*The government is proposing a levy to fund the development of carbon capture and storage technology. Dominic Maclaine looks at how it might work.*

The government has been trying to encourage the development of carbon capture and storage (CCS) in a modest way for some years, but in the past year or so things have moved up a gear. Officials have announced that any new coal power stations built today must have CCS fitted to their full capacity by 2025. The government also now requires any new coal power station in England and Wales to include a commercial scale CCS demonstration element covering all three parts of the CCS chain (carbon dioxide capture, transport and storage).

The big problem is that although it has great potential to decarbonise fossil fuel plant, CCS is not yet a proven or commercially viable technology and support is needed. Peter Whitton, managing director of clean coal project developer Progressive Energy, says: "Although this is an emergent technology area, technologies are available now that can produce decarbonised electricity considerably more cheaply than, for example, offshore wind, and the best interests of the consumer are served by supporting the rapid introduction of CCS. The need is for a financial framework which enables the investments required to be justified."

*The Energy Bill*

The government has responded to such demands. The Energy Bill, currently passing through Parliament, includes a measure to introduce a levy on consumers that will fund up to four CCS demonstration projects. This funding will be used to stimulate different forms of CCS - pre-combustion, post-combustion and oxyfuel. An amendment to the Bill tabled two weeks ago has an eye to broadening the scope of the support mechanism in the future to back projects on gas as well as coal-fired plants.

Two post-combustion projects - put forward by Scottish Power and Eon - are already vying for funding of up to £90 million to complete detailed design and development studies and around £1 billion in support for a 300-400MW final project. The government is expected to announce the winner of the competition within the next 12 months - either late in 2010 or early in 2011.

The proposed levy will pay for both the first round of projects and following rounds, but in different ways. The first round of projects will receive a mix of capital and revenue support. In following rounds, developers will enter a bidding competition (based on price per carbon tonne stored). The details of further rounds have yet to be announced, but it is hoped that projects that benefit from economies of scale, such as the 800MW pre-combustion plans put forward by Progressive Energy and Powerfuel, will be eligible.

The government seems to be considering two options for the levy: a fixed additional payment for CCS generation or using a contract for difference (CfD) against the carbon price. Jim Fitzgerald, assistant director, energy and environmental infrastructure advisory at Ernst & Young, says: "A flexible support mechanism such as a CfD is needed, but it should ensure that consumers receive value for money."

*Up-front Payment*

Others favour some form of up-front payment. Alice Waltham, of IPA Energy + Water Economics, says: "Given the uncertainty of the project and the current climate for lending, these demonstrator projects are likely to be difficult to finance and in the short term may need to principally rely on equity provided by shareholders. Capital support delivered up front as far as possible would reduce the requirement for shareholder funds and minimise the overall requirement for support."

However, no-one knows how large the projects in the subsequent funding rounds will be. "There is a decision to be made by government," says Andy Read, clean coal business development manager at Eon. "Are we going to demonstrate the technology even if other countries are ahead of us in terms of demonstration or do we move straight to full-scale commercial build? Does the government want CCS technology demonstrations or large-scale coal for security of supply reasons?"

The government says that although there will be no immediate impact on electricity bills, by 2020 the average annual impact on domestic and industrial bills for a programme of four demonstrations is expected to be an increase of 2-3 per cent. The initial levy, which will be imposed on electricity suppliers but passed on to consumers, will run for 15 years. This will pay for the first phase of CCS, under which new coal plants will have to capture the carbon from only about a quarter of their generating capacity.

However, aside from knowing that a levy of some kind will be introduced to fund the four projects, the legislation's wording is so vague that no-one seems to know how it will work or how it will be paid.

"The precise means of dispersing the levy has yet to be agreed," CCS Association chief executive Jeff Chapman says. "Providing the formula is suitable, it could form the basis of not only support for the demonstration projects but also ongoing deployment of CCS."

*Responsive to Concerns*

The government does seem to be responsive to industry concerns. According to Oliver Rix, director at specialist energy consulting company Redpoint Energy: "In its consultation response, the government indicated that the levy could be extended to support additional capture facilities in the 2020s at the demonstration sites, once CCS is proven. This removes a big risk for potential developers, because previously they could have been forced to fully fit CCS later without additional subsidy."

To help to mitigate the costs for UK consumers, the government hopes that at least one, and possibly two, UK CCS demonstration projects will qualify for European Union support, which would reduce the impact on bills. Powerfuel's Hatfield integrated gasification combined cycle development has already secured €180 million from the EU's economic recovery funding pot. And this month, the EU agreed a new plan to award money from the auctioning of emissions trading allowances in the so-called New Entrant Reserve - a pot of allowances reserved for new installations and extensions to existing permitted installations.

So what happens next? Once the four demonstration projects are up and running the government hopes that by 2018 it will be able to publish a report, written by the Environment Agency, that will consider the technical, economic, environmental and safety status of CCS technologies in the UK and developments elsewhere.

At that point, the government hopes to be able to say that the technology is ready and should be retrofitted on the demonstration plants to their full capacity. If there are some reasons why CCS is not deemed to be suitable, it may either insist that the running hours of the demonstration projects are cut or some kind of emissions performance standard is introduced.

However, environmental non-governmental organisations want more rapid action to ensure that new coal projects without CCS do not get their foot in the door. Jim Footner, senior energy campaigner at Greenpeace, says: "What we don't want to see is new, mostly unabated coal-fired power stations for the next half a century as a result of a failed experiment in demonstration technologies that in turn jeopardises our efforts to tackle climate change."

Dominic Maclaine is editor of New Power.

Email: dominic@newpowerconsulting.com