The government is continuing to work on business models for carbon capture, usage and storage (CCUS) and hydrogen.
On 21 December, BEIS published an update on proposed business models for CCUS that apply to transport and storage (T&S), power, and industrial carbon capture (ICC) while also updating on hydrogen business models as well. The models for CCUS have been developed with the guiding objectives of establishing a new CCUS sector, enabling low cost decarbonisation in multiple sectors, and developing a market for carbon capture.
T&S networks, it set out, will be key to delivery of CCUS. There could be a need for greater government intervention to support private sector investment in a new sector. This could include potentially ensuring T&S networks are the right size to accommodate expected future growth in CO2 volumes captured by storage. It assured the regulatory framework will support a stable, predictable, index-linked model that underpins investor returns, allowing carbon capture to play a role in the UK’s economy for “decades to come” with appropriate levels of government intervention supporting when required.
As for power, the government has designed a Dispatchable Power Agreement (DPA) model in a bid to incentivise a power CCUS plant to operate in a dispatchable mode. This will see the plant incentivised to react to market prices and generate during periods where this is required to meet demand, while reducing generation during periods of low prices. Due to the flexibility of power CCUS, it should be able to complement the intermittency of renewables, it noted, stressing it should not displace low cost, low carbon generation.
The proposed business models for ICC, meanwhile, aim to incentivise the deployment of carbon capture technology for industrial users with no other option to achieve deep decarbonisation. The government expects the model to proceed with an ICC Contract, covering operational expenses, T&S fees and a rate of return on capital investment. This is targeted for first-of-a-kind projects and is expected to evolve as technology and investment confidence matures, with a competitive allocation process anticipated in the long-term, along with a market-driven carbon price to promote permanent CO2 abatement.
As for the update on hydrogen business models, it signalled its intention to support the development of both CCUS-enabled and electrolytic hydrogen production technologies, taking a disaggregated approach to business model design. There was a recognition there will unlikely be a “one size fits all” approach, while a key aim throughout will be avoiding double subsidies and ensuring an appropriate level of financial support.
On specific models, it cited Frontier Economics, which had concluded producer subsidies through either a contractual or regulatory framework would most likely incentivise investment in hydrogen production. The government suggested a contractual framework would be more appropriate as it recognises the asset life of hydrogen production assets, the likely investor profile and the long-term aim of a subsidy-free market for low carbon hydrogen.
The government will consult on its preferred hydrogen business models in Q2 2021, before finalising in 2022. Further details on the revenue mechanism to support the business models will also be brought forward next year.