On 30 March 2023 and as part of the “Energy Security Day”, the Department Energy Security and Net Zero (DESNZ) published its latest plans to scale up carbon capture (CCUS), hydrogen production and Bioenergy with carbon capture and storage (BECCs).
CCUS – emitters selected for Track 1 negotiations and Track 2 expressions of interest open
Government has confirmed the eight capture projects they will take through to negotiations on the dispatchable power agreements as the capture projects that will connect and form the first two CCUS clusters (the “Track-1 Clusters”). Scotland and the Humber projects have been excluded from Track-1 but DESNZ stress that the narrow geographic nature of the list does not represent the extent of its ambition; they intend to launch a process later this year to enable further expansion of the Track-1 Clusters.
In addition, DESNZ announced the launch of the Track-2 Cluster process.Track-2 aims to identify two further clusters, each becoming operational in the 2030s, in line with the UK Government’s ambition to capture 20-30 Mt CO2 per year across the economy by 2030. DESNZ opened a four-week expression of interest period for T&S systems that may meet the Track-2 eligibility criteria. Formal expressions of interest must be submitted by 28 April 2023.
Government has published its responses (the “Response”) to its 2022 consultation on the proposed BECCs business model. The Response confirms its intention to proceed with its minded-to position of a dual CfD business model. This will entail a 10-15 year contract to incentivise the production of negative emissions with a co-benefit of low carbon power generation. Government anticipates that the dual CfD model will comprise a three-part payment mechanism; a difference payment for the low-carbon electricity generated (referred to as a CfDe); a difference payment for carbon captured (referred to as a CfDc); and, to support the use of the T&S Network, a T&S Charges Payment.
The business model will not specify which biomass feedstocks will be eligible for support but will instead establish the supply chain emissions thresholds and sustainability requirements for eligible feedstocks.
Next steps require determination of the difference payment mechanism, floor and ceiling strike prices and the publication of a wider Biomass Strategy, which has been scheduled for Q2 2023.
Hydrogen projects – NZHF winners and LCHA projects shortlisted
DESNZ published the winning projects from the £240m Net Zero Hydrogen Fund. Also published is the shortlist of projects put forward for the due diligence phase of the First Hydrogen Allocation Round, as part of Government’s intention to support 250MW of new electrolytic hydrogen production capacity. Those projects successful in HAR1 will be awarded contracts in Q4 2023, with the first projects becoming operational in 2025, and will benefit from support under the proposed Low Carbon Hydrogen Business Model.
Hydrogen production, Industrial Carbon Capture (ICC) and Waste ICC business models
As anticipated, hydrogen projects for industrial and waste models need their own forms of business models. DESNZ launched a consultation (the “Consultation”) on how such projects will be supported. The Consultation closes at 11:45pm 10 May 2023.
The Consultation is limited to three aspects of the business models:
- the process by which producers would be offered a contract;
- requirements to have certain information about contracts and projects published; and
- what entities would be ‘eligible’ as a low carbon hydrogen producer and carbon capture entity.
Government proposes that revenue support contracts would be negotiated between the Secretary of State and the relevant hydrogen production, ICC or Waste ICC project. It would be the Secretary of State who would direct the relevant revenue support counterparty to offer to contract with the eligible low carbon hydrogen producer or eligible carbon capture entity. Such a mechanism would be in keeping with the Contracts for Difference Allocation Regulations where the CfD Counterparty (Low Carbon Contract Counterparty or LCCC) offers CfDs to selected projects following a direction to offer to contract from the Secretary of State.
As with CfD models, the LCCC maintains a “CfD Register” which includes key information for all investment contracts and CfDs to which LCCC is a party, including the strike price, target commissioning date and the generation technology. There is scope therefore only to withhold confidential project specific information. Further details on what is deemed to be “confidential information” can be found in the Consultation.
Finally, the Consultation sets out Government’s position on “eligibility”. Government’s minded-to position is that an eligible hydrogen producer will be a “low carbon hydrogen producer”, as defined in the Energy Bill 2022 (the “Bill”), and will need to meet both the (forthcoming) revenue support regulations, and any further eligibility criteria set out in the guidance to each allocation round. For the the ICC Business Model, eligible carbon capture projects will be required to meet the definition of a “carbon capture entity” in the Bill and in the (forthcoming) revenue support regulations. The Consultation stresses that the carbon business models are designed to encourage the deployment of new carbon capture and storage activities and it not their intention to support projects which have already operational CCUS plants which are connected to a T&S network. Further, CCUS projects where the carbon dioxide is captured with a view to its permanent containment other than in geological storage (i.e. not connected to the T&S network) could still be eligible.
Confirmation of the Track-1 CCS Clusters and winning projects under the Net Zero Hydrogen Fund mark a significant step towards Government’s net zero aims. Although the Track-1 winners are geographically narrow, the launch of Track-2 offers hope to additional projects, particularly in Scotland and the Humber region of north east England. Notably these announcements come a fortnight after the European Commission unveiled its Net-Zero Industry Act and the efforts at an EU level to encourage deployment of low carbon hydrogen production and CCUS projects. It will also be assessed against opportunities offered elsewhere notably, in the US in the context of the US Inflation Reduction Act. Rapid development of the business models, and commitment of funds, is required if the UK is to remain an attractive investment destination for these vital transition technologies.
Government commitment to BECCs, as a negative emissions technology, is a welcome development, as is the promise of a wider Biomass Strategy in the coming months. However, the absence of encouragement for GGR technologies is a notable gap as carbon removals as well as carbon reduction are both needed to if the UK is to meet its net zero obligations.