The spending watchdog examined a competition launched in 2012 by the Department for Energy and Climate Change, whose responsibilities were taken over by the new Department for Business, Energy and Industrial Strategy in 2016.
The competition was closed in January 2016, after £1bn of capital funding was withdrawn by the Treasury in its spending review the previous month.
The report, published today, concluded that the plan to use a competition to develop and deploy carbon capture and storage technology (CCS) was “ambitious, but ultimately, unsuccessful”.
CCS is a process that involves capturing carbon dioxide from large sources like power stations and energy-intensive industries, transporting it in pipes and storing it, usually in underground rock formations.
Although the technology has not yet been implemented on a large scale anywhere in the UK, it has been an important part of the government’s plans to reduce CO2 emissions. However, it is currently too expensive to be commercially viable for private developers without public support.
The department hoped that the competition would demonstrate the commercial and technical viability of CCS in the UK, and that it would enable developers to invest in CCS in the early 2020s with government support.
This was the second competition of its kind run by the department. The first competition was launched in 2007, but then cancelled in 2011 before any funding had been awarded, after £68m had been spent.
In the second competition, DECC had already awarded £100m to cover 75% of development costs for two projects, proposed by Shell and Capture Power Limited, a consortium of companies. If successful, these projects would have received support through capital grants (from the remaining £900m of capital funding) to support construction costs, and contracts for difference (CFDs) that guaranteed them a fixed price for electricity.
The NAO found that DECC began the competition without having agreed with the Treasury how much financial support would be available over the projects’ lifetimes, and this ultimately contributed to the decision to withdraw funding. While the £1bn capital funding was confirmed, DECC was uncertain about how much the CFDs would cost consumers. Initially this was expected to be between £2bn and £6bn, although later this was increased to between £3.9bn and £8.9bn.
In addition, the report found that the Treasury was concerned that the competition aimed to deliver CCS before it was cost-efficient to do so, that it would not guarantee the further investment required to expand CCS, and that there were better uses for the £1bn.
The report highlighted a tension between balancing the risk and future benefits of CCS projects. “Many stakeholders think the government needs to carry more risk if it is to enable CCS to be deployed affordably to consumers,” it concluded.
Auditors recognised the department had “gained valuable technical and commercial knowledge about how to deploy the competition projects”, but said it would need to apply lessons learned from the project in future schemes to ensure CCS eventually succeeded.
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.”
Meg Hillier, the chair of the Public Accounts Committee, added that it was ultimately the taxpayer who had lost out from the failure of DECC and the Treasury to reach an agreement.
“Taxpayers will be alarmed that disagreement between departments means the taxpayers have little to show for the £100 million the government spent on the competition,” said Hiller.
Responding to the report, a spokesperson for BEIS said: “We haven’t closed the door to carbon capture and storage technology in the UK, but decisions had to be taken to control government spending and protect consumer bills.
“This is why the government ended the funding for the CCS competition, and ensured tax payers were protected from significant costs when the competition closed.”
