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CCS Alliance for Risk-based Policyin collaboration with Hunton & Williams
www.ccsalliance.net
Presented by:
Andrew Paterson
CCSAlliance.net
Washington, DC
571-308-5845
adpaterson@gmail.com
Domestic and International
Policy Dynamics for CCUS DeploymentFactors Affecting Financing for Early Plants
Bumingham, AL
8 June 2015
1
Background: CCS Alliancewww.ccsalliance.net
Focus of the CCS Alliance (started in 2007):
A coalition of entities sharing a common interest in removing impediments to the investment in
and development of projects with CCS. (Rural coops, utilities, insurance, resource companies)
Particularly focused on regulatory requirements regarding financial assurance, site closure
certification, post-closure monitoring, and long-term liability.
Addresses issues regarding the applicability of other federal environmental statutes, project and
pipeline siting authority, subsurface property rights, and other issues.
Promote the development of policy at state and federal levels to address CCS risk and liability
issues appropriately. Work with regional partnerships on state level issues.
Not limited to the power sector; industrial projects are important also for near-term progress.
Efforts and Accomplishments:
Conducted a comprehensive study of risk and legal liability issues, focusing on barriers posed by
existing law and regulatory regimes to the commercial-scale deployment of CCS.
Submitted comments on proposed CCS-related regulatory regimes, including EPA’s proposed
rule for underground injection wells (a new Class VI) under the SDWA.
Communicated key issues to policy-makers regarding the treatment of liability and regulatory
issues under proposed climate change and energy legislation.
Examining the design and impact of a variety of incentives and regulatory approaches that
stimulate investment and commercial deployment. Actively commenting on EPA rule makings.
Active engagement with CSLF Finance Task Force
2
CSLF: 23 Countries+EU; 75% of world energy, CO2
3
CSLF Structure
POLICY GROUP
Chair: United States
Vice Chair: United Kingdom
Vice Chair: K.S.Arabia
TECHNICAL GROUP
Chair: Norway
Vice Chair: Australia
Vice Chair: K.S.Arabia
CSLF
SecretariatTask ForcesTask Forces
CSLF Technical Group Reviews Progress of Collaborative Projects
and Identifies Promising Directions for Research• Projects Interaction and Review Team
• Risk Assessment Task Force
• CCS in Academic Community Task Force
4
CCS Alliance has been supporting the CSLF Finance Task Force
Energy Demand 20 years from now…
5
Largest cities by 2030 concentrated in Asia
6www.bloomberg.com/infographics/2014-09-09/global-megacities-by-2030.html
BLOOMBERG
Sept. 9, 2014
Only Japan is
losing population
21st Century: Urbanization drives demand in Asia
7
Seoul
Where do I put
a wind turbine
or solar panel ?
Population Density in Asia, 2012
8
Solar Intensity in Asia – not near cities
9
No matter the cost for solar panels or efficiency, PV requires sunlight.
Jan. 2015
PM 2.5
The other reason solar doesn’t work well in Beijing…
10Beijing “AIR-POCALYPSE”, Jan. 2013: 750+
NASA photo
Forbidden City…?
Measured at US Embassy, Beijing
UN: Another 2 billion in cities by 2040 (6b)
11
Now
Another 2 billion by 2040
UN: Another 2 billion in cities by 2040 (6b total )
12http://esa.un.org/unpd/wup/Highlights/WUP2014-Highlights.pdf
3b
1b
1 reactor serves 500k-1m people, depending on level of consumption per household.
One billion people would require 500 to 1,000 reactors if served by nuclear energy.
100 reactors: $600B investment
US: 80 urban areas >500k
Powering Mega-cities a Major Driver in 21stC. (2030)
13
Massive growth in Asian mega-cities continues to drive demand for nuclear.
Migration: “Arrival City” – Story of 21st Century
14
ARRIVAL CITY by Doug Saunders
“Never in human history have so many people changed their locations and
lifestyles so quickly. Each month, there are 5 million new city dwellers
created through migration or birth in Africa, Asia and the Middle East.
China alone has an estimated 200 million “floating” citizens with one foot
in a village and the other in a city. If current trends continue as expected,
between 2000 and 2030, the urban population of Asia and Africa will
double, adding as many city dwellers in one generation as these
continents have accumulated during their entire histories. Between now
and 2050, the world’s cities will add another 3.1 billion” people.
http://dougsaunders.net/2011/06/egypt-china-usa-rural-immigration/
Mumbai
Bangkok
Cairo
What about “Energy Poverty” in cities?
