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Conference note

Towards a UK CCS roadmap

Regulatory and financing options from the USA

Friday 20th March 2009

Institute of Directors, 116 Pall Mall, London

Conference agenda

The California policy context: legislation and regulationThe California policy context: legislation and regulationThe California policy context: legislation and regulationThe California policy context: legislation and regulation

• Nancy Ryan (Deputy Executive Director for Policy and External Relations, California Public Utilities Commission)

• Meg Gottstein (Principal, Regulatory Assistance Project; formerly Administrative Law Judge, California Public Utilities Commission)

CCS in California: projects andCCS in California: projects andCCS in California: projects andCCS in California: projects and policy policy policy policy

• Lewis Gillies (Chief Executive, Hydrogen Energy International Limited)

• Michael Peevey (President, California Public Utilities Commission)

• Gene Rodrigues (Director of Energy Efficiency, Southern California Edison Inc)

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• Richard Cowart (Director, Regulatory Assistance Project; formerly energy regulator in Vermont and Chair of the National Council on Competition and the Electric Industry)

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• Steve Corneli (Senior Vice President, Regulatory and Government Affairs, NRG Energy Inc)

• David Hawkins (Director, Climate Programs, Natural Resources Defense Council)

Assembling the components of a UK CCS roadmapAssembling the components of a UK CCS roadmapAssembling the components of a UK CCS roadmapAssembling the components of a UK CCS roadmap

• Mike Farley (Director of Technology Policy Liaison, Doosan Babcock)

• Keith Allott (Head of Climate Change, WWF-UK)

• Samantha Lumb (Climate Change Policy Manager, Environment Agency)

• Stephen Brown (Sustainable Development Manager, Energy and Climate Change, Yorkshire Forward)

• Alastair Rennie (Project Director, AMEC)

Presentations are available from http://www.green-alliance.org.uk/grea1.aspx?id=3620

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The California policy context

Nancy Ryan of the California Public Utilities Commission (PUC) opened the conference with an introduction to California’s energy and climate policy, highlighting that key to reducing emissions was a focus on the loading order in which new investments were undertaken. The state has policy mandates in place that prioritise procurement of energy efficiency and demand response measures first, then renewables, before finally low-carbon fossil fuels. Thanks to this approach, average per capita energy consumption in California has stayed almost flat since the 1970s, whereas consumption levels have doubled for the USA as a whole.

The Emissions Performance Standard (EPS) introduced in 2007 has also played a role more recently in confirming that the state is on a pathway to a low-carbon electricity sector. It has done this by ruling out the procurement of electricity from new unabated coal plants, but would permit CCS plants if they were to be proposed. Alongside this, the state is working proactively to identify suitable CO2 storage locations, as it recognizes that it needs to invest now in CCS and other measures that will be key for reducing emissions after 2020.

Meg Gottstein of the Regulatory Assistance project followed by providing more detail on the introduction of California’s EPS – a process she had overseen as Administrative Law Judge at the PUC. Firstly, she highlighted that the purpose of the EPS was threefold: to protect ratepayers from

future financial risk exposure (to the costs of reducing emissions from unabated coal, or absorbing the impact of stranded assets); to avoid future supply reliability problems by insuring appropriate investment now; and to ensure that there is no ‘backsliding’ towards high-carbon energy sources during the transition to a cap and trade system. More

broadly, this regulatory mandate approach provides benefits over emissions trading alone, as the carbon price signal is not able at present to influence either the dispatch order of existing generation, nor can it quickly pull through to market alternative new technologies. Only unacceptably high carbon prices would do that, but in the case of California this would be accompanied by a real risk of ‘carbon leakage’.

California’s EPS was therefore designed to provide a more stable policy foundation which would guide the investment decisions made by its ‘load serving entity’ power companies. The EPS thereby also applies to any contracts they would enter into with out-of-state generators. Meg Gottstein underlined that, contrary to expectations from many overseas observers, the setting of the EPS at a limit of 500gm/kWh was an uncontroversial decision, coming as it did following a series of stakeholder consultations.

This level was selected to rule out investments in unabated coal, but by applying a screening process for new proposals, the PUC is able to approve investments in any new CCS plant that can show that it could meet the EPS once in operation, and over the lifetime of the plant. Similar approaches have been taken in Washington State, Montana, and Oregon (pending), so as to leave the door open for CCS while taking action to immediately reduce the prospect of new high-carbon emissions sources being permitted.

More broadly, the introduction of the California EPS has sent the financial community a clear signal that CO2 emission rates are relevant to the financial risk profile of power plants, and elevated the issue of CO2 emission rates in the permitting process across many states in the USA.

