Down and Out with CCS ?

Down and Out with CCS ?

Often seen as the panacea for the coal industry, Carbon Capture and Storage (CCS) has in fact managed very little to get excited about over the last five years. Globally there are less than 70 large scale integrated CCS projects and the majority of these are at early stages of development with uncertain futures. Although most large scale CCS projects are in the power generation sector there has been a 29% reduction over the last year. In the UK the situation is in a very sorry state. Back in 2007 DECC announced a large scale CCS Demonstration programme that would look to educate and stimulate world energy and environmental campaigns that CO₂ can be captured and then safely transported, stored or even utilised in enhanced oil recovery projects.

Technology and equipment supply chains to be fair lost interest some time ago when it became clear that national support in many countries was waning as more serious and immediate issues of security of fuel supply and price of short to medium term energy loomed.

Recent political attitudes towards low carbon technology in the UK have not helped. E.ON and the ScottishPower led consortium both pulled the plug on proposed CCS schemes at Kingsnorth and Longannet respectively. The latter did at least make it to the Front End Engineering Design (FEED) stage and most of the results were disseminated to interested UK parties. However the salient parts of the Longannet study involving technical and legal issues over CO2 transportation pipelines, detailed costing analyses and liability issues for subsea storage were kept close to source.

The individual technical aspects of CCS are not particularly daunting. We know how to scrub flue gases and remove CO2, we operate high pressure gas transportation pipelines all over the world; we even know how to develop and utilize enhanced oil recovery. The real challenges for CCS involve integration of the parts. The technical, legal and operational complexities here are significant. Who is responsible for loss of CO2 pressure when EOR cannot operate and oil production drops, how does the carbon capture plant impact on generating efficiency when the station is scheduled in the Capacity Mechanism under the proposed new UK market reforms? Who is liable for CO2 leaks and any marine environmental impact?

The UK government has failed miserably on the first CCS Demo Programme and was much derided. The second attempt is ongoing although successive governments seem to be just kicking the can further down the road. Recent announcements of R&D investment for the White Rose scheme at Drax indicate some hope.

Some recent US studies indicate that CCS will take 20 to 30 years from concept to full scale effective deployment and that costs are significant, possibly reducing plant efficiency by over 25%. Such numbers are not attractive to private generating companies. It is also reasonable to state that other low carbon technologies can be successfully implemented within 30 years reducing the requirement for coal based CCS.

Will UK plc really benefit from the CCS Demonstration Programme? For most SMEs and even higher tier suppliers and service providers, CCS projects are not really on the radar. The EPC contractors and OEM design companies have taken a keen interest and because they can, they have 3-D modelled, desktop designed and taken new processes with fancy new brand names to pilot scale. None of these players are true UK plc companies. It does seem that political malaise and a private sector lacking critical size, a joined-up approach and commercial foresight will fail to reap the rewards if CCS ever does come to fruition.

The use of fossil fuels and in particular, coal in global power generation will remain very high for many decades. China and India are progressing ambitious power plant construction schedules and the majority of these will be emissions unabated. Global warming is a known if not fully understood concept. Humanity will always push the status quo to the limit before invoking radical reform. Surely that limit on fossil fuels based energy systems is rapidly closing.

Coal Is Still King

Coal Is Still King

It’s relatively cheap and plentiful with huge reserves in some regions of the globe. It’s also the most widely used fuel used in modern power generation accounting for 40% of global electricity production. And it’s dirty, difficult to handle and gives out large quantities of harmful emissions. Nevertheless, it still has an important role to play even in the UK and Europe with its high social stance on environment and low carbon future.

Europe Directives have ordained that older inefficient coal fired plant that cannot adhere to current emissions regulations must limit its operation and cease working completely by 31^st December 2015. In the UK this amounts to over 11,000MW of plant, around 14% of current total generating capacity. The thought projection seven years ago or so was that new nuclear plant to replace an ageing UK fleet would be close to commissioning, advanced carbon capture and storage systems would be in place and high efficiency gas combined cycle stations would provide flexible load following. Also, we would have significant offshore wind power installed and more advanced marine based renewables would be making an impact.

