What now for UK clean coal?

Hatfield colliery, owned by PowerfuelPowerfuel’s move into administration is grim news for supporters of carbon capture and storage, not least those companies thinking of investing in the sector.

Powerfuel was developing one of the UK’s first commercial scale clean coal power plants, but ended up unable to foot the hefty bill.

One of the administrators, Richard Fleming of KPMG, said:

Developing low carbon energy generation requires a large amount of capital upfront and the CCS development falls £635m short of the investment needed to progress the project beyond the preliminary stage. It needs moving on to a new owner with deeper pockets.

But is there anyone with deep enough pockets? Fleming suggested that Richard Budge, who bought the UK’s last deep coal pits from the government in the 1990s, and has seen his equity in Powerfuel wiped out, could be a buyer. But if Eon could not make coal CCS work, saying the market was “not conducive”, it seems far from certain anyone else could.

The government has pledged £1bn in subsidies for CCS projects. But over half of that would have been needed to have rescued Powerful’s plant alone.

The message is clear: government needs to put up more money if it wants private finance to back the next phases of CCS trials.

A Decc spokesman gave this response:

The government is disappointed to hear that Powerfuel plc has appointed administrators.  Although the UK government has not provided funding to Powerfuel Power’s CCS project, we were supportive of their successful application for funds awarded by the European Commission from the European Economic Recovery Package.

The work being undertaken by Powerfuel Power to develop one of the world’s first CCS projects is groundbreaking.  We very much hope that a new owner will be found to build on the substantial progress already made on the CCS project.

The department added:

This Government is committed to driving forward the development of CCS – not just because it represents a massive opportunity for jobs in the UK, but also because it is an indispensable technology for dealing with climate change. That is why we have made £1 billion available for the first demonstration CCS project – one of the first commercial-scale CCS plants to be built in the world.

As we have seen from the results of our recent market sounding exercise there is strong interest from industry in CCS, and in taking part in the Government’s forthcoming process for selecting additional CCS projects for support.

At a recent gathering of UK CCS professionals, which included many people from those companies bidding for future rounds of government support, there was general agreement that a lack of funding remained the major obstacle to commercial-scale CCS. But there were other problems too, not least regulations.

Simon Tysoe, a partner at Herbert Smith, sees three major points of tension:

1) What the oversight regime will be and how much it will cost to provide the monitoring demanded by the government. That’s obviously a particularly sensitive subject in the wake of Macondo.

2) Who owns the plant – and especially the liabilities – once the carbon storage is finished. Will companies remain in hock for any post-closure leak of CO2?

3) What security needs to be provided in case of a CO2 leak. At first, the government tried to demand liquid assets against the full cost of a spill, including what it would cost to buy CO2 permits for the gas leaked. It soon realised this was impossible, however, and changed this to more of a probability-based model. Exactly what security will be demanded however remains unclear.

But before companies hit these regulatory hurdles, someone has to pay to get the project off the ground. And as Eon’s departure from Kingsnorth and Powerfuel’s administration show, this is becoming increasingly difficult.

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