New developments in UK CCUS: BEIS publishes details of Dispatchable Power Agreement and Industrial Carbon Capture Business Models

United Kingdom

On 12 April, the Department for Business, Energy and Industrial Strategy (“BEIS”) published two further updates on the proposed Dispatchable Power Agreement (“DPA”) and Industrial Carbon Capture (“ICC”) Business Model (together the “Update”) for carbon capture, usage and storage (“CCUS”) projects.

The proposed DPA and ICC Business Models incorporate several new positions since October and November 2021 respectively. The Update also includes Government consultation (until 10 June) on the proposed form of the draft ICC Business Model support package prior to the negotiation and due diligence phases of the Track-1 Phase-2 of the Cluster Sequencing for Carbon Capture Usage and Storage Deployment process. This also includes the first details of how energy from waste projects can take part in the ICC Business Model.

This bulletin considers and assesses the details of the latest Update and should be read in conjunction with our previous article from January 2021, which can be found here.

For details of updates in relation to the UK Hydrogen strategy, please see our recent Law-Nows on the Net Zero Hydrogen Fund and the Low-Carbon Hydrogen Agreement.

DPA Business Model

The DPA is the proposed contractual framework for power CCUS and is based on the Contracts for Difference (“CfD”) Allocation Round 4 standard terms and conditions, as adapted to enable gas-fired generation and captureCCUS projects to help meet electricity demand. As with other CfD projects, the DPA is subject to projects meeting their Milestone Requirements and Target Commissioning Windows. The Initial Milestone Delivery Date will be 18 months after the agreement date but this may be extended in the case of Force Majeure, electricity and gas connection delays, or T&S unavailability.

The rationale of the DPA is to incentivise low-carbon, non-weather dependant generation capacity; therefore the payment structure of the DPA is significantly different from the payment structure of the CfD projects. The Update confirms BEIS’ intention to do so  via an Availability Payment based on generator performance. In keeping with the UK’s Net Zero Strategy (of shifting away from higher carbon energy sources), the Availability Payment will be paid regardless of whether a facility is dispatching- meaning there will be no incentive forfacilities to displace lower cost and lower carbon sources. The Update further confirms BEIS’ intention to use a  “Variable Payment” to CCUS facilities which accounts for their increased running costs versus an unabated competitor, thereby makes higher carbon generation alternatives more expensive. The Variable Payment metric, which is included in the Update is more developed than that proposed in December 2020. Itaccounts for factors such as gas cost differential, carbon cost differential, T&S volumetric fee referenced to a theoretical unabated plant. It has also has been further refined so that it more accurately models the theoretical unabated facility; it now features a CCGT with a defined thermal efficiency of 62.4% on a lower heat value basis which the DPA Counterparty will be required to review and update every 5 years by 2027.The formula for calculating Variable Payment, and the explanation for including each constituent term (such as Gas Cost Differential due to CCUS or T&S Volumetric Payment Charging Rate), is set out in Table 9 of the Update.

The DPA is part of the wider CCUS Cluster Sequencing Process; projects were able to make submissions for a DPA in Phase 2 up until 21 January 2022. Although Governmentare yet to confirm when submissions will be assessed or when the exact timetable for awarding contracts will be published, they expect the first power CCUS projects to receive their DPAs in mid-2023.

The DPA has four components; the Front End Agreement, DPA Contract, Direct Agreement and Gain Share Schedule, drafts of which have been published alongside the Update. New policy is included in grey text boxes and in these the Update proposes:

Policy Area

Updated Position

Term Length

Term length of between 10 and 15 years. The term will be DPA and project specific and flexible enough to account for the remaining operational life of each project.

Performance Tests

Full Load Tests and Start/Up Shutdown Tests will be applied uniformly against all projects. The benchmarks projects will be scored against are under discussion.

Transport and Storage (“T&S”) Prolonged Unavailability Events

New guidance is provided on when a T&S Prolonged Unavailability Event gives the DPA Counterparty (the Low Carbon Contracts Company) the right of termination and what compensation a generator will receive for irrecoverable and unavoidable costs in this instance. Prolonged Unavailability Events listed in the Update include:

  • A Full T&S Outage Event which lasts for at least 6 months;

  • A T&S Commissioning Delay which lasts for at least 6 months; or

  • A T&S Cessation Event such as a notice of discontinuation from the Secretary of State or the revocation of the T&S operator’s licence.

 

BEIS is still considering the appropriate timelines so it is possible the six-month windows may be changed in future policy updates.

 

BEIS’ compensation proposal is that if termination for T&S Prolonged Unavailability Event occurs, a Generator will receive compensation for irrecoverable and unavoidable out-of-pocket costs which have been, will be or are reasonably likely to be incurred. These include development and pre-development costs, decommissioning costs, financing and contractual break costs and construction costs.

