E3G

Taming King Coal - the EU’s energy policy

By Nick Mabey

Market push

The current legislation also fails to provide guaranteed EU funding to deliver the demonstration plants. The industry-led Zero Emissions Platform (ZEP) estimates the total incremental cost of the full CCS demonstration programme over its life time would be at least €6-10 billion. Others have estimated €10-16 bn. Industry has reiterated to the Commission the need for significant public support if they are to make complementary investments in major CCS demonstration projects. The result is that there is currently little progress on moving forward many of the major planned demonstration projects.

Innovative proposals from ZEP to use part of the emission permit allocation in Phase III of the ETS have not yet found sufficient support among Member States to be implemented. The Commission will review the potential for EU funding at the end of 2008. This exercise primarily will look toward the next 7-year EU budget period for 2014-2020, but the clock is ticking, and with political will an earlier funding stream could be unlocked from the current budget underspend.

In December 2007 the Member States rescued the Galileo satellite project using that year’s Common Agricultural Policy underspend.

With the 20% (probably 30%) emissions reduction target looming, another existing EU project is now at risk of failure. It too could be funded. Agriculture underspend from 2008 alone was projected to be €7-8 bn – before rising food prices. This year’s underspend could now top €10 bn.

Balancing risk and reward

While lack of market pull cannot be made up just by additional public funding to push development and demonstration activities, and while extensive experience shows that over-reliance on public funds will lead to cost-overruns and “white elephant” experimental projects, companies will not drive aggressively toward CCS commercialisation without a near-term market signal.

The European CCS demonstration strategy therefore must provide an acceptable balance of risk and reward for the private sector, and send very clear signals to investors over the future regulatory environment for fossil fuel power plants in Europe.

The current high levels of uncertainty are tending to disincentivise investment in new low carbon technology in favour of simple hedging strategies like moving to gas–fired generation. There is a need for immediate European funding to support the initial capital costs for a priority programme of CCS demonstration projects which would give high European public value. 

This programme should provide “first-mover rewards” by funding one example of each of the following: all major capture technologies; large scale CO2 storage and transport; demonstration in Central and Eastern Europe; CCS in the steel and cement industry; and CCS demonstration in major developing countries. Member States should develop and part-fund these projects with industry. EU funding of around €250-500 million per annum for 2009-13 would kick start this process. In return, all projects would operate under conditions of full transparency and comparability and potentially agree to conditions on technology cooperation.

Depending on market conditions and/or technological development the CCS demonstrations may cost less than anticipated. In this case it is important that there are no windfall profits to CCS developers. This safeguard could be achieved by including a clause on sharing profits above a reasonable rate of return, with a 100% profit claw back above a certain level.

Of course, the stronger the market pull signal, the more companies will be prepared to invest their own resources in demonstrating technologies, and the less public funding will be needed for the demonstration programme.