Introduction

The United Kingdom’s Contracts for Difference (CfD) is a publicly funded support measure for large-scale renewable energy projects, introduced in 2014. The CfD policy targets clean electricity investment—to date, mainly offshore wind—and is designed to protect project proponents from changes to the wholesale electricity price.

Canada, through its new Growth Fund, has recognized CfD policies as an effective way to provide the private sector with price or revenue certainty. Canada has also considered ways to better guarantee its carbon price schedule through carbon contracts for difference (CCfD), a policy that would be similar to the UK’s CfD but offers certainty around the price of carbon, rather than the price of electricity.

In effect, the U.K. CfD policy closes the gap between the price that a clean electricity generator needs to receive in order for the business investment to be attractive, and the price provided through supply-and-demand dynamics on the fluctuating power market. The CfD therefore provides a guarantee of a steady revenue stream, addressing private-sector investment risk and making for a more appealing investment environment compared to other forms of energy.

The certainty provided by the CfD also allows project developers to borrow money at lower interest rates, attracting new entrants that increase competition and help drive down costs. This attractive investment landscape, coupled with technology advancements and economies of scale, has seen the public cost of the U.K.’s CfD on a per-kilowatt basis fall significantly over the years.

Figure 1: The U.K.’s CfD reduces costs to the public by providing price certainty to the private sector.

As a subsidy-based policy, the U.K.’s CfD has a unique financing structure in that it is ultimately paid for by U.K. power consumers—though one of its longer-term objectives is to stabilize consumer electricity rates. The CfD payments are funded by a statutory levy on all licensed electricity suppliers, with this cost eventually passed on to households and businesses through their power bills.

The private market intervention has been justified by policymakers through three channels: greenhouse gas emissions reductions, energy security, and long-term energy affordability. On the first, the U.K. is striving towards a mid-century net zero greenhouse gas emissions target, pledging to decarbonize the electricity grid by 2035 from the current over-40-per-cent fossil fuel-based portfolio.

Meanwhile, Europe’s current energy crisis has brought energy security and affordability to the forefront of policy decision making. While some observers have called for quick-fix fossil-fuel production increases, successive heads of U.K. government have noted that renewable energy will ensure less exposure to volatile fossil fuel prices set by international markets.

The U.K.’s independent Climate Change Committee, the official advisor to the government, has estimated that reaching the net zero commitment will require an investment of £50 billion (C$81 billion) a year by 2030, with much of this investment needed to replace older energy-related infrastructure. The U.K. government has said that it aims to leverage £90 billion (C$146 billion) of this amount from private actors through 2030.

With these objectives clearly defined, the U.K. government hit the accelerator on the CfD policy in February 2022, committing to annual auctions from March 2023 rather than the previous biennial schedule, with the aim of more rapidly spurring private capital towards quicker renewable energy deployment.

Description of the policy

All power generators sell their electricity on the open market in the U.K., or sometimes through a power purchase agreement. The market price fluctuates with supply-and-demand dynamics, where the price received is determined by the cost of supplying the last unit of electricity. In the U.K., it is the marginal cost of fossil gas-powered generation that currently sets the wholesale price across the market. Since the price of fossil gas is determined on the international market, power prices can vary significantly, and are currently very high due to the region’s geopolitical instability.

The CfD is designed to fill the gap between this wholesale market price and the generator’s strike price. The strike price is determined through the auction process and, once set, will not fluctuate throughout the life of the contract, currently 15 years. Generators will consistently receive the strike price for each unit of electricity produced.

Within the auction process, renewable generators submit a sealed bid that represents the price they desire to be paid per kilowatt hour to make the project profitable. An administrative maximum strike price is set by the U.K.’s Department for Business, Energy and Industrial Strategy, the entity responsible for the policy. The U.K.’s system operator, the National Grid, runs the auctions and ranks the bids by unit price. It then accepts the best bids up to the point where the budget or capacity caps are reached. The sealed bid for the last project accepted sets the strike price that all successful bidders receive, so long as they are in the same year/technology “pot.” While the strike price applies to the full 15 years of the contract, it is indexed for inflation, with annual adjustments.

