Carbon Capture & Storage (CCS) –supporting by carrots or sticks?8th Conference on Applied Infrastructure Research

10 October 2009

Jason Mann, Jens Perner, Christoph Riechmann

Key questions addressed

1. What are the specifics of CCS?

2. Why do politicians promote CCS?

3. What are the sticks and carrots?

4. What are the impacts?

● CCS Specifics

● Policy interest

● Sticks/carrots

● Conclusions

Carbon Capture and Storage (CCS) consists of…

Source: Economist, March 5th 2009, CO2CRC Online Image Library

1. Isolating carbon dioxide wherever it is produced in large quantities and compressing it (Capture)

2. Transporting it to a well-suited site (Transport)

3. And pumping it underground (Storage)

CCS Specifics

Capturing

~ 50%-70% of

extra costs

Transport

~5-25%

of extra costs

Storage

~10-25%

of extra costs

Transport & storage costs can vary significantly with site and transport distance!

…and there are major differences in cost estimates

● Questions of feasibility remain

● No leap in developments to date

● Higher up-front investment costs: about 30 to 70 % higher than for standard plants

● Higher operational costs especially due to Lower Efficiency: 8 to 10 %-points lower than without CCS

$150 per t CO2

US Department of Energy Website (Capture Costs)

Goal: <$10 per t CO2 in 2015

€35-45 per t CO2 in 2030Future

$100-300 per t CO2€60-90 per t CO2Current

McKinsey Report (10/2008)

US Department of Energy Website (Sequestration Costs)

CO2 abate-mentcosts

CCS Specifics

Only 85% to 90% of CO2 captured, CO2

cost incurred forthe remainder

CCS economics still a challenge…

Conclusions● CCS currently not viable

based on costs

● Extra-cost depend on fuel and investment costs and CO2 saving

● Specific CO2 abatementcosts□ lower for coal than for gas

□ lower for lignite than gas

● If built, CCS should be for baseload generation□ High fixed costs

□ Lower variable costs than the corresponding conventional plants (thanks to CO2 saving)

● Key Assumptions□ CO2 price 12.50 €/t

□ Coal price: 105 $/t (Cif ARA)

□ Gas price (GCV): 19 €/MWh (NGC)

□ Exchange rate: 1.40 $/€

□ No subsidisation of CCS plant

CCS Specifics

Indicative estimated long run marginal costs of power generation (2010)

0

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100

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500

100 500 1000 2000 3000 4000 5000 6000 7000 8000 8500

Load factor

LRM

C (€

/MW

h)

Hard CoalHard Coal CCS (IGCC)CCGTOCGTLignte CCS (IGCC)

h/a

● Specifics

● Policy interest

● Sticks/carrots

● Conclusions

Global CO2 targets drive political interest in CCS…

Decision rule:Keep temperature

change close to 2°CVery low <1% chance

of 4°C rise

Global emissions:Reduce 50% by 2050

and more by 2100

Burden sharing:Equal per capita

emissions imply 80% reduction for the

industrialised countries by 2050

G8 announcement

1990 2010 2015 2020 2050-20%-40% - 60 to 80%Current EU GHG reduction target

Tightened EU target If binding post-Kyoto agreement comes into force

Global CO2 targets drive emissionallowences in EU ETS

Policy Interest

Targets of EU ETS

● Reduction of GHG emissions in the EU ETS until 2020□ -21% without „post Kyoto“ agreement compared to 2005

□ Higher if „post Kyoto“ agreement comes into force

2008

2010

2012

2014

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2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

mt C

O2

Emission rights w/o CDM CDMs

Potential CO2 reductionpath (EU, power sector)

2013-2020: Phase with steep reduction targets in the power sector?

Long term: Other sectors contribute to a higher extent?

