Failure to agree the total cost of government support for a competition to build the UK's first carbon capture and storage (CCS) plant was a key reason behind the Treasury's sudden withdrawal of funding, a review has concluded.
The National Audit Office (NAO) scrutinised the way the energy and climate change department (now the Department of Business, Energy and Industrial Strategy (BEIS)) ran the competition. The contest was the second attempt by the government to kick-start a CCS industry in the UK after the first failed in 2011.
In a report of its findings, the NAO noted that £1bn capital to support construction of a CCS plant was clear from the outset of the second competition. However, there was less clarity on the revenue support that would be available through consumer-funded contracts for different (CfDs), which fix the price developers receive for each unit of electricity they sell, it found.
When the competition was launched, there was uncertainty in the department about how much it would cost consumers, with forecasts ranging from £2bn to £6bn. But the department failed to agree an overall budget for the total cost of the projects with the Treasury from the outset. If it had, the department would have been able it to tailor its approach to the competition within a known budget, the report states.
The NAO praised the department for designing the competition so it could withdraw from supporting its preferred bidders without incurring cancellation costs. It also welcomed the fact that the department had gained valuable technical and commercial knowledge from the competition.
Amyas Morse, head of the NAO, said: ‘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 NAO said BEIS must learn from the experience if CCS plants are to be built in the UK in near future.
Luke Warren, chief executive of trade body the Carbon Capture and Storage Association, said that, if the funding had not been withdrawn, the UK could now be building its first CCS facility.
CCS projects could be cost-competitive with other low-carbon technologies if a new delivery programme took an innovative approach, building on the lessons from the competition, he added.
Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, said: ‘For the NAO to lay blame at the inability of different Whitehall departments to work in unison highlights a recent trend of changeable and unpredictable UK energy policy.
‘From ditching onshore wind and rendering solar unprofitable almost overnight, the government is turning away from the cheapest ways to keep the lights on and knocking the confidence of investors at the same time, which paradoxically makes energy more expensive.’
Ministers should recognise that CCS is also important for decarbonising other industries, such as cement and chemicals, he added.
