Final report for One North East And NEPIC 21/12/10 - The Carbon ...

7 Conclusions and RecommendationsThe case for a Tees CCS networkFinal ReportThe analysis presented in this report identifies that manufacturing and power industrywithin the Tees Valley are critical to the economy of the North East of England. Thecommercial viability of several of these businesses is threatened by increasing carbonprices and carbon regulation. This could result in these businesses relocating to countrieswith lower environmental regulation, resulting in severe impacts to the North Easteconomy. Whilst this issue has been recognised by the Committee on Climate Changeand UK Government, at present there does not appear to be a coherent national (orEuropean) strategy to resolve this.A CCS network offers the potential to transform the Tees Valley from an area threatenedby tightening carbon regulation to a preferred location for European manufacturing industryand fossil and biomass power stations. A CCS network developed in the Tees Valley istechnically feasible, could deliver up to 8% of the UK‟s required CO 2 reduction for 2030,and is already understood and has the support of several local stakeholders.The average abatement cost of a „Medium‟ sized CCS system connecting 8 point sourcesis estimated at ca. £48/t CO 2 abated. Of this, £7/t CO 2 is expected as a cost of service foruse of a common transport network with a maximum capacity of 22 Mt CO 2 /year. Thereare at least five possible candidates for CCS demonstration projects in the North East anyof which could act as an anchor customer for a CCS network. A shared pipeline networkreduces the cost to all users, potentially allowing some users to connect at marginal costand difficulty.The actual cost of service will depend on a range of inter-related factors. Demonstrationfunding, use of nearby sinks, favourable financing conditions and early connections ofsubsequent sources could each reduce network cost of service below £5/t CO 2 . Incontrast, reduced utilisation, long offshore pipelines or high risk premia could each drivecost of service above £10/t CO 2 which would likely render the network uneconomic.Combinations of factors obviously have a more profound impact on overall economics thanindividual factors alone. An agreement to purchase CO 2 by an oil company for use in CO 2 -enhanced oil recovery would dramatically improve the economics of CO 2 pipeline, butenthusiasm for this within the oil industry under current market arrangements is limited.The absence of a dominant source, and the existing experience for industrial emitters insharing pipeline infrastructure suggests that economic regulation to avoid monopolisticpractices may not be necessary. An „Open Season‟, whereby existing emitters purchasecapacity rights or tradable options, may be used by demonstration projects to leveragesome private investment, although this will likely be very limited at this stage of technologymaturity, regulatory clarity and with current carbon pricing signals. At present the capitalmarkets are unlikely to provide debt finance. However, in the period up to and beyond2020, the economic signals and legal requirements for carbon reduction are likely tobecome significantly clearer, which offers the potential to refinance initial investment atlower cost.7.1 Barriers to delivering a North East CCS networkThe key barrier identified in this study for the development of a North East CCS network isinsufficient long-term clarity on policies, legislation, regulation, market incentives andsocial acceptance for the energy and climate sector in general, and on CCS specifically.65