Source: Frontier scenario

CCS can be essential for reaching targets

Fossile Neubauten mit und ohne CCS

0

10,000

20,000

30,000

40,000

50,000

60,000

2008 2010 2015 2020 2025 2030 2040Jahr

MW

all_model

LIGNITE CCS

COAL CCS

LIGNITE w/o CCS

COAL w/o CCS

GAS w/o CCS

Erneuerbare Stromerzeugung in TWh und in % der Last

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2008 2010 2015 2020 2025 2030 2035 2040Jahr

TWh/

Jahr

0%

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30%

35%

40%

45%

50%

IT

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DK_W

PL

CZ

AT

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FR

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NL

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all_model

Erneuerbare Stromerzeugung in TWh und in % der Last

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600

800

1,000

1,200

2008 2010 2015 2020 2025 2030 2035 2040Jahr

TWh/

Jahr

0%

5%

10%

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20%

25%

30%

35%

40%

45%

50%

IT

PT

ES

GB

DK_W

PL

CZ

AT

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FR

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NL

DE

all_model

Back stop technologies…● …for low carbon power generation (plus

energy saving) in the long term essential for reaching CO2 targets

● Backstop technologies can be e.g.□ Renewables

□ Nuclear

□ CCS

CCS…● …expected not to be commercially

available before 2020-25

● However, after 2020/2025, CCS can be crucial for CO2 abatement

● Otherwise more nuclear (policy constraints) or more REN (costs?) needed - or non-compliance with targets

Potential power generation from renewables(based on policy announcements)

Capacity additions for fossil fuels w/o CCS

Source: Frontier assumptions and model simulations

CCS likely to beincreasingly

important

Significantincrease in

market share

Policy Interest

CCS may also have a limiting impact on CO2 prices and power prices

Jährliche CO2-Emissionen (ohne Einlagerung)

0

200

400

600

800

1,000

1,200

2008 2010 2015 2020 2025 2030 2040Jahr

t CO

2/Ja

hr

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CO2 PriceEstimator

Annual CO2 emmissions and CO2 pricesFalling CO2

emission pathCO2 price peak(restricted CCS)

CCS com. available

CCS…● …may be able to limit

CO2 and power prices after 2020-25

● CCS can become important especially if□ REN integration

turns out to be costly or technically difficult

□ Nuclear production is politically limited

Source: Frontier assumptions and model simulations

CCS as an „insurance“ against exploding CO2 prices

Policy Interest

Promotion of CCS has an option value…but are there really market failures?

R&D phase● High risks and high upfront

costs □ Technology and costs still

unproven

□ But: Is this a reason for publicpromotion?

● External effects / public goods character leads to free-ridership□ Test of political acceptance

□ Test of public acceptance

□ Test of technical feasibility

□ Test of large scale costs

● CO2 price reflects the economic benefit of CO2 abatement□ CO2 prices reflect emission

constraints

□ Benefit for CCS if stored CO2 isnot subject to allowancerequirements

● Market failure only if CO2 market is not working effectivelye.g. □ Politically driven CO2 price caps

□ Uncertain policy framework

Commercial phase

Focus in the political discussion

● Specifics

● Policy interest

● Sticks/carrots

● Conclusions

Policy can choose between sticks and carrots to promote CCS

Carrots

Sticks

Schemes● Subsidisation schemes

□ Upfront lump sum payment (fixed mn€)□ Capacity payment to generators per kW

(upfront or per year)□ Payments based on electricity production

(per kWh)□ Payments based on avoided CO2 emissions

(per avoided t CO2)

● Obligatory CCS e.g. from 2020/2025□ Only new plants vs. retrofit of old plants□ Only coal vs. all fossil fuels

Examples

● Schemes on EU level and in some EU member states (e.g. UK)

● Currently discussion about CCS readiness for new plants

Sticks/Carrots

1

2

Indicative estimated long run marginal costs of power generation (2010)

0

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100

150

200

250

300

350

400

450

500

100 500 1000 2000 3000 4000 5000 6000 7000 8000 8500

Load factor

LRM

C (€

/MW

h)

Hard Coal

Hard Coal CCS (IGCC)

CCGT

OCGT

Hard Coal CCS Subsidised(60% of variable costs)

Indicative estimated long run marginal costs of power generation (2010)