CCS in California

Following on from this introduction to the California policy framework, the next panel of speakers looked at what this meant in practice for the development of CCS in California.

Lewis Gillies, Chief Executive of Hydrogen Energy International highlighted how they had two major projects moving forward

Nancy Ryan

Meg Gottstein

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internationally: in Abu Dhabi and California. Thanks to PUC support, the California project was making good progress in association with Southern California Edison. Key to it making the step to commissioning would however be whether it could secure funding from the federal administration, perhaps through the economic recovery package.

Lewis Gillies underlined that the regulatory approach taken by California had sent a clear market signal that the state would be a ‘taker’ of CCS projects. But, as elsewhere, it is the coming together of the regulatory package with sufficient financing that will enable CCS projects to

happen. Thankfully, Lewis Gillies noted, it looks as though significant financing opportunities are at last coming together in a number of key countries.

Gene Rodrigues of Southern California Edison Inc (SCE) followed by outlining where CCS fits into the SCE portfolio, and provided details of their cooperation with Hydrogen Energy. SCE is co-funding ($30M) the study that will evaluate the feasibility of the proposed plant. The aim is to produce low-carbon baseload electricity by gasifying petroleum coke to produce hydrogen for electric generation through an Integrated Gasification Combined Cycle plant, plus capture the CO2 emissions for Enhanced Oil

Recovery (EOR) with sequestration in California’s oil fields. If the project were to go ahead, SCE would use the hydrogen produced for power generation. Importantly, they hope to recover through the rate base their share of the costs of involvement in the project and are in discussions with the PUC about this.

Michael Peevey, President of the PUC, expressed his belief that the Hydrogen Energy / SCE project would be the first operational CCS plant in the USA. He made clear that the PUC considered CCS an important step forward that is worthy of public financial support through the rate base and direct financial incentives.

Michael Peevey also noted that this proposed project would have additional environmental benefits for the state. He explained that at present, petroleum coke is produced in Californian refineries and exported to Asia. There it is often burnt without sufficient pollution control measures, with the contaminated air ultimately ending up back across the Pacific Ocean in California as a major source of poor air quality. By converting this petroleum coke into Hydrogen instead, the state will receive a double benefit of cleaner air and reduced carbon emissions.

US state-level regulation

If the previous discussion had been very positive about the prospects for CCS development in California, Richard Cowart of the Regulatory Assistance Project (RAP) provided a more sobering overview of the policy progress to date across the different US states. He highlighted that while demonstration funding will ultimately need to come from federal sources, individual states have many different parts of the regulatory puzzle under their remit.

This is notably important for the future demonstration and deployment of CCS because it is extremely likely that even a federal cap-and-trade system would not be able to deliver viable CCS projects due to four main reasons: 1, cost containment is a real concern in Congress – CO2 prices are unlikely to be very high; 2, CCS is not needed for load growth – renewables and energy efficiency are likely to be enough; 3, existing coal plants will keep running unless the CO2 price is very high; and

Gene Rodrigues

Lewis Gillies

Michael Peevey

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4, even optimists say a $90/ton CO2 price is needed to launch CCS.

In respect to current on the ground progress, Richard Cowart shared that RAP’s nationwide research had revealed at least 25 different policy options under discussion, formally proposed, or adopted across the USA, but that all are being pursued on an ad hoc basis. The most visible of these are the

generator performance standards already in place in Oregon, Washington, Montana (50% or better CCS), and Massachusetts, together with the retailer carbon standards in California (as detailed by Meg Gottstein earlier) and Washington State. In addition, state policies can affect all stages in the development, construction, and operation of CCS facilities, including utility planning; project applications and reviews; financial incentives; and support for operations and technology development. For example, the different state permitting procedures for transportation and storage can also prove to be barriers for project development in respect to the time requirements involved. Several states are now trying to develop ‘one stop shop’ approaches that can speed up the permitting process. Richard Cowart then outlined a series of criteria that have been developed by RAP to evaluate the policy options available and provide guidance for state regulators. These provide a means of identifying whether policies support key outcomes such as the ability to accelerate CCS deployment and spur innovation while also meeting public utility requirements for value for money and regulatory administration. In summary, Richard Cowart underlined that despite the growing interest in CCS, there were valid reasons for state utility regulators to be cautious. Cost overruns are a realistic concern, as nuclear was not “too cheap to meter” in the past and CCS is still unproven at scale. Similarly, the question remains as to why individual states should shoulder the national

burden for technology development? He suggested that what will be needed is a proper balance on costs and risks between shareholders and ratepayers. Given that there was still limited political momentum for CCS deployment in the USA, he highlighted that EU action has the potential to influence both state and federal level initiatives going forward.