Wireless Advanced Vehicle Electrification: City Buses
The city of Gumi, South Korea recently launched
a pair of electric buses wirelessly charged through
the roadway, and if the initial tests go well, this
could pave the way. The Korea Advanced
Institute of Science and Technology developed
the inductive charging system, called the Online
Electric Vehicle (OLEV) platform. This system has
already deployed it on trams at the Seoul Grand
Park amusement center and buses around the
KAIST campus. The city of Gumi now has the pair
of buses running a 15-mile route, and hopes are
high for this initial test.
http://gas2.org/2013/08/13/wireless-charging-
powers-south-koreas-electric-buses/
WAVE company’s cofounder and head of sales
Wesley Smith expects that wireless electric buses
will be implemented in about 10 more cities by the
end of 2014. Diesel buses are cheap to acquire,
but expensive to operate, with diesel prices at $3
per gallon. Meanwhile, electric power is selling at
12 cents a kilowatt hour, which roughly equals
$0.65 per gallon.
15
Wireless charging extends
range of electric bus batteries
http://www.waveipt.com/portfolio
Key issue: “Urban Reliability”, What power source?
16
Tokyo
New York
Paris
Mumbai
Shanghai
Rural India
Seoul
Not just National Security… “Urban Reliability”
EIA: Projected Electricity Generation by Fuel in
Developing Countries to 2040 [NOT OECD]
17
Global electricity demand will be driven by many factors, including urbanization, the rise of the middle class,
policies to reduce greenhouse gasses, and the need to treat and pump rising amounts of potable water for
drinking and agriculture. After 2020, the expanding middle class appetite for appliances and electricity, more
use of electric vehicles and urban mass transit, along with desalination, will drive more electricity demand in
the global energy and water sectors. China and Asia are driving this growth.
China
India
Nuclear
COAL
State-owned Enterprises earn higher credit ratings
18
Moody's assigns A3 rating to China General Nuclear Power CoGlobal Credit Research - Singapore, October 18, 2012 -- Moody's Investors Service has assigned an issuer rating and senior
unsecured bond rating of A3 to China Guangdong Nuclear Power Holding Co. Ltd. (CGNPC). The rating outlook is stable.
RATINGS RATIONALE
CGNPC's A3 rating reflects it baseline credit assessment (BCA) of ba2, and a five-notch uplift, given the likelihood of very high support from the
Chinese government (Aa3 positive), under Moody's joint-default analysis approach for government-related issuers.
Moody's expectation of very high support is based on: 1) complete ownership of CGNPC
by the government; 2) CGNPC's strategic importance to China's economic development,
including advancement of clean energy; 3) the government's strong history of support."CGNPC's BCA of ba2 is underpinned by its dominant position in China's nuclear power industry, its large-scale and relatively low-cost power-
generation assets, stable cash flow, as well as its good access to capital markets and banking credit. It will also benefit from China's growing
economy and strong demand for power," says Ray Tay, Moody's Assistant Vice President and Analyst.
"The success of the nuclear power program is important to the Chinese government because of the reputational and political risks, and
importance to the country's energy strategy. The government has great incentive to ensure support for CGNPC, which is leading the
civilian nuclear power expansion program," adds Tay, who is also the Lead Analyst for CGNPC.
Under the country's current regulatory framework, CGNPC enjoys operation under a favorable tariff regime, in tandem with CGNPC's fuel security
through ownership of mines and CGNPC's base-load dispatch -- translate into strong profitability. CGNPC also benefits from China's robust nuclear
power sector regulatory framework, that has adopted international safety standards and closely monitors general operations and expansion progress
to ensure adherence to standards.
Despite these advantages, CGNPC faces certain challenges.
The company is currently expanding very aggressively, with installed nuclear capacity set to more than quadruple by year 2015 to 24 gigawatts
(GW) from 6 GW currently. This level of expansion requires a significant amount of capex, which we expect would result in high debt/book
capitalization in excess of 70% and low RCF/debt of below 5% for the next few years. In the absence of additional equity financing, we expect
FFO/debt will be under further stress and decline to around 4% in the next few years, while debt/capitalization will reach 75% in 2014.
As a nuclear power plant operator, CGNPC also faces inherent liabilities in relation to the disposal of spent fuel, decommissioning, and potential
incidents. In addition, the extent of its financial responsibility for these matters has been defined by the current policy framework, which provides a
degree of predictability. The Chinese government will also ultimately bear contingent liabilities, given its 100% ownership of CGNPC.
The standalone ba2 rating also reflects structural subordination at the holding company, as more debt is held at the operating subsidiaries.
CGNPC has a sound liquidity profile, supported by its RMB25.3 billion in cash holdings and RMB12.6 billion in cash flow from operations in 2011, as
well as its easy access to the domestic bond market and bank credit.
