CCS Alliance for Risk-based Policy

in collaboration with Hunton & Williams

www.ccsalliance.net

Domestic and International

Policy Dynamics for CCUS Deployment
Factors Affecting Financing for Early Plants
Bumingham, AL
8 June 2015

Presented by:
Andrew Paterson
CCSAlliance.net
Washington, DC
571-308-5845
adpaterson@gmail.com
1

Background: CCS Alliance

www.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 EPAs 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

CSLF Structure
CCS Alliance has been supporting the CSLF Finance Task Force

POLICY GROUP
Chair: United States
Vice Chair: United Kingdom

TECHNICAL GROUP

Vice Chair: K.S.Arabia

Chair: Norway
Vice Chair: Australia
Vice Chair: K.S.Arabia

Task Forces

CSLF
Secretariat

Task 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

Energy Demand 20 years from now

Largest cities by 2030 concentrated in Asia

Only Japan is
losing population

BLOOMBERG
Sept. 9, 2014

www.bloomberg.com/infographics/2014-09-09/global-megacities-by-2030.html

21st Century: Urbanization drives demand in Asia

Where do I put
a wind turbine
or solar panel ?

Seoul

Population Density in Asia, 2012

Solar Intensity in Asia not near cities

No matter the cost for solar panels or efficiency, PV requires sunlight.

The other reason solar doesnt work well in Beijing

Forbidden City?

Jan. 2015
PM 2.5

NASA photo

Measured at US Embassy, Beijing

Beijing AIR-POCALYPSE, Jan. 2013: 750+

10

UN: Another 2 billion in cities by 2040 (6b)

Now

Another 2 billion by 2040

11

UN: Another 2 billion in cities by 2040 (6b total )

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

3b
1b

US: 80 urban areas >500k

http://esa.un.org/unpd/wup/Highlights/WUP2014-Highlights.pdf

12

Powering Mega-cities a Major Driver in 21stC. (2030)

Massive growth in Asian mega-cities continues to drive demand for nuclear.

13

What about Energy Poverty in cities?

Migration: Arrival City Story of 21st Century

Cairo

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 worlds cities will add another 3.1 billion people.
http://dougsaunders.net/2011/06/egypt-china-usa-rural-immigration/

Mumbai
Bangkok

14

Wireless Advanced Vehicle Electrification: City Buses

Wireless charging extends
range of electric bus batteries

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-chargingpowers-south-koreas-electric-buses/

WAVE companys 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.
http://www.waveipt.com/portfolio
15

Not just National Security Urban Reliability

Key issue: Urban Reliability, What power source?

Tokyo
New York

Rural India

Paris

Shanghai
Mumbai
Seoul

16

EIA: Projected Electricity Generation by Fuel in

Developing Countries to 2040 [NOT OECD]
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

COAL

India

Nuclear

17

State-owned Enterprises earn higher credit ratings

Moody's assigns A3 rating to China General Nuclear Power Co
Global 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 powergeneration 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.

18

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

N. Am

?
?

Asia ?

?
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)
Cheap coal prices (<$2-$3/mBtu)
Oil above $80 with steady outlook (like 2013-14)
Electricity prices (>12c/KWh) with incentive for CO2 savings

N
Yes
Was
N

Yes
Yes
EnSec*

Yes

Or 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)
State takes long-term (>30 years) liability for CO2 leakage

N
?

?
Yes
21

SASOL: Whats up (down) with that?

S&P 500
CVX

SASOL

BTU

22

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

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)

Interest rates remain low globally;

lots of capital worldwide
Growth is highest in large coal
users: China, India

Expectations running low for COP21

What could come of US-China
bilateral GHG accord?
Whither EPA Clean Power Plan ?
23

EIA (AEO 2015): Oil Price Scenarios

$200

$70

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.

24

EIA (AEO 2015): N.Gas Price Scenarios

$8

$4/mBtu

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.

25

Sudden Oil Price Slump Strands Investments

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

26

Oil Price (2003-15), Major events

27

US Coal Capacity impact of EPA Air Toxics Rules

Source: Bloomberg
April 2015

http://www.bloomberg.com/graphics/2015-coal-plants/

28

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.

$30 Trillion by 2030

$13.6 T

$6.3 T

$5.5 T

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

Global
Financial
Crisis

Slow
Recovery

31

Climate Bonds but very few in Poorest Places

Sovereign credit support by USA via Development banks might be one approach

<$8B of $346B to Development bank climate finance

HSBC: http://www.climatebonds.net/wp-content/uploads/2013/08/Bonds_Climate_Change_2013_A4.pdf

32

What if ? (dealing with politics in N.America)

33

Senate, July 2010: Climate Bill Shelved

(passed House in 2009)

The same summer as the massive

Deepwater Horizon oil spill blowout (!)

