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5 Making the business case for CCS
The long-term deployment of any low-carbon technologies will be shaped by the climate change policies of governments. Policies that place a predictable, long-term financial value on reducing CO2 and other greenhouse gases – either directly through a carbon price or indirectly through regulation – are essential to adopt mitigation technologies. In the shorter term, the development of low-carbon technologies is being accelerated through governments and industry actively contributing large amounts of funding to research, development and demonstration activities.
In the development of CCS technologies, this effort is focused on proving up capture and storage applications in current and future high emitting industries, such as power generation. To date, measured progress has been observed in these large-scale CCS demonstration activities. Progress is dependent on particular industry, country and regional conditions. Nonetheless, a common challenge across all industries and regions for such large-scale demonstration projects remains the need to establish a viable business case, derived from both public and private sources of project funding together with the various revenue streams that may be available.
As with most industrial projects, building a viable business case for a CCS demonstration project is a complex and time-consuming undertaking that requires both the economics of the project and its risks to be understood prior to a final investment decision.
The economics of the business case involves defining the individual revenues and costs of a project so that a return on investment is achieved or, if targets like technology development and research and development are prevailing, major losses are avoided. For example, in a CCS demonstration project in the power sector, determining the economics of a business case would factor in the sale price of power, policy impacts such as a price on carbon, government grants, potential revenues, capital and operating costs of CCS technology and site specific costs.
On top of the usual ‘base case’ project economics, the project risk profile (and potential mitigations) also needs to be analysed when determining the range of possible financial outcomes. Agreements to lay-off or share these risks with other project participants have to be forged and contingencies developed for the residual risks. The higher the project risks the more difficult it is to build a viable business case. The risks to a CCS project may include performance risk, market and regulatory risk, construction risk and community acceptance risk.
While it is easy to dissect a business case into its components, the reality of bringing the components together is challenging and highlights the uncertainty faced in demonstrating CCS. This uncertainty adds further complexity to the business case and increases the time required to adequately define the project to the point that investment decisions can be made.
Progress is occurring where projects can establish a viable business case and this often involves the use of mature capture technology coupled with EOR and/or already well characterised storage reservoirs. However, progress is slower where projects aim to apply CCS to power generation and ‘greenfield’ storage sites in deep saline formations. For projects in the construction or operation stages, the key factors affecting the business case (Table 16) are:
- relatively low cost storage options, including revenue generation through EOR;
- remote or offshore locations; and
- the maturity of the capture technology and the sector in which it is applied.
For nearly all projects in the Execute and Operate stages, CO2 is being stored in already well characterised storage reservoirs, benefitting from previous subsurface activity of the oil and gas sector, or the CO2 is being used for EOR purposes. For example, the Sleipner, In Salah and Gorgon CO2 Injection projects all inject into deep saline formations in the near vicinity of appraised gas or oil reservoirs. This has allowed each of these projects to draw upon a wealth of developed geological data to help identify and characterise the storage site. Other projects, such as the Shute Creek or the Great Plains/Weyburn-Midale projects draw on EOR opportunities which provide a revenue source in addition to having well understood geological properties and existing infrastructure.
Many of these projects are also located in remote or offshore locations, or sometimes in communities already engaged in oil and gas operations. This results in limited community impact in these locations and reduces the costs and risks in developing and implementing the project overall.
Projects with storage in greenfield deep saline formations, however, have a very different proposition. The expenditures and timeframe required to characterise a suitable saline formation to the criteria required for a final investment decision mirror those for new oil and gas exploration, and similarly have no guarantee of success. The timeline can be five to 10 years or more and involve tens to hundreds of millions of dollars in expenditure.
