Insights and Commentaries
Can We Make CO2 Capture Profitable?
10th June 2019
The fate of the energy transition lies with governments. Yet, government alone will not solve the climate problem.The solutions will be developed, commercialized and deployed by the private sector. When it comes to carbon capture and storage, an essential climate tech, the U.S. government has already created a path for CO2 emissions reductions to become profitable in the future. Now incentives are needed to mobilize private capital.
Carbon capture and storage, an emissions reductions technology that stores the CO2 underground, is essential to stabilizing the global climate. It is part of a least-cost energy transition through decarbonizing industrial processes and power plants providing dispatchable backups to renewables, as confirmed by the Intergovernmental Panel on Climate Change.
Despite governments knowing that the technology is needed, the necessary large-scale deployment of carbon capture to at least 2,000 facilities by 2040 has been lagging. The rapid growth of the renewable energy industry demonstrates how the private sector can drive decarbonization where there is a sound business case. Despite the fantastic renewables build out, about 80 percent of global energy is still supplied by fossil fuels, about the same as half a century ago.
Emissions are higher than ever before. And electricity generation is only one-third of total emissions. To meet climate goals, governments must find ways to create similar private sector interest in CCS. There are significant lessons to be learned from the 23 large-scale CCS facilities currently operating and in construction, which will be able to permanently store about 40 million metric tonnes of CO2 every year.
All of these projects benefited from a coincidence of supportive policy and favorable commercial conditions that enabled private investment. For example, almost all of them take advantage of low-cost CO2 capture opportunities in industry, and most received some sort of capital support from government. In the United States, many generated value for their owners through the sale or use of carbon dioxide for enhanced oil recovery or benefited from a CO2 storage tax credit.
In Norway, the Sleipner CCS facility commenced injection in 1996 in response to a carbon tax enacted by the Norwegian government. These projects, like all business ventures, were driven by the expectation of an appropriate risk-weighted return on investment. Nowhere is the recognition of this fundamental prerequisite for investment more clearly expressed through policy than in the United States.
Increasing recognition of the urgent need to reduce greenhouse gas emissions is driving exciting entrepreneurial activity in the United States, supported by the Department of Energy. Venture capitalists, angel investors and household-name technology providers are pouring hundreds of millions of dollars into efforts to develop and commercialize new technologies for the United States and the global market — nonetheless, access to affordable debt is still lacking. In short, the United States is doing what it has always done so well: See an opportunity; take a risk; develop a solution and create wealth.
The United States also leads carbon capture and storage, a deployment-ready technology. In fact, the oldest commercial CCS facility in the United States started operating in 1972. Today, the United States hosts half of the world’s 18 large-scale CCS facilities in operation.
Obviously, capital flows to where there is a return on investment. To reduce emissions, the most fundamental driver is a value on carbon. Without it, there is simply no incentive to invest.
Since last year, thanks to bipartisanship, the United States has one of the most progressive values on carbon globally. The so-called 45Q tax credit will be worth up to $50 t/CO2 captured and permanently stored. Add the value of the California Low Carbon Fuel Standard credit through its newly created CCS-Protocol, currently trading at close to $185 t/CO2, and here is your business case. In short, U.S. policy is making emissions abatement profitable.
But more needs to be done. Governments can also enact policies designed to reduce the cost, which includes early-stage research and development and deployment. For the large-scale deployment of capital-intensive technologies such as CCS, government can help reduce the cost of finance.
The interest rate charged on loans and the return required by equity investors are directly related to the perceived risk of the investment. A banker may charge only 5 percent interest on a loan provided to a blue-chip company for a low-risk venture. The same banker may charge 15 percent interest on a loan for a more speculative venture, which CCS is currently perceived to be.
This 10 percent risk premium for a capital-intensive project such as CCS can add tens of millions of dollars to the annual cost of servicing debt. As it comes straight off the bottom line, it reduces expected returns, making investment much more difficult.
CCS project owners are best placed to manage general project risks like technology performance risks. There are, however, other risks that project owners cannot effectively manage.
One example is cross-chain risk, where a CCS value chain consists of only one CO2 source and one storage operator. If one business fails or ceases operations, the other has no alternative customer or service provider.
The answer to this problem is a transport and storage network. Networks afford economies of scale that deliver significant unit-cost reductions and reduce cross-chain risk by creating multiple customers for the operators of CO2 transport and injection businesses, and multiple CO2 storage service providers for industrial CO2 sources.
Here, government can kick-start the establishment of CO2 transport and storage networks by enabling initial investment in infrastructure for an anchor customer, with the option of privatizing the business when profitable. This model is not new. Consider government’s leading role in establishing road, rail, telecommunications and electricity infrastructure.
Any costs incurred by government should be considered an investment with the return being significant emission reductions enabled by private sector capital and capability. The future of the planet lies with governments, and as such, their investment is critical to the energy transition.
This piece was originally published in Morning Consult in the United States and was written by Alex Zapantis, General Manager, Commercial, at the Global CCS Institute, an international think tank backed by governments and businesses, and he recently co-authored a report reviewing all carbon capture and storage facilities globally and identifying the mechanisms that allowed their realization.