UK: CCS: What's in Store?

Carbon Capture and Storage could develop to become the leading technology in the fight against climate change. The introduction of a licensing regime could lead to opportunities for many companies, including insurers.

Although plans for the introduction of low carbon technologies like nuclear, solar and wind are becoming more and more ambitious, the simple fact is that it will be many years before the world's consumption of fossil fuels starts to tail off in any meaningful way.

Put another way, millions more tonnes of carbon dioxide will "go up the stack" and play their part in inducing climate change before low carbon technologies can sensibly take over.

Is there any way that these emissions can be avoided? The answer could lie in Carbon Capture and Storage (CCS).

CCS is the process by which carbon dioxide is separated from the other exhaust gases produced in the industrial combustion of fossil fuels and stored at suitable onshore or offshore underground locations.

CCS has the potential to drastically reduce the amount of carbon dioxide emitted by fossil fuel powered industry. If wholeheartedly embraced and adopted, we will be able to continue to use fossil fuels without any major downside until low carbon technologies arrive on the scene, or so the theory goes.

Unfortunately there is a catch. Although many of the constituent parts of CCS have been tried and tested in other contexts, experience of all the parts working together as one is very limited.

Demonstration projects are being planned and financed in an effort to demonstrate that CCS as a whole can be made to work. However, experience of CCS working in practice is in short supply, and this is leading to nervousness about its introduction in some quarters.

An EC Directive

To pave the way for CCS, the EU introduced a Directive (2009/31/EC) slightly more than a year ago. It has to be implemented in member states by June 2011. The Directive lays down a framework for the regulation of the complex "storage" aspect of CCS. In particular, it deals with:

• the granting of permits for exploration of potential CCS sites; and
• the granting of storage permits to operators for storage at sites that have been explored and found to be suitable.

Obviously, permits will come with conditions attached. The Directive suggests that key conditions will relate to:

• composition of the carbon dioxide stream, volumes permitted to be stored, pressure limits and injection rates;
• monitoring and reporting, and what corrective action to take if any irregularities are observed; and
• site closure and post-closure obligations.

Once at least 20 years have passed after closure, and certain other conditions have been satisfied, the Directive provides that responsibility for a trouble-free storage site can be transferred from the operator to a member state competent authority.

Financial security and financial mechanism

Unsurprisingly, the Directive deals with financial matters in some detail. This is the aspect that is of most interest to insurers. Essentially:

• before a storage permit is granted, adequate provision by way of financial security has to be demonstrated by the operator to meet its permit obligations, in particular closure and post-closure obligations and any obligations that might arise as a result of the inclusion of the storage site in the EU Emissions Trading Scheme (which might happen if the site started to leak carbon dioxide). This financial security has to be valid and effective before the commencement of injection; and
• before a transfer of responsibility from operator to competent authority can take place, the operator has to make a financial contribution to the competent authority.

The UK Government's response to CCS

The Department for Energy and Climate Change ("DECC") responded quickly to the Directive. At the end of 2009, it issued a consultation on proposals for domestic offshore carbon dioxide storage licensing.

The proposals follow the broad format set out in the CCS Directive. In relation to financial security, DECC proposed that:

• it can include cash deposits, charges over an asset, performance bonds, guarantees, insurance and letters of credit;
• it must be in place and effective before the commencement of injection;
• it must be effective during post-closure through to transfer of responsibility; and
• it must cover all permit obligations, including those arising from inclusion of the site in the EU ETS.

In August 2010, DECC published its response to the consultation. In relation to financial security, a number of insurance-related points had been made by consultees, including that:

• financial security is an area where the insurance industry can play an important role;
• there are difficulties in pricing the risk of CCS given the lack of experience with this technology. That said, CCS can be broken down into a range of activities, some of which are already routinely covered by insurers;
• the long term and potentially unlimited nature of operator liabilities are difficult to grapple with, especially with so little information being available on CCS in practice. It was suggested that the Government consider various ways to cap operator liability, for example in time and amount; and
• a pool or mutual insurance arrangement could be considered.

The Government responded to these points by saying that the express wording of the Directive restricted its room for manoeuvre, but that additional guidance on the requirements for financial security could be expected in the coming months. Discussions within Europe on this aspect are still in progress.

Insurer opportunities

It is becoming clear to insurers that climate change is leading to a range of exciting opportunities. For example:

• the possibility of investment in completely new asset classes like renewable energy;
• the possibility of making profits through carbon trading; and
• the possibility of insuring novel aspects of renewable energy projects and low carbon technologies.

CCS represents just one possible opportunity of many for insurers arising out of climate change. Its potential scale of use in the future is enormous.

Although it is still some way off widespread use, and the nature, timing and size of some of the potential liabilities of operators under the proposed licensing regime are not clear cut or conventional, insurers should be monitoring the development of this incipient technology with great interest.

This article first appeared in "Insurance Day", on 17 September 2010.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.