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Rocket to the moon?Carbon capture may be a shining hope for the low-carbon future. But opinion is divided on how best to incentivise industry to pilot it, or promote its widespread adoption. Jess McCabe reportsCarbon capture and storage (CCS) offers a beguiling vision of the future for fossil fuel-dependent industries, in which they might consign to history their reputation as big polluters. But CCS is still an experimental technology – or rather bundle of technologies – which has yet to be proven at scale. So what incentives will be needed to get the first CCS plants up and running and, further into the future, to promote their widespread adoption? To effect CCS, power plants and other big emitters would install a second plant alongside the main emissions source. These plants would collect carbon dioxide (CO2) and other emissions, preventing them from being released into the atmosphere, using technology such as pre-combustion separation of CO2, already used in the fertiliser industry, postcombustion CO2 capture or the oxyfuel process, which involves burning the fuel in pure oxygen and is still in the pilot stage of development.
The waste gases would then be compressed and pumped deep underground, into geological formations such as saline aquifers or, potentially, exhausted oil and gas fields, to be stored for thousands of years. Industry estimates that CCS could capture 85–95% of CO2 emissions from a coalfired power plant, potentially making it a key tool in international efforts to tackle global warming. The Intergovernmental Panel on Climate Change (IPCC) endorsed the use of CCS earlier this year, while Nicholas Stern concluded that it will be a crucial technology in his influential 2006 report on the economics of climate change for the UK government. According to an IPCC report, injection of CO2 under the sea bed is still at the research phase, while pre- and post-combustion capture of the gas has passed the research and demonstration phases and is now “economically feasible under specific conditions”. The IPCC also estimates that installing CCS at a coal-fired power plant would raise the cost of generating power from four to five US cents per kilowatt hour, to between six and 10 cents/kWh – meaning that CCS could double the cost of producing electricity from coal in the worst case, or increase it by one third in the best case. If the captured gas is used for enhanced oil recovery, extra revenue earned would reduce the overall cost to five to eight cents/kWh. But no power plant or other facility has yet installed a full CCS system.And there lies the challenge. “It’s a bit like the difference between knowing you can launch a rocket into orbit and sending a rocket to the moon,” says Phil Hare, director of the consultancy Poyry, which compiled a report on the cost of CCS for the UK government. “The market needs some proof that it works at full scale and it’s a long way from doing that at the moment.” The first stage, industry and governments agree, is to get a number of demonstration plants up and running at scale. As the investments required for these plants edge close to the billion-dollar mark, and there are a variety of technologies to test, this first step presents a tough challenge. In the US, the main CCS initiative is FutureGen, a collaboration between industry and the US Department of Energy. The FutureGen Alliance plans to get a full-scale plant in operation by 2012.The $1 billion project is being financed partly by the 12 members of the alliance, who will contribute a total of $400 million over the lifetime of the project, and partly by the US government. Mike Mudd is chief executive of the FutureGen Alliance, which includes mining firms Anglo American, Rio Tinto, Xstrata Coal and Consol Energy, as well as China Huaneng Group, the country’s largest power generator. Before taking on this role, Mudd served as manager of generation technologies and technology development at American Electric Power, a utility which sources its electricity from coal-fired power plants. And he cautions against pushing too hard at the moment: “What type of a financial incentive would be required to convince us to invest in CCS? It’s a very huge figure.”
Tax credits or other incentives that cover only the capital cost of building CCS plants will not be enough, he warns, because the energy needed to run those plants is likely to reduce the overall efficiency of a coal-fired power station by 20–35%.The expense will be “almost as much as the cost of coal itself”, he says, and yet he asks: “Is it reasonable to expect the financial incentives to be covered by the government?” On the other side of the Atlantic, the European Commission has expressed its ambition of getting between 10 and 12 plants up and running in the EU by 2015. Speaking at a conference in Berlin in March, Peter Zapfel, EU Emissions Trading Scheme (ETS) co-ordinator at the Commission, said it is working on CCS and will come forward with proposals in the second half of 2007. Different member states have different initiatives. In the UK, the government is planning a competition that it hopes will lead to the first large-scale demonstration plant – although both the rules and the prize are yet to be determined. In Norway, where Statoil is developing some of the most advanced plans for full-scale CCS plants in the world, the stimulus has come from a carbon tax on offshore oil and gas operators. Meanwhile, in Australia, one of the initiatives intended to boost technologies that lower emissions is the clean coal levy in Queensland, under which coal companies voluntarily contribute to a fund which is expected to reach A$1 billion over the next 10 years. The premier of Queensland, Peter Beattie, has said he wants the money to be spent on cleaner-coal demonstration projects, which could include CCS. Business has also taken a leading role. BP and Rio Tinto have launched a joint venture, Hydrogen Energy, to develop hydrogen fuelled power generation projects using CCS. But all this effort focuses on the immediate problem of getting those first power plants up and running using CCS technology. What about the long-term goal?
