Research and analysis

November 2021: Updates on the industrial carbon capture and dispatchable power agreement business models

Updated 9 April 2024

Disclaimer

This update sets out further details on the government’s current proposals on the potential business models for industrial facilities and power plants with carbon capture usage and storage (CCUS). The proposals, as set out here, in whatever form they are expressed, are indicative only and do not constitute an offer by government and do not create a basis for any form of expectation or reliance.

The proposals are not final and are subject to further development by the government, and approval by Ministers, in consultation with relevant regulators and the devolved administrations, as well as the development and Parliamentary approval of any necessary legislation, and completion of necessary contractual documentation. We reserve the right to review and amend all provisions here, for any reason and in particular to ensure that proposals provide value for money and are consistent with the current subsidy control regime, and that government is comfortable with any balance sheet implications.

This update takes into account engagement that has taken place throughout 2021 and since the publication of updates on the dispatchable power agreement (DPA) and industrial carbon capture (ICC) business models. This includes engagement with the CCUS Expert Groups, including the DPA Expert Group, ICC Expert Group and Expert Group on Waste CCUS, project developers, and other interested parties.

BEIS will continue such engagement as it works to refine its proposals, including engagement with the devolved administrations, to ensure that the proposed policies take account of devolved responsibilities and policies across the UK.  

Introduction

Background

In 2019, the UK became the first major economy in the world to pass laws to end its domestic contribution to global warming by 2050 (also known as ‘net zero’). The Prime Minister’s Ten Point Plan for a Green Industrial Revolution set out the government’s approach to accelerate the path to net zero and the ambition to capture and store 10 megatonnes of carbon dioxide (MtCO₂) per year by 2030 was first proposed.

The recent publication of the Net Zero Strategy expanded on this ambition by committing to delivering four CCUS clusters, capturing 20-30 MtCO₂ across the economy per year by 2030.

For industry specifically, the Industrial Decarbonisation Strategy set out that, without CCUS, emissions from current industrial processes cannot be reduced to levels consistent with net zero. That is why the Net Zero Strategy builds on government’s previous aspirations by setting an ambition to capture and store at least 6 MtCO₂ of industrial emissions per year by 2030 and 9 MtCO₂ by 2035.

For power, the Energy White Paper set out the government’s view of how to achieve a low cost, low carbon electricity system. A low cost system is likely to be composed predominantly of renewable electricity – those renewables will need to be complemented by technologies which provide power when the wind is not blowing or the sun does not shine. Power CCUS is one of the technologies that can provide this capacity. The Net Zero Strategy builds on the commitment to power CCUS in the Energy White Paper, noting that we will seek to bring forward at least one power CCUS plant in the mid 2020s through the CCUS Cluster Sequencing Process, subject to the outcome of that process including value for money and affordability considerations. The government is developing business models for industrial and power CCUS, low-carbon hydrogen production and CO₂ Transport and Storage (T&S) in order to support CCUS projects and stimulate private sector investment, with the aim to finalise business models in 2022.

In May 2021, the CCUS Supply Chain roadmap was published as part of a suite of documents, which also included the launch document for Phase-1 of the Cluster Sequencing process and updates on the Carbon Capture and Storage (CCS) Infrastructure Fund, business models for transport and storage (T&S), power and industrial CCUS.

As part of a hydrogen package, the Low Carbon Hydrogen Business Model consultation was launched in August 2021 and closed on 25 October. We aim to publish a response to the consultation, and indicative Heads of Terms and more information on the allocation process for non-CCS enabled hydrogen projects in Q1 2022.

Further updates on the business models for power and industrial CCUS – the dispatchable power agreement (DPA) and industrial carbon capture (ICC), respectively – were published in October 2021, alongside annexes for provisional Heads of Terms for each and, for ICC, an indicative Front-End Agreement. October 2021 also saw the announcement that, following the completion of Phase-1 of the Cluster Sequencing process, the HyNet and East Coast Clusters will be taken forward into Track-1 negotiations. We also announced the Scottish Cluster as a reserve cluster. This puts these places – Teesside, the Humber, Merseyside, North Wales and the North East of Scotland – among the potential early SuperPlaces over the next decade.