Right now we are not even close to this idealistic picture. Nuclear is still alive, albeit kept so by the guarantee of taxpayer money masquerading as a state subsidy. Renewables have suffered from construction and operation cost risk and to be honest, less than robust government support, particularly in light of Big Six price hikes. Security of gas supply is fragile, global demand is upward and this is reflected in wholesale costs. Any future impacts of shale gas through fracking in the UK are at least a decade away and there is no certainty that domestic gas prices will reduce as in the US experience. Developers are involved in a global industry and have little loyalty to price control in the home market.

It is crucial to reduce energy consumption and thus demand. Although fitting insulation to domestic dwellings is important, it is not the solve-all and I personally am rather tired of our senior politicians banging on this drum time after time. It shows a genuine lack of understanding of the UK energy position. The public needs a structured and expertly delivered message. Prior to this, government must have certain delivery partners in place. Smart Grid ability and Demand Side Reduction policies are key drivers. One can understand the reluctance of the private sector to invest or put their heads above the comfort parapet. This is where “we the people” (government, state and public) must become stakeholders in our own energy future. This will be subject of further blogs but please place this concept in your minds.

Over the last few winters and indeed whole years, the return on investment from gas fired power plant has been paltry and many operators have either introduced split-shift working or mothballed plant completely. The “spread” index gives a measure of fuel use profitability. In early November 2013 with the spark spread (gas) at £5/MWh and the dark spread (coal) at £25/MWh any positive investment signals have been truly sunk. Centrica declared a loss of £64 million on its gas fired operations in the first half of this financial year.

The Energy Bill due next year will impose new reforms into the power generating sector. A Capacity Payment mechanism is set to encourage investment in new gas plant by rewarding operators who can deliver at peak times. A carbon floor price and further tightening emissions legislation aims to discourage coal based options. Contracts for Differences are expected to reduce longer term risks for investors by smoothing revenue streams around a fixed strike price per MWh. However there are growing concerns around the new reforms. There is an undeniable element of scepticism from the informed public who fear the lobbying strength of the main operators. Also some feel that the number and complexity of the reforms is too great and beyond DECC’s control. There are also genuine worries about rising energy costs from the general public.

Everything is happening reactively and far too slowly. Our capacity margin (available installed capacity versus maximum expected demand) has become very tight; older nuclear plant retiring, the withdrawal of older coal plant and little upcoming new-build plant at any significant level are not good omens. It will only take a few high pressure cold spells over the winter months during 2016/17 to tip the balance and cause political mayhem. At least for the next few years we are blessed with our old coal fired power stations. Let’s hope that gods of the central heating cupboard look favourably on us this Christmas and please, raise a toast to King Coal.

The Uncomfortable Politics of Power

UK politics and the UK energy sector are not comfortable bed partners, they never really have been since the great privatisation sell-off of British Gas and the CEGB. The promise of increasing competition to provide for cheaper domestic and industrial energy has never been sustained. The disconnect is apparent at many levels. It is not rational to profess a free and liberal market only to thwart its natural dynamics through complex and ungainly regulation in an attempt to stimulate investment and “keep the lights on”. This latter expression defines the political graveyard for any government that cannot control the electricity generation sector. The ability to appease rising costs for households and industry against the large profits of operators and retailers is not a skill that either side displays well. I think it is also fair to say that government as a whole and front line politicians in particular just to do not understand the complexities of a modern energy industry.

Power stations have a realistic asset lifetime of around 40 years whereas politicians and ruling parties are strive from one month to the next, or five years if they get lucky. This is a paramount issue in reflecting on what might be unpopular for the nation and what will keep a party in power. A nuclear build project can exceed three terms of office; who is going to make such potentially unpopular decisions. Is it possible to separate politics from energy in the national interest? Probably not, but there has to be a better solution is the necessary answer. The safe, reliable and affordable provision of energy in the UK should surely be of cross-party political responsibility with representation from industry, the public consumer and regional bodies. Lobbying and any exertion of undue influence must not be tolerated.

