United Kingdom Offers £20 Billion to the CCUS Industry, but There Is Still Room for Improvement
As part of the Spring Budget Statement on March 15, UK’s Chancellor Jeremy Hunt announced that the government would allocate up to £20 billion to support early development of carbon capture, utilization and storage (CCUS) projects. The latest pledge represents a significant expansion of funding for the emerging sector relative to £1 billion earmarked for the Carbon Capture and Storage Infrastructure Fund (CIF) in November 2020. In addition, it underscores the government’s strong commitment to the CCUS sector, whose importance has been recently highlighted by the Climate Change Committee (CCC), an independent advisory body, and the Scottish Affairs Committee at the House of Commons. However, despite a broad political consensus and potential availability of large public funds, persistent woes could hamper the advancement of CCUS projects in the UK.
Sequencing drives uncertainty
In 2021, the government established the Cluster Sequencing Process to identify low-carbon industrial clusters that would be eligible for support from the CIF and through CCUS business models, which are yet to be released. The process consists of two phases:
Track-1 Sequencing is tailored to select two most suitable CCUS clusters ready for deployment in the mid-2020s.
Track-2 Sequencing will feature individual projects across capture applications (industry, power, hydrogen) to connect to the Track-1 clusters. Successful candidates should be able to take final investment decisions (FIDs) from 2024 and become operational by 2027.
Both Tracks are intended to ensure capture and storage of 20-30 megatons of CO2 per year by 2030 in line with the Net Zero Strategy adopted in late 2021. But here is the problem: the government’s flexibility with the sequencing timelines has resulted in protracted reviews. In October 2021, the government selected the East Coast Cluster and HyNet as the Track-1 clusters, but since then the authorities have not provided any updates as to the funding decision.
In the meantime, the Track-2 sequencing has faced delays as the government failed to comply with the schedule. This phase was launched in November 2021 and shortlisted candidates were expected to start negotiations/due diligence stage in May 2022, with funding decision to be taken in Q2 2023. However, shortlisted projects were announced only in August 2022 and it remains unclear when the government will be able to move to the next stage.
While such an extended sequencing process is likely to delay FID on CCUS developments, it will also create challenges for proposed blue hydrogen projects that will require CO2 storage facilities before they can start producing hydrogen and capturing associated emissions. This situation creates a risk of missing the UK’s 2030 carbon storage target and undermining the decarbonization of the power sector through blue hydrogen applications in electricity generation.
What’s the point of ‘reserve clusters’?
The Cluster Sequencing Process includes the concept of ‘reserve clusters’ that did not make into Track-1, but “have met the eligibility criteria and performed to a good standard against the evaluation criteria”. The government has the option of entering negotiations with such clusters if it has additional funds to support them or if there is a technical fault within one of the Track-1 clusters (among other things). Long story short, reserve clusters could wait indefinitely for a potential government decision, unable to conduct long-term planning and take an FID without any clarity as to government support. This is what happened to the Acorn Project (the Scottish Cluster) in Aberdeenshire, which got the ‘reserve’ status following the completion of the Track-1 Sequencing. The project is led by Storegga and features a carbon capture plant to decarbonize two St. Fergus Gas Terminals, a blue-hydrogen production facility and CO2 transport and storage infrastructure. The £20-billion package from the 2023 Spring Budget is likely to pave the way for the Acorn Project to move forward, but the overall concept of reserve clusters indicates inherent uncertainty in the sequencing process, which could discourage participation in future tracks.
Where will the money come from?
According to the Spring Budget, the planned expenditure will be financed primarily by gilt (government bonds) sales of £241.1 billion. This will include the sale of green gilts, which were first issued in 2021 in line with the UK Government Green Financing Framework. The government is expected to issue £10 billion of green gilts in 2023-24, and proceeds will be used to support eligible green projects in the form of “direct or indirect investment expenditures, subsidies, or tax foregone (or a combination of all or some of these) and selected operational expenditures”. Thus, CCUS developments will likely compete with other decarbonization projects for government support and the amount of funding in each particular year is likely to remain uncertain due to the unknow number of potential applicants. In addition, the availability of government support is likely to be contingent on the market conditions and the attractiveness of the UK’s green gilts.
Overall, increased funding commitment is an improvement for the CCUS investment climate in the United Kingdom. However, the publication of all CCUS-related business models, more guidance on Track-1 and Track-2 decisions as well as potential adjustments to the sequencing process are likely to bolster the attractiveness of the country relative to its international competitors.