Risk Analysis for Projects with CCSFactors Affecting Financing for Early Plants
CCS Alliance for Risk-based Policyin collaboration with Hunton & Williams
www.ccsalliance.net
Co-Author
Maria Dubravka Pineda, Ph.D.
CCS Alliance
Washington, DC
202-460-8269
Presented by:
Andrew Paterson
CCS Alliance
Washington, DC
619-807-3267
World Bank Balkans Workshop
Dubrovnik
3-5 May 2011
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.
2
What if ? (dealing with politics in N.America)
3
World Bank Workshop on Projects with CCS – Dubrovnik (May 2011)
4
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.
5
Current annual consumption
= 7 billion tonnes
Why Coal?: Reliable supply, we know where it is, high energy density, not explosive.
World Coal Production (without China), 2000 – 2010
Source:
EIA
Global coal production is only rising in Asia, and other countries feeding the appetite in Asia: Australia, Indonesia,
and then India for its own consumption. Production is declining in Europe, particularly as gas becomes more available.
China is projected to consume more than 3 billion tons of coal in 2011, rising at 2%-5% a year.
6
EU consumption declining in favor of gas
Higher
production
feeding
growth in
Asia.
Population Growth a Key Factor in Policy Differences
7
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
Fossil Signal: Tories (blue) Roll to Majority (May 2011)
8
• Tory PM Harper got his
majority, 167 seats total,
a gain of 21 (308 total),
seen as “pro-fossil fuels”.
• The NDP (102) are now
the official opposition.
• The bloc Quebecois were
reduced to 4 seats (from
48) and no longer have
official party status.
• The Liberals lost a vast
number of seats (-43,
down to 34), except in
some Atlantic areas.
• The Green party kept 1
seat (Elizabeth May won
in her riding in Victoria)
http://www.theglobeandmail.com/news/politics/election-results/
Harper, the PM from Calgary SW, remains committed to fossil fuels for N.America.
Initial “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 the Balkans 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.
9
EIA International Energy Outlook 2010 (base case)
The world remains dependent on Fossil Fuels through 2050 (liquids, coal, gas)
Coal remains an expanding portion of energy supply through 2030 (Asia, OECD).
Coal
(Asian growth)
We cannot conserve our way to lower GHG emissions. Energy use is rising, demanding investment.
Rising renewables, but
just to feed new demand,
rather than replace fossil.
Nuclear will hold current
share (with new plants).
10
Also Benefaction: Improve Values of Coal (>50%)
11
K-Fuel®upgrading technology processes low
quality sub-bituminous coal resulting in:
• Higher energy value –Demonstrated to
increase the efficiency and heating value of
sub-bituminous, lignite and brown coals by
30% on average, accomplished by decreasing
equilibrium moisture content by 50%
• Higher economic value –Allows product to
compete with bituminous coals and makes low
rank coal marketable
• Physically and chemically stable product –
Handled/transported as the feed coal
• Reduced transport costs –Reduced moisture
content can lead to lower transportation costs
• More environmentally friendly product –
More efficient burning could lead to lower
carbon emissions, and in particular reduced
Hg, SO2and NOx
The consequence is that a significantly large
number of low quality, high moisture coal deposits
worldwide become economically viable and more
environmentally friendly K-Fuel® is a patented coal technology which upgrades low value sub-bituminous,
lignite and brown coals to high ranking thermal coal quality, for example from
3,500kcal/kg (~6,300BTU/lb) to 5,650kcal/kg (~10,200BTU/lb)
Coal-based Electricity for Europe
12
Lignite and Coal Production
13
Lignite and Coal Production, SE Europe
14
Balkan Overview: Vital Statistics
15
(comparison) Total Estimated Estimated
Greece Balkan Albania Bosnia Croatia Macedonia Serbia Montenegro Kosovo
Population 2010 11.00 23.82 3.00 4.60 4.50 2.00 7.30 0.62 1.80
GDP 2010 (PPP) $306 $243 $23.30 $30.40 $77.70 $19.50 $82.70 $4.10 $5.30
GDP per capita $27,850 $10,202 $7,400 $6,600 $17,330 $9,400 $11,360 $6,600 $2,940
GDP per capita (to Greece) 100% 37% 27% 24% 62% 34% 41% 24% 11%
Sovereign credit rating BB ?? B B B CCC ?? ??