New York Times

34

USA, EU CO2 Emissions peaked in 2005; China, ROW rising

Progress in curbing
carbon emissions
since 2005 in OECD:

Growth in future CO2 emissions is

completely dominated by China and
Developing Countries now.

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

N.Am peak
emissions

2000

2010

2020

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.

without
climate
legislation

35

UN Conference of Parties Failing

2009

COP 19: Green groups walk

out of UN climate talks
COP 18 wrap-up: weak Doha outcome underlines
importance of clean revolution leadership
Date10 December 2012

Environment and development groups protest

at slow speed and lack of ambition at Warsaw
negotiations (2013)

COP 18 was another major disappointment

www.theguardian.com/

36

Carbon footprint of the Great Divergence (Pomeranz)

But, Climate impact is based on Cumulative Fossil Emissions

CDIAC.org http://petrolog.typepad.com/climate_change/2010/01/cumulative-emissions-of-co2.html

37

Population Growth a Key Factor in Policy Differences

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.

EU-27

NAFTA
EU-15

USA

Russia

Mexico

Japan

Canada

38

Demographics a Driver for Energy, Water use

39

Global Political Economy and Regional Resources

Pomeranz: Potential for conflict [over water resources] is gigantic.

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.

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

http://japanfocus.org/-kenneth-pomeranz/3195
40

Energy, Resources vital to Stabilization

Aug 2014)

Philippines (2013)

Pakistan floods (2010)

Yazidi refugees (Iraq 2014)
41

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 nations coal resources cannot be recreated, therefore,
garnering more value from coal enhances the nations 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

Finance Roundtable Dialog

Public-Private Funding Models: Key Elements

Government

Trigger points
for mobilizing capital

Industry & Investors

GHG policy
Siting regulations
Performance Standards

Property investment
Feedstock & infrastructure
Monetizing cost / benefit

R&D / Tech cooperation

Demonstration & FEED

Engineering & Innovation

System integration
Training, education

Monetary incentives

Debt / Equity financing

Insurance; trust funds
Market presence

- Tax measures, FITs

- Allowances
- Green bonds

Energy/Elec. rates
Reliable energy from
secure supply with
environmental
stewardship

FUNDING MODELS
- Public utility
- Private project
- Hybrids others

CSLF
(IEA, G20,
other forums)
43

Public Private Partnerships (PPP) Evolve

PPP 1.0: Subsidies

PPP 2.0: Subsidies +

PPP 3.0: Risk-based Subsidies

Regulatory Reform

+ Regulatory Reform, Negotiated

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.

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.

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

Not just the global air-shed, but regional watersheds are being stressed future wars?

Climate change: Glacial retreat, less snow threatens water supplies

UNEP Glacier
Monitoring Program

1850

2010

http://www.geo.uzh.ch/micro
site/wgms/

http://ossfoundation.us/projects/environment/global-warming/natural-cycle
ETHZ: The Evolution of the Rhone glacier from 1850 until today.
Calif: the Golden
Brown state

ADP: Jungfrau Glacier in central Switzerland, July 2012.

Calif. drought threatens water supply for cities, agriculture.

45

Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7

Strategic Option:

Co-Production (Fuels + Power) with CCS

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

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

Strategic Option:

Co-Production (Fuels + Power) with CCS

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.
47

Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7

Strategic Option:

Co-Production (Fuels + Power) with CCS

48

 or you can just burn the Coal

Mere combustion is easiest, but fails to provide many strategic options.
Countries can pursue combustion and gasification in parallel.

49

Debt Financing Drives the Framework, not Equity or Venture Capital

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

Regulatory and policy risks

Fossil projects with CCS cannot
complete financing without a
comprehensive commercial risk
analysis by creditors with debt
financing.

Deployment = debt financing.

[credit risk framework]

Technical and
Technology
and
operating
operating
risks
risks
Market risks
and Financial risks

$
Close
Financing

possible
downtime

Revenues
and profit

Permitting
$
Design &
Development

Engineering &
Construction

Operations &
Maintenance
50

Risks Mitigation Approaches Actions Needed

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

A) Commercial
Risk Analysis
Risk Type

B) Mitigation
Mechanisms

Key Risks

1) 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)
30 Respondents
Category
ALL (34 Qs)
Tech - CCS
Policy
Policy - CCS
Policy - CCS
Policy - CCS
Policy - CCS
Market-CCS
Market-CCS
Market
Market-CCS
Policy - CCS
Market-CCS

