3. Framework for CCS
A carbon price or equivalent mechanism will have a positive impact on the economics of CCS.
For CCS from power generation, a strong carbon price and improved capture costs will be required to make CCS viable. Initial CCS demonstration projects for power generation will require public funding in addition to any carbon price that is likely to prevail in the near-term.
For CCS from natural gas processing (low cost capture), current carbon prices under schemes such as theEmissions Trading Scheme are not far short of the level necessary to trigger CCS.
It is generally agreed that CCS is an essential component of a portfolio of technologies and other measures to reduceemissions. Despite this long term requirement for CCS, it is currently only commercially viable for gas processing and EOR-supported projects and remains some way off commercial viability for the power generation, steel and cement industries.
Applying CCS technology to industrial processes imposes additional capital and operating cost penalties when compared to the same process without CCS. The viability of these CCS technologies depends on the existence of either a sufficiently strong price signal or a regulatory obligation or both. The initial demonstration projects will also require substantial public funding to overcome the first-of-a-kind cost and competitive disadvantage. A high-level description of the possible commercial framework applying to CCS is given below.
3.1 No pricing of CO2 and no regulatory obligation
At present, in most countries outside Europe, CO2 emissions do not incur a cost and there are no regulatory obligations to capture and store CO2. In the absence of either a price signal or a regulatory obligation there are very limited drivers for private companies to invest in a process that does not give defined benefit and only serves to increase their cost base and reduce competitiveness.
There are potentially CO2 reuse technologies (such as EOR) which will facilitate and support CCS projects becoming commercially viable, whilst also providing long term storage. It is therefore possible that some capture and long term storage of CO2 will emerge (and has already been implemented) based heavily on commercial drivers. However, CCS already implemented due to commercial drivers has relied on CO2 sources where capture costs are low when compared to the forecast costs for capture from power generation.
CCS reduces CO2 emissions vented to the atmosphere. This creates a cost saving where the emission source is covered under an emissions trading scheme such as the European Union Emissions Trading Scheme (EU ETS), and provided the cost of CCS is less than the price penalty imposed on emissions.
The sources covered under an ETS are typically large point sources with material CO2 emissions. For example, thecovers around 11,000 installations in power generation and other industries (oil refineries, coke ovens, iron and steel plants, factories making cement, glass, lime, brick, ceramics, pulp and paper). From 2012, the EU ETS will also include civil aviation, and from 2013 it will include manufacturing of aluminium and certain basic chemicals.
Most other ETS’s in place or under development have a similar focus on large point sources of CO2 emissions. In addition, some countries (such as Norway) have used domestic taxes that have a similar impact to an ETS through pricing CO2 emissions.
Where a point source is covered under an ETS (or a tax) the viability of CCS depends on the benefits of reduced CO2 emissions in comparison with the cost of CCS technologies. In simple terms, if it is cheaper to capture and store than to emit CO2, then CCS technologies should be viable.
In most cases where CO2 is priced the price remains too low to make CCS technologies viable at their current stage of development. This is particularly true of power generation with CCS due to the relatively high costs of capture.
Current estimates of the cost per tonne of CO2 avoided are given in thefoundation report Economic Assessment of Carbon Capture and Storage Technologies (2011 Update). The cost per tonne of CO2 avoided is based on comparison against a reference plant for the same product. The analysis shows the following costs per tonne of CO2 avoided, once the relevant technology is mature (and so Nth-of-a-Kind or NOAK costs):
- US$44 to US$103 for power generation technologies. Post-combustion technologies, the dominant current technology, has costs in the range US$57 to US$78.
- US$49 for cement and US$49 for steel production.
- US$20 for fertiliser production and US$19 for natural gas processing.
The EU ETS is currently the largest and most liquid carbon market. The price under the EU ETS has been volatile and is currently around EUR15/tonne (US$18 based on a foreign exchange rate or EUR1 = US$1.2). This indicates that CCS costs for power generation are well in excess of carbon prices currently or in the near future.
This analysis also suggests that CCS for natural gas processing and fertiliser production will be closer to viability if these processes are covered under an ETS or some other mechanism for pricing emissions. Sleipner and Snohvit provide examples of installing and operating CCS in response to price signals on the cost of CO2 emission, although in this case a tax rather than the EU ETS.
The evidence is therefore that pricing of CO2 emissions can have a positive impact but is currently unlikely to be sufficient to provide incentive for widespread incorporation of CCS within power generation, steel making and cement making unless there is a significant increase in carbon prices and/or a reduction in CCS costs.
3.2.1 Regulatory obligations to capture and store CO2
In addition to price signals under an ETS, it is possible to impose CCS obligations through mechanisms such as planning consents, major project approvals, operating licences and other mechanisms.
Compliance with a regulatory obligation will also impose significant capital and operating costs. The impact of imposing these additional costs will depend on the viability of the project:
- In some cases the benefits will justify the additional costs of complying with CCS regulations and the project will proceed. A recent example is the Gorgon project in Western Australia. The significant revenues associated with natural gas production from the Gorgon field mean that the project appears to remain viable with the additional costs associated with incorporating CCS. As noted, the additional costs for natural gas processing are lower than for power generation, increasing the prospects of viability. In other cases the impact of regulatory obligations may mean that projects do not proceed. For example, the UK Government has introduced an obligation that new coal-fired power generation include CCS for sent-out capacity of 300 MW. This will only be commercially viable if coal-fired generation with CCS is competitive against the costs of other generation technologies such as (unabated) CCGT, nuclear and renewable generation.
The evidence shows that regulatory requirements can either promote CCS, where the project remains viable when these costs are included, or defer or prevent projects when the project is not viable when the costs of complying with regulation are included.
3.2.2 Summary of present position
Experience to date indicates that in the absence of substantial public funding, large scale demonstration of CCS is likely to be restricted to projects analogous to those already in operation – that is where low cost CO2 sources such as gas processing can be combined with storage that yields some kind of benefit such as EOR. High cost sources such as the capture of CO2 from power generation and steel making are unlikely to be commercially viable under current conditions where:
- price signals are either non-existent or too low to cover the full costs of power and industrial CCS; and, or
- regulatory mechanisms may prevent the development of unabated technologies but in many cases will not make CCS viable in competition with other technologies which do not bear similar cost penalties.
This conclusion is also reflected in other recent studies. For example, the IEA report states:
“A financial gap exists as a result of the additional costs for CCS above a conventional plant being higher than the revenue from the relevant market plus the additional benefit from CO2 reduction. This gap will decline as experience with the technology increases resulting in cost reduction, and as the revenue from the relevant market and the benefit for CO2 reduction increases.”5
In summary, the principle impediment in the adoption of CCS for power generation, steel and cement making is the present high cost of capture. However, the adoption of CCS regarding gas processing and fertiliser production appears more favourable, given the lower capture costs.
5 IEA/CSLF report to the Muskoka 2010 Summit, page 7