - that paves the way for a forthcoming public consultation on the future of CCS in Europe. This policy paper seems to be the long-awaited "CCS communication" announced by EU energy commissioner Günther Oettinger in May 2012 which was supposed to have come out last year.

Dark prospects

Since then, the prospects for CCS in Europe have worsened. The latest blow for the CCS industry was failing to win any share at all of €1.5bn raised from the sale of the first 200 of 300 million carbon allowances ("NER300") specially set aside to raise money for innovative renewables and CCS. One by one, CCS contenders for the cash fell by the wayside (see "The CCS Mess").

In the policy paper under preparation, the Commission says it is time to "re-assess" CCS objectives and "re-orient" EU CCS policy to "realistic" goals. What this means - as the paper goes on to spell out - is that there will not be 12 CCS demonstration projects operating in Europe by 2015, as the European Council committed to back in 2007. "It will even be a great challenge to realise a smaller number of projects," the Commission admits.

This will not be news to anyone who has followed the European CCS debate, but it is the first time the necessary downgrade in ambition is officially acknowledged. At the same time, the Commission makes clear it remains fully committed to CCS due to the "increasing rather than decreasing role of fossil fuels, both in the global and the EU context". Without CCS, the EU cannot reduce greenhouse gas emissions by at least 80% by 2050.

Problems to date

Despite initial EU leadership however, "out of eight first-of-a-kind full size [CCS] demonstration projects currently implemented globally, none of them are located in the EU". The Commission points the finger of blame squarely at the low EU carbon price, which it says has killed the business case for CCS by hugely raising operating costs: most projects assumed a carbon price of at least €20 a tonne, while the current price is below €10 a tonne.

If one million tonnes of CO2 are stored annually over ten years, a price difference of €10 a tonne generates additional operating costs of €100m, the Commission points out. Enhanced oil recovery (EOR) could help plug this gap but "unlike in the US or China, EOR can never be the main driver for CCS deployment [in Europe]", the Commission says. It adds that the initial assumptions for the capital costs of CCS were "realistic", however.

Both member states and industry remain reluctant to fund CCS. In 2008, industry said they were willing

"A sector specific emissions performance standard for new installations would give the carbon market certainty concerning future developments"

to invest more than €12bn into CCS, the Commission notes, but "the actual financial commitments made are not in line with this commitment". "In fact for most projects industry is now limiting its funding to approx. 10% of the additional costs for CCS." Meanwhile, only the French Ultra-low CO2 Steel making (ULCOS) project met a 50% co-financing requirement required for accessing the NER300 funds - before it was withdrawn due to technical problems.

Public opposition and subsequent delays in transposing the EU CCS directive, which sets out conditions for storage for example, has been another big problem, especially for pilot German and Polish CCS projects.

Emission Performance Standards or certificates

So how to move forward? If the carbon price were in the range of €40-75 per tonne, it would compensate for the additional costs of CCS, suggests the Commission. But even if ETS reform measures point the price in this direction - and that remains a big "if" at present - this will not drive CCS investments in the near term.

"Resolute action", "alternative policies", "another measure" that does not compete with the EU Emission Trading Scheme (ETS) but works alongside it, are necessary, the Commission suggests.

It presents two options: an emission performance standard (EPS) or mandatory CCS certificates. For the first it points to California, where a non-tradable 500gCO2/kWh EPS on new electricity generating plants is in place i.e. new plants will not get a permit if they emit more than this. In practice, this means all new coal - but not gas - plants need to be equipped with CCS. The UK is currently discussing a 450gCO2/KWh standard that would have a similar effect. In Norway, no gas power plants without CCS can be built, the Commission adds. An EPS could apply to new investments or to all emitters, and could be tradable or not.

The second option is taken from Illinois in the US. From 2015, electric power utilities there will have to source 5% of their electricity from a "clean coal power source", rising to 25% by 2025. Plants operating before 2016 count as clean coal as long as at least half their carbon emissions are captured and stored. This goes up to 70% for plants expected to start operations in 2016-7 and to 90% for those starting after that.

In a nutshell, such a "mandatory CCS certificate system" would require carbon emitters or fossil fuel suppliers to buy CCS certificates equal to a certain share of their emissions or embedded emissions (if applied to suppliers).

Compatibility with the ETS

Both options are compatible with the EU ETS, the Commission says. "A sector specific emissions performance standard for new installations would give the carbon market certainty concerning future developments," it explains. And the mandatory certificate system "would work perfectly aligned with the ETS system, as the volume of CCS certificates... would have its equivalent in ETS allowances".

The certificate system has the added advantage of implementing the "polluter pays" principle, adds the

Renewables reps fear a push for EU-wide, technology-neutral green certificates

Commission, and of not discriminating against new market entrants. It would ensure CCS investments are made in the most cost-effective way. But it would probably also lead to debate over what resources should go where, since some member states face political as well as economic obstacles to CCS (think public opposition in Germany - yet Germany is one of only four EU countries - alongside the Netherlands, Greece and Romania - in which new coal plants are either under construction or planned).

