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Carbon capture and storage in the UK: storage risks

In this article, we consider the risks involved in the storage of carbon.

29/05/2023 · 7 minute read

Carbon capture and storage (CCS) is essential to the UK’s drive to achieve net-zero carbon emissions by 2050 with the UK Government pledging £20 billion to the technologies over the next two decades. 

As the Intergovernmental Panel on Climate Change (IPCC) has stated, the deployment of carbon dioxide removal to counterbalance hard-to-abate residual emissions “is unavoidable,” if net zero is to be achieved. The IPCC has said that “net-zero CO2 energy systems entail: a substantial reduction in overall fossil fuel use, minimal use of unabated fossil fuels, and use of CCS in the remaining fossil fuel system”.

In the previous articles of this three-part series, we considered the risks associated with both the capture and transport of CO2. In this final instalment, we explore the geological storage of CO2, intended to isolate it permanently from the atmosphere, and consider the risks and the role of risk transfer to support its development.

How CO2 is stored

The subsurface injection of captured CO2 is the only proven method available for its long-term removal at present.

The CO2 is stored in the pore space of sedimentary rocks in a dense, supercritical state (where it has the properties of both a liquid and a gas), capped by low permeability rock formations to form a seal. Suitable sinks include both depleted oil and gas reservoirs and saline aquifers.

The deployment of carbon capture to reduce emissions is underpinned by both the availability of permanent storage and the accessibility of these stores. 

CO2 storage capacity

The oil and gas industry has extensive experience in the transportation and subsurface injection of CO2 that has been utilised for enhanced oil recovery (EOR) and gas processing for decades. Today, around 75% of captured CO2 is still used for CO2-EOR.

There are currently only 10 dedicated storage operations worldwide, according to the International Energy Agency (IEA), with a capacity to store around 10 million tonnes per year of CO2 (Mt CO2/year). That total could reach 270 Mt CO2/year by 2030, based on the execution of projects currently in the early and advanced stages of development.

While that may sound like an impressive trajectory, in the context of the International Energy Agency’s net-zero scenario, it remains far below the nearly 1,200 Mt CO2/year that needs to be captured and stored by 2030.

But how much storage space is available for captured carbon? The IPCC estimates global technical geological storage capacity at 1,000 gigatonnes. This figure far exceeds the required storage modelled to limit global warming to 1.5°C above pre-industrial levels through 2100.

UK CCS clusters

In terms of the UK’s capacity to store carbon, the British Geological Survey cites a storage potential of over 70 billion tonnes within the UK North Sea basin. As such, CCS could provide a viable path for the UK’s oil and gas industry — and hard-to-abate industrial sectors — to transition to net zero while continuing to contribute to the nation’s energy security.

The extent to which the required storage capacity is accessible at a viable cost is a crucial factor in determining the scale and pace of CCS investment and development. In recognition of this, there is a global trend towards creating shared networks or CCS “hubs,” providing both economies of scale and reducing the risk of stranded assets.

The UK’s cluster model focuses on highly industrialised areas, where emission-intensive industries share pipeline infrastructure and a single storage site.

Securing support under the UK Government’s CCS programme, Track 1 clusters — HyNet and East Coast Cluster — aim to be operational by the mid-2020s. In addition, 20 new licenses have recently been awarded to companies, contributing to the target of storing up to 30 Mt CO2/year by 2030.

The relatively new and interconnected nature of the CCS removal chain is resulting in bespoke and sometimes complex contractual regimes. These commercial frameworks need to be considered alongside the applicable government policy and regulatory environment, and as such, each entity or joint venture will require careful mapping of their own risk profile, particularly surrounding the contingent business interruption exposures.

Storage risk and insurability

The most fundamental aspects of risk management is in the selection of an appropriate storage site, in the first instance, and subsequently its effective management.

Decades of oil and gas experience in the North Sea mean stakeholders benefit from existing subsurface information and geological understanding, providing high confidence in the availability of safe storage in large volumes.