Most industry observers agree that the EU ETS – and other emissions trading schemes yet to come – are likely to play a significant role in driving adoption. Europe’s Union of the Electricity Industry – Eurelectric – published a position paper in June arguing that CCS “when commercially viable, should be deployed rapidly by relying on market-based instruments, with the main incentive provided by the EU ETS”. Adam Whitmore, director in the economic consulting team at Deloitte, says: “Emissions trading is helpful – and especially helpful if you get tighter, longer and credible caps – but it is unlikely to be enough for the foreseeable future at what most people expect carbon prices to be.” Whitmore adds: “CCS, thermal solar, PV [photovolataics]. None of these are viable at the EU [allowance] price we have now. Unless we actually use some other mechanisms to get costs down, these technologies won’t come online fast enough.” Estimates on the price that carbon will have to reach in order to trigger investment in CCS by big emitters vary, from around €30 ($ 40.9) a tonne of CO2 to more than €80/t. One oil industry insider tells Environmental Finance that the figure is likely to be “higher than the general numbers you are hearing”. But even if prices on the EU ETS rocket up to €80 a tonne – up from €21 for 2008 allowances in early July – there is no guarantee that emitters will build CCS. Heleen Groenenberg, from the Energy Research Centre of the Netherlands (ECN), says: “There are cheaper abatement options available. [If the price of carbon on the EU ETS rises], CCS may become more affordable, but other technologies will become more attractive as well.” Jeff Chapman, chief executive of the UK based Carbon Capture and Storage Association (CCSA), argues that emissions trading will currently not be enough.“The EU ETS as a support mechanism is completely un-bankable,” he argues.This is partly an issue of timing – it is unlikely any projects will come to fruition much before the end of Phase II of the scheme, in 2012, and the rules for Phase III are yet to be established. Moreover, the regulation is not yet in place for carbon capture via CCS to be counted towards emissions reductions. “If you want to invest a billion pounds of capital, you have to have a form of secure return for the capital you are spending,” says Chapman. Michel Myhre-Nielsen, CO2 business development manager at Statoil New Energy, agrees. “You will need some other methods than a pure market mechanism,” he says. “It won’t be enough to affect CCS being deployed on a large scale in the initial phase.” Instead, he argues, more generous incentives will be needed, at least in the early stages of the technology’s development.The industry is “not even close to getting a profit with today’s incentives or cost of energy or cost of CO2”, he points out. Statoil’s planned CCS plant at Mongstad is only going ahead with substantial financing directly from the Norwegian government. Under one suggestion, says Mark Lewis, an analyst at Deutsche Bank in London, the revenue due to be generated in Phase II of the EU ETS, when member states begin to switch from free allocation of emissions allowances to the increasing use of auctioning, could be used to subsidise development of CCS directly.
Even the Commission is not betting all its chips on CCS. Zapfel argues that it will not be a disaster if CCS “doesn’t work”, because the EU has chosen a market-based mechanism to reduce GHGs. So, if coal-fired plants are built on the expectation that they will retrofit CCS systems, but it turns out the costs are higher than expected, the consequences are simple – there will be a greater scarcity of carbon allowances in the market, a higher carbon price and therefore more incentives to reduce emissions elsewhere. But even if the EU ETS is able to stimulate CCS development in Europe, what about the rest of the world – in particular China and India, where rising emissions are causing international concern? Some suggest that the answer lies with a souped-up version of the Clean Development Mechanism, under which firms can develop projects that cut emissions in the developing world in exchange for carbon credits that can be counted towards industrial or country caps on emissions. But, according to the World Bank report, State and Trends of the Carbon Market 2007, the weighted average price for primary carbon credits under the CDM was €8.40 a tonne in 2007, well below the levels needed to finance a CCS project. In addition, Gerhard Mulder, an emissions trading specialist at investment bank ABN Amro, questions whether the CDM is the right vehicle for addressing the issues of liability that go with CCS, or whether it could provide an adequate regulatory framework for making it work. So what are the other options? Some suggest it could be possible to model a financial incentive on the UK’s Renewables Obligation, which requires electricity suppliers to source a percentage of their supply from renewable sources, using tradable certificates. But Chapman from the CCSA is not in favour of this model. “I don’t think it’s a good idea because the obligation shouldn’t be on electricity produced.What you need to do is to make your incentive on tonnes of CO2 abated,” he says. Any such incentive for CCS risks falling foul of the problems that have arisen when governments try to encourage a particular technology, Chapman argues. For example, by simply requiring the use of CCS – rather than setting a target for tonnes of CO2 abated – governments would have to set a standard for a minimum of CO2 captured. Although industry guesses the technology could capture 95% of emissions, governments would likely have to set the standard lower, at for example, 85%. “That 10% is the most expensive 10% to collect,” Chapman points out, so generators would be unlikely to exceed that minimum amount. But direct subsidies from government are also problematic, he says.“Capital grants have never been any use to anybody. I don’t think the Commission would ever allow capital grants anyway [under state aid rules].” Instead, Chapman advocates a type of carbon contract – with the government allowing generators to bid for a government contract which would secure them a stable income from CO2 saved using CCS.This could well be the model that the UK government chooses to use in its planned CCS competition, and then replicates in the long term once CCS has passed the demonstration stage. Others, such as Scott Deatherage, a partner at the law firm Thompson & Knight in Dallas, argue for low-interest government bonds – along the same lines as war bonds.“We could probably structure it as a loan, subsidy or competition,” says Deatherage. But should regulation play a role? Most CCS observers seem to agree that it is too early to mandate installation of the technology, or even require new power plants to be ‘CCS-ready’ – as it is still unclear which capture technology will prevail in the market. But, argues Groenenberg from ECN, it may well be the only way to encourage takeup in the long term. “There’s obviously going to be a lot of protest from industry,” she acknowledges. “And there are certainly problems to address to do with member states that have very limited storage capacity.” Additional financial incentives could be put in place, she suggests, but they are unlikely to promote cost reductions or technology improvements. Regulation may be the only answer.
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