While the policy is run by the Business, Energy and Industrial Strategy department, the contracts themselves are administered by the Low Carbon Contracts Company, a government-owned private company. The Low Carbon Contracts Company is also tasked with recouping the cost of the program through a levy set on power suppliers—that is, those delivering final electricity requirements to end-use consumers.

An important design detail for the CfD is that payments are run on a two-way street. If the average wholesale price (the “reference price”) is below the strike price, the Low Carbon Contracts Company pays the generator the difference. But when the strike price is below the reference price, the generator pays the Low Carbon Contracts Company the difference (Figure 2).

Up until recently, the reference price had been consistently below the strike price of projects, and the Low Carbon Contracts Company had been directing difference payments to generators. However, with the onset of the European Union’s energy crisis and related sky-high fossil gas prices, the wholesale electricity price has been above the strike price, meaning that generators have made payments back to the Low Carbon Contracts Company.

Figure 2: Under a two-way CfD, firms make or receive support payments depending on market price

The CfD continues to garner considerable interest from the private sector, with investment pouring into the market. Results from the policy’s fourth allocation round were published in July 2022, confirming 93 new projects, more than in the previous three auctions combined, and bringing the total number of CfDs under management to 168. The allocation round is expected to result in nearly 11 gigawatts of additional generating capacity, with these sourced from offshore wind, onshore wind, solar, remote island wind, and—for the first time ever—tidal stream and floating offshore wind. When those projects are all in operation, CfD-combined projects will provide around 30 per cent of the U.K.’s power needs. The fifth allocation round that is due to open for bids in March 2023 will push this figure upwards.

Policy strengths and limitations

As a result of the significant additions to renewable energy capacity to date, and innovative auction-based design, the U.K. CfD is broadly recognized as a policy success story. The policy has several strengths relative to its predecessor, the Renewables Obligation system, which placed a requirement on suppliers to source an increasing proportion of electricity from renewable sources, similar to a renewable portfolio standard. Since the Renewables Obligation system could have achieved the same renewable capacity result as the CfD, it is worth considering the specific characteristics that have made the U.K.’s CfD policy world-renowned, while it is also important to note its limitations.

Strengths

1. The U.K.’s CfD policy is designed to offer price certainty while remaining cost efficient, minimizing pressure on the public purse.

Subsidy-based programs are often criticized for inefficiencies, including when publicly funded payments are higher than what would be required to spur private action, resulting in freeriding. Freeriding can be a problem because incremental public payments do not result in incremental investment. The policy has weakened these types of occurrences through the competitive nature of its auctions, which have been able to leverage competition and capture the falling costs of renewable technologies.

Reflecting the falling costs of renewable technologies, costs per kilowatt hour have fallen successively each CfD round, and by a massive 65-75 per cent since the first auctions were held in 2015.

As only the lowest price bids are successful, private actors will compete against each other, finding innovative ways to drive down costs, and ultimately bringing down the cost of the policy on ratepayers.

2. The two-way nature of the policy means that payments can either be received or made, limiting the risk of publicly funded windfall profits.

The two-way design characteristic, which sees generators pay into the program when the wholesale price of electricity is high, has been particularly important for cost efficiency as well as for garnering public support. Since September 2021, record-breaking energy prices have seen low-carbon generators under the CfD scheme make payments back that reflect revenues received in excess of the agreed strike price. Since the design of the CfD largely prevents participants from reaping windfall profits at times of high wholesale energy prices, they have been exempted from the 45 per cent windfall profit tax that the U.K. will levy on other energy providers between January 2023 and March 2028. This has also meant cost savings for ratepayers, with over £1 billion (C$1.66 billion) in revenues from generator payments expected to be received between April 2022 and March 2023.