The USCAP approach

Steve Corneli of NRG Energy provided an overview of NRG’s interest in CCS as a crucial means of decarbonising its energy generation portfolio. Alongside its investment in nuclear power, NRG sees CCS as a means of maintaining security of supply and a balanced portfolio while meeting the imperative of reduced emissions reductions. Given the election of President Obama, Steve Corneli was hopeful that significant climate legislation could indeed be passed in the USA. In particular, he highlighted the economic opportunities that would come from a credible climate policy. This would offer government a way to end deficit spending and “hand off” the recovery to competitive private sector investment that will drive economic growth. He suggested that a successful policy along these lines would need to have three components: 1, it must satisfy the environmental need for aggressive emission reductions by mid-century and for developed economies to play the front of the field; 2, it must satisfy business and economic needs to avoid rapid shocks to shareholders and customers, without creating windfalls; and 3, provide extremely strong incentives (carrots and sticks) to develop and deploy efficient new low/no carbon technologies. This must include CCS and coal as this will be preeminent for both climate and domestic economic reasons.

Richard Cowart

Steve Corneli

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Steve Corneli proposed that such a package would build a broad coalition of members, regions and interests, and could boost growth when deficit spending stops. This has been one of the aims of the US Climate Action Partnership (USCAP) – a coalition of NGOs and leading corporations who published consensus proposals for US climate legislation in January 2009 [and which have been taken up by the Waxman-Markey bill]. On CCS, the USCAP proposals include the combination of an EPS alongside a dedicated funding mechanism for CCS demonstration and deployment, which will provide incentives for early-movers and fuller capture levels. Steve Corneli highlighted that NRG was active in USCAP as part of its proactive policy engagement, and that they saw this package of measures as providing a crucial level playing field for their commercial investments. As an energy company wanting to invest in CCS, they need to have confidence that they would not lose out to other companies building unabated coal plant. Similarly, they need to have a range of options from technology providers (and competition on price), which will only come from the CCS industry having a clear sense of the size of the market and the timeframe for investment. Both of these commercial drivers therefore depend on a package of regulation and financing to provide a clear market signal.

David Hawkins of the Natural Resources Defense Council continued the discussion of the USCAP approach by highlighting the need to engage with the concerns of ‘coal states’ if any federal climate legislation is to be passed. This political dynamic can be clearly seen by the locations

and energy mix present in the states represented by Democrat members of Congress who have questioned previous attempts at climate legislation.

The USCAP approach therefore promotes a package of legislative measures that would introduce emissions trading, together with necessary complimentary policy measures, but in a way that provides a means for companies to adjust and make viable investments in low-carbon technologies. By bringing together businesses and major NGOs, the USCAP proposals show that it is possible to agree a climate policy that meets political concerns as well as business needs, while also setting the USA on to a credible pathway to major cuts in emissions. On CCS, David Hawkins introduced the USCAP proposals. These include an EPS that would apply to all new coal units without a permit today. The compliance emissions levels would be phased in: starting with a limit of 1100 lbs/MWh for units permitted before 2020, followed by a limit of 800 lbs/MWh for post-2020 units. Similarly, there is a phasing in proposed for compliance dates: the above limits would need to be met upon startup for units permitted post 2014; while there would be a grace period for any new coal units permitted before 2015. This period would end 4 years after the deployment of 2.5GW (in the USA) to 5GW (globally) of CCS, thereby requiring these new units to fit CCS once sufficient CCS capacity is in operation globally to provide guarantee of its commercial availability. This regulatory package aims to set a clear timetable for CCS deployment, and would be accompanied by a funding mechanism that would allow commercial investments to proceed. Payments would be made per ton of avoided CO2, with two sliding scale mechanisms applied to progressive tranches of CCS capacity. There would be a $/ton amount based on the level of capture, calibrated so that the earliest projects get highest $/ton payments – this could be up to $90/ton for the first tranche of 3GW. There would then also be the potential to provide ongoing support into the future depending on the carbon price – in effect offering a floor price for carbon for qualifying CCS projects in case the market carbon price does not increase as predicted.

David Hawkins

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A UK CCS roadmap

Matt Phillips of the European Climate Foundation chaired the final session of the conference, which turned to the questions of what a viable package of regulation and finance might include in the UK. Keith Allott of WWF-UK stated that an effective policy on coal and CCS was now the litmus test for effective climate action in the UK and EU. He pointed to the December 2008 report by the Committee on Climate Change as providing the target for any forthcoming UK policy: “Any feasible path to a 80% reduction by 2050 will require the almost total decarbonisation of electricity generation by 2030” and that “There is a strong case for buttressing the carbon price lever by establishing a clear and publicly stated expectation that coal-fired power stations will not be able to generate unabated beyond the early 2020s”.