The rating outlook is stable, reflecting Moody's expectation that: 1) CGNPC's capacity expansion will progress without delay or significant cost
overruns; 2) the policy and regulatory environment will remain stable; and 3) the company will not undertake aggressive overseas acquisitions.
Perspective from Shell (CSLF Financing Roundtable)
Dr. Graeme Sweeney of Shell,
summarized a majority
viewpoint in the roundtable :
1) Fossil fuels will remain
dominant until at least 2050;
so CCS is vital.
2) There are physical limits to
the rate at which new energy
technologies can be deployed.
Structured government
intervention is needed to drive
technology change. Energy
infrastructure takes decades
to turnover: e.g., power plants,
energy-intensive industry,
transmission, buildings,
vehicles, transportation
patterns, city planning.
3) We need policies and
incentives targeted specifically
at CCS to accelerate
deployment, and these policies
and mechanisms need to
adapt as deployment unfolds.
19
Societe Generale: Financing Challenges
20
CCUS: Where are we ? What do we need ?
TECHNOLOGY
Technical performance of carbon capture; [getting there…] ? ?
Proven performance of a replicable energy system, CCS ? More
[Why are wind, solar easy to finance?: mass-production; failed units easily replaced]
China (using >50% of all coal) is building much more gasification than any other country.
Where are we with public acceptance ?
ECONOMICS
Natural gas above $8/mBtu, and volatile (like 2000-05) Nø Yes
Cheap coal prices (<$2-$3/mBtu) Yes Yes
Oil above $80 with steady outlook (like 2013-14) Was… EnSec*
Electricity prices (>12c/KWh) with incentive for CO2 savings Nø YesOr… make something of higher value than electricity from coal (fuels, chem)
* Energy Security in Asia means using domestic coal vs imported oil, gas
POLICY
A predictable value for CO2 savings >$40/ton (not volatile) Nø ?
State takes long-term (>30 years) liability for CO2 leakage ? Yes
21
N. Am Asia ?
SASOL: What’s up (down) with that?
22
S&P 500
CVX
SASOL
BTU
Observations: Markets & Finance… Policy
Market & Finance Context
Electric load growth is flat (since 2008)
Extended outlook for low N.gas
prices (<$6 for 20 yrs) kills a lot.
Lower oil prices since late 2014
also pose a big challenge (EOR)
Cost overruns on large plants
make financing more difficult
Little CO2 pipeline infrastructure
US RGGI prices <$3 / ton
Cheap, older units running
• Interest rates remain low globally;
lots of capital worldwide
• Growth is highest in large coal
users: China, India 23
Political / Policy Context
Chances for a climate bill vaporized
in Summer 2010 (despite oil spill !)
US States reliant on coal deter GHG
emission caps, regulations
Pro-fossil Republicans control a
majority of state legislatures
Consensus from UN COP is
flagging; dim funding prospects
EU ETS failed to provide adequate
pricing (< €10/ton)
• Expectations running low for COP21
• What could come of US-China
bilateral GHG accord?
• Whither EPA Clean Power Plan ?
EIA (AEO 2015): Oil Price Scenarios
24
In the AEO2015 Reference case,
continued growth in U.S. crude
oil production contributes to a
43% decrease in the Brent crude
oil price, to $56/bbl in 2015
(Figure ES1). Prices rise steadily
after 2015 in response to growth
in demand from countries outside
the OECD; however, downward
price pressure from continued
increases in U.S. crude oil
production keeps the Brent price
below $80/bbl through 2020.
$200
$70
EIA (AEO 2015): N.Gas Price Scenarios
25
Projections of natural gas prices
are influenced by assumptions
about oil prices, resource
availability, and natural gas
demand. In the Reference case,
the Henry Hub natural gas spot
price (in 2013 dollars) rises from
$3.69/million British thermal units
(Btu) in 2015 to $4.88/million Btu
in 2020 and to $7.85/million Btu
in 2040 (Figure ES2), as
increased demand in domestic
and international markets leads
to the production of increasingly
expensive resources.
$8
$4/mBtu
Sudden Oil Price Slump Strands Investments
26
Dec. 2014: Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields
www.bloomberg.com/news/articles/2014-12-18/bankers-see-1-trillion-of-investments-stranded-in-the-oil-fields
Oil Price (2003-15), Major events
27
US Coal Capacity – impact of EPA Air Toxics Rules
28
http://www.bloomberg.com/graphics/2015-coal-plants/
Source: Bloomberg
April 2015
Capital Investment is Daunting Requires Debt
Lenders and bondholders will provide the bulk of energy financing to 2030, NOT venture capital,
so a credit risk framework will prevail, focused on predictable, steady cash flows.