3. The program is administered at arm’s length from government, decreasing political risk.

Ensuring the CfD is administered through a private organization protects the integrity of the program from political fluctuations. Successful renewable project proponents enter into a private law contract with the Low Carbon Contracts Company, which issues the contracts, manages them during the construction and delivery phases, and issues CfD payments. The government is the sole shareholder of the Low Carbon Contracts Company and therefore is represented on the board, and requires certain types of reporting to the Department for Business, Energy and Industrial Strategy. But the CfD is designed as a private-law contract, in which the Low Carbon Contracts Company is the counterparty, and cannot be cancelled without legal repercussions. This protects the policy from political interference or cancellation, promoting investor confidence.

Limitations

1. The policy is regressive, meaning that it has a worse impact on lower-income households’ spending power.

Given that the CfD policy is paid for through a per-unit levy on end users, the more electricity consumed, the higher one’s payments towards the scheme. Although the amount of power consumed normally increases with income—making overall payments to the program larger for higher-income earners—lower-income earners generally pay a higher proportion of their available income towards energy costs, making the policy regressive. For this reason, complementary policies are advisable to lessen the disproportionate burden of the levy on lower-income earners. The U.K.’s Warm Home Discount Scheme, fuel vouchers, and Cold Weather Payments are all examples of complementary policies offering this type of targeted support.

2. The policy takes time to demonstrate measurable results, both in terms of new renewable capacity additions, and resulting emissions cuts.

Although all policies take time to show results, the U.K. experience clearly demonstrates the delay between policy implementation and the time it takes for renewable power objectives to materialize. Contracts awarded in October 2019 will see committed capacity come fully online only by 2027, though there will be a gradual ramp-up to this capacity onwards from 2024. Private-sector industrial investment decisions can take years to develop, and the price certainty offered by the CfD is needed before most projects can access capital and begin due diligence and other approval processes. Measurable emissions reductions follow many years later.

3. The CfD’s payback structure includes administrative inefficiencies.

Since September 2021, wholesale power prices have exceeded CfD strike prices, requiring generators to make payments back to the Low Carbon Contracts Company. This has meant that the levy on suppliers has been set to zero because the regulations do not allow the Low Carbon Contracts Company to set a negative levy rate. Instead, the reverse flows happen at quarterly reconciliation points where the Low Carbon Contracts Company pays the accumulated sum of the payments to suppliers. The challenge is that these quarterly payments are not translated in the same way into reduced payments for consumers. It is left to suppliers to determine how the Low Carbon Contracts Company payments are used, and it is not clear to what extent the payments help mitigate higher power bills. That is the cost-saving pass-through rate is not always known.

Lessons for Canada

Generally speaking, CfD policy can be applied to other climate change mitigation technologies under consideration in Canada, such as carbon capture and storage and clean hydrogen production. There are, therefore, several applicable lessons from the CfD policy that may be beneficial to Canadian policy development, particularly as Canada examines the CfD financial model to support industrial decarbonization, including under its new Canada Growth Fund.

1. Provide price or revenue certainty to help address financial risk, to foster long-term investment.

CfD is able to spur private investment through risk management, including by providing certainty about a project’s revenues. The U.K.’s CfD policy also pushes the administration of the contracts to a private company, the Low Carbon Contracts Company, sheltering the policy from inconsistencies in political support and risks of program rollback. The Low Carbon Contracts Company could serve as an important model for administering Canada’s $15 billion Growth Fund. The fund—slated to be launched by the end of this year—has promised to include a “permanent and independent” structure, which is to be defined by the first half of 2023. Although further details are not yet known, the government has been clear that the growth fund will transition from a subsidiary under the Canada Development Investment Corporation to an institution with operational independence.

2. Help private investors tackle the cost of borrowing to bring down overall project costs, lessening he level of subsidy required to incentivize project development.