Purpose of this document

This update follows the October 2021 publication of the further updates on the DPA and ICC business models and provides an update on CCUS supply chains and the applicability of the ICC business model to waste management CCUS projects.

This is being published alongside the Cluster Sequencing for CCUS Deployment: Phase-2 Launch.

Update on CCUS Supply Chains

In May 2021, BEIS published our CCUS Supply Chains: a roadmap to maximise the UK’s potential , which sets out how government and industry can work together to harness the power of a strong, industrialised UK CCUS supply chain, whilst ensuring that the CCUS sector as a whole remains investible, cost effective and focused on delivery.

We intend to provide a further update in due course on our approach to UK CCUS supply chains. Building upon the lessons of offshore wind and noting the sector’s commitment to increase UK content to 60% by 2030 ^{[footnote 1]}, and also noting the voluntary target of 50% UK content within the North Sea Transition Deal, that update may consider what further steps industry may wish to take to boost the UK CCUS supply chain.

Business model support for ICC and DPA (and potentially CCUS-enabled hydrogen in the future) projects awarded as part of the Cluster Sequencing process can play a role in supporting the development of the CCUS supply chain. This document sets out two proposals which will form an important part of our Phase-2 approach and subsequent business model negotiations with emitter projects. We believe it is important to publish this now as the proposals affect the Phase-2 negotiation process and will also be relevant during the term of each DPA and ICC Contract.

Reserving the right to discontinue negotiations

During the negotiation stage of the Phase-2 cluster sequencing process, government reserves the right to discontinue discussions if an Applicant does not comply or is not able to demonstrate that it will be able to comply with the plans set out in its Phase-2 Submission, including in relation to its supply chain. As the sector matures and we build our evidence base, we will keep this approach under review for future rounds of allocation.

As set out in Section 1.6 of the Phase-2 launch document, government also reserves the right to discontinue negotiations if an Applicant seeks to renegotiate elements of its Submission which would mean that it no longer satisfies government’s eligibility criteria or would have an adverse effect on the score awarded to the Submission at an earlier stage of this Phase-2 process.

We consider these rights important to ensure that Applicants consider the deliverability of the proposals contained in their Submissions and for government to ensure the integrity of the Phase-2 process. Further information on the negotiation/due diligence stage of the Phase-2 process is set out in Section 7 of the Phase-2 launch document.

Regular reporting on economic benefits and CCUS supply chains post-contract signature

As part of the Phase-2 application process, Applicants must submit information on jobs, skills, community regeneration and their supply chain in relation to the delivery of the relevant capture project. As well as being used to assess Phase-2 Submissions, this will provide BEIS with key economic, technical and commercial data around the supply chain and the value drivers that underpin it.

We would like to take this approach further by subsequently requiring emitters supported under the DPA and ICC business models to submit follow-up reports on economic benefits and supply chains at regular intervals following contract signature, for information gathering purposes and policy development by government. We aim to provide details on the Hydrogen business model and its requirements in Q1 2022 when we publish our response to the consultation and indicative Heads of Terms. The department may also share information within reports with other parts of government for the purposes of policy development and facilitating coordination in certain areas if relevant, for example, CCUS supply chains.

It is anticipated that the first report will need to be submitted before the Start Date for each DPA and ICC Contract (for example, 18 months after contract signature to align with the Milestone Delivery Date), with subsequent reports required to be submitted regularly (for example, every 3-5 years) during the term of the relevant contract.

BEIS may look to publish some extracts from these reports in order to share information with wider industry and to support implementation of a strong CCUS supply chain. Before doing so, any information deemed by the Department to be commercially sensitive would be removed.

