UK carbon policy uncertainty weighs heavily on CCS market: industry body

The lack of a predictable UK carbon price and market frameworks such as the proposed Carbon Border Adjustment Mechanism are keeping early carbon capture and storage project costs elevated, the Carbon Capture and Storage Association said March 4.

The CCSA said the volatile and uncertain UK carbon market price of recent years was impacting CCS investor confidence, leading to a need for higher state subsidies for project development.

"It is really a question of having clarity and predictability in how the UK Emissions Trading Scheme is going to evolve and develop," CCSA UK Director Mark Sommerfeld told Platts, part of S&P Global Commodity Insights, in an interview.

UK ETS allowance prices high highs of almost GBP100/mt in 2022, before slumping to just over GBP30/mt in 2024.

"The price is expected to remain uncertain and volatile throughout the 2020s as further policy changes and market developments are implemented with uncertain impacts on the long-term price," the CCSA said in a report.

Platts last assessed nearest December UK ETS credits at GBP39.69/mt on March 4, down 4% on the day.

"Measures such as the expansion of the UK ETS to include negative emissions and removing free allowances are expected to help drive CCUS deployment by ensuring coverage across the economy," the CCSA said in the report, "Driving cost reductions and value for money in CCUS."

The CCSA also warned that carbon leakage remained a risk.

"Whilst several key sectors are included in the UK CBAM from 2027, several other sectors that need to deploy CCUS are not within scope," it said. "For example, decarbonizing the refining sector will depend heavily on CCUS, but its products are at significant risk of carbon leakage due to its exclusion from the UK CBAM."

Sommerfeld said the government should also align the UK ETS with the EU Emissions Trading System.

"Based on current policies, the midrange forecasts and cost estimates, the UK ETS may not cover the full value chain cost of CCUS until 2035 or later, weakening developer business cases," the CCSA said.

Cost-cutting potential

The CCSA identified a package of measures that could cut UK CCS project capex costs by up to 25% for projects reaching final investment decision by 2030, and by up to 30% for FIDs in 2035.

It also pointed to the potential for operating cost reductions of 5%-10% by 2030, and up to 25% by 2035 through technology improvements, innovation and cross-value chain collaboration.

Sommerfeld said that the main priority to support CCS projects in the UK was for the government to take long-awaited decisions on funding the next phases of its CCUS Cluster Sequencing program.

The government announced GBP21.7 billion in funding for the Track 1 CCUS projects in the HyNet and East Coast Clusters in October, paving the way for the ECC to take FID on the transport and storage infrastructure.

However, project developers await further details of the timings and funding for Track 1 expansion and Track 2 projects of Acorn in Scotland and Viking on the east coast of England.

"Most importantly, the government must sustain momentum by providing long-term certainty and commit funding to the already-selected CCUS projects and the broader pipeline," Sommerfeld said. "Companies have already invested millions in the UK's industrial heartlands and require policy certainty to see the CCUS industry really take off." 

Government funding for CCUS and other low-carbon energy investments are subject to the spending review, with decisions expected in June, Sommerfeld said.

The government could also finesse some of its rules for CCUS project development, for example, by removing a cliff-edge payment suspension under capture business models, should projects not meet targets.

The high capture rates specified of over 85% were welcome, but led to over-design of first-of-a-kind projects, raising costs, Sommerfeld said.

The government could replace the clause with a sliding scale of payment suspension, he said.

Financing options

The CCSA said the government could use Great British Energy and the National Wealth Fund to finance CCS projects, and Sommerfeld said the association had had position discussions with the NWF.

Chancellor Rachel Reeves recently expanded the remit of the fund to also support defense spending in light of the Russia-Ukraine conflict and wider geopolitical tensions.

Sommerfeld said it remained to be seen how the fund would be allocated, but noted that "a key part of security and defense is having a reliable, secure energy system in the UK."

Clarity on the role of energy from waste and negative emissions in the UK ETS would also bolster CCS projects, potentially providing capture projects with another source of revenue, either through the ETS or voluntary carbon markets.

"We're already starting to see lots of interest on the VCM side, and that's going to be really beneficial," he said. "But that needs to be tied up with the obligated market as well, which will give a really strong signal to those projects."

That in turn would reduce the need for government subsidies for early projects, and help draw in further private finance, Sommerfeld said.

Energy-from-waste is set to come under the UK ETS in 2028, and the government also plans to integrate carbon removal credits into the ETS by that date.