Being a strictly regulated industry, a huge amount of site-specific information will be required for license applications. Only projects with low-risk profiles, detailed risk mitigation measures, and proposed remediation actions will be granted permits. The commercial insurance market is, therefore, the ideal risk transfer vehicle for the associated low probability loss scenarios that are measurable in nature.

The vast majority of storage risks will likely continue to be underwritten in the upstream market, leveraging the industry’s extensive knowledge of both the exposures and existing covers. This experience also puts the upstream market in the best position to support the development of new risk transfer solutions where policy creates a new financial exposure to operators of the transport and storage project.

UK Emissions Trading Scheme (ETS)

The traditional property damage (including remedial measures), control of well, business interruption, third-party, and environmental liability covers all have an important part to play. However, one new area of cover Marsh has been developing for clients relates to the ETS cost to a transport and storage company following CO2 leakage from their facilities.

If a leak were to take place from the geological storage site, the permit holder would be liable for purchasing (or sacrificing) allowances commensurate to the amount of CO2 leaked, with the prevailing ETS price per tonne released applying. The commercial insurance market will need to provide coverage aligned to this specific financial exposure, whether the leak is a result of a mechanical event (via the injection well) or geological (leaking from the wider store).

The probability of leaks is deemed remote for sanctioned carbon storage projects, but should it ever occur, a leak could still represent a significant exposure, particularly given the rising financial cost of emitting CO2.

When the UK Emissions Trading Scheme auctions began in May 2021 (the UK left the EU ETS), the cost of emitting CO2 was £45/tonne, compared to £62.22/tonne in May 2023 — and is currently EUR89.85/tonne under the EU ETS, up substantially from the EUR25/tonne cost in January 2020. With the total annual ETS allowances set to reduce to align with a net zero-consistent trajectory, there is a general expectation that carbon prices will continue to rise over time, supporting the deployment of CCS and wider measures to reduce carbon emissions.

In light of the modelling Marsh has seen and completed to date, there is unlikely to be a credible scenario whereby the entire volume stored leaks to the atmosphere. Capacity requirements are, therefore, likely to be well within insurers’ appetites.

Post-closure liabilities

As with oil and gas wells today, operators are responsible for the storage site during the post-closure period, which is up to 20 years in the UK. 

Following the CO2 injection, and eventual plugging and abandonment of the injection well(s), the operator’s responsibilities continue. Responsibilities include monitoring, reporting and corrective measures, as well as all obligations relating to the purchase/surrender of allowances in case of leakages and preventive and remedial actions until the storage site is transferred to the competent authority. The operator is also responsible for sealing the storage site and removing the injection facilities.

In order to provide comfort around both the availability and cost of insurance coverage for this post-closure period, the availability of long-term risk transfer solutions should be considered versus the viability of an annually renewable policy. This may be of particular value to incorporated joint ventures, where the only insurable risk remaining post closure is for the single, decommissioned store.

Other solutions are also available to meet the operator’s ongoing financial security obligations, such as surety in respect of the known decommissioning costs.

CCS and the energy transition

It is clear that decarbonising fossil fuels and industry via CCS will be vital in order for the continued global use of oil and gas to be compatible with modelled pathways limiting global warming to 1.5°C.

The availability of storage at a cost per tonne below that of a carbon allowance underpins the viability of carbon capture and storage for regulated industries. The importance of policy instruments to address some of the barriers to deployment at the scale and pace required and to incentivise investment is, therefore, clear.

The insurance industry has an important role to play in supporting the development of CCS in the UK through the provision of thoughtful and competitive risk transfer solutions. As policy and regulation continues to develop and evolve across geographies, this will become an increasingly global role.

For underwriters and brokers alike, supporting the development of CCS aligns with the increased focus on environmental concerns and the desire to support clients with their transition to net zero.

If you have any questions about carbon capture and storage, please contact your Marsh adviser.

Our people

Hannah Jennings

Hannah Jennings

Senior Vice President and CCS Working Group Lead, Energy and Power

Hugh Miller

Hugh Miller

Senior Vice President, Energy and Power

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Thomas R D Smith

Managing Director, Energy and Power, Marsh Specialty UK

  • United Kingdom

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