Carbon Capture and Storage (Scotland)

Charles Hendry Excerpts

Tuesday 17th January 2012 Westminster Hall

[The Minister of State, Department of Energy and Climate Change (Charles Hendry)]

It is a great pleasure to serve under your chairmanship today, Mr Howarth. I begin with an abject apology to you and to the House for my late arrival. I am afraid that there was confusion in my office about the time at which the debate started; I therefore turned up slightly late. I apologise profusely and will write to Mr Speaker to make my apologies known to the House.

In particular, I had wanted to hear the comments of the hon. Member for Dunfermline and West Fife (Thomas Docherty). He has shown a strong personal commitment to the issue that goes way beyond the interests of his constituency alone, to look much more broadly at the interests of carbon capture and storage and future energy development in the United Kingdom and particularly in Scotland. I am profoundly grateful to him for his interest and the expertise that he has shown, and I was keen to hear his remarks in full—I will read them—but of course I accept his request for a meeting. If he and other hon. Members wish to talk to me about their concerns in more detail at any point, they are more than welcome to do so.

We have had an extremely valuable debate, characterised by the extent to which hon. Members have spoken with both commitment and expertise. It reinforces why we all desire the issue to be seen as outside politics, and there is an enormous prize for our whole country. People looking to invest want to see as much clarity and agreement between the parties as possible, to which the tone of the debate has been conducive. We are all frustrated about the pace of progress and we are all disappointed that the Longannet project could not be made to work within the budgetary framework, but we are all equally committed to taking the issues forward, to ensure that the United Kingdom is one of the most attractive places in the world in which to invest in CCS. The UK has unique facilities, which should put it at the forefront of developing CCS, and Scotland is at the forefront in the United Kingdom. The industry’s potential for Scotland, for existing industry and for new industries that want to support CCS and to provide part of the supply chain is extremely comprehensive.

The frustration was outlined before the general election by Paddy Tipping, then the Member of Parliament for Sherwood and a member of the Select Committee on Energy and Climate Change, who said it was a competition without end—the competition for CCS seems to have gone on for ever. Given that we must now proceed with new urgency on setting a new competition, it is not lost on any of us that we wasted the chance over a number of years to take the opportunity forward, and we must now do so with extra vigour.

[Thomas Docherty]

Does the Minister share my observation that part of the problem with the previous competition was people’s apparent belief that it was a case of the last bidder standing, rather than of having technology that worked? Can he ensure therefore that much more robust criteria are set down at the start, so that everyone understands what the competition is?

[Charles Hendry]

My concern was always that the competition was too narrowly focused. Given the requirement for post-combustion technology, the interest in pre-combustion technologies, such as the BP project at Peterhead, could not qualify. The assumption at the time was that the technology could then be sold to China and elsewhere to retrofit old plants, but the Chinese are now clearly quickly developing their own technology that they want to sell to the rest of the world, so we need to look at a wider range of technologies. An added complication, which I will come to later, is retrofitting an old technology to an old plant, with the significant extra costs inevitably occurred in bringing that plant up to scratch, to give it decades of future life, on top of the cost of the CCS alone.

We all agree that CCS can play a fundamental part in delivering our secure, low-carbon energy needs. It provides us with a generation option that other technologies do not: its flexibility can provide a balance between the intermittency associated with renewables and the base-load nature of nuclear. It allows fossil fuels to play a full part in our low-carbon future and allows the decarbonisation of industrial emissions. We—the whole of the United Kingdom and the Government—remain firmly committed to working with industry to achieve that.

We have made available £1 billion of capital funding to support early CCS projects, and I will say more on that in a moment, in response to the questions. We are establishing a market for CCS electricity through our reforms to the electricity market. We are continuing to lead the world in putting in place the regulatory framework to support CCS, including legislation on third-party access to pipelines. We are supporting essential research and development, including opening the UK’s first carbon capture demo at the Ferrybridge power station. We have also established the CCS development forum, which has drawn together around 40 members from the industry to be directly involved in delivering CCS in the United Kingdom, together with representatives from the international academic and non-governmental organisation communities.

There are many different ways to achieve the decarbonisation of the power sector. At this stage, it is not possible to predict which will be the most cost-effective route or what exactly the power sector will look like in 2030. Nevertheless, we can use economic models to produce projections, using the best evidence currently available. Analysis undertaken for the carbon plan of the Department of Energy and Climate Change suggests that around 40 to 70 GW of new low-carbon electricity generating capacity will be needed by 2030, depending on demand and the mix of generation built. In response to the point made by the hon. Member for Banff and Buchan (Dr Whiteford), a strong continuing role for gas is envisaged in that mix.

[Ian Swales]

The Minister mentioned economic modelling. Do the Government have any wider modelling that takes into account the whole picture, not only carbon capture and the grants that might be required to get it going, but—my earlier point—petroleum revenue tax resulting from enhanced oil recovery?

