STATUS OF CCS DEMONSTRATION PROJECTS- NORTH

AMERICA

GLOBAL CCS INSTITUTE MEMBERS MEETING

ROTTERDAM, NETHERLANDSMAY 9, 2011

VICTOR K. DERFormer CSLF Policy Chair

Former USDOE Assistant Secretary for Fossil Energy (actg)

HOW CCS FIT INTO U.S. CLEAN

ENERGY STANDARDS • U.S. Administration Advocating a Clean Energy

Standard for Electricity of 80 % (GHG - Carbon emission-equivalent free) by 2035

• Big finds in Shale Gas =>Push for Natural Gas Combined Cycle as part of the portfolio. The most NGCC can contribute is 40% since it’s value is taken as 0.5 GHG content per unit energy.o That means, absent coal and/or gas with CCS,

nuclear and renewables will have to shoulder 60%--a tall order by 2035

• That is why CCS is considered a necessary part of the portfolio, whether it be CCS on coal or natural gas generation.

CURRENT CCS SITUATION IN U.S.• NO LEGISLATIVE CO2 MANDATE = TOUGH TO RATE BASE CCS

• EPA Underground Injection Code – Clean Water Act – Regional Class 2 Injection for EOR vs Class 6 Storage requirements

• EPA AIR EMISSIONS FOR GHG – issued in January 2011; working out details –perhaps in place by 2012; State of Texas law suit pending against EPA

• PROPOSED BILL IN SENATE FOR CLEAN ENERGY STANDARD ALIGNED WITH ADMINISTRATION PUSH FOR 80% CES BY 2035

• Projects that go forward will need to make it on the market demand for CO2 and other factors

• Absent a national mandate on carbon, some States may end up taking a lead role for CCS (e.g., California, Texas, etc.) , but for EOR--– CO2 demand creating a driver for capture.

Federal government ~$1.3 billion for CCS supporting studies and demo projects Clean Energy Dialogue with the United States

Alberta government $2B towards deployment of 4 projects by 2015 Groundbreaking CCS legislation:

- Assumption of long-term liability - Establishment of long-term stewardship fund- Address pore space ownership

Saskatchewan, British Columbia & Maritimes Approval of SaskPower’s $1.24B CCS project Advancement of several other large-scale CCS projects Study work to understand underground storage potential

CANADA: Important Steps Have Been Taken ( $4.5B Government Funds)

POLICY INCENTIVES FOR U.S. CCS

DEMOS

• TAX INCENTIVESo INVESTMENT TAX CREDIT –Secs 48A & 48B – limit

(~ 4GW)o PRODUCTION TAX CREDIT –Sec 45Q – limited to

75MM tonnes; $10 for EOR; $20 for Storageo FAVORABLE RECENT TREASURY PROCEDURAL

RULING ALLOWS “STACKING” BENEFITS (production credit now allowed for first 65% capture under 45Q requirement)

• LOAN GUARANTEES for gasification and combustion with CCS are funding limited thus far (Section 1703 of EPAct 2005)

• US DOE Demonstration Funding for CCS Power Demos:o Recovery Act ($800M + $1B for FutureGen 2.0)o Clean Coal Power Initiative- $600M from

Appropriations• Industrial CCS- pilot demos from Recovery Act

funding-$686M

• RECOVERY ACT- Industrial CC Utilization (CCUS) projects

DEPLOYMENT INCENTIVES

LIMITATIONS

• EVEN WITH TAX INCENTIVES, GOV’T DEMO FUNDING, AND LOAN GUARANTEES WHERE THEY EXIST, PROJECT MUST BE ECONOMICALLY VIABLE ON ITS OWN

• HURDLES:o LACK OF CARBON VALUATION LIMITS THESE TYPES OF PROJECTSo STATE REGULATORY RELUCTANT TO ALLOW R&D (ELECTRICITY

COST PREMIUM FOR DEMOS) INTO RATE BASE o LONG –TERM LIABILITY NOT ADDRESSED AT THE FEDERAL LEVEL–

SOME STATES MAY BE WILLING TO ACCEPT LIABIILITY WITH TERMS TO BE DETERMINED– TEXAS SEEMS TO BE A LEADER (SEES A BUSINESS IN CO2 STORAGE ALONG WITH EOR )

• MAJORITY OF THE CCS PROJECT MAKE USE OF CO2 FOR EOR APPLICATIONS.

