Domestic and International Policy Dynamics for CCUS Deployment: Factors Affecting Financing for Early Plants

CCS Alliance for Risk-based Policyin collaboration with Hunton & Williams

www.ccsalliance.net

Presented by:

Andrew Paterson

CCSAlliance.net

Washington, DC

571-308-5845

[email protected]

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

http://gas2.org/2013/08/13/wireless-charging-powers-south-koreas-electric-buses/

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”

http://www.geo.uzh.ch/microsite/wgms/

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

http://www.climatevision.gov/pdfs/Co-Production_Report.pdf


47


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.


48


… 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

$

$




CloseFinancing

Permitting

and profit

possible

downtime

$

$




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


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


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

Documents

Domestic and International Policy Dynamics for CCUS Deployment: Factors Affecting Financing for Early Plants