Despite global tensions, political instability and economic uncertainty, the UK’s renewable energy generation market is still seen as a safe bet and investor interest remains high, creating a competitive marketplace for assets and opportunities.

While the secondary market for operational solar and wind continues to be a focus alongside appetite for consented or ‘ready-to-build’ solar, battery, co-located assets and onshore wind in Scotland and Wales, 2023 may be the year that market competition sees investors move beyond a ‘watching brief’ on some of the less mainstream technologies and opportunities. Could this include carbon capture, utilisation and storage (CCUS)?

In March the government committed to investing £20bn over a period of twenty years to scale-up CCUS projects, before announcing it will enter into negotiation with eight projects representing a range of innovative CCUS technologies. The intention is for the projects to kick start the hydrogen economy, realise economic benefits across North Wales, North-West England, and the East Coast of England and support decarbonisation while maintaining security of supply. This has provided a clear pathway for the development of CCUS projects, which will deliver the government’s investment promise. But the question remains whether this will be enough to boost private sector investment.

A key revenue stream for new CCUS projects will be in the form of government support for one of the business models making up the value chain. The proposed business models are Transport & Storage Regulatory Investment (TRI) business model, Dispatchable Power Agreement (DPA) business model; and the Industrial Carbon Capture (ICC) business model. Each of the three models include forms of government funding and revenue support, but each model is heavily modified. The lure of guaranteed revenue streams will be attractive to investors but they will need to be familiar with, and understand, the relevant business model relating to the project being invested in, the interaction between the different business models and the associated risks. The risks are not insignificant – take for example the risk of the carbon capture plan being completed but the transport and storage (T&S) network being delayed – that will have a significant impact on project delivery.

Outside of the UK, operational CCUS schemes have demonstrated the viability of the technology but one of the biggest challenges for the UK is that CCUS has yet to be deployed at scale. This presents a range of considerations for investors as there are few precedent projects to draw from. Take for example construction risks, the government business models do not offer pre-operational revenue support so if an investor is entering the pipeline at ready-to-build stage they will need to be aware of their exposure – delays, technical underperformance, failures and so on could all impact on the ability to complete the project on time and within budget.

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There are also additional risks around the development of the T&S network particularly under the TRI model. Delays in developing the T&S network could lead to project connections being delayed. The knock-on effect of this is twofold – the project won’t receive its expected revenues, and if the T&S network company consistently fails to hit its revenue allowance, this could result in the T&S network becoming a stranded asset. While the government is seeking to implement strategies to mitigate these risks – for example by developing the T&S network at separate clusters in the North-East before developing the carbon network – this is still something that investors need to be aware of.

The changing political climate could also impact CCUS projects. Those working in the sector have learned to adapt to the changing winds of policy and this has been less of a challenge for establishing technologies such as solar and wind even with the cessation of FiT & ROC subsidies. However, for an unproven technology like CCUS the removal of an adequate subsidy regime could negatively impact investor appetite and in turn scheme delivery.

Putting aside the potential risks and considerations, high levels of capital and the demand for new investable projects could see some of the sectors’ avant-garde investors start to consider CCUS. However, it is more likely that the risks and level of capex needed will lead to joint venture arrangements between a number of specialist developers, with the project then being funded by a consortium of investors (which could be a mix of debt and equity) and investors entering the pipeline at different stages depending on risk appetite.

CCUS has an important role to play in decarbonisation particularly in negating the impact of emissions from carbon-intensive industry while fossil-fuel alternatives are developed. To encourage the level of investment needed to develop this technology at scale, the government is going to need to continue its funding promise and ensure that both the T&S network and the initial tranche of eight projects are delivered effectively – if (and when) CCUS becomes a proven technology then, and only then, will investment really start to be channelled into this area.

Written by Maria Connolly, partner and head of future energy and real estate at TLT.