A new report released Monday by the UK's Parliamentary Advisory Group on Carbon Capture and Storage outlines a potential new path towards significantly reduced CCS costs of GBP85/MWh (USD113/MWh) in the early 2020s for the first projects.
This compares to a recent study by consultancy Poyry that estimated CCS costs of around GBP115/MWh in the mid-2020s falling through a process of "learning by doing" to about GBP90/MWh in the early 2030s.
If CCS can be made more affordable, it would open up a sustainable, long-term future for fossil fuel use in the power generation sector.
The report, Lowest Cost Decarbonisation for the UK: the Critical Role of CCS, argues that a major part of the costs of CCS are inflated by private-sector risk premiums.
While private companies have the capacity to provide all of the technological components of CCS, none provide the full chain of capture, transport and storage.
According to Stuart Haszeldine, professor of CCS at Edinburgh University and member of the advisory group, previous UK government competitions for CCS projects have asked private sector companies to do the impossible. They were being asked to create a new type of infrastructure and take on risks in terms of operation and long-term CO2 storage which are almost uninsurable because of the lack of track record of such projects.
As private companies, they must also borrow at commercial interest rates for a capital-intensive investment and provide commercial rates of return to shareholders that reflect the risk involved. This, the report says, inflates the cost of CCS, making it unaffordable.
The advisory group argues instead that a state-owned company should be created -- a CCS Delivery Company or CCSDS -- which would act as contract holder and project manager. This would transfer operational and long-term CO2 storage risk to the state, and by extension the tax payer, but would significantly reduce both insurance and capital borrowing costs.
The group envisages the CCSDS contracting out each part of the CCS chain, including new gas-fired generation plants, to contractors, using competition in each segment to get the best price.
These assets would get regulated rather than market returns. While much lower than commercial rates of return, regulated rates are state-backed and guaranteed. Such returns are often favoured for long-term infrastructure investment and would further reduce the cost of CCS.
STATE NEEDED TO DE-RISK CONSTRUCTION
The report notes that a series of market-based competitions for UK government funds have failed, arguing that the state must step in to create the initial infrastructure in order to de-risk construction of CCS.
Once the start-up infrastructure is built, commercial companies would enter the market as third parties to buy capacity for the transport and storage parts of the system.
The group also proposes the creation of a CO2 storage obligation on CO2 emitters and a certificate system. This would create a market for CCS, providing both an incentive for the power sector and other industries to participate in the newly-formed CCS market, and certainty for the storage operators of a flow of CO2.
The creation of an obligation to store would in turn de-risk the state's investment in the infrastructure.
Although an ideological departure from current UK government thinking on energy markets, the creation of a state-owned corporation does have precedent for large public sector infrastructure projects. The advisory group also advocates eventual privatization of the CCSDS.
Not all observers of the rise of renewables believe that CCS is a necessity, and electricity systems operating with 100% renewables without CCS have been modelled in both the US and Germany.
Many environmental groups see CCS advocacy as an ill-advised and unnecessary attempt to lock fossil fuel use into national power generation systems long term.
The report by the UK parliamentary group takes the view that fossil fuels are needed, in particular to meet the huge seasonal variation in UK heat demand. This, the group says, requires the decarbonisation of heat at the point of consumption, a route towards electrification, or at the point of energy production, which would mean replacing natural gas with hydrogen, which would be piped to gas boilers in residential homes.
Either way, fossil fuels will be needed to generate the amount of electricity or hydrogen this would require, making CCS a necessity, the report argues.