 

DPA Counterpart suspension of payments to Generator

In addition to the October 2021 proposal, where a project fails to achieve a minimum CO₂ capture rate of 50% for a prolonged period, the DPA Counterparty may suspend payments where:

  • The Generator is in breach of the metering schematic obligations;

  • The Generator fails to provide the DPA Counterparty with metering access rights;

  • The Generator fails to provide Declaration Capacity Data;

  • The Generator fails to allow the DPA Counterparty to exercise its Declaration Access Right;

  • The Generator fails to undertake an Annual NDC Test;

  • The Generator fails to provide the DPA Counterparty with Annual NDC Test Access Rights;

  • The Generator fails to comply with a SCADA Systems Obligations;

  • The Generator fails to comply with the Compliance of Technology undertaking;

  • The Generator fails to comply with a T&S Prolonged Unavailability Procedure Obligation.

Generator Declaration Obligations

Confirmation that the Generator will be obliged to notify the DPA Counterparty of any Full Capture or Full Outage Events, Declared CO2 Capacity Data and Capture Rate – each a Generator Declaration Obligation.

Installation, Configuration and Operation of CO2 Meters

The Generator is required to install, configure and operate CO2 meters in accordance with BEIS CO2 metering standards. The rationale for metering being that Achieved CO₂ Capture Rate, CO₂ quality and quantity of CO₂ captured by the Facility and delivered to the T&S Network, factors important for ensuring that accurate payments between parties across the CCUS chain are made, will be closely recorded.

 

BEIS is yet to confirm the benchmark CO2 metering standards but have committed to publishing prior to the first DPA contract awards in mid 2023.

Gain Share

Government’s “minded-to” position provides for two types of gain share where a Generator’s profits exceed an agreed equity IRR threshold:

  • “Project gain share”, where a project would pay 30% of profits above the agreed threshold every 5 years; and

  • “Sale gain share”, where a project pays 30% of the profits of any sale of a material interest in the Generator before the later of

    • 5 years of the Start Date, or

    • the date on which the aggregate economic interests of an investor group fall below 60% of their original level.

It is these proposals, along with the December 2020 Heads of Terms, which BEIS is consulting on. The consultation is open until 10 June 2022.

Industrial Carbon Capture Business Model

The ICC Business Model,  is intended to incentivise the adoption of carbon capture technology by industrial users who have few other options to achieve deep decarbonisation. Initial projects under the Model will receive funds from the £1bn CCS Infrastructure Fund (the “CIF”).

Alongside the ICC Business Model, BEIS has published the draft ICC Contract Standard Terms and Conditions for initial projects, as well as a draft Front End Agreement. BEIS proposes an ICC Contract of 10 years with an exercisable 5-year extension, departing from the standard fixed term offered under previous CfDs.

The proposals are open to public consultation until 10 June at 23.59 and BEIS is seeking feedback to inform the drafting of a final ICC Contract. Key features of the ICC Business Model Update include:

  • Offering capital grants (from the CIF) on a ‘last spend’ basis whereby industry is tasked with sourcing private sector funding in the first instance. The Update proposes a maximum grant of up to 50% of capital costs;

  • A fixed 5-year capex payment in £ per tonne of CO2 captured with the proviso that if capex is not fully repaid within those 5 years the capex payment will continue to apply for 5 more years;

  • Confirmation of the January 2022 T&S Tariff Arrangements whereby the Emitter is paid their T&S costs under the ICC Contract;

  • Minimum Carbon Intensity Reporting Standards to provide the ICC Contract Counterparty (the Low Carbon Contracts Company Limited) with assurances that the Emitter has not created excess CO2 to claim further subsidies under the ICC Contract; and

  • The performance conditions (such as Average Capture Rate and Average Capture Quantity) that the Emitter will be assessed against to trigger the ICC Contract extension after the end of the initial 10-year term.

The Update confirms that the majority of provisions included in the ICC Contract will not be negotiable on a project-by-project basis, in keeping with previous CfD models used. In practice, this means stakeholders should engage now, whilst the proposals are still at the consultation stage, if they want to influence Contract content. The same is true of the DPA proposals.

However, the capex payment rate (a fixed £ amount per tonne of CO₂ captured), strike price (which will apply for the duration of the contract but be inflation adjusted based on the Consumer Price Index) and size of the capital grant issued under the CIF are expected to be project specific. In the case of the capital grant, up to 50% of total capital costs may be awarded.The Update proposes that financing information provided by applicants in Phase-2 be used to inform negotiations and agree specific capital grant funding.

