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UK Government moves ahead on carbon capture projects

© Shutterstock / Olivier Le MoalPost Thumbnail

On 10 February 2021 the UK Government published a consultation paper seeking views on an approach to sequencing the deployment of carbon capture, usage, and storage (CCUS) clusters.

A “cluster” is a reference to an industrial cluster and is to comprise carbon capture and carbon dioxide transmission and distribution projects.

This consultation follows on from Prime Minister Boris Johnson’s Ten Point Plan for a Green Industrial Revolution announced on 18 November 2020, in which a commitment was announced to deploy two carbon capture clusters by the mid-2020s, and a further two clusters by 2030.

The consultation identifies a two-phase process in 2021 whereby industrial carbon clusters will be evaluated and sequenced, and individual carbon capture and transportation projects for clusters will be selected. Final investment decision on the initial clusters is timetabled for H1 2022, and onwards.

The timetable is ambitious, and the success of its plans depends on its ability to negotiate agreements with the private sector which provide for a politically acceptable level of risk taking by and cost for energy consumers and or the taxpayer.

The consultation closes on 10 March 2021 and follows a previous update dated 21 December 2020 in which the government set out its proposals on potential business models and revenue mechanisms for CCUS projects.

The business models can be summarised as follows:

– CO2 transportation and storage network projects will receive an economic licence allowing the project as licensee to receive a regulated fee from network users from the completion of construction (the “TRI Model”).

– Power CCUS plants will have to be operated in dispatchable mode mid merit order to complement renewable energy generation. Therefore, a Dispatchable Power Agreement would be established between the power CCUS project company and the Low Carbon Contracts Company (“LCCC”), an existing government company which participates in renewable energy projects with subsidies from energy consumers.

– Industrial carbon capture projects are expected to be supported with a contract for difference based industrial carbon capture contract anticipated to be with LCCC.

A government support package is also discussed for each model for high impact low probability risks such as CO2 leakage, asset stranding and uninsurable risks, with certain risks and costs assumed by the consumer and/or the taxpayer.

A further consultation on the government’s preferred hydrogen business revenue models is expected in Q2 2021.

The paper further outlines the government funding available for carbon capture and hydrogen projects, including the £1bn CCS Infrastructure Fund (CIF).

Initial projects will be negotiated projects, not awarded by competitive tender. Future projects involving sponsors taking any element of pricing, cost or availability risk in relation to CO2 disposal, as is currently done in the power sector, may require: (i) a market for CO2 to have matured and sponsors having the ability to fix or hedge the future price of CO2 with an external hedge provider and (ii) an allocation of and pricing of risks and operational flexibility along the CO2 value chain, and into other value chains (for instance from CO2 into power, emissions and hydrogen prices).

The government’s plans for CCUS clusters will rely on proven project development and finance techniques and models.

Given the interplay within clusters, and with others not in the cluster, CCUS projects will be complicated to negotiate, but doable based on the government’s plans.

Clyde & Co is a London-headquartered global law firm that focuses on insurance, energy, trade & commodities, infrastructure and transport.

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