If reports are not submitted at all, or are not submitted to an appropriate standard, and if such failure is not subsequently rectified, our minded to position is that a financial penalty will apply under the relevant DPA or ICC Contract, which may include fines and/or withholding of contract payments until the relevant failure is rectified. We do not expect such failure to lead to termination. We expect a rectification process to apply if reports are not submitted or are not submitted to an appropriate standard, to allow an opportunity for the emitter to rectify the failure before contractual consequences apply. In a future update, we will set out the rectification processes to be followed and period for these to be completed, to provide emitters with confidence relating to the processes that they will need to follow and that any contractual consequences will only apply as a last resort where there has been clear failure by the emitter to satisfy the reporting requirements.

Ahead of negotiations commencing with ICC and DPA projects successful in Phase-2 of the cluster sequencing process, we will provide a template report to be completed at each of the regular reporting milestones, guidance on what will need to be reported, the standards for preparing this report, the process for submitting the report, and how reports will be evaluated against the reporting requirements.

Applicability of the ICC business model to waste management facilities

Introduction

The management of residual waste is a particularly challenging sector to decarbonise. The waste management sector is comprised of a diverse range of technologies (including waste incinerators with no energy recovery, Energy-from-Waste (EfW) facilities which incinerate waste with heat and/or electricity output, and gasification/pyrolysis technologies which can produce heat, electricity and/or fuels) with the shared primary purpose of safe and timely disposal/recovery of waste (i.e., processes more similar to industrial facilities than electricity generators). Carbon capture and storage (CCUS) is the main decarbonisation option for many of these technologies.

In their Sixth Carbon Budget report, the Climate Change Committee (CCC) recommended that any new EfW facilities (within the waste management sector) should be built with CCUS or be CCUS-ready and that retrofits of existing EfW facilities should be required to install CCUS. In their Progress in reducing emissions 2021: Report to Parliament, the CCC identified the decarbonisation of EfW as a gap that needs to be addressed with urgency, providing support to enable existing EfW facilities to begin to be retrofitted with CCUS from the late 2020s, and introducing policy to ensure that any new EfW facilities are built with CCUS or are ‘CCUS ready’.

Decision on eligibility

Given the importance of deploying CCS in the waste management sector, we have been exploring whether to provide support to waste management projects via the ICC business model. In the May 2021 update on the ICC business model, we set out our minded-to position to provide support for the application of CCS at waste management facilities via the ICC business model, noting that this was subject to change as we continue to develop our approach. Since May, government has engaged with relevant stakeholders through two dedicated expert groups on waste CCS, alongside meetings with individual waste management CCS projects and with the Environmental Services Association.

After careful consideration of the benefits and risks relating to the inclusion of waste management CCS projects within the ICC business model, a decision has been taken to enable waste management CCS projects to be eligible for support through the ICC business model for Phase-2 of the Cluster Sequencing process. Government considers the ICC business model to be the best way to support deployment of waste management sector CCS projects at this stage, given the commonalities between the current barriers for waste management CCS projects and industrial CCS projects, and the importance of CCS to the decarbonisation of the waste management sector.

Allowing waste management projects to be eligible presents an opportunity to progress the decarbonisation of waste management facilities in the 2020s and demonstrate the feasibility of deploying CCS for such facilities in the UK (in turn, reducing the risks and costs for future waste management, and other industrial, CCS projects), in line with the CCC’s recommendations. It also presents the opportunity to potentially realise additional emissions reductions from CCS clusters and increase optionality to achieve government’s binding Carbon Budgets. Another benefit of extending ICC business model eligibility to the waste management sector is the potential to drive increased competitive tension in the Phase-2 process and diversify the CO₂ supply for the T&S network.

However, further work is being done to assess whether any modifications to the ICC business model are necessary for waste management CCS projects. More information on our latest thinking is included below and we will continue to engage with the waste management sector in the run up to the Phase-2 submission deadline in January 2022. We have also developed detailed eligibility criteria for waste management projects, which can be found in the Phase 2 launch document. Decisions on eligibility for future rounds of funding have not been made, and inclusion in this round of funding does not guarantee funding nor eligibility in future rounds of funding.