Market
Tech - CCS
Tech - CCS
Market-CCS
Market

(Q#) Specific Risk

Overall Average
7. Capital costs for carbon capture equipment (>50% capture) impair
financing of a new plant.
18. National policies lack sufficient incentives (loans, tax measures) for firstof-a-kind plants.
13. Uncertainty about EPA carbon emission regulations and CCS hampers
permitting on new plant.
19. National policies (e.g., tax credits) lack sufficient incentives for
sequestration of carbon.
17. Regional, state policies fail to provide sufficient clarity about CCS
requirements and liability.
15. Value of (eventual) carbon emission allowances does not adequately
cover costs of CCS.
31. EPA regulations on underground injection of CO2 and liability fail to
offer clarity for financing.
34. Prospect of liability for long-term leakage of CO2 from CCS threatens
new plant financing.
28. Financing of new plant proves difficult (e.g., debt tenors too short, more
equity required).
33. Revenues from the sale of CO2 (e.g., for EOR) are not adequate to
cover costs of CCS.
16. Regional, state policies fail to provide sufficient incentives to support
plant economics with CCS.
27. Market rates or state PUC approved rates do not offer sufficient
recovery of CCS costs.
23. Current conventional coal plants are allowed to run longer, curbing
demand for new plants.
9. The site for CCS could suffer a significant technical failure and more
than minor leakage occurs.
11. Transportation of CO2 for CCS proves difficult logistically (e.g., transit
path too long)
32. Transport costs of CO2 become more costly after new plant is
operating, threatening run time.
24. Natural gas prices drift and stay lower (<$4/MBtu), making the plant
with CCS uncompetitive.

25 point scale
Rated
Severity
10.2

Relative Value
Average

17.1

High

16.2

High

15.9

High

15.6

High

15.2

High

13.9

Above Avg.

13.4

Above Avg.

13.3

Above Avg.

13.3

Above Avg.

12.9

Above Avg.

12.9

Above Avg.

12.8

Above Avg.

9.7

Average

7.3

Below Avg

7.0

Below Avg

6.1

Low

5.3

Low

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

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

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

Spring 2008

Risk Ratings: TECHNICAL

Deploying CCS creates a large drain on plant production, so capital costs run much higher.
Interesting
lows

Rating of Risks (probability x impact)

0.0

5.0

10.0

15.0

High capital cost (w/o CCS)

High labor/operating cost

average
Excessive downtime, repairs
High cost of basic materials
Constrained EPC capacity
Accident damages plant

30 respondents
20.0

25.0

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 costs on CCS high

CCS equipment downtime
CCS site technical failure

CAPITAL COST is the major

issue (including parasitic
load for CCS compression),
not operating costs.

"Thin" EPC system warranty

Transport of CO2 difficult

CCS related

53

Spring 2008

Risk Ratings: REGULATORY / POLICY

Regulatory uncertainties (federal + state) about CCS costs and liability threaten financing.
Interesting
lows

Rating of Risks (probability x impact)

0.0
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

5.0

10.0

15.0

average

30 respondents
20.0

25.0

Overcoming 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.

Water use regs tightened

CCS related

54

Spring 2008

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.
Rating of Risks (probability x impact)

Interesting
lows

0.0

5.0

10.0

15.0

30 respondents
20.0

25.0

Long-term demand falls short

average
Coal transport erosion, hitches
Old, cheap coal units run longer
NGas prices decline (<$4/Mbtu)
Coal prices rise markedly
Interest rates rise (to 2012)

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.

Market/PUC rates low for CCS

Finance difficult (equity, terms)
Transmission congestion
Customers breach off-take

EOR / EGR is not readily

available in all regions, or
volumes are not adequate
to offset costs of carbon
capture and storage.

EPA regs unclear on CCS

Transport of CO2 expensive

Clarity is needed on CCS

liability to close financing.

EOR revenue inadequate for CCS

CCS liability threatens financing

CCS related

55

Overview of Business Case Critical Risks

Some of the risks vary based on the market and policy differences by region; other risks are common across regions.
#

Risk Type

Tech

Policy

Mkt / Fin

Policy

Mkt / Fin

Policy

Mkt / Fin

Business Case Risk Description

EU

N.Am

Asia

Capital costs (+ parasitic load) with CCS run too high relative to competing baseload

High

High

High

Electricity rate regulation fails to offer dispatch preference or incentives for CCS

High

High

High

Credit financing constraints result in difficult terms (more equity, short debt tenor)

High

High

Med

Uncertain regulation on CO2 emissions results in low economic value for CCS

Low

High

High

Natural gas prices remain lower making coal with CCS uneconomic

Med

High

Med

Incentives for CCS operations (allowances, tax credits) are inadequate for costs

Med

Med

High

Volatility of (or lack of) carbon allowance prices hinders financing

Med

High

Low

Policy

Water use regulations threaten coal plant operations with CCS (shutdowns)

Med

Med

Med

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

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

Risk Analysis rooted in Project Structure

Public Sector
Policies

Commercial Scale Projects with CCS: Key Elements

59

Mitigation Mechanisms vs. Critical Commercial Risks

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.

60

World Coal Reserves

Why Coal?: Reliable supply, we know where it is, high energy density, not explosive.

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.

Current annual consumption

= 7 billion tonnes
End of Cheap Coal, Nature 18 Nov 2010
61

Global Capital Markets awash in Capital