Key takeaways
UK takes major step in carbon capture rollout
First commercial agreements mark progress toward net-zero targets.
Government support drives large-scale investment
Contracts provide certainty for developers and accelerate project delivery.
Carbon capture seen as critical to energy transition
Industry collaboration aims to cut emissions and boost sustainability.
The UK government’s drive towards clean power is gathering significant momentum, creating valuable opportunities for businesses in the low-carbon technology space.
In this article, we discuss the latest developments in the government’s push to deploy technologies such as carbon capture, usage and storage (CCUS), which is an enabler of low carbon technologies like hydrogen to power (H2P) and forms of long-duration electricity storage (LDES).
Teesside leads the charge in carbon capture innovation
On 10 December 2024 contracts were signed for the first CCUS projects in the UK. These contracts will kickstart a wave of groundbreaking projects across Teesside and the Humber. These projects could help to decarbonize two of the UK’s biggest carbon emitting regions – Teesside and the Humber – and could remove nearly 50% of total UK industrial cluster CO2 emissions. These projects form the East Coast Cluster of carbon capture storage (CCS) and hydrogen projects.
CCS is the process through which carbon dioxide is captured from industrial processes or directly from the atmosphere and compressed until it becomes a liquid-like substance. This is then channelled to a storage site, usually via a pipeline, and stored underground, often in depleted oil or gas reservoirs.
The Northern Endurance Partnership (NEP), a collaboration between bp, Equinor and TotalEnergies, announced financial close on 10 December 2024 giving the green light to proceed to the execution phase of the UK’s first CO2 transportation and storage infrastructure network that will serve three initial carbon capture projects on Teesside: NZT Power, H2Teesside and Teesside Hydrogen CO2 Capture. The initial projects, which will capture and store carbon emissions from industries in the Northeast region, are set to start construction in mid-2025.
In parallel to this process, the North Sea Transition Authority (NSTA) has awarded the first-ever carbon storage permit to the Endurance store. This store is operated by NEP and is centred around a saline aquifer located around 1000m below the seabed and it is proposed it will be linked to the mainland by NEP’s pipeline. The permit allows for first injection by 2027 with a permitted injection rate of 4 million tonnes per annum. Averaged over a duration of 25 years, this could reach a total of 100 million tonnes, equivalent to taking 58.8 million cars off the road for a year.
Ofgem have now taken over as the regulator for the CCUS economic license, overseeing the construction of the country’s first-of-a-kind CCUS Network and have released guidance on their approach to the economic regulation of a CO2 T&S Licensee.
As well as helping the government to achieve its ambitious targets for emission reduction, other benefits of these projects include job creation, skills development and supply chain benefits.
Funding for the CCUS projects
Dispatchable power agreement (DPA)
The DPA is the proposed contractual framework for power CCUS. It is based on the CFD for allocation round 4 (CFD AR4) standard terms and conditions but adapted to enable natural gas fired power CCUS facilities to play a mid-merit role in meeting electricity demand, displacing unabated thermal generation plants. The DPA proposes an availability payment, linked to facility performance, to incentivise the availability of low carbon, non-weather dependent dispatchable generation capacity. The availability payment will be calculated and paid regardless of whether a facility is dispatching power. This means that CCUS will not be incentivised to produce power to displace lower cost and lower carbon sources of generation such as renewables and nuclear.
To ensure that a power CCUS facility generates electricity ahead of higher carbon alternatives, a variable payment will account for the additional cost of generation for a power CCUS facility compared to an unabated reference plant, which is intended to be a combined cycle gas turbine with the highest defined thermal efficiency, assessed on a lower heating value basis operating on the GB electricity system.
Tax Relief for repurposing assets for carbon capture usage and storage
Currently oil and gas companies are required to pay the cost of decommissioning into a fund to cover the asset’s end-of-life. This system provided no incentive for these assets to be reused for CCUS. As part of the Autumn 2024 Budget, the government introduced a tax relief for payments made into decommissioning funds when the payment is associated with the transfer of an asset from an oil and gas company to a CCUS company. The measure also exempts from the Energy Profits Levy the related payments made by the CCUS company to the oil and gas company in respect of those transferred assets. Energy Profits Levy legislation will also be amended to specifically exclude receipts received by the oil and gas companies for assets transferred for CCUS, from the computation of Energy Profits Levy profits.
The measure was announced at Autumn Statement 2023 by the previous government, but Labour has now included this in the Finance Bill for 2024-25 and will come into effect when that bill receives Royal Assent. This tax relief is likely to encourage oil & gas companies to consider whether any assets in their portfolios are suitable for CCUS use as there may be increased interest in purchasing them.
Hydrogen to Power Business Model
Hydrogen power (H2P) is another critical piece of the puzzle for the UK’s clean energy future. This involves the use of hydrogen, which, when combined with oxygen to create electricity, releases only water vapour into the atmosphere instead of CO2 or other planet-warming greenhouse gases. When renewable power is used to produce hydrogen through the process of electrolysis, this ‘green’ hydrogen provides zero carbon fuel. ‘Blue’ hydrogen, which is produced from natural gas, also produces only water vapour when converted to electricity, but must be used alongside a CCUS facility to capture the CO2 released in the process.
In December 2024 the government published its action plan for H2P. In this plan the government commits to implementing a H2P business model (H2PBM) based on a Dispatchable Power Agreement-style mechanism to support the accelerated deployment of H2P and also allowing H2P projects to participate in the Capacity Market.
To progress development of the H2PBM, the government intends to publish a market engagement document in Spring 2025 outlining further detail on the proposed design of the H2PBM. It is also establishing a H2P expert working group to support its policy development.
Long Duration Electricity Storage (LDES) investment support scheme expected to open to applicants shortly
Carbon capture isn’t the only innovation on the horizon. The UK is also preparing for a revolution in energy storage. The government recently announced a new LDES investment support scheme to help build energy storage infrastructure.
The new scheme builds on a “cap and floor” mechanism, offering revenue support to developers to encourage investment in LDES technologies. This creates a safety net for investors, while also ensuring that the benefits of energy storage are shared with consumers. By guaranteeing a minimum income for developers, this scheme reduces the risks associated with emerging technologies, making it easier to attract the investment needed to scale up LDES solutions.
The investment support scheme, which will be designed by Ofgem, is expected to be open to applicants early this year and will have two application routes: one concentrating on mature technologies and the other on new innovation.
Commentary
As the government continues to roll out its clean power initiatives, there is a burgeoning ecosystem for businesses that are ready to engage in these transformational projects. With substantial government backing and a clear roadmap in place, the opportunities for growth, collaboration, and innovation in the clean energy sector are significant.
