The Department for Business, Energy & Industrial Strategy (the department) has not achieved value for money for its £100 million spend on the second competition for government financial support for carbon capture and storage, according to the National Audit Office.
Carbon Capture Storage (CCS) is a process to avoid the release of carbon dioxide (CO2) into the atmosphere. CCS has the potential to help the UK achieve its ambitious targets to reduce CO2 emissions, if it is used in the power and industrial sectors. The Department also spent £68 million on the first competition on support for CCS, which it cancelled in 2011. Today’s report found that the Department’s plan to use a second competition to develop and deploy carbon capture and storage was ambitious, but ultimately, unsuccessful.
Achieving this goal was challenging because the untried nature of the technology meant the costs and benefits of the proposed projects were inherently uncertain. Given the level of challenge, it was an achievement for the Department to sustain negotiations with the preferred bidders to the point where it gained valuable technical and commercial knowledge about how to deploy the competition projects. But any value that could be gained is contingent on the Department applying the lessons it and the sector has learnt as a result of the competition.
The NAO found the Department began the competition without agreeing with HM Treasury on the amount of financial support available over the lifetime of the projects. This ultimately contributed to HM Treasury’s decision to withdraw £1 billion of funding from the competition, leading to its cancellation, as it was concerned about future costs to consumers. The Department had, however, designed the competition so it could withdraw from supporting its preferred bidders without incurring cancellation costs.
The terms of the competition contributed to one of the two shortlisted projects being unlikely to reach the construction phase. The Department funded two developers to undertake work that would reduce the commercial and technical risks surrounding the construction of the first CCS plant. One of the two shortlisted projects, backed by a consortium, was not able to present a proposal compliant with the Department’s risk allocation as it was struggling to allocate risks between the parties involved. The other competition was more commercially viable but would have had fewer benefits for reducing the costs of subsequent CCS projects.
Many stakeholders think the government needs to carry more risk if it is to enable CCS to be deployed affordably to consumers. The Department’s approach to allocating risk was in line with wider energy policy. But following the competition, many stakeholders think the government should bear more risks, particularly over stored CO2. Government taking a greater share of the risk could reduce delivery costs but would expose taxpayers to losses in the event of risks materialising. The NAO found that flaws in the Department’s design and implementation of its Levy Control Framework, which caps the costs of certain consumer-funded policies, also impacted on CCS investors’ confidence.
In developing the next phase of CCS, the NAO recommends that the Department should maximise the potential value from the competition by incorporating into its new CCS strategy the lessons it and the key stakeholders have learned.
"The Department has now tried twice to kick start CCS in the UK, but there are still no examples of the technology working. There are undoubtedly challenges in getting CCS established, but the Department faced an uphill battle as a result of the way it ran the latest competition.Not being clear with HM Treasury about what the budget is from the start would hamper any project, and caused particular problems in this case where the upfront costs are likely to be high. The Department must learn lessons from this experience if it is to stand any chance of ensuring the first CCS plants are built in the near future."
Amyas Morse, head of the National Audit Office, 20 January 2017
Notes for Editors
Capital support available to bidders in the government’s second competition for supporting Carbon Capture and Storage
Cost to government of the second competition prior to its cancellation
Upper limit of the Department’s range of expected
cost to consumers over a 15 year period once the two planned projects started generating electricity
Examples of operational large-scale Carbon Capture and Storage (CCS) projects worldwide at December 2016
0 Examples of large-scale CCS in the UK
Years the government ran its first competition to build CCS
Years the government ran its second competition to build CCS
Preferred bidders that undertook design and engineering stage research and development during the second competition
Percentage of the bidders' design and engineering costs that the government planned to meet
£168 million Amount the Department spent (2015-16 prices) to fund two CCS competitions that were cancelled
The Department's 2015 estimate of the cost to meet the UK's 2050 decarbonisation target without CCS in the power sector alone
Carbon Capture Storage involves capturing CO2 from sources such as power stations and energy intensive industries, transporting it through pipes and storing it, usually underground. If it is combined with CCS, coal and gas could be used as a low-carbon means of producing hydrogen. This can potentially be used as a way of heating industrial furnaces, powering vehicles and as the main heating fuel in homes and businesses. Globally, there are 15 examples of large-scale CCS operating and 23 more being developed. None of these are in the UK. Like other low-carbon technologies, CCS is currently too expensive in the UK to be commercially viable for private investors.
The Department for Business, Energy & Industrial Strategy (the Department) has lead responsibility for ensuring that the UK meets its target to reduce carbon dioxide emissions in 2050 by 80% compared to 1990 levels.
The Department launched its first competition for government financial support to develop the first CCS projects in 2007, but cancelled it in 2011 before awarding any funding. In 2012, it launched a new CCS programme, with an aim to enable CCS developers to take investment decisions in the early 2020s, requiring government support competitive with other low-carbon generating technologies Its aim with both competitions was to demonstrate commercial and technical viability of deploying CCS in the UK to reduce the costs of subsequent projects to the point where government support investors require is comparable to other low-carbon generating technologies. Neither of the competitions resulted in a CCS plant being built.
Today’s report follows on from an NAO report last July, Sustainability in the Spending Review which looked at HM Treasury’s decision to withdraw the £1 billion previously available for the second competition during the 2015 Spending Review.
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The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.21 billion in 2015.
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