STORAGE LIABILITY SITUATION IN

U.S.• CURRENT FOCUS ON LONG TERM LIABIILTY ON NATIONAL LEVEL

HAS COOLED - ABSENT A NATIONAL CARBON MANDATE

• PAST PROPOSALS ON LONG-TERM LIABILITY /INDEMNIFICATION INCLUDED:o An Industry proposal on capped pay-in fee with subsequent

hand-off of liability to government o Congressional draft legislation for indemnification of long-

term liability after post-closure stabilization for first 10 large scale CCS demos ( >1 MMT/YR) with a pay-in for risk coverage– monetizing storage risk

• INSURANCE INDUSTRY MAY COVER A LIMITED POST-OPERATIONAL PERIOD– BUT NEED TO COLLECT PREMIUMS DURING OPERATIONS

• EPA UIC REGS MANDATE NOMINAL 50-YEAR MONITORING IN POST OPERATIONS UNLESS CAN SHOW OTHERWISE A STABLE CO2 “PLUME”

• STATES (E.G., TEXAS) MAY WANT TO ASSUME LIABILITY – FOR REVENUES

Nine Major U.S. CCS Demonstration ProjectsLocation & Cost Share

HECACommercial Demo of AdvancedIGCC w/ Full Carbon Capture$2.840B – Total$404M – DOE

Summit TX Clean EnergyCommercial Demo of AdvancedIGCC w/ Full Carbon Capture$1.727B – Total$450M – DOE

AEPPost Combustion CO2 Capture$668M – Total$334M – DOE

Archer Daniels MidlandIndustrial Power & Ethanol$208M – Total$141M – DOE

NRGPost Combustion CO2 Capture$334M – Total$167M – DOE

Leucadia EnergyMethanol$436M – Total$261M – DOE

Air ProductsH2 Production$431M – Total$284M – DOE

Future Gen 2.0Oxy-combustion/Regional Repository$1.24B – Total$1B – DOE

Southern CompanyIGCC-Transport Gasifier w/Carbon Capture$2.880B – Total$293M – DOE

Total Cost: $10.7BDOE – $3.4 BNon-Federal – $7.3 B

These projects collectively will capture up 16 million TPY of CO2Source: U.S. DOE Office of Fossil Energy

STATUS AND DESCRIPTION OF CCS

DEMOS• SIX OF NINE U.S. AND ALL CANADIAN PROJECTS =

EOR; ALL AT >1MM CO2 TONNES/YR EXCEPT ONE

• SIX POWER CCS DEMOS IN U.S.: o FUTUREGEN 2.0 –OXYCOMBUSTION IN SALINE; o KEMPER- AIR-BLOWN IGCC WITH EOR; o AEP POST-COMBUSTION- SALINE; o HECA- OXYGEN-BLOWN IGCC - EOR; o TCEP- OXYGEN- BLOWN POLYGEN GASIFICATION-EOR; o NRG- POST-COMBUSTION-(400,000 TNS CO2/YR) -EOR

• THREE INDUSTRIAL CCS IN U.S. o ADM- ETHANOL POST-CAPTURE-SALINE; o LEUCADIA – METHANOL -POST CAPTURE - EOR; o AIR PRODUCTS- H2- SEPARATION - EOR

