Recommendations for transitional measures to drive CCS deployment in Europe
About the report
CCS will play a critical role in meeting EU and global climate targets cost-effectively – as confirmed by the EU Energy Roadmap, the IEA, and almost every global emissions reduction scenario. The technology is on a critical delivery path as demonstration projects must take Final Investment Decisions (FID) imminently so that commercial projects can operate from 2020 with widespread deployment from 2030. However, the long-term business case – which relies on a strong European Union Allowance (EUA) price – is now seriously undermined.
In response to this challenge, top economists from all of ZEP’s constituencies have produced a ground-breaking piece of work to resolve this blocker: a set of clear recommendations for action at EU and Member State level. While the Emissions Trading System (ETS) must remain the backbone of an overall incentive system, a wide variety of instruments were examined and recommended. These include, in the short-term, an EUA set-aside and capacity payments, amongst others, all the way to longer-term actions such as the need to extend the ETS cap from 2020 to 2030 and apply it across all sectors. All measures should complement the ETS – which should be adjusted to take them into account. Equally important is that while measures are divided into short, medium, and long term, the earlier they are all adopted, the greater the impact on earlier stages due to anticipation effects.
Executive summary
The European Commission has confirmed that Europe cannot be decarbonised cost-effectively – and
maintain security of energy supply – without CO2 Capture and Storage (CCS). Indeed, with fossil fuels
currently meeting over 80% of global energy demand and as much as 85 GW of additional capacity
expected in Europe alone, CCS is “vital for meeting the Union’s greenhouse gas reduction targets”.
Yet the benefits of CCS go far beyond that of climate change mitigation: with annual investments worth
billions of euros, CCS will create and preserve jobs, boost industry and fuel economic growth, ensuring
Europe remains competitive on the world stage as a leader in low-carbon energy technologies.
New model shows the lowest-cost route to decarbonising European power
In order to identify how low-carbon technologies can decarbonise European power most cost-effectively in the horizon to 2050, the Zero Emissions Platform (ZEP) has developed a model based on an existing model from the Norwegian University of Science and Technology (NTNU) and linked to the Global Change Assessment Model (GCAM).
ZEP’s model is designed to select the lowest-cost investments to meet expected electricity demand, while
replacing plants that exceed a defined lifetime – country by country. It is unique in that it not only takes into account optimised operating costs hour-by-hour, but a dispatch model of renewable power based on capacity factors and historic weather data.
By 2030, CCS will play a critical role in reducing emissions at lower cost – driven by the ETS
Cases studied in the baseline modelling show that the wide and progressive use of lignite, coal, gas and
biomass with CCS between 2030 and 2050 – combined with hydro, wind and solar – is the lowest-cost route to reducing emissions from electricity generation,3 driven by the EU ETS. Given the assumptions made, the model suggests that a CO2 price ramp rising from current low levels through 35-40 €(2010)/tonne at 2030 is sufficient for CCS to be deployed, taking into account cost learning curves.
However, this relies on CCS demonstration projects delivering results before 2020 to reduce costs, so that the next wave of projects can commence from the early 2020s, leading to wide deployment by 2030.
The generation mix, including CCS, reduces emissions by 76% in 2050 (compared to 1990 levels); without
CCS, this figure drops to just 34%. CCS also reduces the total cost of electricity to the consumer by 4-10%
(compared to cases without CCS). Finally, CCS combined with sustainable biomass is shown to be effective
as the only large-scale technology that can remove CO2 from the atmosphere.
As the EU Energy Roadmap 2050 carries a CCS (for power) deployment rate of ~4 GW p.a. in the 2030s to
~11 GW p.a. in the 2040s. This sets the pace for deployment from 2020 to 2030 to be ~1 GW p.a. in 2020 to ~3 GW p.a. in 2030 – and a minimum set of 3-5 demonstration projects between 2015 and 2020.
Transitional support measures are essential to ensure CCS is widely deployed by 2030
The modelling assumes that the ETS will be the most cost-efficient mechanism for driving decarbonisation
in the long term, as shown in Figure 4, page 20. In the short term, however, the price of Emission Unit
Allowances (EUAs) have fallen to a level where they provide no incentive to invest (€2.5-5/tCO2 in Q2 2013).
This situation will continue until the ETS has undergone structural reform – in particular, setting a tighter cap out to 2030 and beyond, as part of a holistic EU Energy and Climate Policy framework. Yet even if action is taken now, it will still not result in EUA prices that are high and robust enough to deploy CCS in time to meet EU climate targets.
In the meantime, EU policy currently offers targeted support (e.g. feed-in-tariffs) to wind, solar, biomass,
biofuels, etc. – but not CCS. Indeed, few Member States have a national strategy for CCS development and fewer still have targeted policies to facilitate demonstration and deployment. ZEP focused on measures that would create minimal distortion to the liberal markets of Europe and a minimal subsidy that could otherwise increase the cost to consumers or taxpayers.
Identifying the most effective measures to incentivise CCS demonstration and early deployment
In the next stage of the modelling, ZEP therefore added various support measures for CCS to test their effectiveness in incentivising demonstration and early deployment projects in Europe. (This was based on a defined volume of 5 GW by 2025 as an example, but a larger volume may also be achieved.)
