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Interview on UK Energy Transformation: Do We Still Need CCUS in View of Its High Cost and the Low Carbon Price?

Saturday, January 7, 2017

Carbon capture, utilization and storage (CCUS) can drastically reduce the carbon emissions to help to limit global average temperature rise within 2without changing the existing production pattern. This technology can play a prominent role of limiting CO2 emissions in countries heavily relying on coal.

The captured CO2 will be piped to subsurface depleted oil and gas reservoir for permanent storage. CO2 enhanced oil recovery (EOR) has been put into practice for many years to increase the production of oil and gas wells.

Compared with renewables, CCUS has its unique advantage of emission reduction and EOR as well as the disadvantage of high cost and weakness in job creation and scale-up. In addition, the declining of carbon price hinders investment in CCUS. Confronted with all these difficulties, what are the driving factors to decarbonize? And what’s the choice of UK between combating climate change and energy transformation?

During the 3rd Guangdong International CCUS Workshop, Energy Observation (eo) interviewed Prof Charles Hendry, Former UK State Minister of Energy and Climate Change, and Mr Tim Yeo, Former Minister of Department of Environment and Climate Change, former Chairman of Energy and Climate Change Committee of the House of Commons on topics regarding the cost, risk of CCUS and the emission trading system (ETS). Charles said that no large scale CCUS project was operating in UK, and UK was promoting renewables and nuclear and related low carbon technologies while transforming its energy structure.

Regarding the cost of CCUS, Tim Yeo thought the opportunity of large scale projects is clearly growing in China because of enormous size of China’s coal industry which still accounts for almost 2/3 of total electricity generation.

Under the current low carbon price, Charles insisted that the carbon price cannot support the development of CCUS on its own unless it is set at such a high level which would have a very significant other adverse impact. So other policies were needed to drive the investment.

China plans to develop a nationwide carbon market by 2017, and Tim Yeo said that China had considered about the reasons of failure in EU ETS. He also stated that the carbon price would increase over a long term.

eo: There are two routes for future energy competition, one is the decarbonization process of CCUS used in the traditional coal fired power plants; another is decentralized renewable energy systems such as wind power, photovoltaic generation. From the prospective of UK’s energy transmission, how do you balance these two methods? Does the UK support both routes? Or which way does UK prefer?

Charles Hendry: UK has very old coal plants, so we are in the process of phasing out the old plants. And therefore the new investment is primarily going in new low carbon technologies to scale up nuclear, offshore wind and other renewables. And so for UK, the main focus is using a big energy efficiency program to help reduce overall demand. There has been works done on carbon capture. But realistically, that would not be used in the old plant but in new plants going forward, either gas or coal. So gas also has important role to play in the UK market. We have significant demand on our own gas. It is still declining, but we have a significant demand available. And so we have thought to decarbonize by rolling out low carbon technology in the renewable industry, rather than going straight to CCS.

So there is no large scale project for CCUS at this stage. The roll-out renewables has moved from 5% of electricity production in generation 6 years ago to 25% now. There has been very significant change in terms of the volume of electricity which is come from renewables. We are looking at nuclear programs with Chinese investment, and there are many of these plants. So that would be the main driver for the UK as we build on energy infrastructure.


eo: Currently there are 10 CCUS projects running in the world, mainly in the United States, Canada, Norway, Japan and China. As UK supports the commercial deployment of CCUS, which areas that UK mainly focuses on?

Tim YeoMany countries go on consuming coal largely including China, despites all the efforts that is been invested in nuclear, renewables, energy efficiency and demand sides, reduction techniques. I think the world needs CCUS. In terms of where we were making a particular effort, probably China is the lead country for our collaboration. Honestly we remain closely what the work has been done, particularly in Canada and the United States.

One of the reasons why the UK is keen to collaborate here in southern China is that the geology of Guangdong province and other provinces in southern China is much like the UK geology which has good storage opportunities. We have a lot of offshore storage projects as a result of oil and gas exploration in North Sea for the last 40 years. So I think we see the common interest between UK and southern China, particularly, we will develop the last session there. We want to develop cost effective way of building the pipeline and getting the storage into the offshore location.


eo: The cost and energy consumption of CCUS is high. It is a great challenge to commercialize the technology. And at present, CCUS development mainly relies on technology rather than the market. Also one of the challenges is that the carbon price is too low. The emission reduction cost of CCUS is around 48 to 109 US dollars per ton, which means the subsidies for carbon price need to be increased by 6 times. So, how to deal with these problems?

Charles Hendry: I think there is a difference between the initial projects which perhaps you will call a pathfinder to show if we can do this work at a significant scale and the rolling out of more commercial projects afterwards. For initial phase, you do need different mechanism for support, you need other ways of bringing in funding and you can’t do that simply through the market. There would be a great way of learning which would be happening as part of the process of doing pathfinder. And therefore that can be used to help drive down the cost of projects.

Well what we have in United Kingdom is a market where different ways of support can be given to technologies as they are emerging. The long term goal for these technologies should be competitive, and they should be competitive with each other. We recognize that new technologies need more support in the early years and therefore we have a structure which will deliver that. So I don’t think the carbon price cannot do that on its own unless it is set at such a high level which would have a very significant other adverse impact. And so you need other policies which will help to drive through the investment.


eo: Could you give some examples of policies supporting investment in CCUS in the UK?

