Can Labour’s £22bn CCS pledge capture investor interest?

When the UK government announced a £22bn pledge for projects to capture and store carbon emissions from energy, industry and hydrogen production earlier this month, it raised eyebrows among some net zero conscious investors. 

Carbon Capture and Storage (CCS) remains a controversial technology, largely due to it being in the early stages of development and heavily influenced by investments from the oil and gas industry. Critics argue it is a way of extending the lifespan of fossil fuels rather than accelerating the transition to cleaner energy.

On the other hand, some in the sector believe that CCS is critical for net zero transition. Bob Ward from the Grantham Research Institute on Climate Change and the Environment argues that there is “no net zero without carbon capture and storage”. Firstly, due to the technology’s role in decarbonising the hard to abate sectors, and secondly, to eliminate residual emissions from sectors such as agriculture. .

Prime minister Keir Starmer announced the £22bn funding for two “carbon capture clusters” in Merseyside and Teesside to be deployed over 25 years, with the aim of attracting £8.5bn of private investment for CCS projects. But has the UK government’s commitment to the technology sparked interest among asset owners?

‘Silver bullet’?

Labour's pledge could open up investment opportunities for the local government pension funds such as the £10.4bn Merseyside Pension Fund. Speaking to Net Zero Investor, Peter Wallach, director of pensions at explained that the fund does not currently have direct investments in CCS. However, they are shareholders in several of HyNet’s commercial partners, including Eni and Heidelberg Materials. HyNet is a UK energy project focused on replacing fossil fuel gas with clean hydrogen and CCS technology.

“I think it’s right to be cautious about the risks of over-reliance on CCS in company transition plans; equally, done well and at scale, it can support meaningful decarbonisation in hard to abate sectors like steel and cement. Industrial demand for low-carbon hydrogen as a green fuel will only grow.

“There is no silver bullet to achieving the UK’s net zero goals and CCS has a role to play in achieving them along with other transition strategies,” he told Net Zero Investor.

Similarly, Albena Vassileva, executive director at IFM Investors, acknowledged the “important role” CCS can play in an “integrated national net zero strategy”, stating that IFM is “actively monitoring the sector”.

I am supportive of the UK government designating CCS clusters in its pledge, with appointed transport and storage operators under a Regulated Asset Base model, Vassileva told Net Zero Investor.

“Supporting the full value chain (from emitters to transport and storage) are crucial pillars which can ensure that commercial risks are managed to create an investable profile,” she remarked.

UK private pension fund Universities Superannuation Scheme (USS), which has £81bn in assets under management, has also showed interest in the technology, having introduced a £500m Sustainable Growth mandate in 2021, which includes investments in CCS technology. It is also understood the USS is looking to invest in carbon sinks as part of its five year investment target for decarbonisation solutions across private asset classes.

Alongside USS, £52.3bn Local Government Pension Scheme pool Border to Coast has also tapped into the CCS through its £1.35bn Climate Opportunities portfolio.

Scepticism

Despite some interest in CCS, some asset owners remain cautious and are calling for further action and support from the UK government before fully committing to investments in the technology

Vassileva cautioned that CCS faces “technological upscaling risks”, which, in IFM’s view, need to addressed through partnerships between experienced industrial operators and financial investors - an area where the government could further facilitate progress by ensuring “favourable legal framework”.

Lorenzo Sani, analyst, power and utilities at Carbon Tracker, highlighted that the UK government plans to allocate £22bn of public money to the sector, but only expects to attract £8bn of private capital, “so the proportion doesn’t sound very promising.”

Sani warned that, as an investor, “all in all I would be a bit sceptical and worried about what the [CCS] industry claims and what can really be achieved.”

It’s worth noting that the UK government’s £22bn funding for CCS is allocated over 25 years. Although this represents an increase from the previous Conservative government’s £20bn pledge, the Labour government has significantly lowered its target for emissions capture, from 20-30m tonnes [under the Conservative pledge] to 8.5m tonnes.

Sani also pointed out that the government’s spending on CCS is not being allocated effectively. He noted that very few of the proposed projects are focused on industrial applications, with two-thirds of the projects centred on gas and blue hydrogen.

“We are critical of these applications as there are better alternatives, it is a very high-cost sector, and they extend the UK’s link to global gas markets. They are not a carbon solution,” he told Net Zero Investor.

Despite these concerns, Sani acknowledged that CCS could contribute to the UK’s decarbonisation efforts but only in “a few niche sectors” like cement. However, he couldn't specify the level of investment required.

Similarly, when asked the same question, Ward told Net Zero Investor: “We don’t know how much CCS will be needed, but it’s clear that if we don’t invest now, we won’t have it when we need it.”

Net zero push: UK to pump £20bn into carbon capture and storage