The conclusions were as follows:
Public grants need to cover capex and opex to incentivise CCS ‘first movers’.
This is because capex grants alone – even equivalent to 100% of the marginal capital costs of CCS – do not ensure that CCS power plants will be dispatched, as the operating costs of electricity production may still be higher than electricity prices for demonstration and early deployment projects. Both capex and opex support is therefore needed to ensure CCS plants are dispatched and first movers are compensated for taking the lead in CCS deployment.
ZEP therefore recommends establishing a ‘CCS Fund’ large enough to support EU demonstration projects in both the power and industrial sectors, but which takes into account the lessons learned from recent EU funding schemes. Funding could come from the Commission (e.g. by setting aside sufficient EUAs from the New Entrants Reserve, or earmarking funds from the EU budget, not unlike the European Energy Programme for Recovery (EEPR)) and from Member States (e.g. by using some of the proceeds from ETS auctions, or already established national carbon taxation schemes).
Feed-in premia (FiPs) offer investors the greatest security of income – a proven method for supporting new low-carbon energy technologies.
This is because well-designed FiPs provide support to power plants in a form that best ensures them access to the electricity grid, reducing both revenue risk and price risk for investors. This correspondingly lowers the cost of capital. Only the technological risk therefore remains, as is typical for projects at this stage of development. In other words, if construction and operational costs are greater than expected, these are borne by the developer.
CCS certificates are a potential option, but require careful design.
The modelling, which could not simulate a market for CCS certificates (CCSCs) – only the effect of a functioning CCSC market – estimated that 25% and 35% of opex support advances lignite and gas CCS, respectively. ZEP recognises that when considering this option, specific issues have to be addressed, such as the high transaction costs incurred in setting up the system, while the market for such a small volume could be open to competitive misbehaviour.
Furthermore, investors still carry the main risk since forecasting the CCSC price may be challenging and the return on investments may fall if it is low. In the certificate system, power plant receives money only if it is operated – unless, under the scheme, plants are guaranteed to dispatch and operate over the lifetime of the project. ZEP would be pleased to provide further advice to the EU and Member States on the feasibility and design of such a scheme.
Emission performance standards (EPS) in the short term will not incentivise CCS in Europe.
If an EPS is set at 450g/kWh in 2030, the effect in 2025 does not advance early CCS, while the effect in 225g/kWh in 2030, on the other hand, prevents investment in unabated gas and gas with CCS is
selected; it then advances lignite, coal and gas CCS and by 2050 increases the total level of CCS
deployment. Due to the grandfathering of existing plants, an EPS therefore cannot be expected to be introduced and enforced before 2030, by which date CCS technology is expected to be mature.
CCS will create and preserve hundreds of thousands of jobs across Europe
Based on the modelling, the deployment of CCS in Europe will create and secure an estimated total of
330,000 jobs in fuel supply, CCS equipment manufacture, plant operation and CO2 storage facility
operation, while creating a whole new infrastructure for CO2 transport and storage which can also be utilised by energy-intensive industries (e.g. steel, cement, refining, etc.).
CCS will strengthen security of energy supply for Europe
The rapid growth of renewables in Europe, alongside the exploitation of indigenous fuel sources, is an
important step towards ensuring diversity in energy supply. However, the modelling shows that intermittent renewable generation needs to be supported by conventional power plants operating in base-, medium- and peakload.
Without CCS, this support would come from a narrower range of fuels. With CCS, support will be provided by a mix of gas, lignite and coal – the latter being indigenous to Europe, thus strengthening security of energy supply.
Modelling results for CCS are insensitive to input variations
The sensitivity of the model and input data was assessed by varying assumptions in the GCAM model, fuel prices, CO2 prices and electricity demand: cases included a 25% increase in fuel prices, a 100% increase in fuel prices, a reduction in CO2 price and a reduction in European electricity demand. While modelling results are always dependent on the inputs, it was found that the results of the baseline case were insensitive to these changes in terms of CCS deployment.
Urgent policy actions are needed to deliver EU energy and climate goals for 2030
If the European power industry is to reduce CO2 emissions substantially and cost-effectively by 2050, the
modelling shows that CCS must play a significant role in any future energy system. Yet without transitional support measures for CCS demonstration and early deployment, CCS will not be widely deployed in time to meet EU climate targets.
Transitional measures are also needed to stimulate CCS in industry sectors beyond power (e.g. iron, steel,
cement, refining) – now expected to deliver 50% of the global emissions reductions required from CCS by
2050. Indeed, in some industries, it is the only means of achieving deep emission cuts. Several have
almost pure CO2 streams, dramatically reducing the cost of CO2 capture, while clustering different CO2 sources will result in significant economies of scale for both industrial and power projects.
Finally, to fulfil the significant potential of Bio-CCS, negative CO2 emissions via the capture and
storage of biogenic CO2 must also be rewarded under the ETS – to the same extent as for fossil CCS.
The window of opportunity is vanishing fast. Transitional support measures are vital to ensure early
CCS demonstration in Europe – and wide deployment by 2030. ‘Business-as-usual’ is not an option.