The cost of capital can be a significant portion of project costs and an indicator of whether a project will go ahead, with these costs generally increasing with the risk profile of the project. The certainty provided by the CfD makes a project more attractive to investors, lowering interest rates and thereby overall project costs for project developers. Beyond assurance of a solid and long-lasting program, this requires sophistication in lending institutions, and government programs could be developed to ensure capacity to correctly identify the risk mitigation effects of the policy.

3. Target mature and established technologies when using the U.K.’s CfD structure.

The CfD policy was applied in the U.K. after renewable power, specifically offshore wind, was well advanced. To get to that point, government policies focused earlier on research-and-development investment and supply chain growth. CfD policies may be more suitable to scale technologies that have already proven themselves, rather than early-stage innovations. 

4. Require multiple bidders within each auction to establish healthy competition.

As a result of its auction-based design, the U.K.’s CfD has been successful in driving down costs compared to other forms of subsidies. Private actors are incentivized to find cheaper ways to generate clean electricity in order to win the contracts, driving down costs. However, in order for auctions to be successful, there needs to be many private actors involved, and these actors should not have means to collude on price bids. A strong pipeline of projects and cohort of developers is needed for the auction model to be successful.

5. Consider made-in-Canada supply chains and labour enhancements to help boost broader competitiveness objectives.

The low-carbon transition is set to present a significant economic opportunity, but global competition is likely to be intense. Many countries are taking a strategic approach to their industry support policies. The U.K. has recently made locally sourced content requirements a part of CfD eligibility for turbines, something that Canada might consider when examining supply-chain requirements. Other related provisions include building domestic talent through employment strategies that are tied to the policy’s support structure.

Conclusions

The U.K.’s CfD has proven to be a policy success story, spurring additional renewable capacity, leveraging private-sector investment, and both driving and benefiting from falling technology costs. The transferability of this success to the Canadian context, however, will depend on several factors. Primarily, the U.K. CfD model is best suited to mature technologies with robust market competition, to ensure successful auctions. The price guarantee must then be delivered over a long-time horizon, such as 15 years, with a suitable administrative institution that is not vulnerable to political fluctuations.

Introduction

Longship is envisioned to be a network of carbon capture and storage projects that could serve as one of Europe’s first large-scale initiatives to tackle industrial decarbonization, facilitating emissions reductions from heavy industries that are not able to fuel-switch or electrify. The megaproject has received considerable technical, operational, and financial support from Norway’s public sector, with the government expected to cover some two-thirds of total phase-one project costs, valued at over C$3.5 billion.

The Longship network will initially link two sub-projects that capture carbon dioxide from cement and waste-to-energy plants, with a storage plant in the North Sea. Norway’s state-led oil and gas company Equinor, along with oil majors Shell and Total, are partners to the Northern Lights portion of the project, the transport and storage facility, bringing significant experience in carbon dioxide storage in depleted offshore gas reservoirs. Construction of the Northern Lights terminal began in 2021, with the first phase expected to be complete by mid-2024, offering an initial storage capacity of 1.5 megatonnes of carbon dioxide per year over 25 years. The aim of phase two is to increase storage capacity to 5-7 megatonnes per year by 2026.

Longship’s first sub-project is a carbon capture plant at a cement factory located in Brevik, owned by Norcem-Heldelberg, a subsidiary of Germany’s HeidelbergCement. The project aims to use surplus heat to capture 400,000 tonnes of carbon dioxide per year, a third of the emissions caused from producing 1.2 megatonnes of cement per year. The second sub-project is a waste-to-energy plant located in the capital Oslo, the Hafslund Oslo Celsio (formerly named the Fortum Oslo Varme). The sub-project aims to match its sister’s capture rate at 400,000 tonnes of carbon dioxide per year, with emissions captured from the waste combustion process. This sub-project tried but failed to obtain additional financial support from the European Union’s Innovation Fund, meaning that the Norwegian government had to commit additional financing to cover the investment gap.

