UK moves to open up subsidy scheme to carbon capture technology

* Shell (LSE: RDSB.L - news) says assessing government proposal

* Could open way to apply for cash for Peterhead project

By Susanna Twidale

LONDON, Nov 4 (Reuters) - Britain could open its subsidy scheme to support low-carbon power generation to existing fossil fuel plants to help fit technology to capture emissions and store them underground, a government consultation published on Wednesday showed.

The move could pave the way for oil company Shell and utility SSE (LSE: SSE.L - news) to apply for cash for their project to add carbon capture and storage (CCS) technology to an existing gas plant in Peterhead, Scotland.

The consultation launched by the Department of Energy and Climate Change proposes amending the rules of its Contracts for Difference (CfD) scheme "to specify that retrofit Carbon Capture and Storage projects, involving the connection of an existing power station to a complete CCS system, are eligible," it said.

A spokesperson for Shell said the company was assessing the consultation. "We look forward to swift resolution of the issue," the company said in an email.

Britain sees CCS as a key technology for reducing carbon emissions in the energy sector.

The government has already committed 1 billion pounds ($1.54 billion) for CCS projects including Peterhead and the White Rose project developed by Drax and Capture Power limited on a new coal plant in Yorkshire.

The rule change is "important not only for the Peterhead project but also in terms of future-proofing the CfD policy," said Theo Mitchell, policy manager at the Carbon Capture and Storage Association (CCSA)

"If we do see lots of new gas plants coming forward it is important to ensure that capacity can be retrofitted with CCS and participate in the regime," he said.

In general, CCS technology has so far failed to live up to early hopes of wide adoption. After many years of research, Saskatchewan Power opened the world's first coal-fired power plant retrofitted with CCS last year, but European utilities have struggled.

As part of extensive reforms of Britain's electricity market, the government has been changing the way it supports renewable energy by replacing direct subsidies with a contracts-for-difference (CfD) system.

Under the scheme, qualifying projects are guaranteed a minimum price at which they can sell electricity and renewable power generators bid for CfD contracts in a round of auctions. ($1 = 0.6505 pounds) (Reporting By Susanna Twidale; editing by Susan Thomas)