$13.6 T $6.3 T $5.5 T
$30 Trillion by 2030
75% of power sector
investment ($13.6 T)
targeted in China,
OECD Europe,
and N.America
29
Global Project Finance – Key Sectors
30
Global Project Finance Volume, 2005-2013
31
Global
Financial
Crisis Slow
Recovery
Climate Bonds… but very few in Poorest Places
32
<$8B of $346B to Development bank climate finance
HSBC: http://www.climatebonds.net/wp-content/uploads/2013/08/Bonds_Climate_Change_2013_A4.pdf
Sovereign credit support by USA via Development banks might be one approach…
What if ? (dealing with politics in N.America)
33
Senate, July 2010: Climate Bill Shelved (passed House in 2009)
34
The same summer as the massive
Deepwater Horizon oil spill blowout (!)
New York Times
202020102000
N.Am peak
emissions
USA, EU CO2 Emissions peaked in 2005; China, ROW rising
35
Based on data compiled by ADPaterson from EIA; Presented at Environmental Business Summit 2014
EIA: “U.S. carbon dioxide emissions declined 4 percent in 2012 from 2011 levels, the U.S. Energy Information
Administration reported. U.S. carbon dioxide emissions are lower now than at any point since 1994, and are 10
percent lower than emissions at the end of the Clinton-Gore administration in 2000.”
Growth in future CO2 emissions is
completely dominated by China and
Developing Countries now.
Progress in curbing
carbon emissions
since 2005 in OECD:
• Recession, less
commuting
• Bldg. efficiency
standards
• More natural gas,
less coal for power
in USA
• Better engines
(with fleet stds)
• Biofuels
• Higher oil prices,
conservation
• Some closure of
heavy industry
… without
climate
legislation
UN Conference of Parties Failing…
COP 18 wrap-up: weak Doha outcome underlines
importance of clean revolution leadership
Date10 December 2012
COP 18 was another major disappointment
36
COP 19: Green groups walk
out of UN climate talksEnvironment and development groups protest
at slow speed and lack of ambition at Warsaw
negotiations (2013)
2009
www.theguardian.com/
But, Climate impact is based on Cumulative Fossil Emissions
37
CDIAC.org http://petrolog.typepad.com/climate_change/2010/01/cumulative-emissions-of-co2.html
Carbon footprint of the “Great Divergence” (Pomeranz)
Population Growth a Key Factor in Policy Differences
38
Population growth in the NAFTA region is robustly rising, while EU-15, Japan, and Russia are not growing.
Technology Investment:
Growing populations mean
that EE and RE are not
enough. More fossil and
nuclear are needed to
modernize the fleet and
supply plug-in hybrids. NAFTA
EU-27
USA
Russia
EU-15
Japan
Mexico
Canada
39
Demographics a Driver for Energy, Water use
Pomeranz: Potential for conflict [over water resources] is “gigantic”.
Feb. 5, 2014 – Great Divergence and Rise of the West
Political Economy and Ecology on the Eve of
Industrialization: Europe, China, and the Global Conjuncture
Author(s): Kenneth Pomeranz
Source: The American Historical Review, Vol. 107, No. 2
(Apr., 2002), pp. 425-446
40
The Great Himalayan Watershed:
Water Shortages, Mega-Projects and
Environmental Politics in China, India,
and Southeast Asia Summer 2009
“The most ambitious new plans are, not surprisingly,
found amidst the highest mountains. Pakistan, India,
Bhutan, and Nepal all have plans for huge dams in
the Himalayas. Planned construction over the next
decade totals 80,000 megawatts (versus 60-64,000
in all of Latin America).”
“This extremely aggressive exploitation of
groundwater is unsustainable.”
“Meanwhile, evidence is mounting that thanks to
climate change, the water supplies all these projects
seek to tap are much less dependable than planners
have frequently projected.
“The potential for such [water] projects to create
conflicts between China and India –and to
exacerbate existing conflicts over shared
waterways between India and Bangladesh – is
gigantic.”
http://japanfocus.org/-kenneth-pomeranz/3195
Global Political Economy and Regional Resources
Energy, Resources vital to Stabilization
41
Yazidi refugees (Iraq 2014)
Philippines (2013)
Pakistan floods (2010)
Aug 2014)
“Larger Context” Observations
• China, primarily, and then USA and India determine global usage of
coal from here (60% of total), for power and industrial projects. CCS
(or coal use) in Europe will not impact climate measurably.
• Just ten countries account for 80% of coal use worldwide.