Captured carbon dioxide from the two plants will be transported by ship to the Northern Lights reception terminal in Øygarden municipality, and then by pipeline to the injection well where storage will take place beneath the seabed. This portion of the project—the transport and storage infrastructure—aims to eventually become commercially profitable based on a tariff paid by emitting firms to transport and store their captured carbon dioxide.

Figure 1: Longship includes the full carbon capture chain through sub-projects linking captured carbon dioxide with storage

Longship provides an example of hands-on, targeted support for a large-scale emissions-abatement initiative, where the government works directly with its private-sector partners on project design, construction, implementation, and marketing. While subsidizing the lion’s share of phase one of the project, the government has said that phase two of the project, or any additional expansions, will need to be privately funded. The consortium of partners has already promoted the Northern Lights sub-project as commercially viable, aiming to become a storage provider for carbon captured from industrial sites across Europe.

Description of the policy

Norway has a long history of state ownership and other stakes in strategic industries, and this economic model has propelled the nation to one of the top-10 richest countries in the world. At the same time, Norway is known for its successful wealth distribution policies—including intergenerationally—made possible through its sovereign oil fund that manages revenue contributions from its petroleum sector. This reliance on its fossil fuel resource abundance, coupled with strong climate commitments (currently to cut emissions by at least half by 2030 compared to 1990 levels), has driven considerable interest in carbon capture and storage technology over the last two decades. Norway is now mobilizing its existing expertise, its ready access to North Sea storage, and a belief that a carbon capture and storage market will emerge as regional carbon pricing and other climate policies accelerate.

The Norwegian government launched the project through a white paper in September 2020, committing NOK 16.8 billion (C$2.32 billion) out of the total planned investment of NOK 25.1 billion (C$3.47 billion). Parliament approved the proposal at the end of that year, with the funding to roll out between 2021 and 2034, covering both capital and operational costs. This represents the Norwegian government’s largest ever investment in a single climate project. But the government’s support stretches beyond a financing role, to addressing other potential barriers to development, such as regulatory challenges.

State enterprise Gassnova was specifically established in 2005 to advance research and development into carbon capture and storage, and is now acting as the technical advisor to the government for Longship. This includes conducting the pre-feasibility study, leading in overall planning activities, and managing contracts with industry partners. Gassnova is also responsible for communicating results, and has committed to providing lessons learned from the regulatory and development processes to facilitate demonstration. Several other Norwegian public sector bodies are also heavily involved in the development of Longship, with several state agencies and directorates handling regulatory roles in addition to municipalities and county governors. The government is also involved as a project integrator, coordinating various public and private partners.

While phase one of Longship will connect only two plants capturing carbon dioxide in Norway with the Northern Lights facility, the network is envisioned to expand in later years. For the second phase, Northern Lights is offering commercial carbon storage services to companies across Europe, where emitting firms would pay a service charge for carbon dioxide handling and storage. European industrial sites that choose to capture carbon dioxide will be able to pipe or haul its liquified form onto ships that transport it to a facility on the Norwegian continental shelf before it is injected into permanent storage sites 2,600 metres below the seabed. Northern Lights has identified over 90 suitable capture sites, and there is already interest from industrial plants in eight countries, spanning sectors such as steel, biomass, and hydrogen.

Norway is promoting the project as a way to jumpstart a European carbon capture and storage market. While withdrawing its financial support in this commercial phase of the project, the government remains involved in bilateral relations, making agreements between participating governments a prerequisite for Northern Lights’ carbon dioxide storage agreements. The Ministry of Petroleum and Energy is already in consultations with several governments, and has signed memorandums of understanding with Belgium and the Netherlands. This has paved the way for the first cross-border commercial agreement, signed in September 2022, that by 2025 will see up to 800,000 tonnes of carbon dioxide per year transported from Yara Sluiskil, an ammonia and fertilizer plant in the Netherlands, and stored.

