1.8 CCS business case

1.8.1 What is the business case for CCS?

The application of CCS has been undertaken at commercial scales in the natural gas processing and EOR industries. A viable business case for commercial scale, integrated projects has not been established at this time for coal-fired power generation and other large CO2 emitting industries. Without policies and legislation to assign a value to CO2 or to compel large stationary emitters to reduce CO2 emissions to atmosphere, industry has limited incentive to install CCS facilities.

A viable business case for commercial scale, integrated projects has not been established at this time for coal-fired power generation and other large CO2 emitting industries

First-of-a-kind CCS plants inherently tend to have higher costs arising from greater risks in terms of finding and appraising a storage site, transport, financing, design integration and environmental licensing. In addition, the uncertainty surrounding the potential economic value of CO2 has caused project proponents to be unable to identify potential long-term revenue streams. As a consequence, this has delayed investment decisions in CCS.

There are current developments that are considering the business case of collecting CO2 from multiple emitters and transporting the CO2 through a large trunkline. This is being considered in an attempt to gain economies of scale from transporting and storing large quantities of CO2. However, this model may incur higher risks as it requires all proponents to commit to a project simultaneously which is highly unlikely.

Natural gas processing plants where CO2 removal is an inherent part of the process offer excellent opportunities to demonstrate CCS. The integration of all elements of the CCS chain is mature and represents minimal additional investment for the capture plant. However, there are no commercial scale, integrated CCS projects for coal-fired power generation in operation today.

What could make the business case work in the G8 timeframe for commercial scale, integrated CCS projects is the “field of dreams” or the “build it and they will come” option - this involves governments working in partnership with industry and the community to develop, finance and build common user transport and storage infrastructure

The attraction of offshore storage is obvious for geographically small nations with maritime borders but as stated previously, these are likely to incur significantly higher costs compared to onshore CO2 transport and storage. These proponents are likely to need significant public assistance to finance these activities.

What could make the business case work in the G8 timeframe for commercial scale, integrated CCS projects is the “field of dreams” or the “build it and they will come” option. This involves governments working in partnership with industry and the community to develop, finance and build common user transport and storage infrastructure.

These would take advantage of the economies of scale from larger capacity pipelines and storage sites and may also minimise public opposition by concentrating infrastructure development in designated easements.

1.8.2 What has been the impact of the Global Financial Crisis on the business case for CCS?

In the post Global Financial Crisis (GFC) environment the financing of infrastructure assets are likely to face serious challenges in securing private equity funds. The perceived higher risk of infrastructure assets involving CCS means that they are likely to face extraordinary challenges to secure private capital. As a result, government investments will be crucial to assist technology deployment to meet the G8 objectives.

A significant commercial gap exists in financing CCS projects from private capital markets. This challenge is likely to face all CCS projects irrespective of capture, transport and storage technologies even prior to the GFC. In a post GFC market, CCS projects are likely to face extraordinary challenges to securing capital from private markets.

At present, with the impact of the GFC, there is some market intelligence that suggest that costs for key inputs such as materials and labour that would be involved in constructing CCS projects has softened. However, given the rapid change of the global economic system arising from the GFC there is a high degree of uncertainty on the scale and the longevity of these cost decreases. Indeed, the implementation of government stimulatory packages and their potential effect of boosting infrastructure development could result in these returning to pre-GFC levels.

The GFC has had a substantial impact on the pricing of debt, which in turn has impacted the overall cost of funding for infrastructure projects.

The GFC has renewed lenders’ focus on the credit worthiness of borrowers. Most infrastructure transactions now require a credit rating, even small transactions and investment grade ratings have become more difficult to obtain. As a result of these factors it is highly unlikely that CCS project proponents will be able to finance their projects from private capital markets alone.

As a result of the GFC, it is highly unlikely that CCS project proponents will be able to finance their projects from private capital markets alone