0

50

100

150

200

250

300

350

400

450

500

100 500 1000 2000 3000 4000 5000 6000 7000 8000 8500

Load factor

LRM

C (€

/MW

h)

Hard Coal

Hard Coal CCS (IGCC)

CCGT

OCGT

Hard Coal CCS Subsidised(80% of inv costs)

Lump sum support vs. output oriented support Lump sum & capacity payments● Current support schemes for

demonstration plants focus on lump sum payments or capacity payments (upfront)

● Risk that CCS plants would currently be used as mid or peak load (current CO2 price too low)

● Also less incentive to favour a technology with significant CO2 benefits

CCS maybecome

competetive in mid and peak

load

Energy related payments● Energy or output orientated schemes

would improve the competitiveness especially in base load

● Higher load factors of CCS than withoutsupport

● Also less incentive to favour a technology with significant CO2 benefits

CCS becomescompetetive in

base load

Sticks/Carrots1

How would markets and market participants beaffected by obligatory CCS (e.g. from 2020)?

2

CO2

New coal plants

● Potentially less investment in coal

+ old coal plants

● Potential shutdown of old plants

+ new gas plants

● No investment in new gas plants?

What is covered?

● No impact on emissions if CO2 caps are not adjusted downwards – otherwise only CO2 prices fall

● Dirigistic approach – risk of lower efficiency of CO2 abatement● Would the CO2-market (EU ETS) still make sense?

Generators

Mar

kets

● Higher incentive for R&D if early announcement of obligation

Sticks/Carrots

Power● Unambiguous

□ higher costs for fossil fuelled power plants - but which plant is „at the margin“ regarding LRMC in the reference case?

□ Lower CO2 prices (?) and impact on fuel prices (?)

Politics ● “Cheaper” than “carrots”

● Specifics

● Policy interest

● Sticks/carrots

● Conclusions

Conclusions

● Rely on the EU ETS! EU ETS can set the right incentives in the long term□ Requirement: no political intervention into CO2 prices

□ CCS would compete with other „back-stop“ technologies

● Develop the R&D optionMarket failure may justify support in the short/medium term

● Select an appropriate support scheme!Avoid capital grants (may be acceptable for single projects)

● Be careful with CCS obligation!Risk of reduced efficiency of CO2 abatement

● Use the EU ETS instead!Maintain competition among abatement technologies

Role of EU ETS

R&D subsidies

CCS obligation?

Appendix

CCS will only be technically and commerciallyavailable if further developed

Source: McKinsey Report, 2008

Phase in which CCS exhibits high upfront costsand external effects /public goods character•

Policy Interest

Major argument for political promotion

The EU currently discusses carrots for pilots

Carbon Capture and Storage Projects

Country ProjectEnvisaged

Community Contribution

CapacityCapture

Technology Storage Concept

Hürth 450 MW IGCC Saline Aquifer

Jänschwalde 500 MW Oxyfuel Oil/Gas Fields

Eemshaven 1200 MW IGCC Oil/Gas Fields

Rotterdam 1080 MW PC Oil/Gas Fields

Rotterdam 800 MW PC Oil/Gas Fields

Poland Belchatow €180m 858 MW PC Saline Aquifer

Spain Compostilla (Leon) €180m 500 MW Oxyfuel Saline Aquifer

Kingsnorth 800 MW PC Oil/Gas Fields

Longannet 3390 MW PC Saline Aquifer

Tilbury 1600 MW PC Oil/Gas Fields

Hatfield (Yorkshire) 900 MW IGCC Oil/Gas Fields

Italy Porto Tolle €100m 660 MW PC ?

France Florange €50m

Source: Jens fragen

Transport of CO2 from Industrial installation (steel plant) to underground storage (Saline Aquifer)

United Kingdom

Netherlands

Germany €180m

€180m

€180m

Financial stimulus package

EU ETS directive

Sticks/Carrots

● 300 million CO2 emission allowances for funding of clean energy demonstration projects including CCS projects.

● Allowances will be made available until 31 December 2015● Still open as to how the funding will be split between CCS projects and

other clean energy technologies (REN)

Source: EU Commission

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