At the same time, member state competition for CCS funds could drive incentives for improved public acceptance, the Commission suggests.

EPS back from the dead?

Whichever option the Commission ultimately pursues - if either, it only says it may initiate preparatory work with a view to preparing a proposal before the end of its current mandate in 2014 - it is likely to be controversial.

At least some NGOs and renewable energy representatives have in the past argued in favour of an EPS to meet long-term climate targets. Indeed the idea of an EPS is not new to Europe - it was very much alive during discussions on the first climate and energy package in 2008 and, although eventually dropped then, reared its head again during debate on a new Industrial Emissions Directive (IED) in 2010.

At the end of that however, policymakers again rejected the idea of an EPS - on account of its potential impact on the ETS! An EPS would "highly confuse" the carbon market, a Commission official warned at the time. This seemed to bury the idea for good at EU level, even if member states were given the option of pursuing it nationally.

Today some renewable energy stakeholders still believe a European "EPS" could be valuable. But others, including Giles Dickson from technology provider Alstom, warn that it could also be "very dangerous" for CCS. "It all depends at what level you bring them in," he explains. "If at a level that forces utilities to put CCS on new coal-fired plants but not on gas, then you risk crowding out investments on CCS whether on coal or gas."

What the economics would dictate is building new, unabated gas plants. The risk of a lock-in to unabated gas is one the Commission's draft paper also draws attention to. This risk could be mitigated, says Dickson, if the EPS were set at a level that mandated CCS on gas as well as coal (100-150gCO2/kWh). If that isn't possible, then there would have to be a longer time horizon promising a future decrease in the EPS, so that over time it covered both coal and gas.

For Dickson, a second problem with an EPS is that increasing uncertainty over load factors at thermal plants makes it more difficult for utilities to predict their emissions performance and hence compliance with an EPS and necessary future investments. The US Environmental Protection Agency is currently running into this very problem with its new emissions control proposals.

Certificates scare renewables reps

If an EPS is likely to prove controversial, CCS certificates no less so. For Dickson this option is "more

The Commission makes it clear that despite the problems that have beset CCS, it remains "the only available technology" that can help cut CO2 emissions from fossil fuel burning at power and industrial plants

promising" - if not one Alstom has actively promoted - but it is considered "very dangerous" by the renewables sector. This is the first step towards putting CCS on an equal footing with renewables under the label "low-carbon energy generation" to meet climate targets.

Renewables reps fear a push for EU-wide, technology-neutral green certificates. For them, there are two problems with this: one, it would impose a single green energy support system that renewables reps say the market is not ready for (only some countries have green certificates today; others have feed-in tariffs) and two, more importantly, it would not distinguish between renewables and CCS.

Of course this is precisely why CCS stakeholders view it favourably: they would like to see the current 20% renewables by 2020 target extended to include CCS so that it becomes a "low-carbon energy consumption" target as part of a future 2030 climate and energy package. Renewables support schemes should apply to CCS as much as to renewables, they say, as the UK is currently planning to do.

For Dickson, certificates would also reduce the risk of investing in unabated gas. "[And] the key is how you handle gas," he says.

For the renewables community however, certificates carry a different risk: they would force companies to invest in fossil fuels: if utilities had to source a certain percentage of their power from "clean" fossil fuels and CCS retrofits are expensive, they might build new fossil fuel capacity to meet the CCS requirement. At the expense of renewables, of course.

Way ahead

The Commission makes it clear that despite the problems that have beset CCS to date, it remains "the only available technology" that can help cut CO2 emissions from the burning of fossil fuels.

Therefore it ends its analysis of the CCS situation in Europe today by asking stakeholders whether member states with a high share of coal and gas in their energy mix and industrial processes, should be required to 1) develop a roadmap to restructure their electricity sector towards low-carbon fuels (nuclear or renewables) by 2050 or 2) develop a national strategy to deploy CCS on coal and gas.

It also asks how the public acceptance of CCS can be improved and whether utilities and/or energy-intensive industries should be required to install CCS-ready equipment as part of all new investments, to ease retrofits. It asks whether "fossil fuel providers" should contribute to CCS deployment through specific measures that ensure its financing.

And the Commission asks whether it can be assumed that CCS will develop over time thanks simply to the EU ETS, or whether other measures are needed to secure its deployment. These other measures could be sectoral EPSs, mandatory CCS certificates or indeed something else altogether, it suggests.

That last point is the one that will generate much debate as the Commission's policy paper is finalised and the consultation kicked off. What the CCS and renewables communities agree on at this point is that while a stronger ETS is a must, it alone will not be enough to see their respective technologies through to fruition.