Financing

Funding for CCS projects comes from a wide variety of private and public sector sources as shown in Table 7.

TABLE 7 Potential CCS funding sources

PUBLIC Grants.
Tax credits.
Loan guarantees.
Concessional equity.
Concessional debt.
PRIVATE Sponsor equity.
Institutional equity (infrastructure funds, superannuation funds, pension funds etc.).
Sponsor debt (balance sheet financing).
Commercial debt.
MULTI-LATERAL AGENCIES AND EXPORT CREDIT AGENCIES Concessional debt.
Credit guarantees.

As CCS moves towards commercialisation it is expected that increasing amounts of funding will be sourced as institutional equity and commercial bank debt. However, at the development stage a customised and sophisticated mixture of public, private, and multi-lateral funding sources will often be required.

Of the 16 CCS projects that have reached financial close, raising finance is more problematic for the high-cost, low CO2 concentration projects.

Where private sector financing has been committed to-date for power sector CCS projects like Kemper County and Boundary Dam, it has typically been via equity and/or debt contributions from the key project sponsors. Such balance sheet financing will be limited by the appetite and ability of such sponsors (mainly major utility companies) to contribute a significant proportion of their capital budgets to an activity which may not currently deliver a financial return commensurate with the risks of project development.

Since the current public funding programs for CCS require private sector finance through cost sharing, the lack of ability to raise debt at the project level provides a significant barrier to the roll-out of CCS.

The ability of CCS projects (as opposed to project sponsors) to access debt markets has been affected by the lasting impacts of the GFC as well as the BASEL III capital and liquidity requirements.

The GFC severely affected the global financial system, constraining the availability of capital and significantly increasing the relative cost of borrowing for lower rated credits, particularly for those customers who are not considered to be ‘investment grade’. The ongoing economic uncertainty stemming from Europe in 2012 will continue to impact financial markets, reinforcing bank risk aversion and preference for higher rated borrowers Figure 32 and Figure 33 show bank lending volumes in Europe and the US for non-investment grade borrowers.

FIGURE 32 Bank lending volumes in Europe for non-investment grade borrowers

Source: ThompsonONE.

Note: Shaded period represents GFC. *2012 figure annualised based on data in first two quarters.

FIGURE 33 Bank lending volumes in the US for non-investment grade borrowers

Source: ThompsonONE.

Note: Shaded period represents GFC. *2012 figure annualised based on data in first two quarters.

Both diagrams show the strong fall in volumes during the period of the GFC. They also show some recovery in lending volumes for 2011, but volumes still remain significantly below the levels achieved immediately before the GFC.

This increased bank risk aversion has a number of implications for the financing market for CCS demonstration projects.

  1. CCS projects during the demonstration phase will struggle to raise non-recourse or limited-recourse project finance. Financiers will favour those projects that have been able to significantly de-risk their construction and operation activities.
  2. Capital grants of 30–50 per cent of the capital costs of the CCS component of a project are not enough in isolation. Neither sponsor funds nor bank debt will fund the remaining cost unless a project can be made commercial – which will require revenues from CO2 utilisation and/or some type of operating period support (e.g. long-term PPA, FIT, operating period subsidy etc.).
  3. Even projects that can access the debt markets may find that debt availability from commercial banks is insufficient to meet the funding needs of their project.

A number of projects are attempting to plug the capital gap remaining after grant funding and debt availability by:

  • seeking debt at concessional lending rates from multilateral developments banks like the EIB and Asian Development Bank (ADB); and
  • seeking support from export credit agencies – which can drive technology selection and project structuring decisions to ensure project eligibility.

However, funding remains a key barrier for the development of CCS projects.