While the Norwegian government is essentially designing and subsidizing a significant share of the project, it is simultaneously working to drive long-term demand for carbon capture. This includes a rising carbon price applied to fossil energy products such as petrol, diesel, and natural gas, currently slated to reach NOK 2000 (C$275) per tonne in 2030, up from NOK 590 (C$81) in 2021. The carbon price applies to sectors that are covered, as well as those that are not covered, by the European Emissions Trading System, with a pricing top-up currently applied to the former to reach the national benchmark.

While this strong carbon pricing trajectory will incentivize domestic industry to consider capturing their emissions, the carbon price applied within the European Union remains insufficient to do so. The targeted capacity at Northern Lights of 5-7 megatonnes per year by 2026 is a fraction of what is needed to help Europe decarbonize: a study by the University College London Energy Institute estimated it would require 230-430 megatonnes of carbon dioxide storage per year by 2030, increasing to 930-1,200 megatonnes of carbon dioxide storage per year by 2050 under a 1.5C-compatible scenario. For this reason, support-based policies are building in popularity under the European Commission, which has approved more state aid for carbon capture activities and also funds its own carbon capture and storage projects through its Innovation Fund.

Policy strengths and limitations

As the first large-scale carbon capture and storage project in the region, the Longship project has been called a “demonstration project,” helping to legitimize government support to test the technology as a climate change solution, including functionality, efficiency, and potential to scale. These types of public expenditures into clean technologies may help realize public benefits from innovation, including by building knowledge and related skills (the so-called “knowledge spillover” effect). The first-mover advantage—from being the first in Europe to enable cross-border carbon trade for storage—has also enabled the company to establish early partnerships and build a strong reputation in the market. Lessons learned may also bring down costs or remove other barriers that benefit future project proponents.

Many of the celebrated achievements of Longship thus far surround its success in overcoming financial and non-financial barriers to project implementation. While the large upfront capital costs of the project were identified as a significant barrier to development, the government has also helped to overcome other barriers to private-sector carbon capture development, such as regional red tape. This has meant trailblazing new public-private partnership models, and navigating a path to a more efficient regulatory process.

Strengths

1. The project represents a strategic and specific investment with measurable results.

Unlike government policies that provide blanket support to industry, such as tax breaks or energy rebates, Longship is an example of a government targeting a specific project with measurable results and a potential revenue stream. These results include carbon capture as a key component of regional decarbonization, as well as tapping into the commercial opportunities of carbon dioxide storage across the region. As a public project, Longship defies market failures that prevented it from being realized by private actors, including high upfront capital costs, insufficient carbon price levels, and risks associated with the technology. In so doing, it targets a specific type, and volume, of climate change mitigation (i.e., 1.5 megatonnes of carbon dioxide captured per year), and supports clean technology innovation. It also relies on a science-based approach to target which technology type to support, with carbon capture present in all globally recognized scenarios consistent with limiting global temperature rise to 1.5C-2C.

2. The government’s participation includes funding, designing, and managing the project through the full carbon capture and storage chain.

Recognizing that the concept of carbon capture does not work without a reliable storage option, the project has been designed to grow the entire carbon capture and storage chain in unison. Each component of the initiative is being considered as a separate sub-project, with the government establishing separate agreements with each industry player, thus helping to avoid cross-chain risk for private partners. While the model means that the government bears additional cross-chain risks related to the interface between the sub-projects, it protects private partners from weaknesses in other links of the chain. For example, if one of the capture projects were to fail, Northern Lights could find other carbon dioxide suppliers, or if Northern Lights were to fail, the capture projects could likely find a different storage provider without facing catastrophic loss.

3. The project addresses a specific barrier to scale carbon capture and storage as a climate change solution: the availability of supporting infrastructure.

One of the identified barriers to carbon capture project development in Europe is uncertainty around transport costs and long-term storage options. Longship aims to address this well-known chicken-and-egg problem, where no industry emitter will invest in a capture project without the existence of a storage solution, and no company will develop a storage site without knowing that there is carbon dioxide to be stored. Longship will allow emitting firms to develop carbon-capture projects with the security of knowing there will be a reliable transport-and-storage option. The project has already mustered considerable interest from industrial emitters across Northern Europe.