The government has an energy policy. However the government finds it rather difficult to deliver this policy. It has a whole spectrum of stakeholder groups to please including the regulator, the customers, low carbon ambitions, EU Directives, utility shareholders and the City and admittedly this is no tea dance. Current policy is merely a wish list of what government would like to achieve, as you might expect when you have little control over nearly all of the participants. Government has to shape its policy to take account of the privately owned assets and the requirement for future investment and this is where it fails. DECC and its various advisors are not able to dictate terms in what is a truly global market nor is it clear whether they have the knowledge or clarity of purpose to succeed.

At worst, energy policy becomes a tool to prostitute the UK in an awkward beauty parade of international sugar daddies. At best it manifests as a truly burdensome set of opaque regulations that do little to kindle consumer satisfaction. A persisting uncomfortable dichotomy of balancing gainful profits for utilities whilst on the other hand keeping prices low for consumers and to spark economic recovery. Private enterprise has not so far delivered a satisfactory energy industry in the UK. It remains extremely uncertain whether recent announcements from government will improve our sorry state.

Attractive Models : Fancy One?

EPC Contracting Models in a Changing World

It’s always been a tough game of “dog eat dog” in the contracting market. This phrase is set to take on more significance with the rise of powerful South Korean and Asian companies offering a modern approach to traditional contract models.

 Korean based contractors have been prolific in the Middle East over the last few years with Samsung, SK and Hyundai E&C all muscling in on well-trodden patches. A number of large awards in the North Sea over the last few years could be just the start of an aggressive foray. They are very competitive on commodity pricing, labour efficient and adopt quite different business models. European and US contractors have been all too wary of this threat and have taken a more aggressive stance, cutting margins to the bone and with many bids tendered below expected budgets.

 Will price cutting be enough to sustain market share? No, not really, as the operators are already naturally exploiting the decline in EPC costs and retendering many projects for a better deal. Surviving in this industry requires foresight and an ability to adapt quickly. This is not always easy in a large tier 1 organisation. Utilizing the right contract model for the right market conditions and controlling risk are the key areas to address.

 Many of the South East Asian contractors are offering one-stop solutions to the EPC market and are taking on a larger share of the traditional project and delivery risks. This is because they are gaining in confidence and have the controlling strength to deal with difficulties. National pride combined with Asian business ethics, a highly skilled and educated workforce and a growing reputation for reliability and value is a tough combination to beat. On the other hand some well-known EPC companies in Europe have redefined their capabilities to steer away from their contracting past and move more robustly towards consultancy and project management.

It is essential to be able to judge risk allocation using indexed and fixed price models and know which elements of a project have the greatest exposure. EPCm contracts with inbuilt commodity cost escalation and uncertain labour clauses generally favour the contractor, particularly over longer timescales. As operators drive towards a fixed price model, when the cycles of global economics direct, then the pressure turns towards contractors and only the most agile and disciplined will flourish.

Fracking on the Golden Mile ?

Is Lancashire Fracked or Broken ?

Shale gas has provided a much needed fillip to US domestic energy security. Now the UK wants to play, although Surrey seems to have taken its ball home. Shale gas offers a part solution with large reserves in areas of the country, notably the Bowland Basin in Lancashire that could sustain gas demand for many years, provide hedging against global price movements and also bring jobs to local economies.

A senior panel of DECC commissioned academics has recently given the all-clear for shale gas exploration in the UK. Of course, we don’t want to tumble Blackpool Tower so measures to mitigate seismic risks have been recommended by the report authors. A Richter scale traffic light system will provide warnings to operators to stop fracking and assess before proceeding. DECC has left the door open for further public comment and will take these into account before any decision is taken on future fracking.

Not surprisingly, renewable energy bodies are nervous. Shale gas is seen as an easy fossil fuel option and could seriously divert operators, investment funds and contractors away from developing sustainable low carbon energy. Shale also creates a dilemma for the government in balancing affordable reliable primary energy with the legal requirements of achieving low carbon targets. What with UK nuclear projects also a little shaky then the scales may start to tip. Gas is a lesser carbon emitter than coal but it’s relative; although gas with carbon capture and storage might just do the trick. DECC has just re-launched its CCS competition; let’s hope they don’t throw this one away.

Hope the earth moves somewhere near you tonight, it could lower your gas bills. Elvis impersonator on Blackpool Promenade? Unlikely, he’ll be out prospecting for shale in them there Lancastrian hills.