BEIS has committed to providing a response to the consultation, as well as a summary of stakeholder feedback – although no timeframe has been given. However, the Update does note that Government are seeking to publish the final generic ICC Contract later this year and anticipate the first contracts being awarded in mid-2023.

ICC Contract adaptions for Waste Management CCS Projects

BEIS confirmed (for the first time) in November 2021 that eligible waste management CCS projects would be in scope to apply for ICC business model support for Phase-2 of the CCUS cluster sequencing process. The Update includes the first CCS EfW proposals and recognises the  requirement forvariations to the generic ICC Contract drafted for power CCUS - the Update focuses on where such adaptions may be required, for example:

  • Where an Emitter in the waste management sector is subject to (further) carbon pricing in the future, the payment per tonne of CO2 captured and stored should be linked to the project’s carbon price exposure, so as not to distort market conditions. The consultation asks for stakeholder feedback on three such payment calculation metrics.

  • A longer capex repayment period to reflect the higher stranded asset risk and lower exposure to international competition faced by waste CCS projects.

  • A more stringent requirement for R1 efficiency status throughout the duration of the Contract, with Counterparty payments suspended for periods R1 is unmet.

The Update proposes these adaptions be added to the final generic ICC Terms and Conditions to create a bespoke CCS from waste contract, a draft of which should be published later in 2022.

ICC Terms and Conditions

The Update includes a draft ICC Contract comprising a standard set of terms and conditions (T&Cs) and an ICC Agreement (which sets out project specific information and amendments to the T&Cs). As with the DPA Business Model, BEIS has confirmed that Milestone Requirements, Operational Conditions Precedent and Termination (for T&S Prolonged Unavailability Events, Prolonged Force Majeure or Prolonged Minimum CO2 Capture Rate breach) will all be features of the ICC T&Cs.

The reference price for ICC projects will reflect the market carbon price under the UK Emissions Trading Scheme, and follow an equally-stepped trajectory for the first 10 years of the payment term. This price will be published prior to the commencement of the first negotiations.

The positions taken are “minded-to”, and Government is currently consulting on these proposals.

What comes next?

The Update provides some clarity on the potential synergies between Hydrogen and ICC. For example, it confirms that for retrofitted CCUS enabled projects that also produce hydrogen as a by-product, ICC business model support awarded through cluster sequencing Phase-2 will not be conditional on project compliance with the future UK Low Carbon Hydrogen Standard. However, the scope of the Low Carbon Hydrogen Standard will be covered in a forthcoming Government response.

A draft Waste ICC Contract will be released over the summer and a final generic ICC Contract published by the end of 2022. Subject to project-specific negotiations the first ICC Contract awards are expected to be made in mid-2023.

The Update confirms that the Cluster Sequencing for Carbon Capture Usage and Storage Deployment: Phase-2 timeline (published November 2021) continues to apply for the DPA. Government’s response to the consultation should be published in 2022 and simultaneously applications to the Phase-2 submission will be assessed. Shortlisted projects will then enter specific negotiations and, whilst no timeframe has been put on these, it is hoped that the first DPAs will be awarded in mid-2023, mirroring their ICC Contract counterparts.

Significant next steps in the 2035 Delivery Plan:

Milestone

Date

Commentary

Launch of £240m Net Zero Hydrogen Fund (NZHF) – Strand 3

Allocation to open in June/July 2022

Strands 3 and 4 of the NZHF offer support for UK-wide projects, and will provide capex grant co-funding, to sit alongside revenue support from the business model where relevant. Strand 3 is for non-CCUS enabled projects and Strand 4 is for CCUS-enabled projects.

Launch of £240m Net Zero Hydrogen Fund (NZHF) – Strand 4

Full application to be submitted to NZHF in early 2023.

Announce winners of £70m DACCS & other GGRs innovation programme

July 2022

This competition aims to bring down the cost of relevant technology and support newly emerging efficiency improvements across the broader CCUS sector in the UK. Entry for this competition is now closed.

Publication of T&S, ICC and power business model updates

Q3 2022

This will reflect the responses received to the consultation opened on 12 April 2022.

Interested parties can engage with the relevant consultations by responding to BEIS before the deadline (12 June). A response form for the DPA Business Model is located here; and a form for the ICC Business Model is available here.

Design of Hydrogen Business Model complete

Q4 2022

This will include the final terms of the DPA Agreement and T&Cs, as currently being consulted on.

Launch of £140m Industrial Decarbonisation and Hydrogen Revenue Support scheme

Q4 2022

This covers revenue support for under both the DPA and ICC Business Models.

It is not clear at this stage what “launch” refers to, as BEIS have previously stated that the first DPA and ICC contracts are to be awarded in 2023. Interested parties will need to await further details on allocation and award of relevant contracts.