Europe

Does private money hold the key to pushing CCS forward?

Issue 10 and Volume 18.

Although not universal, carbon capture and storage (CCS) is widely recognized as a critical technology in our efforts to decarbonize power generation as we move towards a low-carbon economy.

It also has an important role to play in energy security in regions such as Europe and the USA, which will remain reliant on coal to generate a significant proportion of their electricity, at least in the medium term. However, in recent weeks commercial-scale CCS development has suffered two significant setbacks.

Firstly, E.ON, one of the ‘Big Six’ power suppliers in the UK, announced it would no longer be building a CCS demonstration plant at its Kingsnorth site in the UK. Late last year the company deferred an investment decision on the Kingsnorth proposals for up to three years, blaming the global recession and the accompanying fall in electricity demand.

The Kingsnorth project was one of two schemes shortlisted last year to receive funding in the UK government’s CCS competition, which aims to build the first commercial CCS scheme in the UK. The cancellation of the Kingsnorth project obviously means that E.ON has now withdrawn from the competition.

Paul Golby, chief executive of E.ON UK, said that the economic conditions were still not right for it to progress the project, and therefore E.ON could no longer meet the competition timescales. The other shortlisted CCS scheme is ScottishPower’s Longannet power plant in Scotland.

In response to E.ON’s decision, the UK government very quickly confirmed that the CCS competition would still go ahead, and in his recent spending review finance minister George Osborne earmarked £1 billion ($1.6 billion) for CCS development.

But this is expected to pay for just one demonstrator plant, rather than the four the power industry originally hoped for. So this, in combination with E.ON withdrawal, bodes ill for the UK’s ambition to lead the world in CCS.

The dust had hardly settled before Finland’s Fortum confirmed it was discontinuing its Finncap project, which aimed to build a large-scale demonstration plant for CCS at the Meri-Pori power plant.

The project, which had been under development for the last two years, had been expected to be part of the European Union’s CCS demonstration programme, the application period for which will begin soon. In a company statement Fortum said “technical and financial risks related to the project contributed to [its] decision”.

In reality, acceptance into the EU programme would have only covered part of the costs of the €500 million ($710 million) project, so additional funding from other sources, most likely national funding from Finland plus significant investments from the participating companies would have been required.

Clearly, in these economically straitened times the financing of high capital projects, such as CCS demonstration schemes has become more challenging. And as governments continue to tighten the public purse strings, especially in Europe, should we expect to see other CCS projects fall by the wayside?

More importantly, is there an alternative to public sector funding for commercial CCS development? If we can trust recent research by the Climate Group and Ecofin Research Foundation for the Global CCS Institute, the answer is yes.

The research looked at whether private sector capital providers would be prepared to finance first generation large-scale CCS projects. A joint team canvassed more than 30 capital providers to find their views on the risks and returns of a hypothetical post-combustion, new build, coal fired power station.

The main conclusion was that debt could well be available for CCS projects as long as three prerequisites were addressed: a performance guarantee across the entire generation and capture chain; the involvement of sponsors with a strong reputation and track record; and a route for CCS to become competitive without public funding.

These are initial findings and further research is being conducted, but it is encouraging to learn that the financial community appears to be ready to invest in the global deployment of CCS. If these first findings prove correct, the finance sector could well play a pivotal role in the development and deployment of commercial-scale CCS within the required time frame.

Kind regards,
Heather Johnstone
Chief Editor

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