• Still, CCS (“synthesis) can deliver higher value uses of coal (fuels,
chemicals, steam) versus only burning it for power.
• Think “Carbon Management” -- look at best purposes + biomass
• Burning coal simply for electricity produces little direct export value.
• Industrial and power projects with CCS will be funded with debt,
therefore credit risk evaluation (repayment) drives financing.
• Once used, a nation’s coal resources cannot be recreated, therefore,
garnering more value from coal enhances the nation’s economy.
• CCS is costly AND entails more risks. Liabilities must be addressed.
• The credit crisis remains, placing greater importance on revenues,
management, credit quality, collateral, and efficiencies, not just cost.
• Hence, projects with CCS will require public - private partnerships.
42
Public-Private Funding Models: Key Elements
Government• GHG policy
• Siting regulations
• Performance Standards
• R&D / Tech cooperation
• Demonstration & FEED
• Monetary incentives- Tax measures, FITs
- Allowances
- Green bonds
• Energy/Elec. rates
Industry & Investors• Property investment
• Feedstock & infrastructure
• Monetizing cost / benefit
• Engineering & Innovation
• System integration
• Training, education
• Debt / Equity financing
• Insurance; trust funds
• Market presence
“Trigger points”
for mobilizing capital
FUNDING MODELS
- Public utility
- Private project
- Hybrids… others
Finance Roundtable Dialog
“Reliable energy from
secure supply with
environmental
stewardship”
CSLF(IEA, G20,
other forums)
43
Public Private Partnerships (PPP) Evolve
PPP 1.0: Subsidies
Grants and tax credits or
feed-in tarriffs – basic
subsidies (“throw money at
it”) with bids by private
projects, demonstration
phase mostly; minimal
attention to regulatory issues
or risk analysis.
PPP 2.0: Subsidies +
Regulatory Reform
Grants and subsidies coupled
with regulatory reform (e.g.,
emissions rules, site
characterization, CO2 injection
regulations, long-term liability
rules, etc.).
Debt investors, in particular,
demand regulatory clarity.
PPP 3.0: Risk-based Subsidies
+ Regulatory Reform, Negotiated
Subsidies + Regulatory measures +
Risk analysis with credit support
(loan guarantees; government
preferred equity possibly; insurance
or transferrable trust funds).
Requires more in-depth negotiation
between public agencies and private
projects and investors on specific
risk-oriented instruments.
System performance guarantees
remain a crucial mechanism, which
may require public sector support for
early projects.
Enough support to enable financing.
Built around tax policy
or feed-in tariffs.
Engages parliaments
and regulatory agencies
Engages parliaments and
requires training with
energy and regulatory
agencies (federal, local)
44
Climate change: Glacial retreat, less snow threatens water supplies
45
ETHZ: The Evolution of the Rhone glacier from 1850 until today.
1850 2010
ADP: Jungfrau Glacier in central Switzerland, July 2012. Calif. drought threatens water supply for cities, agriculture.
UNEP Glacier
Monitoring Program
http://www.geo.uzh.ch/micro
site/wgms/
http://ossfoundation.us/projects/environment/global-warming/natural-cycle
Not just the global air-shed, but regional watersheds are being stressed… future wars?
Calif: the “Golden
Brown state”
Strategic Option: Co-Production (Fuels + Power) with CCS
Investment Analysis:
• Co-production plants provide BOTH fuels
and power, offering better economics … if
oil is >€60 or $80.
• Provides a higher value export than
electricity with development dividends.
• Offers strategic national value by
expanding domestic supply.
• Carbon capture is performed to make the
fuels. Power is generated from heat
recapture to steam turbines.
• Burning syngas (H2 + CO) is an economic
reversal – why burn valuable inventory ?
• Some risks are higher: such as capital
cost recovery, and complexity of
operations, CCS liability.
• But, some risks are lower, e.g., ability to
stockpile production, access to broader
market than a dedicated power plant.
46
Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7
http://www.climatevision.gov/pdfs/Co-Production_Report.pdf
Strategic Option: Co-Production (Fuels + Power) with CCS
47
Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7
For a 32,500 bbls per day plant ($3.7B with financing costs and CC&C). Using 18,000 tons per day of bituminous coal
(or 33.600 tons of lignite). Carbon capture would be operating 90% of the time at an effective level of 80%. Electricity
co-production was sold at $58/MWh with a 19% IRR allowed to fund a 70/30 debt / equity structure.
The model entails use of 8 gasifier trains for lignite (6 gasifiers for bituminous coal), rotating O&M to optimize run time.
Incentives modeled include grants, tax subsidies for capital and for operations, plus government loan guarantees.