Energy use (000 bbls/day) 414 292 36 26 106 18 90 4 12
Electricity Consumed
(billion KWh)58.3 84.7 6.6 10.8 18.0 8.2 34.1 3.0 4.0
Electricity use per capita 5,300 3,556 2,200 2,348 4,000 4,100 4,671 4,839 2,222
Coal usage (electricity) 50% 45% 3% 60% 5% 70% 65% 30% 50%
Coal power (billion KWh) 29.2 38.4 0.2 6.5 0.9 5.7 22.2 0.9 2.0
% Total of Coal Power 100% 1% 17% 2% 15% 58% 2% 5%
Credit quality is intensifying as issue driving finance going forward.
Key Industrial Sites and Hot Spots
16
http://maps.grida.no/index.cfm?ev
ent=searchFree&q=Macedonia
WorldBank Balkans Workshop -- notes
• EU offering funding subsidy from New Entrants Reserve (NER 300)
• 22 projects applied (18 in power mode; 4 industrial)
• Damir Pušet: “Capital likes growing markets” (emerging vs. developed)
― In Balkans, 60% of space heating, cooking, is electric (vs gas)
― Old age of plants and networks, many losses
― “Concerns for energy supply are highly expressed.”
― Prices too low – still need to recognize socialization of energy
― Significant potential for wind, biomass, energy efficiency
― Electricity gap causes need for imports, upgrades
― Significant crude refining base already [useful for C-T-L]
― Pipeline connectivity is needed to realize potential for export
― Energy sector itself cannot resolve political / policy challenges
17
CSLF Structure
POLICY GROUP
Chair: United States
Vice Chair: United Kingdom
Vice Chair: South Africa
TECHNICAL GROUP
Chair: Norway
Vice Chair: Australia
Vice Chair: South Africa
CSLF
SecretariatTask ForcesTask Forces
CSLF Technical Group Reviews Progress of Collaborative Projects
and Identifies Promising Directions for Research• Projects Interaction and Review Team (Australia chair)
• Risk Assessment Task Force (United States chair)
• CCS in Academic Community Task Force (Brazil chair)
18
CCS Alliance has been supporting the CSLF Finance Task Force
Opening Observations for CSLF Finance Roundtable
1. Energy use cannot be curbed as much as GHG emissions by 2030; so,
carbon management (CCS) enables more efficient use of fossil fuels.
2. Commercial plants and projects with CCS are not being built (except with
EOR) for several reasons: not just elevated costs, but higher risks also.
3. Subsidies are NOT enough to get plants built; market uncertainties and
emissions regulations and subsurface rules must be addressed as well.
4. The inherent size of projects with CCS requires debt financing, not venture
capital; therefore, predictable cash flow (debt service) is the top issue.
5. Dealing with just some elevated costs and higher risks of first plants
will not promote commercial deployment. Financing industrial plants
is like a rocket launch: all risks must be addressed.
6. Stove-piping of power, energy and chemicals hinder best use of a broader
industrial base with varying access to capital to deploy CCS.
7. A more resilient 21stC industrial base can be built, by drawing on broader
industrial experience and engineering know-how. Bridging the commercial
gap entails more industrial cross-uses and joint ventures.
(Drilling technology in oil sector to power plant CCS; gasification from chemicals to power)
19
CSLF Financing Roundtable
6 April 2010, Washington, DC
Photo, B.Frois, Chairman
Landscape for Investment in Energy Projects
Difficult Challenges
Tight credit globally, with stiff
competition for investment
Cheap fossil fuels (natural gas), with
E&P subsidies still intact
High uncertainty about GHG policy
Severe fiscal deficits (local, federal)
Unclear regulatory permitting in some
areas and sectors
Lack of technology operating
performance for many innovations
Cheap, old coal plants still running
(competition for new supply)
Major Opportunities
• Historically low interest rates
• Reduced volatility in market prices with
by reducing imports of feedstock
• Tech pathways exist to fix large GHG
sources by adopting alternatives
• Modernization of industrial base toward a
lower fossil use profile (engineering)
• International cooperation (public and
private) needed to accelerate progress
• Local economic development
• Alternative fuel diversification with
broader domestic utilization provides
better energy security
21
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.
