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Sussex Energy GroupSPRU - Science and Technology Policy Research
Economics of CCS
Jim WatsonDirector, Sussex Energy Group
UKCCSC Winter School, 9th Feb 2011
Sussex Energy GroupSPRU - Science and Technology Policy Research
Overview
• CCS economics: how do they compare?
• Why economic comparisons can be misleading
• Why should government support CCS investment?
• Evaluating options for public policy support
Sussex Energy GroupSPRU - Science and Technology Policy Research
How do CCS economics compare?Some illustrative figures
0
500
1000
1500
2000
CCGT Coal Coal +CCS Nuclear Onshore
wind
Offshore
wind
Cap
ital co
sts
(£/k
W)
Source: Committee on Climate Change, 2009
An informed guess
Sussex Energy GroupSPRU - Science and Technology Policy Research
How do CCS economics compare?Some illustrative figures
0
2
4
6
8
10
CCGT Coal Coal +CCS Nuclear Onshore
wind
Offshore
wind
Gen
era
tio
n c
osts
(p
/kW
h) Estimates for 2010
Carbon price: 30 Euro / tonne (CO2)
Source: Committee on Climate Change, 2009
Sussex Energy GroupSPRU - Science and Technology Policy Research
How do CCS economics compare?Some illustrative figures
0
2
4
6
8
10
CCGT Coal Coal +CCS Nuclear Onshore
wind
Offshore
wind
Gen
era
tio
n c
osts
(p
/kW
h) Estimates for 2020
Carbon price: 51 Euro / tonne (CO2)
Source: Committee on Climate Change, 2009
Sussex Energy GroupSPRU - Science and Technology Policy Research
Why economic comparisons are misleading
• Analysing costs in p/kWh or £/tonne of carbon give a poor guide to real investment behaviour
• Risks very important too – investors may favour an option with higher costs if it has lower risks
• It also matters what other investors are doing: issue of ‘herd behaviour’ (e.g. gas fired power in the UK)
• Many new technologies subject to ‘appraisal optimism’ by advocates
Sussex Energy GroupSPRU - Science and Technology Policy Research
Why economic comparisons are misleading, particularly for CCS
• CCS has never been implemented at full scale
• Economics subject to many uncertainties, e.g.
–Capital costs (especially for ‘first of a kind’)
–Fuel prices, carbon prices, operating efficiency
–Storage costs and liabilities (linked to legal regime)
• Theory and evidence from ‘learning curves’ suggests costs should fall with cumulative investment
• But past experience shows this isn’t always true
Sussex Energy GroupSPRU - Science and Technology Policy Research
Costs can fall with experience
Source: Watanabe et al, 2000
Sussex Energy GroupSPRU - Science and Technology Policy Research
But they can also rise …
0
500
1000
1500
2000
1965 1970 1975 1980 1985 1990 1995 2000
Cap
ital
Co
sts
($1996 /
kW
)
CCGT Conventional Coal
Source: Watson, 1997
Sussex Energy GroupSPRU - Science and Technology Policy Research
SECOND TRANCHE
Commercial &Regulatory Drivers
GLOBALCCS
ROLLOUTBig prize is getting two learning cycles
from two tranches of CCS projects before
global rollout
EUCCS
ROLLOUT
PLANTSCOMINGINTO SERVICE
2015DEMO
PROJECTSIN PLACE
2020CCS
STANDARDIN EU
2025GLOBAL
CCSROLLOUT
FIRST TRANCHE
Demonstration
12 plants by 2015 in EU
CCS retrofits on existing plant
Learning process likely to be complex and long
Source: Adapted from
Chalmers and Gibbins
Sussex Energy GroupSPRU - Science and Technology Policy Research
Costs of learning are substantial
Stage 1 (R&D) Stage 2 (early
demonstration)
Stage 3 (refinement
& cost reduction)
Stage 4 (early
commercialisation)
Fu
nd
ing
Source: Adapted from Carbon Trust
Status of CCS
‘Valley of death’
Sussex Energy GroupSPRU - Science and Technology Policy Research
Why support CCS in the UK?
• Diplomatic rationales
–Shores up UK /EU leadership on climate change
–Early CCS demonstration in UK could help persuade China,
the USA to take action on emissions
• Geological rationale
–UK is well placed for CO2 storage in both depleted
hydrocarbon fields and saline aquifers
• Economic rationales
–UK skills, especially in offshore engineering?
