Government publishes response to CCUS business model consultation

THE UK Government has published its response to a 2019 consultation on business models for carbon capture, usage, and storage (CCUS). The response sets out progress made on business models to incentivise CCUS and the new carbon capture and storage (CCS) infrastructure fund announced in the UK’s spring budget.

The CCUS consultation ran from 22 July to 16 September last year. The recent response by Government summarises consultation feedback received and the Government’s view on potential CCUS business models for industry, power, carbon dioxide (CO₂) transport and storage, and action needed on low carbon hydrogen production to enable CCUS deployment in the 2020s, including a CCUS delivery action plan; and objectives and principles for CCUS deployment.

Government’s response to the consultation comprises six sections, including deploying CCUS in the 2020s and industrial CCUS.

Deploying CCUS in the 2020s and the CCS Infrastructure Fund

According to Government, CCUS is to play a significant role in a net zero world, particularly in supporting decarbonisation of industry and power, producing low carbon hydrogen, and greenhouse gas removal technologies. Furthermore, it states that this decade will be critical for CCUS, and that during the period the public and private sectors need to transition from planning to the operational delivery of the UK’s first CCUS clusters.

In June, the UK Committee on Climate Change (CCC) published a progress report on reducing UK emissions. The CCC was established to advise Government on climate change targets. In the June report, the CCC noted the importance of CCS in achieving net zero, adding that significant progress is required in the 2020s to get on track to meet the target by 2050.

To achieve the needed transition into operational delivery over 2020 and 2021, the Government has developed an action plan. The current proposal is as follows:

• Develop commercial frameworks and delivery capability, and continue engagements with projects on this, along with framing the scope and objectives of the CCS Infrastructure Fund during 2020
• Award funding as part of the second phase of the Industrial Decarbonisation Challenge by the end of 2020
• Provide an update on commercial frameworks for industry, CO₂ transport and storage networks, and power, by the end of 2020
• Update assessment of potential business models to deploy low carbon hydrogen by the end of 2020
• Publish a draft value for money methodology and criteria and metrics for assessing the affordability of CCUS enabled industrial clusters at the end of 2020
• Progress business models for CCUS and low carbon hydrogen at pace, with a view to finalising business models within the next two years, in line with expected financial investment decisions for projects

CCUS business models must enable the UK to compete and grow in the global economy while reducing their carbon footprint, says the Government. It adds that that it is essential that the models can stimulate future private sector investment in CCUS; de-risk delivery and successful commercial operation of CO₂ infrastructure; support initial carbon capture projects as well as cost reductions; and catalyse, along with other enablers, the project pipeline and domestic supply chain.

The Government expects that newly-established CCUS Expert Groups can accelerate delivery of CCUS business models. Through these Expert Groups, launched in February, the Government intends to pool knowledge, capability, and resources to progress a decision on business models. Ongoing meetings are focussing on power CCUS, industrial capture, and CO₂ transport and storage, and low carbon hydrogen.

In its 2020 spring budget, the Government announced that it was investing at least £800m to deploy CCUS in at least two UK sites across the decade. This so-called CCS Infrastructure Fund is aimed at facilitating deployment in one cluster by the mid-2020s and a second by 2030, including infrastructure to support construction of the UK’s first privately financed CCS power station by 2030.

Alongside the required business models, the Fund is expected to help provide a pathway to low carbon technologies which could support the Industrial Cluster mission, a Grand Challenge mission aiming to establish the world’s first net zero carbon industrial cluster by 2040 and at least one low-carbon cluster by 2030.

The technologies could also support achieving net zero by 2050 and economic revitalisation in most industrialised regions, helping to level up economy and enabling clean, resilient recovery from Covid-19. The Government has begun work to design the Fund, and it intends to work with industry as it progresses work to develop design and delivery of the Fund.

Industrial CCUS

Government believes that CCUS is an important technology for decarbonising industry, particularly in hard-to-abate sectors – cement, chemicals, steel and iron, and refineries. It is therefore committed to progressing CCUS in industrial clusters over the decade with support from the CCS Infrastructure Fund.

Of the models outlined in the consultation, the Government found that a Contract for Difference (CfD) model, combined with upfront grant support from the Government for early projects, received the most support.

The Government explained a CfD model for industrial CCUS using a CO₂ reference price. In the model, the emitter would partly fund the cost of capture by selling any excess free CO₂ allowances (or equivalent) and the Government would pay the difference between the strike price and a defined reference price for an agreed period. Strike price would be agreed per ton of CO₂ abated, based on the expected costs of building and operating the industrial carbon capture assets.

CfD would provide support to cover ongoing operational costs as well as allowing capex investment from the industrial owner to be recovered.

Government is currently using CfDs as the main mechanism for supporting low-carbon electricity generation, incentivising investment in renewables.

In its response, the Government states that it is minded to progress the preferred model and it is carrying out further work and analysis on the potential detailed design of the model. This is expected to enable the Government to further develop its proposals ahead of publishing a final business model. In this regard, the Government says it is working close with industry to achieve this through BEIS-led Industrial CCUS Expert Groups, alongside bilateral engagement with stakeholders.

The Government aims to provide an update on the proposed design of the industrial CCUS business model before the end of 2020, including an updated analysis. By 2022 it aims to have a final business model in place.

Further topics covered in the Government’s response include parameters, integration, and usage; CO₂ transport and storage; power CCUS; and low carbon hydrogen production.

In the report the Government says: “[CCUS] can play an essential role in reaching net zero. It can be an engine to drive cleaner, sustainable growth, transforming our industrial heartlands. It can also unlock new jobs and innovative businesses, raising productivity and competitiveness across the UK.

“We are committed to deploying CCUS this decade. We are determined to realise the key strategic opportunities of CCUS in a way that is affordable and value for money for the consumer and taxpayer.”

The Carbon Capture and Storage Association (CCSA), the UK trade body for CCUS, welcomed the Government’s consultation response.

On the day of the release, CCSA Chief Executive Luke Warren said: “This consultation response is a critical step forward in the development of the commercial framework that is essential if the first CCUS projects in the UK are to be operating by the mid-2020s.

“Whilst this paper does not provide all of the answers, the Government has committed to build on this and come forward with further detail by the end of the year. We look forward to working with [the] Government over the coming months to progress the proposals set out today.”