Sole Bid Further Undermines CCS
BMI View: With an EU programme to fund CCS technology drawing just one bidder, the deployment of the technology in Europe has been severely undermined - and not for the first time. While CCS has been heralded as a key component of the EU's carbon emissions reduction policies, the technology remains in its infancy and will likely remain prohibitively expensive. As a consequence, while the EU will hope the commercial-scale CCS project at Drax qualifies for the funding and is ultimately completed , the technology will require huge government support and commitment if it is to be rolled out successfully across the continent.
With only one commercial scale carbon capture and storage (CCS) project bidding for EU funding under the second phase of the NER300 programme , our long-held views on CCS technology in Europe are very much in play. A venture between Drax Group , Alstom and BOC Group was the sole CCS project developer to bid for a share of the estimated EUR700mn available to renewables and emission s reduction projects under the scheme - with a view to implementing the technology at the Drax power plant in North Yorkshire, UK . This latest development , again, underscores our view of CCS as a high cost abatement option, and positions the technology as a nother faltering component of the EU's carbon emissions reduction policies.
We have long been bearish on CCS technology in Europe, particularly since the first round of the NER300 failed to finance any CCS proposals after the last of the candidates dropped out of the scheme in December 2012 ( see 'EU CCS Plans Go Up In Smoke', Dec 10 2012 ). While CCS has been branded an integral part of the EU's emissions reduction targets, the technology is still in its infancy - meaning technology costs are prohibitive - and it s expansion has been threatened by the eurozone debt crisis. Cheaper gas prices might also undermine the cost of fitting coal-fired plants with CCS technology.
While many of these concerns appear to have weighed on the second round of the NER300 , we note that one pro hibitive aspect of the programme stems from its link s to the problematic EU Emissions Trading Scheme ( ETS ). The NER300 h ad sought to finance up to 12 CCS projects, as well as renewable energy projects , via the sale of 200mn emissions allowances under the first round and a further 100mn for the second round. Yet, we note that as a cons equence, the level of funding will be dependent on the price of carbon permits. With the price of carbon in Europe plummeting in recent months and a recent decision to 'backload' 900mn permits likely to have a fairly limited impact on carbon prices ( see 'Successful Vote Throws CCS A Lifeline, July 5 ) , the level of funding (originally put at around EUR9bn) could fluctuate - creating an element of uncertainty for applicants and investors .
As a consequence, in terms of spurring the development of CCS technology, the NER300 appears to have failed for a second time. Furthermore, while viable CCS technology would prove a massive boon for countries like Poland and Germany, which are heavily reliant on coal-fired electricity generation, we maintain our view that it will fail to play a pivotal role in European energy policy in the near term - especially with traditional infrastructure investors wary of the operating challenges involved (including where to store the captured carbon). While there has been more success in Canada, for example, significant government and continent-wide support will be needed to support the technology - something that will be difficult to achieve in austerity-wracked Europe.
|European CO2 Emissions By Industry, 2007|
Drax To Empower CCS?
Yet, despite the aforementioned problems with the implementation of CCS, Drax could certainly benefit from the funding should it qualify. The 4,000MW power station is the largest coal-fired power station in the UK and is targeting a reduction in its carbon emissions, while also aiming to boost energy efficiency. To this end, the plant will be the first project to benefit from the UK's Infrastructure Guarantee Scheme and plans to include biomass-fuelled generators, with one coal-fired unit to be converted in 2013 ( see 'UK Guarantee Scheme Providing Safety Net For Investors', April 26). Drax is also bidding for a share of a separate US$1.5bn CCS funding plan being offered by the UK government.
With the facility drawing on a number of sources of financing - this could buoy the deployment of the CCS technology - potentially securing the introduction of an important EU CCS demonstration project. If the technology is to gain greater traction, reducing the costs through the expansion of demonstration projects will be vital, and as a consequence the EU will hope the CCS project at Drax is seen through to completion, as its failure could fatally undermine the deployment of the technology more widely.