–UK-based firms may benefit from ‘first mover advantage’
–Another option for emissions mitigation. Lowers costs?
Sussex Energy GroupSPRU - Science and Technology Policy Research
Why support CCS in the UK? But progress has been slow
• UK government has taken a long time to commit to CCS demonstrations – many years to convince the Treasury
• Builds on history of debate on ‘clean coal’ demonstrations dating back to the 1990s
• Original plan for one demonstration plant inappropriate for diversity of CCS technologies / multiple uncertainties
• Coalition has confirmed plans for up to four demonstrations
• A long way to go, and many unanswered questions with respect to uncertainties
Sussex Energy GroupSPRU - Science and Technology Policy Research
Cancelled
Sussex Energy GroupSPRU - Science and Technology Policy Research
Why EU carbon price isn’t enough (European Climate Exchange data)
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportEvaluating options
• The UK CCS demonstration plant / programme already includes several support options
• Demonstration no. 1 funded by capital grant of up to £1bn
• Demonstrations 2-4 may be funded from CCS Levy on consumer bills, possibly via a ‘Contract for Difference’?
• But, funding for Demos 2-4 is subject to uncertainty: subject to wider Electricity Market Reform (EMR) process
• Key question: what are pros and cons of options with respect to 1) investor risks; and 2) the electricity market
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportLots of choice!
Regulations Economic incentives
Emissions Performance
Standard (EPS)
CCS Mandate
Feed-in Tariff
Capital Grant
Carbon price guaranteeCCS Quota Obligation
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportAnd they can be combined …
Regulatory options Price-based options
Emissions Performance
Standard (EPS)
CCS Mandate
Feed-in Tariff
Capital Grant
Carbon price guaranteeCCS Quota Obligation
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportEmissions performance standard (EPS)
• An EPS is proposed as part of the government’s Electricity Market Reform package
• Proposal to limit annual average emissions to 600g/kWh
• Impacts on investment risks unlikely to be significant for CCS unless accompanied by an economic incentive
• Impacts on electricity market depend on implementation:
– If applied to existing and new plants, this risks premature
closure of plant required to balance the system
–At level proposed in the UK, gas plant would still be able to operate without CCS
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportCapital grants
• Capital grant on offer for first UK demonstration of CCS
• Impacts on investment:
–Utilities want grants to lower exposure to capital cost risks (but
problem of only one bidder in the ‘competition’ for demo 1)
–Each plant requires large contribution from limited public funds
–Potential lack of incentive for effective operation: will it lead to
construction of ‘White Elephants’?
• Impacts on electricity market:
• A competitive market should encourage effective operation
since utilities expected to part-fund CCS demonstration
• But is the UK competitive enough to support this assumption?
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportFeed in tariffs
• Feed in tariffs usually support renewable electricity: a fixed payment per kWh generated
• Impacts on investment
–Simple and transparent, with lots of certainty
–Reduction in key risks (e.g. electricity & carbon price), but fuel and other operating costs still matter
• Impacts on electricity market
–No incentive for efficient plant operation in response to power
market prices (income is fixed irrespective)
– In the UK, FITs are classed as taxes despite being financed
from consumer bills: still subject to public spending constraints
Sussex Energy GroupSPRU - Science and Technology Policy Research
Public policy supportPremium feed-in tariff
• A fixed price payment on top of the electricity price
• Impacts on investment
–Less risk mitigation than standard feed-in tariff
–Exposure to electricity prices, carbon prices and fuel prices
• Impacts on electricity market
– Incentive for efficient operation remains, and for
responsiveness to electricity market conditions
–Could be more effective at supporting innovation to improve flexibility of CCS plants
Sussex Energy GroupSPRU - Science and Technology Policy Research
Conclusions
1. CCS economics very uncertain due to lack of experience at full scale
2. Beware of comparisons with more established technologies (risk profiles are different)
3. Process of innovation for CCS likely to be long and costly. Unlikely that all variants will survive
4. Good arguments that the UK should pursue CCS
5. Many options for public policy support, with different implications for CCS investors and electricity market
6. Electricity Market Reform has important implications
Sussex Energy GroupSPRU - Science and Technology Policy Research
Thanks
http://www.sussex.ac.uk/sussexenergygroup