Table 16 Key business features of LSIPs in operation or construction
|Clear business case where revenue exists for CO2use||Clear business case in response to, or anticipation of, climate policies||Business case that required broad government support and other revenue|
|CCS related project features||
|Business case drivers||
For the non-power projects another factor is that the CO2 is already captured as part of the production process in established industries using mature capture technologies. These industrial projects (including gas processing and synfuel or fertiliser production) produce a relatively pure stream of CO2 as a processing necessity which then only requires compression and transport to a storage location. In developing an integrated project, the capture processes employed in these industries and the associated performance and market risks are well understood.
Overall, these projects capture CO2 in an existing market environment. They are finding additional revenue support through EOR or through existing climate policies, such as the carbon tax in Norway, which help to support the additional costs of compression, transport and storage. Some projects may have owners acting pro-actively in anticipation of longer-term climate policies. In others, there is anticipation of developments in carbon markets, such as the carbon offset markets driven by the UNFCCC’s CDM process in the case of the In Salah project. Together, these drivers help to create a business environment for CCS applications.
However, for power generation projects, which are the focus of large-scale demonstration programs, there are significant additional costs and risks in the incorporation (at large-scale and for the first time) of capture technology to separate CO2 from combustion gases or synthesis gas for solely greenhouse gas reduction purposes. These additional costs and risks are not supported in most electricity markets where there is strong pressure on profit margins.
Two projects that have been able to make the business case for the application of CCS to power generation are Kemper County and Boundary Dam. Both of these projects have received government funding which has helped to cover the additional costs of adding capture. Kemper County has been allocated US$705 million and Boundary Dam has been allocated C$240 million (US$251 million).
In building a viable business case, it is interesting to note that Kemper County has set its CO2 capture rate at a relatively low 65 per cent across 582MW of power while Boundary Dam will capture 90 per cent of the CO2 from a relatively small power unit of 110MW. Both approaches reduce the scale of capture equipment required, hence reducing the capital cost of the project and the capture plant’s operational energy requirements. This may have helped to improve the business case by reducing costs and increasing prospective revenue through higher power output. Also, capture technology and performance risks may have been reduced. Furthermore, both projects will use CO2 for EOR, minimising storage risk and gaining additional revenue.
Beyond the two power projects in construction, several power projects have been at an advanced level of project planning for longer than expected, even though government funding has been committed. Hence, government funding is a necessary component to many business cases of CCS projects but provides no guarantee of success.
Incorporation of capture technology in particular into new power plants introduces greater risks. Risks during construction as well as operation of the plant increase, for various reasons (Table 17). Many of these risks cannot or can only partly be laid off or shared with other project participants. Also, the means of mitigating risks and building financial contingencies may not always be available to address the residual risks of demonstration projects.
Table 17 Comparison of risks between a new build CCS demonstration power project with a conventional power project
|Project stage||Risk category||Impact on financing risk for CCS||Description of risks|
|Construction||Cost overrun or delay||Higher||Price premiums for fixed price and schedule.|
|Performance||Higher||Focus on component guarantees.|
|Interest and exchange rate variation||Higher||Higher budgets.|
|Force majeure||Same||Weather, industrial relations, equipment delivery risk.|
|Operation||Regulatory||Higher||Storage regulation untested.|
|Operational performance||Higher||No reference plants to prove reliability.|
|Fuel supply||Higher||Management of oversupply if plant unreliable.|
|Electricity off-take||Higher||Supply shortfall penalties if plant unreliable.|
|CO2 storage off-take||Additional||Possible costs if storage off-take unreliable or minimum supply volumes not met.|
|Interest and exchange rate variation||Same||Currency and financial market exposure.|
|Force majeure||Same||Weather and industrial relations risk.|
|Storage closure||Additional||Liability must be dealt with up front.|
As a consequence, access to third party financing and, in particular, common project finance is extremely limited for CCS demonstration projects. The first operating demonstrations will need to act as reference plants for financiers by showing the availability and performance of CCS technology and its impact on standard plant operation. These reference plants will have to provide confidence that the construction and operation risks can be managed and, most importantly, that minimum levels of power generation necessary for electricity sales to underpin debt servicing and cover fixed costs can be achieved.