Given this starting point, Keith Allott proposed that the only two credible options for policy would be either an absolutely binding deadline for full-scale CCS to be retrofitted, or an EPS. WWF proposes that an EPS could be most effectively introduced as of now at a level that

can be achieved by gas plant operating with heat capture, but the EPS should then be tightened to ensure that both gas and coal plant are covered by CCS during the 2020s. Such a policy would need to be accompanied by appropriate financing and a more strategic approach to CCS clusters and networks. Mike Farley of Doosan Babcock similarly presented a perspective from within the CCS industry that included both financial and regulatory components. After setting out a

number of scenarios for future CCS deployment in the UK, he questioned whether the EPS levels proposed by USCAP or UK opposition parties and environmental groups would be sufficient to drive CCS deployment, or whether it would instead simply result in a further ‘dash for gas’. Acknowledging however that an appropriately set EPS could provide

greater market certainty to help accelerate CCS, he set out some outline

thoughts on how an EPS could be introduced in the UK. He proposed a lower level of permitted emissions such as 150gm/kWh, so that such an EPS would also cover gas plants. Similarly, an EPS could be signaled now to come into effect from 2020 (when CCS technologies could be commercially available), with plant permitted before then on a capture-ready basis plus an expectation of retrofit required by 2025. As with WWF, Mike Farley agreed that significant demonstration funding would also be required, and proposed that CCS demonstrations on three coal and one gas plant should be funded in the UK to be operational by 2015. Samantha Lumb of the Environment Agency outlined their interest as regulators in seeing a stable framework for CCS that can drive emissions reductions from the power sector. She explained that the current Environment Agency thinking on the potential policy framework was that: 1, carbon capture readiness is essential for new large scale fossil fuel combustion plants (coal and gas) but not enough; 2, all new coal fired power stations should demonstrate large scale CCS; 3, full CCS must then be operational across the whole plant within a strict time limit; and 4, virtually all coal and gas plants will need to have been retrofitted, closed, or put on standby only by 2030.

Keith Allott

Matt Phillips

Mike Farley

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Stephen Brown of Yorkshire Forward presented an overview of their work to develop a regional CO2 transport network that would link together the major sources of emissions in the Yorkshire and Humber area, transporting CO2 to available storage sites in depleted oil and gas fields in the southern North Sea. Such an approach would offer greater cost-effectiveness than a project-by-project basis, and would help secure the future of the region’s industrial base as well as its power-generating capacity. Strategic thinking from UK government was therefore required in its future policy to ensure that CCS demonstration projects were undertaken in a way that helped build the future infrastructure for mass deployment.

The benefits of such a joined-up approach were echoed by Alastair Rennie of AMEC, who posed a series of challenges relating to the financing of CCS demonstrations. Given that CO2 emissions stay in the atmosphere for over 50 years, one would hope that our

accounting would value avoided emissions in the

near future more highly. Yet the carbon price set by the EU emissions trading scheme is currently low and will only rise in the future – the reverse of what is required to bring CCS to market quickly. Additionally, financial support for CCS is proposed to operate on a ‘pay for performance’ basis according to the level of CO2 stored. Although this has benefits in respect to incentivising the operation of CCS plant, it does leave a problem in respect to the high capital expenditure costs and project finance risks faced by many CCS projects and their related infrastructure. There may therefore be a role for further financing mechanisms that can address these up-front costs as well.

During discussion, much of the attention focused on the different proposed forms of an EPS. Questions were raised as to the technical feasibility of having a tapering standard, but Keith Allott clarified that the WWF proposal was a one-step approach in respect to the change in the level of permitted emissions, and was

therefore not so dissimilar to the time phasing proposed by Mike Farley. All panelists agreed that the key outcome required was clarity on the requirements for future fossil fuel plant use of CCS, in a way that could enable investment decisions to proceed quickly. Stephen Hale of Green Alliance and Jeff Chapman of the Carbon Capture and Storage Association thanked all panelists and participants for their engagement during the day’s discussions, noting that the time was ripe for a major step forward in UK action on CCS. The policy task is indeed tricky, noted Stephen Hale, but not perhaps as difficult a challenge as the government has made it appear to be to date. As such, the forthcoming UK consultation on CCS and coal policy would be a key opportunity to define a package of regulation and finance that can accelerate progress – not just for the UK but internationally too. The visit by the US delegation showed where policy was starting to make progress across the Atlantic, offering real prospects for a positive policy dynamic over the months ahead.

Samantha Lumb and Stephen Brown

Alastair Rennie

Jeff Chapman and Stephen Hale