A most effective combination: an early stage grant ($200M), plus a loan and excise tax based on carbon capture, with
EOR (of $12/ton). Off-take agreements or rate-basing of the electricity also improve the credit profile of the project.
Strategic Option: Co-Production (Fuels + Power) with CCS
48
Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7
… or you can just burn the Coal
49
Mere combustion is easiest, but fails to provide many strategic options.
Countries can pursue combustion and gasification in parallel.
50
Approach to Business Case Framework
Energy
Project
Development
Timeline
Risk Analysis
of Project
Development
Stages
Rating and
Ranking of
Risks by
Stages
Evaluation,
Application
of Risk
Mitigation
Mechanisms
Fossil projects with CCS cannot
complete financing without a
comprehensive commercial risk
analysis by creditors with debt
financing.
Deployment = debt financing.
[credit risk framework]
$
$
Design & Development
Engineering &Construction
Operations &Maintenance
CloseFinancing
Permitting
and profit
possible
downtime
Regulatory and policy risks
Technical and operating risks
Market risks
$
$
Design & Development
Engineering &Construction
Operations &Maintenance
CloseFinancing
Permitting
and profit
possible
downtime
$
$
Design & Development
Engineering &Construction
Operations &Maintenance
CloseFinancing
Permitting
Revenues and profit
possible
downtime
Regulatory and policy risksRegulatory and policy risks
Technical and operating risksTechnology and operating risks
Market risksMarket and Financial risks
Debt Financing Drives the Framework, not Equity or Venture Capital
Risks Mitigation Approaches Actions Needed
Risk Type Key Risks1) Tech-CCS Capital cost with CCS too high
2) Reg-CCS State rules on CCS not clear
3) …
4) …
Analysis based on Interviews of key actors:
(results of Risk Study)
C) Government
Actions needed
for Mitigation
(Match actions with
mechanisms)
Near-term / Long-term
• Appropriations
• Legislation
• Tax bill
• Regulation
• Agency action
• Executive order
• Reserves (e.g., SPRO)
• Others
B) Mitigation
Mechanisms
Government
• Loan guarantees
• Grants (by DOE, etc.)
• Tax subsidies
• Injection regulations
• Permitting approaches
• Carbon emission rules
• Federal “Energy Bank”
• LT purchase contracts
Industry / Investors
• Insurance / bonding
• Engineering backups
• Long-term contracts
• Site review, feasibility
• Collateral, backup supply
CCS Alliance Scope:
I) Risk Study for CCS Deployment (coal power plants or energy projects with CCS)
II) Legal research on critical issues, risks and formulation of mitigation options
30 Respondents 25 point scale
Category (Q#) Specific Risk
Rated
Severity Relative Value
ALL (34 Qs) Overall Average 10.2 Average
Tech - CCS 7. Capital costs for carbon capture equipment (>50% capture) impair
financing of a new plant. 17.1 High
Policy 18. National policies lack sufficient incentives (loans, tax measures) for first-
of-a-kind plants.16.2 High
Policy - CCS 13. Uncertainty about EPA carbon emission regulations and CCS hampers
permitting on new plant.15.9 High
Policy - CCS 19. National policies (e.g., tax credits) lack sufficient incentives for
sequestration of carbon.15.6 High
Policy - CCS 17. Regional, state policies fail to provide sufficient clarity about CCS
requirements and liability.15.2 High
Policy - CCS 15. Value of (eventual) carbon emission allowances does not adequately
cover costs of CCS.13.9 Above Avg.
Market-CCS 31. EPA regulations on underground injection of CO2 and liability fail to
offer clarity for financing.13.4 Above Avg.
Market-CCS 34. Prospect of liability for long-term leakage of CO2 from CCS threatens
new plant financing.13.3 Above Avg.
Market 28. Financing of new plant proves difficult (e.g., debt tenors too short, more
equity required).13.3 Above Avg.
Market-CCS 33. Revenues from the sale of CO2 (e.g., for EOR) are not adequate to
cover costs of CCS.12.9 Above Avg.
Policy - CCS 16. Regional, state policies fail to provide sufficient incentives to support
plant economics with CCS.12.9 Above Avg.
Market-CCS 27. Market rates or state PUC approved rates do not offer sufficient
recovery of CCS costs.12.8 Above Avg.
