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Lessons from the cancelled UK CCS competition process
In November 2007, the UK Government launched a world-first competition to design, construct and operate a commercial-scale CCS project. Nearly four years later, the Government cancelled the process, and a new approach is currently underway.
The UK Government had committed up to £1 billion to support construction by the competition winner together with additional support for some of the operating costs going forward. During 2011, detailed Ministerial level negotiations were held with the consortium putting forward the Longannet project – the last project remaining in the competition.
However, the Government eventually formed the view that it was not possible to protect value for public money given:
- ability to achieve construction within the limits of £1 billion public support;
- the expected operating lifetime of the project as anticipated increases in carbon prices in the UK increased overall operating costs and thus plant viability. The CCS project would only capture 2Mt out of 9Mt emitted annually, leaving a CO2 liability for around 7Mt annually (and more if other greenhouse gases are accounted for); and
- the lack of any prospect of agreeing contract terms that were mutually acceptable to both consortium members and the Government.
As the NAO notes elsewhere, major projects are inherently risky. They often run over long timescales and are of a significant scale, ambition and complexity. Typically they involve multiple stakeholder groups with conflicting interests. Political imperatives can lead to challenging timescales and the failure to manage political and public expectations compounds the risks.
Both the audit report and public comments by the Auditor General note failures in the process that caused unwarranted delays in decision-making within the Government and its agencies. Whilst titillating (though unfortunate), it is also clear that it was not those failures that led to the cancellation of the competition process.
And those reasons provide food for thought about the steps required for successfully demonstrating CCS projects.
The Auditor General noted that a CCS demonstration project is “an example of a strategically important project, for which the development costs are small scale compared to the potential benefits from the project".
The report also notes that two key criteria in allocating public funds are value for money and affordability. The NAO defines ‘value for money’ as ‘the optimal use of resources to achieve the intended outcomes’. This measure ranks publicly funded projects from the highest value to the lowest value by comparing benefits against costs. The project with the largest, risk-adjusted, net benefit will provide the largest value for money.
Affordability means limiting possible projects to only those that fall within the spending constraints of government budgets, no matter how large the potential benefits.
As with expenditure decisions by a household or a private company, value for money and budget constraints shape outcomes. And governments, like all other actors in an economy, face budget constraints – perhaps even more so in the current global political environment regarding government spending.
The process for managing the CCS competition was considered flawed for not clearly identifying value for money from the outset: "for not reviewing the case for a commercial-scale demonstration project against other alternatives". It was not until May 2011 that detailed criteria were developed to assess whether the contract was likely to deliver value for money for the nominated expenditure of public funds.
A further element that led to the cancellation of the process relates to the challenges of sharing risk among parties for the scale of plant the UK Government defined as commercial: 300-400 MW.
This scale is similar to requirements in other large-scale CCS demonstration programs and proposed projects around the world.
The IEA has noted the rapidly closing opportunities for limiting the increase in average global temperature to 2°C in a world of expanding fossil fuel consumption without abating emissions. And rapidly increasing the scale at which CCS can be demonstrated has been a motivating factor in the demonstration programs globally – with the UK Government noting the need to 'leapfrog' at least one technology development cycle in CCS when discussing the CCS competition program.
Beyond accelerating opportunities to reduce emissions, scale also has benefits – most often in lower cost per MWh or per tonne abated relative to smaller scale demonstrations.
But scale also has costs. The larger the scale, the larger the total cost and the larger the risk associated with the project. Risks arising from technology integration, from uncertainty for a developing technology, from market risk and even from the risks that Government policy or priorities will change.
When thinking about risk and early demonstration of large-scale activities, scale acts as a multiplier rather than a mitigator of risk.
The diseconomies of scale in demonstration with respect to risk mean that the parties which carry that project risk will bear an increasing share of the total project cost.
And in the current CCS policy environment with limited price incentives, commercially driven project proponents require governments to carry much of that risk.
This means that as the scale of the project increases, the share of both risk and the cost of the project that Governments are being asked to carry runs up against value for money and affordability requirements when spending taxpayers' money. In addition to value for money risks, there are also political risks associated with unsuccessful projects that further challenge large-scale projects.
Although addressed only obliquely in the NAO report, it is likely that appropriately sharing the project risk lies at the heart of the finding that there was no prospect for finding mutually acceptable contract terms between the parties.
We have noted elsewhere in discussing the business case for CCS projects, that the only two power projects in construction have mitigated risk through choosing a smaller scale (165 MW for the Boundary Dam project) or setting the capture rate to a relatively low level (65 per cent at Kemper County IGCC project rather than the 90 per cent usually required).
There is much to digest from NAO’s report, but a central lesson for all is designing a process that effectively trades off risk and value for money against the need to rapidly accelerate large-scale low carbon technology development, including CCS.