Whilst this decision increases the diversity of projects that are eligible to apply for support via the ICC business model, it is important to note Government’s stated objective of supporting the development of initial industrial CCUS projects from a range of sectors. Therefore, taking into consideration affordability, the need to drive competition and the accounting for projects potentially leaving the process or negotiations breaking down, a cap may be placed upon the number of projects that will be shortlisted for negotiations from from each sector, which will help promote diversity. More information on this process is set out in the Phase-2 launch document.

It is also important to ensure that the approach to decarbonisation of the waste management sector is consistent with the Resources and Waste Strategy for England published by Defra as well as the respective waste strategies for Scotland, Wales, and Northern Ireland. Careful consideration is required to ensure that the ICC business model does not create perverse incentives which could undermine the waste hierarchy. However, as municipal solid waste (MSW) contains a large proportion of biogenic content (~50% of total waste in England), waste management projects have the potential to generate negative emissions when emissions are captured and stored via CCS. Our thinking on these issues and interactions, and the potential modifications that are needed to the ICC business model to address them, are explained in further detail below.

Potential adaptations of the business model for waste management

When considering the application of the ICC business model to the waste management sector, it is important to note that the sector has a different set of commercial incentives from other industrial facilities that are eligible for support under the model. As a result, we are considering potential adaptations that may be required in the ICC Contract to ensure that, when the business model is applied to waste management facilities, the risk of overcompensation and market distortions can be minimised, and subsidy control requirements can be complied with. We are also considering potential amendments to the ICC Contract to reflect certain Phase-2 eligibility requirements for, and technical aspects of, waste management projects (e.g., requirements relating to energy recovery).

A key difference between the waste management sector and other sectors supported under the ICC business model is that waste management processes are not currently subject to the UK ETS or any other form of carbon pricing. As set out in the Energy White Paper and Budget 2021, the government is currently exploring options for expanding the UK ETS to other sectors of the economy.

Given the above, we are currently considering the following potential amendments to the ICC Contract for eligible waste management technologies, centred around the exploration of a potential change to the reference price. These proposals are indicative only and are subject to further change.

Position for generic ICC Contract: Fixed reference price trajectory defined in advance of contract negotiation for the first 10 years of contract payments.

Applicability to waste management: The sector is not currently subject to carbon pricing. If the sector were to become subject to carbon pricing in future, it may be more appropriate for the waste management sector to enter into a market-based contract linked to a carbon price, to minimise the potential risk of over-subsidy and competitive distortions in the waste management sector that could result from pass-through of carbon costs to customers.

Potential amendment: We will continue to develop our approach, including to determine whether a market-based carbon price or a fixed reference price would be more appropriate for the waste management sector. Under a market-based carbon price, a two-way payment mechanism, where the emitter pays back the difference when the reference price is greater than the strike price, may become more relevant.

The final choice of reference price may have links to policy decisions on other key provisions of the contract such as the contract length and capex payback period, meaning it may also be appropriate to tailor these aspects of the contract. Additionally, there may be other specific consequential amendments to more technical ICC provisions resulting from the choice of reference price. There may also be sector-specific provisions necessary for the waste management sector, such as issues relating to metering. We appreciate the need for the sector to have clarity on the key policy aspects of the business model and aim to progress this work as quickly as possible through the waste CCS expert group. Details on how to join this expert group are listed below in the section outlining our next steps.

Other considerations specific to the waste management sector

Distortion of the waste hierarchy and other perverse incentives

Additionally, any incentive to capture the CO₂ from waste management processes must not result in perverse incentives that could undermine the waste hierarchy or undermine wider government waste management objectives, such as the promotion of recycling. We do not consider that the ICC business model will create an incentive to divert more carbon intensive waste (such as fossil-based recyclable plastics) away from recycling streams. This is due to the correlation between carbon intensity and calorific value of the waste. The waste throughput of a waste management plant would be limited by its maximum thermal input, so if a plant were to burn higher carbon intensity (and therefore higher calorific value) waste, less total waste can be incinerated by the plant and the plant would therefore see a reduction in gate fee revenue.