22
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
23
Societe Generale: Financing Challenges
24
25
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
26
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
27
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
28
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
29
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
30
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.
31
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.
32
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.
33
Commercial Scale Projects with CCS: Key Elements
Risk Analysis rooted in Project Structure
34
Public Sector
Policies
Mitigation Mechanisms vs. Critical Commercial Risks
35
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.
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)
36
Public Private Partnerships are not easy…
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)
38
Policy Response Uncertainties (in supply and demand)
Renewables will not offset new demand, let alone replace old capacity.
End-use energy efficiency will be difficult because consumers don’t tolerate price
increases well and change behavior slowly (in NAFTA).
Transmission costs and resistance will hinder renewables (wind, solar) somewhat.
Biomass power and fuels face local and regional supply challenges.
Off-shore wind is proving more expensive and riskier (more maintenance, etc.).
Not all the nuclear reactors needed for carbon savings can be built physically.
“Electricity competition” (or liberalization) is proving difficult.
Access to shale gas bounty faces some regulatory hurdles.
Will Russia make investments needed to deliver gas to EU (or to Asia) ?
Rotating the vehicle fleet takes 30+ years; consumer acceptance is difficult to gauge.
Retooling takes decades and auto makers face substantial credit constraints to
manufacture plug-in hybrids.
Urban planning and new traffic infrastructure will take two generations.
State and federal financing capacities are under severe strain.
39
Balkans: Need for Development >> GHG Savings
• Balkan countries are more than 50% below EU-15 in energy use
• Holding them to a 1990 baseline of energy use stifles development
IDEA: Give Balkan and other transition economies a 1990 baseline of
EU-15 per capita energy and electric consumption
• Allows more flexibility in modernizing energy and electric sectors
• Enables use of more efficient, better performing technologies
• More modern infrastructure is ultimately more efficient for EU-35…
• Also allows investments to be more competitive in longer term
• Could bolster regional “resilience” to energy supply disruptions
• Improves value of EU-wide connectivity (electric, pipelines, supply)
• Provides superior employment and development options
40
Discussion
41
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.
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Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7
http://www.climatevision.gov/pdfs/Co-Production_Report.pdf
Concerns about Future Oil Supply Remain
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?
Expanding need for liquid fuel supply (LDC growth), plus EOR…
Strategic Option: Co-Production (Fuels + Power) with CCS
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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
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Joint study led by U.S. DOE with DOD, EPRI, U.S. EPA, 2006-7
Value of Gasification (CTL)
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Gasification is more costly, but provides more strategic / economic values.
SASOL: Healthy Business Model on CTL
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SASOL remains one of the leading enterprises for coal conversion, and is doing well financially.
Revenues have run up to $16B annually, and the enterprise value has risen to $30B.
… or you can just burn the Coal
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Mere combustion is easiest, but fails to provide many strategic options.
Countries can pursue combustion and gasification in parallel.
Balkan Coal Profiles
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World Bank Workshop on Projects with CCS – Dubrovnik (May 2011)
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Serbia
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Bosnia
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Greece
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Business Case: Key Financing Factors
Essential “Business Case” Term Sheet elements to address financing include:
1) Strong customer profile for revenues, say, in the form of stable wholesale energy markets,
or of creditworthy industrial off-takers, possibly even with rate guarantees (power projects).
2) Long-term agreements for feedstock or vital supplies, preferably with multiple sources, or
other sources of stability of supply commensurate with the state of the host energy market
3) Technology systems with demonstration and performance data at larger scale
4) An experienced EPC / engineering contractor identified, ideally engaged with incentives
5) Well-detailed construction and project baseline schedule and budget to contain overruns
6) Site control for both the commercial plant and the CCS operations
7) Competitive economics and good debt coverage for given debt with additional subsidies
(feed-in tariffs, tax credits, repayment options, etc.) and regional development impact
8) Equity backing already engaged, supplemented with public sector investment subsidies
9) Advantageous site features with evidence of community support and government backing
10) Project permitting initiated (air, water, land use, storage etc.) with a clear track for
approvals, and pollutant savings with a clear methodology accepted by regulators
11) Insurance for critical events and force majeure incidents and first losses on CCS activities
12) Capable management team with a track record in sector at scale for such projects.
Balkans
??
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