Carbon Capture and Storage in Europe

Current state of CCS

Industry players are dealing with increasing efforts towards decarbonisation. According to the International Energy Agency (IEA), carbon capture and storage (CCS) will be essential to achieve the goal of Net-Zero emissions. CCS projects are gaining momentum globally with more than 800 projects and use-cases under consideration, of which nearly 40% are in Europe. Along with an increase in number of announced CCS projects, the design of the CCS value chain is also evolving. While 1st generation value chains were designed for captive use, recent 3rd generation FIDs, such as the 2nd phase of Northern Lights in Norway, are a stepping-stone to an open and mature market. Transition to 2nd and 3rd generation value chains faces two key challenges: value gap due to high and uncertain costs; and value chain barriers due to delayed availability of infrastructure.

Overcoming the value gap

Costs across the CCS value chain in Europe remain high, resulting in an average value gap of ca. €150/t CO₂ compared to prevailing EU Emissions Trading System (ETS) price levels. The cost of transporting CO₂, ETS prices, and purity of CO₂ are three key variables that add uncertainty to the already high costs, which in turn is negatively impacting investor confidence. The high costs and uncertainties mean that CCS subsidy intensity is typically higher compared to that of other decarbonisation technologies.

Due to high cost-levels, there is a need to prioritise low-hanging fruits to scale-up the ecosystem (i.e., high purity CO₂ streams with lower levelized CCS cost). To derisk projects, governments should adopt a hub-based approach for CO₂ transport, put CO₂ price hedging mechanisms in place, and promote dissemination of knowledge from the initial wave of large-scale projects (e.g., impact of CO₂ purity on storage capacity). It is important for governments to acknowledge that CCS subsidy intensity is high due to the nascent state of technology; there is no alternative but to invest and progress along the cost curve. Use cases where emitters can complement ETS revenues with strong  local schemes and alternate revenue mechanisms (such as voluntary carbon rights) are likely to lead deployment. Countries such as the Netherlands have created additional support mechanisms (e.g., SDE++) to bridge the gap and scale of success will depend on total fund size and speed of subsidy award. So far, all leading CCS projects in the EU have relied on extensive government support, a trend which will continue in the short to medium term.

Overcoming value chain barriers

While there exists a structural gap between the available storage capacity and the increasing need for carbon capture, market uncertainty creates a climate of hesitation among emitters for long-term contracts with fixed dates. Governments should consider financial support for essential first-stage infrastructure projects to reduce risks and enable future scale-up. Early adopters should get extra incentives. Moreover, as the CCS value chains evolve to become increasingly sophisticated with an increasing number of players, the cooperation model for the value chain participants will need to rely on standard market regulations instead of tailored agreements between the participants.

The ecosystem has so far developed for point-to-point and often captive CCS, leading to a gap in transport infrastructure and services required by emitters for a plug-and-play approach. Therefore, initiatives to scale-up the ecosystem, such as a CO₂ market-place, also need to focus on modular (and at times temporary) transport solutions such as inland shipping. New business models in the onshore CCS value chain, in the form of specialised 3rd party players, are required to support aggregation from multiple emitters, and the subsequent CO₂  transportation and transformation solutions (e.g., liquefaction or purification).

Due to high costs and uncertainty, project developers in the offshore part of the value chain are constantly on the look-out for additional optimisation opportunities. Regulatory flexibility is required for CO₂ utilisation and cross-border movement, especially in the initial years. O&G CCS players need an option to exit developed projects to derisk their portfolio. 

Conclusion

There is a need to demonstrate flexibility in funding and regulations to swiftly operationalise major projects and recalibrate the level of support as the market matures.