What is the difference between value and cost? When a technology like CCS is indispensable to the UK economy (high-value), what role does the cost play?
The UK Government published its Industrial Strategy Green Paper a few weeks ago, emphasising the need to reduce the cost of energy and decarbonisation in the power and industrial sectors. There is overwhelming evidence showing that CCS is one of the most valuable solutions to achieving this goal – for example the Committee on Climate Change has concluded that CCS has the potential to halve the cost of meeting the UK’s 2050 climate change target.
However, to realise the tremendous value of CCS, we need to tackle the perception that CCS is high-cost.
According to the National Audit Office report on the second CCS competition, the cost of CCS played a key role in the decision to withdraw the £1 billion for the competition, and the Department for Business, Energy and Industrial Strategy (BEIS) “has stated that the costs of deploying CCS need to come down for it to contribute to decarbonising the UK’s economy”.
You may remember that in September last year, the Parliamentary Advisory Group on CCS (PAG) published its report “Lowest Cost Decarbonisation for the UK: The Critical Role of CCS”. Amongst its many recommendations, the report set a challenge for CCS; to ensure that the costs of the very first CCS power projects can be delivered at or below a CfD strike price of £85/ MWh.
The CCSA has now concluded its own analysis and agrees with the key conclusion of the PAG report that the first CCS projects [in the UK power sector] can be developed at a cost that is competitive with other low carbon technologies, under the right conditions.
But how can CCS now achieve the PAG report cost target of £85/MWh, when the two preferred bidders in the cancelled competition expected to deliver projects in the range of £150-200/MWh? This is an important question and the answer can be explained through a combination of how the programme or competition is designed as well as an understanding of some of the external factors that affect cost, over which we have no control.
For example, building projects at commercial scale, in optimal locations, with access to lower cost of capital and operating as baseload power plants, all contribute to lowering the cost of projects. These factors can be built into the design of a CCS programme. The length of the CfD contract being offered also has a significant impact – a longer contract length reduces the cost as it allows the developer to recover the capital cost of their investment over a longer period.
Other variables, such as the gas price, are influenced by international markets and cannot be controlled by the government or the private sector. A gas price of 47 p/th (the average gas price in 2015) can deliver the CCS strike price of £85/MWh. However if we were to use the Government’s central gas price forecast which reaches 62 p/th by 2030, the CCS strike price rises to £92/MWh. Remember that even the latter is below £100/MWh; the “magic” cost target that most low-carbon technologies in the power sector aspire towards.
We have shown that it is possible to achieve cost-competitive CCS in the power sector from day one. This will enable CCS to produce much needed low-cost, decarbonised, dispatchable electricity to meet demand. These projects should be located in industrial regions allowing sharing of CCS infrastructure with other key sectors like energy intensive industries and heat, thereby lowering costs across the UK economy. This approach ensures that CCS can play a key role in enabling industrial sectors and regions to transition to a low carbon economy and delivering a truly sustainable industrial strategy for the UK.