[Charles Hendry]

My hon. Friend makes an interesting and valuable point. Our focus so far has been on how to advance the technology and to make it commercially viable and on how to bring down the cost. Our focus therefore has been on the energy sector, but he is absolutely right about a range of other benefits, not least in PRT or revenue that might come through enhanced oil recovery, which I will come back to, as well the supply-chain opportunities, the wealth that that creates for the economy and the tax revenues that will come into play.

Our analysis shows that CCS could contribute 10 GW of capacity to the UK electricity market by 2030 and up to 40 GW by 2050. I want to be absolutely clear that we are not setting targets for separate technologies. The industry’s ambition for CCS, as set out by the Carbon Capture and Storage Association strategy paper last year, is significantly higher than in our modelling, seeking 20 to 30 GW by 2030. We would be happy with such deployment, provided that it is the most cost-effective way to meet our decarbonisation targets—an issue raised by my hon. Friend the Member for Warrington South (David Mowat). We must do three things to make that possible: provide incentives for investment, bring down the costs of the technology and tackle barriers to deployment.

The key to delivering the investment that we need in the UK electricity sector is confidence, for both technology developers and investors in the long-term future for their technology, and in the certainty of opportunity for those who want to take forward CCS and other low-carbon technologies. That is why the Government are implementing the biggest reforms to the electricity market for a generation, to provide the certainty that investors require and to create an industry for CCS, rather than only a few pilot projects. We are committed to reforming the electricity market to incentivise the deployment of low-carbon generating capacity.

Electricity market reform is a game changer for CCS. The reforms that we have announced offer the prospect of a future market for CCS electricity that will drive investment in commercial CCS plants. We are considering reforms that offer a range of benefits: longer-term contracts to provide stable financial incentives; support for early CCS projects, with contracts designed to recognise the associated uncertainties; an emissions performance standard set at the equivalent of 450 grams of carbon dioxide per kWh; and a carbon price floor that will further incentivise investment in low-carbon generation. With such incentives in place, the deployment rate for CCS will be dependent on the costs of the technology and how they stack up against nuclear and renewables.

If CCS is to be competitive with other low-carbon technologies, we and the industry must work together to understand the costs and how they can be reduced. There are two elements: technical discovery, through both research and development and learning by doing, and reducing the perceived risk of investing in a new technology, which leads to higher premiums for investment. We are tackling these issues in two main ways: through our £125 million research and development programme, which will continue to provide support for projects such as the UK’s first carbon capture pilot at Ferrybridge, which was opened by the Secretary of State for Energy and Climate Change last year; and through our new CCS delivery programme, which will support larger-scale projects, delivering learning by doing, moving the technology forward and reducing risk premiums. The programme will focus on achieving the overall outcome of cost-competitive, low-carbon electricity from fossil fuel power stations in the 2020s, thus achieving exactly what we want, which is a long-term industry in the sector.

[Thomas Docherty]

The Minister will recall that I previously met him to discuss transmission charging. At that time, we referred to the fact that fossil fuels that come up and down are charged on their capacity rather than what goes to the grid. Will he set out briefly the Government’s thinking on that and how we can change the system?

[Charles Hendry]

The hon. Gentleman’s point is critical to the whole Scottish electricity sector. The work is being taken forward by Ofgem through Project TransmiT, which is considering the appropriate regime for charging when electricity is transmitted over long distances. It will set out its thoughts during the next few weeks, and that can be discussed in more detail. I am very encouraged by the progress that I understand is being made to find a formula that will work for those who are developing projects north of the border and in other parts of the country. More detail will be available shortly, but it is critical to the development not just of CCS in Scotland, but to the whole electricity generating sector north of the border.

We are putting in place a strong financial offer for early CCS projects, and it is one of the best offers anywhere in the world. It includes the £1 billion that is available for the up-front capital costs of projects, the potential for low-carbon contracts for difference to support operational costs and the potential for European new entrant reserve funding, which we fully support.

In response to the point made by the shadow Minister, the Chief Secretary to the Treasury has said that, realistically, because the programme is being put back, the money that we had anticipated being spent in this spending round is unlikely to be spent, and it cannot be spent in the time scale originally intended. If Longannet had gone ahead, it could have started to be drawn down this year and certainly into 2013. With new projects coming through, that will happen at the very end of this spending round and primarily into the next one. However, there is a clear commitment, and the £1 billion remains.

In response to the point made by the hon. Member for Banff and Buchan, good progress is also being made on finding additional sources of funding to bring into the process. Discussion is taking place with sovereign wealth funds overseas to trap their investment in this area. We are seeing a greater appetite from industrial investors to put in their own funding, instead of the Government providing funding. Projects involving enhanced oil recovery might also make a significant financial contribution.