Market 23. Current conventional coal plants are allowed to run longer, curbing
demand for new plants.9.7 Average
Tech - CCS 9. The site for CCS could suffer a significant technical failure and more
than minor leakage occurs.7.3 Below Avg
Tech - CCS 11. Transportation of CO2 for CCS proves difficult logistically (e.g., transit
path too long)7.0 Below Avg
Market-CCS 32. Transport costs of CO2 become more costly after new plant is
operating, threatening run time.6.1 Low
Market 24. Natural gas prices drift and stay lower (<$4/MBtu), making the plant
with CCS uncompetitive.5.3 Low
A) Commercial
Risk Analysis
51
Rating Respondents: Sophisticated on CCS Issues
Gasification Technologies Council
Conoco Phillips
GE
Siemens
Air Liquide
Chevron
Excelsior Energy (IPP)
Worley Parsons
CH2M Hill
Burns & McDonnell
Potomac-Hudson Engineering
Oglethorpe Energy
Eastman Chemical
e3Gasification
ZeroGen (Australia)
Arkansas Electric Coop Corp.
National Rural Electric Coop Assoc.
Minnkota Power Coop
Pace Energy Consultants
IEA GHG R&D Programme (London)
Hensley Energy
EPRI
World Coal Institute (WCI)
ICO2N (Canada)
Natural Resources Defense Council
World Resources Institute
Imperial College of London
MIT
U.S. Dept. of Energy (Fossil Energy)
New Energy Finance
52
0.0 5.0 10.0 15.0 20.0 25.0
High capital cost (w/o CCS)
High labor/operating cost
Excessive downtime, repairs
High cost of basic materials
Constrained EPC capacity
Accident damages plant
Capital costs on CCS high
CCS equipment downtime
CCS site technical failure
"Thin" EPC system warranty
Transport of CO2 difficult
Rating of Risks (probability x impact)
Risk Ratings: TECHNICAL
Deploying CCS creates a large drain on plant production, so capital costs run much higher.
Capital costs spiraled higher
since 2005, but costs are up
for all energy projects.
Respondents expect that
CCS equipment will work,
and do not see CO2
transport as a major issue,
nor do they see a storage
site failure as likely with
sound site characterization.
CAPITAL COST is the major
issue (including parasitic
load for CCS compression),
not operating costs.
average
30 respondents
CCS related
Interesting
“lows”
Spring 2008
53
0.0 5.0 10.0 15.0 20.0 25.0
State air permitting delays
Uncertain EPA carbon regs
Future carbon limits tighter
CO2 allowances don't fund CCS
Regional support lags on plants
State regs on CCS not clear
Nat'l subsidies lag on plants
Nat'l incentives for CCS lacking
Water use regs tightened
Rating of Risks (probability x impact)
Risk Ratings: REGULATORY / POLICY
Regulatory uncertainties (federal + state) about CCS costs and liability threaten financing.
averageOvercoming higher costs is
essential but not enough.
Subsidies are needed.
Regulatory uncertainties
pose “show stopper risks”:
- Carbon legislation and EPA
performance standards are
not defined.
- State regs are not clear
enough yet to resolve CCS
cost and liability issues.
- Incentives are not in place
to offset CCS costs.
A tightening of water regs
needs to be monitored.
30 respondents
CCS related
Interesting
“lows”
Spring 2008
54
0.0 5.0 10.0 15.0 20.0 25.0
Long-term demand falls short
Coal transport erosion, hitches
Old, cheap coal units run longer
NGas prices decline (<$4/Mbtu)
Coal prices rise markedly
Interest rates rise (to 2012)
Market/PUC rates low for CCS
Finance difficult (equity, terms)
Transmission congestion
Customers breach off-take
EPA regs unclear on CCS
Transport of CO2 expensive
EOR revenue inadequate for CCS
CCS liability threatens financing
Rating of Risks (probability x impact)
Risk Ratings: MARKET & FINANCE
Lack of subsidies and uncertainty about liability for CCS make financing very difficult.
Low natural gas prices in some regions also make energy with CCS less competitive.
“First mover” risks on early
plants are prohibitive for
owner utilities, bond
holders, or PUCs; and
engineering firms cannot
economically offer enough
warranty (or “wrap”) to
cover risks feasibly.
EOR / EGR is not readily
available in all regions, or
volumes are not adequate
to offset costs of carbon
capture and storage.