4. The project recognizes climate change as a global challenge, offering neighbouring countries a climate solution while also tapping into a emerging market.

As of 2021, there are over 50 carbon capture projects announced across Europe, offering an abatement potential of over 80 megatonnes of carbon dioxide per year. Many of these projects are considering Northern Lights for their storage requirements, particularly as the endeavour is several years ahead of other storage projects under development in Europe, such as the Port of Rotterdam Porthos Project. As a result, the project’s initial storage capacity is already oversubscribed if all agreements come to fruition. Longship also paves the way for blue hydrogen, where carbon is captured from the burning of natural gas in the production process. Equinor, for example, is already producing blue hydrogen in Hull, England as part of the Zero Carbon Humber carbon capture and storage project, and Northern Lights will provide a viable storage option for these types of endeavours. It should be noted that competition in the region is ramping up, with the U.K. investing £1 billion (C$1.66 billion) through a carbon capture infrastructure fund that is looking to develop two “hub and cluster” projects as early as 2025.

5. The project helps address regulatory barriers.

Immature regulatory frameworks have been highlighted as a barrier to carbon capture project development worldwide. Working in lockstep with the federal government has allowed the project priority access through the regulatory process, and the government has demonstrated agility in shaping the system to facilitate project success—something that will help the next wave of carbon capture projects. Gassnova’s role in sharing lessons learned from the regulatory process has helped demystify the steps and shed light on potential hurdles in the Norwegian context. The importance of involving local authorities early in the process, for example, was highlighted as a key lesson learned due to the complexity and the sheer size of the carbon capture and storage projects. The Longship process has also helped shed light, and address hurdles such as zoning-plan permitting, consent for pipelines, and quay-to-offshore licensing. As a learning-by-doing model, the Longship project has already led to the development of a new licensing system for carbon dioxide storage. In addition, the government has now clarified reporting obligations for carbon capture to facilitate its international climate change reporting obligations.

Limitations

1. The subsidy-based project relies on finite public capital to fund a technology with a mixed level of public support.

Longship has drawn criticism from some stakeholders who see public funding for the project as a form of fossil-fuel subsidy because it is an oil and gas consortium that hopes to benefit commercially from the storage and transport terminal. They note that the oil and gas sector has seen recent record profits and should not be given a share of finite resources from the public purse. Those critics also say that emissions-intensive companies should face regulations or carbon prices that incentivize carbon capture adoption—rather than relying on public funds. Some stakeholders also slam carbon capture as an inefficient or ineffective way of reaching net zero, believing that emissions should instead be reduced at source. While the government has doubled-down on carbon capture as “absolutely necessary” to reaching climate goals, they have also admitted that there is “no guarantee” that Longship will be a success from a climate change perspective.

2. The ultimate success of the project hinges on the shape that domestic and international climate policy take.

Because the carbon price signal is currently insufficient to incentivize carbon capture development in Europe, additional government support is currently needed. The ultimate commercial success of the Longship project will hinge on the regulatory stringency and/or subsidy envelopes from other governments. This means that both ongoing and accelerating carbon price levels and government support are needed to see the carbon capture market take off. There are promising trends here, with four of the seven large-scale projects that were awarded funding in 2021 under the EU-level Innovation Fund considering carbon dioxide storage through Northern Lights, and seven out of seventeen winners from the 2022 Innovation Fund round including a carbon capture component. The upcoming third call will see a significant increase in funding, with the European Commission aiming to invest €3 billion (C$4.3 billion) towards clean tech projects.

Lessons for Canada

Canada’s oil and gas sector has been an early mover in carbon capture, and over three megatonnes of carbon dioxide are already being captured each year from Shell’s Quest Project, Alberta Carbon Trunk Line, and the SaskPower Boundary Dam Project. The Canadian federal government’s Emissions Reduction Plan set a target of capturing at least 15 additional megatonnes of carbon dioxide annually by 2030, including through a generous investment tax credit slated to be applied from the 2022 tax year onward.

