In April 2024, the Department for Energy Security and Net Zero (DESNZ) published an update to the Carbon capture, utilization, and storage (CCUS) Industrial Carbon Capture (ICC) and Waste ICC business models (the ICC Update). The original ICC business model (for the industrial sector) and Waste ICC business model (for the waste management sector) were published in October 2023 and were designed to support Track-1 projects.
The ICC Update sets out potential areas of development and evolution for the ICC and Waste ICC business models, largely speaking, to apply for successful project in the Track-1 and/or Track-2 processes. In addition to more mechanistic changes, the ICC Update also highlights and acknowledges the potential future synergies with other low carbon fuel revenue support schemes, such as the Sustainable Aviation Fuel (SAF) mandate, due to come into effect in the UK at the start of 2025.
This briefing takes a look at the key proposals outlined under the ICC Update for both the ICC and Waste ICC business models.
ICC business model updates
The ICC Update sets out the proposed changes specific to the ICC business model, which include:
Reference price
Whilst a fixed trajectory reference price (as was published for initial Track-1 projects) offers predictability and cost certainty, the UK Government recognises the need to transition towards a more enduring, business-based business model going forwards. The proposal is therefore to transition to a reference price linked to the carbon market price. The UK Government considers that not only is this approach more representative of the carbon costs faced by emitters, it is also more closely aligned to other carbon contracts for difference (CfD) schemes implemented internationally, as well as the UK’s CCUS Vision, published in December 2023.
Free Allowances (FAs)
For Track-1 expansion and Track-2 projects, emitters will no longer need to forfeit FAs allocated under the UK emission trading scheme (UK ETS) to the ICC Contract Counterparty. As a result, there will be no price assurance on FAs and FA volume protection will be removed, simplifying the ICC business model for all parties.
The proposed change also aligns the ICC business model with other international carbon CfD schemes and promotes potential interactions with the UK Carbon Border Adjustment Mechanism (CBAM) due to be introduced from 2027.
Biogenic emissions
As a result of the proposed change to the reference price and the zero-rating of certain biogenic CO₂ emissions under the UK ETS, it will, going forwards, be necessary to identify and account for fossil and biogenic CO₂ being captured under the ICC business model.
The ICC Update proposes that such zero-rated emissions should also be zero-rated under the ICC business model, aligning it with the Waste ICC model. Consequently, the ICC Update states that a “monitoring, reporting and verification [MRV] framework that monitors the biogenic/fossil CO₂ split of captured emissions” will need to be established under the ICC business model and the UK Government will assess whether the current MRV approach in the Waste ICC Contract is suitable for ICC emitters, considering the type and heterogeneity in biomass feedstocks such emitters may use.
In addition to an MRV framework, the ICC Update acknowledges that a methodology for determining sustainability is needed that balances commercial incentives under the business models, compatibility of the ICC and Waste ICC business models, the administrative burden on emitters, and alignment with the government’s principles on sourcing biomass.
However, more widely a consultation is expected later in 2024 to enable the implementation of a cross-sectoral sustainability framework and changes are being considered under the UK ETS to ensure that all forms of biomass combusted at UK ETS installations have a sustainability standard, which is expected to remove the assumed sustainability status of solid and gaseous biomass.
As such, any sustainability related adjustments made to the ICC and Waste ICC business models for Track-1 expansion and track-2 projects may have to be further amended in due course.
Waste ICC business model evolution
The ICC Update sets out the proposed changes specific to the Waste ICC business model, which include the Biogenic content cap. For projects using a high proportion of biogenic waste, the main driver to incorporate CCUS is the generation of negative emissions. The UK Government is of the opinion that these projects are best supported under alternative business models, such as the Greenhouse Gas Removals (GGR) scheme, not the Waste ICC business model. Therefore, to ensure that projects are seeking support under the intended schemes, the UK Government is considering whether to impose additional obligations under the Waste ICC business model to disincentivise consistent use of a feedstock composition producing 90% biogenic CO₂ or above. In such circumstances, one such method suggested is the potential adjustment of payments under the Waste ICC business model.
ICC and Waste ICC model evolution
In addition to the above, there are various proposed changes under the ICC Update that may be made to both the ICC and Waste ICC business models, including:
Special Purpose Vehicles (SPVs)
The ICC Update confirms that the UK Government is now willing to consider the use of a separate SPV entity as owner of the capture facility, rather than requiring both the capture facility and the underlying industrial or waste installation to be owned by the same entity.
Consideration of the use of an SPV will be subject to the finalised SPV structure and the risk allocation of the relevant business model remaining unaffected. Notably, the ICC Update confirms that this change of approach is being considered not only for future Track-1 expansion and Track-2 projects, but also for Track-1 projects.
Low carbon fuel adaptations
The UK Government’s update indicates the potential areas of interaction with low carbon fuel production that could be transformative for energy from waste plants. Notably, there is a promising interface between the ICC/Waste ICC business models and the SAF mandate.
Under the SAF mandate, which enters into force at the start of 2025, aviation fuel suppliers will earn certificates for supplying SAF that meets certain specifications in proportion to the GHG savings delivered. The SAF mandate is also due to be underpinned by a revenue certainty scheme to encourage production, the design of which is being consulted on, but which is scheduled to start by the end of 2026.
The UK SAF mandate includes key policy parameters such as a cap on fuel made from hydroprocessed esters and fatty acids (HEFA) starting in 2027, a power-to-liquid mandate separate to the main SAF obligation from 2028, and a buyout price as an alternative method of compliance where fuel suppliers are unable to secure SAF due to the high cost of production and/or a lack of scaled production.
From 2027 onwards, a cap on SAF produced using the HEFA method (i.e. through refining waste materials, cooking oils and fats) will be introduced, starting at 92% of total SAF and gradually lowering to 71% in 2030 and 35% in 2040. The HEFA cap aims to encourage transition to next generation SAF which has lower lifecycle emissions but also to reduce the risk of diverting HEFA fuel from road transport under the UK’s Renewable Transport Fuel Obligation (RTFO), which relies heavily on HEFA.
If the SAF mandate rewards GHG savings from CCUS, the revenue from the SAF mandate is likely to incentivise producers to install CCUS. There are concerns that in such circumstances, a SAF plant that is subsidised via an ICC business model may, cumulatively, receive revenue significantly beyond that needed to incentivise CCUS deployment. As a result, CCUS business model support for such projects may need to be adjusted to ensure any such support is proportionate to need and harmonious with the subsidy control principles.
By way of example the ICC Update considers that such adjustments could be made at negotiation stage, by determining the required levels of revenue support following assessment of the cost and revenue model for a particular project (such assessment to include consideration of a project’s alternative support through schemes such as the SAF mandate). An alternative method of adapting the support provided under an ICC or Waste ICC business model is the implementation of a “mechanistic adjustment” on the basis of actual revenue received or a SAF market price deduction.
The ICC Update provides the latest step in the evolution of the UK’s CCUS regulatory and policy framework. The concurrent evolution of low carbon fuel support schemes such as the SAF mandate could signal a significant step towards achieving the CCUS Vision’s long term goal of new competitive market in CCUS by 2035.