Charles Hendry: Through the market reform process in United Kingdom, people invest in low carbon technologies such as nuclear, renewables or CCUS would be given a guarantee price for each unit of electricity they generate over many years. It would be 35 years for nuclear and some renewables. By doing that, investors know the price for the power they produce is guaranteed. It gives the long term certainty they need in order to encourage investment. But one can also do that in a way that projects will gradually compete again with each other to drive down the prices over time as we see in the onshore wind sector.


eo: Confronted with all these difficulties, do you agree it is worth of such great effort to develop CCUS?


Tim Yeo: I think we need the CCUS. In the UK, we have some strength but particularly in the policy of our universities. There are several universities which got real expertise working for carbon capture, including Edinburgh. Furthermore, we got very strong opportunities on pilot schemes to test out the technologies. The key barrier is the high cost, so we have to get the cost down. We can only reduce the cost by having really large scale projects. We certainly have enough storage facilities, and if we deploy CCUS in gas and coal plants, we can see a large amount of projects in UK. But I think the opportunity of large scale projects is clearly growing here in China because of enormous size of your coal industry which still accounts for almost 2/3 of total electricity generation. So the opportunities are really big where the costs might be driven down over a period of time dramatically. As we are breaking in the work with China, we also welcome Chinese participation in the development of CCUS industry in the UK.


eo: The background environment for developing CCUS is changing from setting reduction targets for developed countries before COP21 to Intended Nationally Determined Contributions (INDC) based on national conditions. Is there still any driving force for the development of CCUS?

Tim Yeo: Two things are happening. One is that nearly all countries have agreed quite challenging targets for reducing emissions after the Paris Conference last year, including China trying to peak its emissions in 2030. That’s quite a challenging target. I think that is one of the biggest drivers for CCUS in order to reach these targets. CCUS becomes the central technology in countries where still has a very high coal alleviated electricity industry. It is like the airports to many countries. Alongside that, I would expect the carbon price to increase gradually certainly in the next 15 years; we will see a much higher carbon price for both carbon taxes and ETS. And that would be balanced between coal, gas and the low carbon technologies, which would be very helpful. And we can accelerate that process while developing CCUS.



eo: The carbon price floor and emission trading scheme are both being used to adjust the price. In October 2016, carbon prices in the UK soared to £ 18, which led to a reduction in coal use. How can you guarantee the power supply in the UK?

Charles Hendry: The carbon floor price was intended to give a clear signal to investors in a way that the European ETS fails to do. I think early mistakes in the EU ETS mean it could not be a reliable driver of investment. We want to give a clear signal about the cost of carbon in UK.

I think that we’ve seen drops in coal which due to not just the carbon price but a range of affects. For example, we saw a great increase in the use of coal for the electricity in the United Kingdom was the result of American shale gas. American move to generate power by using gas and away from coal, therefore there are cheap coal available in the world market. So, the UK has quite a lot of extra coal usage, and the coal fire power stations were keen to use that early on because they knew that they are writing cost of carbon tax, and it would be more expensive to do so for them if they waited for future years.

So that the carbon floor price is driving some change but not as much as the other part of market reform package. It is stimulating investment by the level of subsidies and the level of support guaranteed through the CfD rather than the carbon price. So, it is a useful addition to that basket of measures, but it is not the most important driver.

Tim Yeo: High carbon price will influence the sector increasingly. The intention of carbon floor price is to keep the price rising every year rather than month by month. We hope the EU ETS would actually become the key driver in reduce cost and the carbon floor price in the UK would become less important.


eo: China plans to develop a nationwide carbon market by 2017, but liquidity of China's seven pilot schemes is limited, and prices in five of the markets have fallen sharply. The recent price in 7 trading pilots fluctuates from 2 to 7.88 US dollars per ton. Does the Floor Price suit to China? What should be a reasonable carbon price?

Tim Yeo: I understand that. We expect the China national emission trading system to have a floor and ceiling price at starting period. In the early stages, as happened with the EU ETS, it is likely that the carbon price would be relatively low near the floor price. And everybody recognize that level does have a great influence on investment positions. It should be increased to a high level that would influences the investment positions. I’ve been discussing the development of the first pilot ETS in Guangdong and a national system for 4 or 5 years, and I hope the people designing the Chinese system to look at the lessons or mistakes we have made in EU ETS about too high level of allocation allowance at the start and a significant proportion of free emission allowances which are increasing dramatically. China has already discussed about the two barriers with the result will be uncovered by the end of 2017. 

But I think we have to be cautious in expecting the carbon price in the first year or two to be very high. It would be unrealistic to assume a new national ETS will produce a new carbon price by the way. This is a long term process. And if we hope that the cost of CCUS can be driven down at scale and the carbon price of the national ETS in China will gradually increase, it will be realized beyond 2020.

Charles Hendry: I don’t think this (carbon price) is something which government should try to decide. We set the carbon floor price to be an indicator, but the preference should always be the market on deciding what is going to be the best price. The role of the government should be driving up the carbon price by agreeing to reduce allocations over time, and that has to be part of the long term approach. There are consequences which would be difficult for countries tries to move too quickly because some part of the country would be affected much more dramatically than others, for example, the areas mainly occupied by heavy industry would be affected at a much earlier stage than areas developing new technology. Therefore, we have to manage that process in order to look at why we can’t make a national interest.

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