EfW environmental permitting conditions and upcoming major waste reforms (such as consistency of recycling collections) will also help avoid any undermining of waste hierarchy, though we are considering whether additional provisions are required in the ICC Contract to minimise this risk. We will conduct further work to determine whether any other potential perverse incentives exist and will explore whether any adaptations to the ICC business model are required to mitigate against such incentives and ensure that the business model does not promote behaviours that are misaligned with government priorities for the waste sector.

Interaction with other forms of government support

We are aware that waste management projects may be eligible (now or in the future) to receive other forms of support which may interact with the business model for CCS. We are working with colleagues across government to ensure that the support provided through the ICC business model aligns with, and takes into account, any other forms of government support received by or available to the project. This includes potential interactions between renewable transport fuels created through Advanced Conversion Technology (ACT) and Advanced Thermal Treatment (ATT) technology, and their potential future eligibility for the Renewable Transport Fuel Obligation.

Biogenic waste and potential for negative emissions

A proportion of MSW is typically biogenic. Capture and storage of emissions from biogenic waste could result in negative emissions. However, more work is needed to develop a Monitoring Reporting and Verification (MRV) system for negative emissions and to understand how to account for the negative emissions produced from waste that is a mix of both biogenic and non-biogenic content. Government is currently considering the approach to negative emissions and Greenhouse Gas Removal (GGR) technologies, having committed to an ambition of deploying at least 5MtCO₂/year of engineered removals by 2030 in the Net Zero Strategy and invited GGR projects to take part in a separate Expression of Interest process (see the Phase-2 launch document). Given ongoing policy development with respect to support for GGRs, the ICC business model is not intended to provide supplementary support to incentivise negative emissions. Work is ongoing in BEIS to develop a negative emissions MRV system and to develop our approach to supporting GGRs including BECCS.

Despite the negative emission potential for waste management projects, it is important for projects to note that a project in receipt of ICC business model support may not be eligible to apply for potential future GGR business model support over the duration of the ICC Contract term. This is because, although the ICC business model is not intended to provide supplementary support to incentivise negative emissions, if any negative emissions occur as a consequence of utilising sustainable biomass feedstocks in that installation (e.g. biogenic waste in an Energy from Waste plant), then support for the costs of the capture plant would already have been provided. We are aware that waste management projects with biogenic waste will be exploring potential future markets for negative emissions produced via the capture of biogenic CO₂ as an additional revenue stream. We are doing further work to assess how the ICC Contract should take into account potential future markets and associated revenue for negative emissions, including to ensure that emitters are not overcompensated by receiving such revenue as well as payments under the ICC Contract. We will continue to consider these issues and engage with stakeholders on potential amendments to the ICC business model for the waste management sector over the coming months, refining our position in parallel to assessment and project development.

Next steps

The next steps in relation to providing support to waste management projects via the ICC business model will be to finalise our positions on:

• Any potential amendments to the generic ICC Contract to ensure better suitability for the waste management sector: including in relation to the reference price and any linked or additional terms of the contract, alongside any sector-specific terms, such as metering for example.
• How the contract will take into account interactions with other forms of government support received by the waste sector.
• How the contract will take into account potential future markets for negative emissions.

We will work through these questions, including through further meetings of the dedicated ICC expert group on waste sector CCS, which we intend to use to provide further clarity to the sector ahead of the Phase-2 submission deadline. We intend to resolve these key elements in time for the publication of the draft ICC contract planned for Q1 2022.

If you are not already a registered member of the Waste CCS expert group, please contact ICCbusinessmodels@beis.gov.uk for more information. We encourage all interested stakeholders to register and attend future meetings.

1. See the Offshore wind sector deal ↩