Nevertheless, the Longship initiative provides policy lessons that span beyond carbon capture and storage, with several of these lessons applying to any large-scale project that the government directly supports.

1. Target the most cost-effective projects to deliver public support.

The most cost-effective publicly funded projects will leverage private sector investment. Norway’s partnership with private industry helps cover a third of project costs, while project operation and expansion will be handed over to the private sector after phase one. Norway has also coupled its carbon capture investment with a commitment to a sharp rise in the carbon price. This will help drive down the required levels of support for carbon capture moving forward, complementing the initial investment by driving demand for carbon dioxide storage. The government also points to long-term economic gains through Longship’s potential to create jobs, and also provide a source of foreign capital as a cross-border carbon dioxide storage service provider.

2. Target all barriers to project development, not just financial barriers.

Longship demonstrates that non-financial barriers are equally important to address as financial barriers. The Northern Lights consortium of oil majors already had the capital for carbon capture ventures, but they cited the partnership with the Norwegian government as fundamental to the project, in part because it would help overcome regulatory hurdles. While looking to develop the carbon capture industry in Canada, the government should identify and remedy non-financial barriers to implementation. These include hurdles related to supporting infrastructure, such as carbon dioxide transport.

3. Leverage Canada’s comparative advantages and existing talent, skills, and experience.

While Longship is often labelled a demonstration project, it leverages over 20 years of experience in carbon capture and storage. Norway started capturing carbon dioxide and storing it under the continental seabed using depleted offshore gas reservoirs as early as 1996. Norway had already built up much of what was needed for project success, including technical expertise and industry know-how. Canada also has considerable experience and expertise in carbon capture technology, but our country also has considerable advantages in other areas, including an abundance of clean hydro power, preferential access to the United States market, and a wealth of natural resources that include critical minerals. These natural advantages should factor into any large-scale publicly funded project.

4. Facilitate capture from across Canada’s heavy industries, not just the oil and gas sector.

Phase one of the Longship project includes carbon dioxide captured from a domestic waste-to-energy and cement plant, recognizing carbon capture and storage as the only currently viable solution for those plants to remain in operation in a decarbonizing economy. Northern Lights is targeting a European market that will provide a storage service to customers capturing carbon from a variety of facilities. Therefore, although Norway is utilizing the strengths and expertise of the oil and gas sector to build Northern Lights, the project broadens the scope of impact across the country’s—and region’s—industries beyond oil and gas. The oil and gas sector nevertheless continues to be a significant contributor to Norway’s emissions, accounting for around a quarter of the country’s greenhouse gas emissions. Norway is in the process of strategizing how to cut emissions from the oil and gas sector, which it said will include a combination of shutting down certain oil fields, carbon capture and storage, and electrifying operations where possible.

Conclusion

Longship offers an example of a government providing holistic, tailored, large-scale support to a particular climate project, where the public sector works directly with its private-sector partners on project design, construction, implementation, and marketing. The public ownership stake is seen as a strategic investment, tapping into Norway’s existing skills and advantages, leveraging over 20 years of experience in carbon capture and storage. The investment places a bet on the government’s expectation that the market for carbon capture will grow as domestic and regional carbon pricing continues to strengthen, and the European Union offers increasing levels of financial support to its member states for carbon capture and storage projects.

Given lessons learned in the Norwegian context, Canada should optimize its comparative advantages when making strategic investments in climate-related and carbon capture projects. It should also consider its existing policy landscape when making decisions about the level of support to offer a project, given that regulations and carbon pricing policies will already be pushing emitters to invest in clean-technology solutions, taking care to avoid crowding out private-sector investment. Ultimately, the scope and scale of complementary climate policies will set the pace of the Canadian and global clean energy transition, shaping related market opportunities.