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Carbon plan to be shelved over funding shortage as fears grow for Tories’ green agenda after chancellor’s ‘austerity’ remark

Scottish Power is understood to have pulled the plug on a major green energy scheme at Longannet power station, Fife, close to the Firth of Forth.

The threatened scrapping comes amid growing concern that David Cameron and George Osborne want to scale back the green agenda on the grounds that low carbon technology, such as carbon capture storage (CCS) and offshore wind power, cost too much in a time of austerity.

The chancellor told the Conservative conference this week that if he had his way the UK would cut “carbon emissions no slower but also no faster than our fellow countries in Europe”.

Scottish Power and its partners Shell and the National Grid have just completed a detailed study of the Longannet scheme. They are concerned about its commercial viability without more public backing.The Department of Energy and Climate Change (DECC) had promised £1bn but the developers are understood to be saying they cannot proceed unless more money is provided to enable them to trial a scheme which involves burying carbon emissions in the North Sea.

Both sides insist “talks are ongoing” but well-placed industry and political sources say the process is “pretty much over” and a statement is expected shortly.

Jeff Chapman, chief executive of the Carbon Capture and Storage Association, said the collapse of Longannet would be a “severe disappointment” for the wider hopes of the sector.

A senior Conservative backbencher with knowledge of the energy sector told the Guardian he expected the CCS deal to collapse within weeks. He said blame lay with the Labour government, which had dithered in awarding the CCS demonstration contract until only one bidder was left, leaving the government in an impossible negotiating position.

A DECC spokesman said Longannet was only one CCS project and the government still planned to choose another three that could be eligible for cash from an EU fund by the end of the year.

In May DECC submitted seven UK-based CCS projects for European funding, including Longannet, but the Fife scheme was by far the most advanced and is spearheading the drive to develop the new technology in Britain. Ministers have repeatedly stressed the importance of CCS as a way to keep coal and possibly other fossil-fuel burning power stations in operation without undermining moves to cut carbon emissions and counter global warming.But they have already seen E.ON back out of plans to construct a new coal-fired power station with prototype CCS technology at Kingsnorth in Kent.

At 2,400MW, Longannet is the third largest coal-fired power station in Europe and was once highlighted as Scotland’s biggest single polluter. In 2009 at the launch of a small-scale pilot study Ignacio Galán, the chairman of Scottish Power and its Spanish parent group Iberdrola, highlighted the importance of the scheme.

“We believe that the UK can lead the world with CCS technology, creating new skills, jobs and opportunities for growth,” he said. “There is the potential to create an industry on the same scale as North Sea oil, and we will invest in Scotland and the UK to help realise this potential.”

Charles Hendry, the energy minister, said in May that Longannet and other CCS schemes in the UK showed it was “at the cutting edge of the low carbon agenda.”

But an industrialist in the department told the Guardian ministers were now privately questioning renewable power and other schemes that involved substantial public subsidies. Ministers have come under sustained lobbying from traditional power companies and energy intensive manufacturers to concentrate on lower priced, higher carbon fuels such as gas.

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