[Tom Greatrex]

I am grateful to the Minister for his partial answer to one of my questions. May I press him on how much of that £1 billion will be available during the current CSR period and the current Parliament if demand is present and whether the projects are advanced enough for the money to be available to spend? How much of that £1 billion could be spent on CCS during this time, or has it been subsumed into a wider infrastructure pot?

[Charles Hendry]

Certainly, the funding that was assumed would be spent on CCS in the middle of this spending round and that will not now be spent and cannot be spent is being made available to other infrastructure projects. I am sure that the hon. Gentleman welcomes that, because it will help to drive forward our economic recovery. Until we have seen the scale and type of the projects and the extent to which they will co-operate and collaborate, we cannot set out exactly what the funding will be. Some of them will access the new entrant reserve fund; some will be more dependent on a predictable income stream through the contracts for difference; and some will need more up-front funding. Until we know exactly what the projects will be, we cannot say exactly how they need to be financed. I understand why the hon. Gentleman wants clarity now, but until we understand the nature of the front-runner projects, we cannot say with certainty exactly how that funding should come forward.

[Tom Greatrex]

I am grateful to the Minister for his response. How much money would be available if those projects were advanced to a stage where they would be considered to be appropriate for that funding? How much of that funding would be available for projects in this comprehensive spending review period if they were in that position? Would the figure be up to £500 million, £200 million or £300 million? How much would be available from that £1 billion during this CSR period if the projects had the applicable framework for that money?

[Charles Hendry]

The hon. Gentleman is tempting me to go out of line, but I am reluctant to pursue that approach. Until we understand the nature of the projects, I cannot explain to him how they will be funded. They will all have a different funding requirement for longer-term running costs or up-front capital, which may come from one or two sources. We want to make it clear that we want projects to try to find other investors to enter the process. There will inevitably be a process of discovery and of trying to find out exactly what the best projects are, but we have made it absolutely clear that that £1 billion remains available. The hon. Gentleman understands that the time scale has been moved backwards because of the decision on Longannet, but the £1 billion remains ring-fenced.

[Dr Whiteford]

I appreciate the Minister’s candour in outlining how he is trying to find alternative sources of funding, but Shell and Scottish and Southern Energy hope to begin a full-scale field study of the Peterhead project in the second half of this year. They have made it clear that they will need funding in years 2 and 3, and it would be helpful if the Minister indicated what the funding prospects were for that time scale.

[Charles Hendry]

The hon. Lady makes exactly the point that I am keen to focus on: there are investors who might want to come into the project—international investors who want to be part of the early development of this game-changing technology because of its global potential. We are encouraging them to try to talk to other potential investors, and we are looking at a range of projects. We are discussing one that could come through the new competition, but it is not the only one. Other projects are viable and would have greater scope for accessing the new entrant reserve fund, but until we have seen their scope and the collaboration and co-operation between different industrial players, it is hard to come to a final decision. However, I give the hon. Lady the commitment that we have a real desire to take the competition forward much more rapidly than the previous competition, and during the next few weeks, we will provide the details.

We had an industry day in December, and during the next month we will have a further industry day to provide more detail on how the competition will work. We will then open up the competition shortly afterwards with a tight time scale to encourage firms to come back. Having lost time, we want to make up for that and to see the full range of projects that can benefit from funding and find out how we can take that forward.

[Gordon Banks]

While the Minister is winding up, will he respond to a point that I made that fits in with the one that he is making about new competition and external funding? What discussions has he had with the Scottish Government about them playing a financial role? Did the First Minister approach the Minister’s Department on Longannet or any future projects?

[Charles Hendry]

I was not remotely close to winding up until I took so many interventions, but I must now do so swiftly. On Longannet, the Scottish Government did not offer funding but, to be fair, they were not asked for funding. The project is seen to be a UK energy policy with funding from the UK Exchequer. We had constructive discussions with the Scottish Government ahead of it. I think that we all share the disappointment at the reaction, and perhaps the lesson is not to announce decisions just before the Scottish National party’s annual conference. We must try to move forward in a way that takes such issues out of politics. The gain from what can be achieved to the United Kingdom is so substantial that we all need to pull together and to work together.

The hon. Gentleman said that the decision on Longannet did not send out the right message, but it was the only decision we could have made, because at the end of the day there was so much difference between what it was going to cost and what was available. We want to take the technology forward, but we cannot do so at any price. Even if funding had been available from the Scottish Government, it could not have made up the difference to enable the project to go ahead.

Much more work needs to be done, and we are taking it forward urgently on regulatory reform, storage, the supply chain, transport and storage infrastructure and planning. In England, we can certainly make it clear through national policy statements and the infrastructure planning commission that that process will work much more smoothly and without the time delays about which people have expressed concern, although planning in Scotland is a matter for the Scottish Government. More details will come forward very shortly—

[Mr George Howarth (in the Chair)]

Order.