Limited and non-limited project finance will only become available for integrated CCS power generation projects based on viable business cases and improved risk profiles. As such, the construction and successful operation of plants demonstrating reliable, integrated capture and storage is essential.
Many governments have embarked on early stage development of climate-change policies designed to bring about the deployment of low or zero carbon energy technologies, primarily through market mechanisms. In setting an explicit price on carbon, or in shaping expectations around future costs of emissions, these environmental policies provide support to both CCS demonstration projects and more commercial ventures.
At the same time, the CCS specific policy frameworks being developed by governments cover a range of objectives including demonstration activities, identifying viable geological storage areas and supporting public awareness and consultation activities. Project specific financial support programs pursued by governments are focused on demonstration projects and accelerating the innovation and development of pre-commercial CCS technologies.
All these policies are essential to bridge and shorten the ‘time to market’ for CCS technology. Uncertainties around the development and timing of policies will also result in postponed decisions for demonstration projects.
The time taken by project proponents to make a final investment decision has been slower than anticipated, particularly for power projects. Some of the delay arises from the time taken to devise and implement funding mechanisms and their requirements, such as the NER300 program in Europe and the competition program in the United Kingdom. Without certainty on funding levels, project proponents are not in a position to consider the viability of the project. In Europe, the time taken to develop and reach agreement on broad-scale funding support is affecting both project definitions and initial timelines.
Uncertainty around the development and timing of policies that place a price on carbon also affects construction decisions. In the United States, the lack of resolution to achieve bipartisan support on the need to mitigate CO2 emissions significantly impacts the business case for power projects. This is due to the uncertainty around the level and timing of incentives for energy consumers to substitute towards any low-carbon energy options. Beyond achieving support to mitigate emissions, uncertainty regarding the timeframe to implement policy, and the stringency of the policy will delay progress. In an uncertain world, there are always benefits to developers from postponing decisions in order to better understand the state of the world that is likely to emerge in the future.
Demonstration projects are underpinned by climate policy, CCS specific policy and an effective regulatory environment. The rate of project development to date suggests that the absence of any one of these policy supports creates uncertainty and impedes project progress. Consistent and coherent policy settings across climate change and CCS policy environments are required. This is the case not only in the breadth of the supporting environment but also with clarity around current and future settings, particularly anticipated carbon prices or emission reduction pathways.
Project proponents also have a role in increasing the transparency between project cost and technology risks. This will aid in permitting efficient sharing of the risks between public and private interests in the demonstration process. While projects face risks in developing a sound business case in an uncertain technology and policy environment, governments also face policy challenges in identifying the appropriate level of support for CCS from a range of competing policy needs both within and outside climate policy. At the same time, there are political risks associated with unsuccessful projects that further highlight the need for more transparency from projects around risks.
Project proponents need to undertake early community engagement as well as continuous monitoring of activities throughout the project lifecycle. As community sentiment and other factors can shift over time, strategy adaptation may be required. Individual project sites require tailored strategies based on specific community attributes and regional needs. Proponents should therefore research and understand the key perceptions and attitudes of the local community and region, to help inform communications and to build trust and credibility with their key stakeholders.
With the current expectations of CCS costs, particularly as technology issues are resolved through the demonstration phase, CCS remains a technology that has a mitigation role at significant scale across a variety of industry sectors in the medium to long term.
Hence, there is value in examining sources of funding to support demonstration activities beyond governments and project proponents. For example, in a carbon-constrained world, fossil fuel producers may significantly benefit from the deployment of CCS technologies. The extent to which the fossil fuel industry benefits from CCS is uncertain and requires careful consideration. However, as seen in Australia, there may be opportunities to raise additional funds from this sector to support demonstration-scale activities.
Only with ongoing broad cooperation can the demonstration program progress, and the associated learnings and benefits be realised. Both government and the private sector have a role in addressing and resolving the challenges necessary to create transparency and resolve business case issues.
Topics:Commercial and finance