Clarity is needed on CCS
liability to close financing.
average
30 respondents
CCS related
Interesting
“lows”
Spring 2008
55
Overview of Business Case Critical Risks
# Risk Type Business Case Risk Description EU N.Am Asia
1 Tech Capital costs (+ parasitic load) with CCS run too high relative to competing baseload High High High
2 Policy Electricity rate regulation fails to offer dispatch preference or incentives for CCS High High High
3 Mkt / Fin Credit financing constraints result in difficult terms (more equity, short debt tenor) High High Med
4 Policy Uncertain regulation on CO2 emissions results in low economic value for CCS Low High High
5 Mkt / Fin Natural gas prices remain lower making coal with CCS uneconomic Med High Med
6 Policy Incentives for CCS operations (allowances, tax credits) are inadequate for costs Med Med High
7 Mkt / Fin Volatility of (or lack of) carbon allowance prices hinders financing Med High Low
8 Policy Water use regulations threaten coal plant operations with CCS (shutdowns) Med Med Med
9 Policy Lack of clarity about liability for long-term stewardship of CCS hinders financing Low High Low
10 Mkt / Fin Long-term demand growth fails to justify investment in baseload units High Low Low
11 Tech Technical performance problems lead to excessive repairs and downtime Med Med Low
12 Policy Older coal units are allowed to run longer posing competitive challenges Low Med Low
13 Mkt / Fin Imported coal prices rise or see more volatility raising costs Med Low Low
14 Tech Transport of CO2 proves too costly or logistically difficult Med Low Low
15 Policy Lack of public recognition or acceptance of value of CCS hinders permitting Med Low Low
16 Tech Injection and storage encounters operating problems triggering higher costs Med Low Low
17 Mkt / Fin Interest rates rise threatening financing terms and costs Low Low Low
Some of the risks vary based on the market and policy differences by region; other risks are common across regions.
56
Example: U.S. Risk Ratings on CCS
Concerns about capital costs remain high, primarily because of parasitic load.
Low NGas prices (<$6/MBtu) since late 2008 pose larger competitive problems.
Subsidies are needed to overcome higher costs, but that is not enough.
(e.g., “Boucher bill” proposes to pay for subsidies with a wires charge on coal, fossil fuels)
Regulatory uncertainties pose “show stopper” risks for deployment of CCS:
U.S. EPA regulatory rules (UIC) on CCS are not defined, but are in process.
The outlook for GHG/carbon emission legislation is more uncertain despite passage of the
House bill… in other words; more questions about rule-makings were raised !
But, without a cap of some form, utility commissioners face little prudence to consider CCS.
State regulations are not clear enough yet to fully resolve CCS cost and liability issues.
Incentives (tax credits, loans, allowances) are not enough to offset higher CCS costs.
A tightening of water regulations does not appear to pose much of a risk, but monitor this.
“First mover” risks are prohibitive for owner utilities, bondholders, or PUCs; and
engineering firms cannot economically offer enough warranty (or “wrap”) to cover
risks. Few owners want to finance early CCS demos and plants.
Respondents expect that CCS equipment will work, and do not see CO2 transport as
a showstopper issue, nor do they see a CCS site failure as likely.
Clarity is needed on CCS liability to close financing – perhaps a “showstopper”.
Increases in coal prices or transport costs were not rated high risks.
57
Current Landscape: Challenges to Financing
The credit crisis deeply damaged project finance (no balance sheet), but at
least interest rates are low… for now.
Imported energy aggravates trade deficits and currency instability.
The fossil price roller coaster in 2008 increases revenue uncertainties, and a
reversal in oil and gas investment could trigger more volatility.
Volatile revenues (market prices) make debt financing extremely difficult.(and carbon trading increases volatility of energy pricing, compared to more stable tax policies).
Many alternative technologies have not achieved scale yet.
Intermittent nature of some renewable energy options poses physical limits
Conventional fossil-based sources wield a vast, already depreciated capital
investment advantage – but face expansion problems.
Regional differences on energy are severe, further fragmenting markets
State budgets are in deficit and will not rebound soon, hampering options.
The depth of the federal deficit demands that some subsidies be repaid.
Financing domestic-based energy resources is one of the best hedges a
country can make.
58
Commercial Scale Projects with CCS: Key Elements
Risk Analysis rooted in Project Structure
59
Public Sector
Policies
Mitigation Mechanisms vs. Critical Commercial Risks
60
Governments wield a variety of tools or mechanisms for mitigating critical risks. Subsidies cost the treasury more,
whereas, permitting preferences or liability coverage may address other risks more directly. In North America some
mechanisms are carried out at the state level (e.g., rate boosts or permitting) more than at the federal level.
World Coal Reserves
End of Cheap Coal, Nature 18 Nov 2010
USA and Russia wield the greatest
reserves, followed by China. Those
three countries account for nearly
60% of total reserves, but China is
the leading producer and consumer,
by far now with > 3 billion tons a year.
Australia is the leading exporter,
primarily to Asia.
South America has minimal reserves.
Unlike oil and gas, no new
reserves of coal are expected
to be discovered… but we
know where the coal is.
61
Current annual consumption
= 7 billion tonnes
Why Coal?: Reliable supply, we know where it is, high energy density, not explosive.
Global Capital Markets awash in Capital
5
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