Canada’s CCS Projects

Project Location Project Type Volume

1. Shell Scotford Upgrader Edmonton, Alberta

• Bitumen Upgrader• Post- combustion amine solvent

• 1 Mt/yr • EOR & Sequestration

2. TransAlta Pioneer

Wabamum Lake, Alberta

• Coal-fired power plant• Post-combustion chilled ammonia

• 1 Mt/yr • EOR & Sequestration

3. Enhance Pipeline

Industrial Heartland,

Alberta (3 facilities)

• Large-scale CO2 pipeline

• CO2 from fertilizer plant & bitumen upgrader

• 1.7 Mt/yr initially• Pipeline for up to 14Mt • EOR

4. Swan Hills Synfuels

White Court, Alberta

• In-situ coal gasification • (syngass for 300MW of co-

generation)

• 1.3 Mt/yr • EOR

5. SaskPower Boundary Dam

Estevan, Saskatchewn

• Coal-fired electricity power plant• Post Combustion Amine

• 1 Mt/yr • EOR

6. Spectra Energy Fort Nelson, British Columbia

• Capture at a natural gas plant• 1 Mt/yr • EOR & Sequestration

FUNDING SOURCES FOR CCS

DEMOS• BALANCE VS OFF BALANCE SHEET PROJECT – DEPENDS ON

PROJECT ECONOMICS, RISK EXPOSURE, RATE BASING AND OPERATING REVENUE SOURCES; AND IF RECEIVE DOE GRANT FOR DEMO => TAXABILITY OF GRANT (US TAX CODE 118) IF NOT A CORPORATION VS LIMITED LIABILITY CORPORATION (LLC)

• DOE COST SHARE AND PARTNER EQUITY – DOE’S CONTRIBUTION DOESN’T DILUTE PROJECT EQUITY AND INCREASES LEVERAGING

• FINANCING FOR OFF-BALANCE SHEET – THOROUGH FINANCIAL DUE DILIGENCE, EQUITY CONTRIBUTION (“SKIN IN THE GAME”), ACCURATE COST ESTIMATION, RISK SHARING, OFF-TAKE AGREEMENTS STRUCTURE ARE A MUST FOR FINANCEABILITY EVEN WITH GOV’T LOAN GUARANTEES;

• TAX INCENTIVES CAN HELP EARLY-MOVERS IN A MERCHANT MARKET ABSENT A REGULATED RATE BASE ALLOWANCE

SOME U.S. EXPERIENCES AND LESSONS

LEARNED • Absent Carbon mandate, must base CCS projects on

project economics that meet risk and return with value products slate including CO2 and off-take agreements

• Engage the State early to solicit support on: o Long –term liability; o Site unitization plans and subsurface rights; o Work with state commissions, regulators,

legislators, public interest groups, and affected public

• Enlist support of environmental groups by showing the project advantages vs. the alternatives over the long term

• Locate CCS projects in communities willing to accept by offering economic, social and environmental benefits – DON’T GO WHERE YOU’RE NOT WANTED.

SOME U.S. EXPERIENCES AND LESSONS

LEARNED (continued)• Lock in feedstock supply agreements, off-takes

agreements for CO2 or other co-produced products (Gasification advantage), and rate-basing or Power Purchase Agreement in States with low-carbon or clean coal electricity portfolio (e.g., Calif., Illinois)

• Tightened, detailed cost-estimates , contingency management, and incentivize holding to schedule; go with reputation via use of world-class contractors (EPCs and A&Es, vendors)

• Allocate and manage risks among equity holders, suppliers, and financiers with proven technology components, securing warrantees and performance guarantees, and design for optimal availability for revenue and return.

• Engage stakeholders, and local community to answer the question: “What’s in it for me?” if you locate in my area.

SOME FINAL THOUGHTS ON FIRST

WAVE OF CCS DEMOS IN NORTH

AMERICA • DIFFICULT SITUATION ABSENT FEDERAL CARBON MANDATE• STATES AND PROVINCES ARE KEY TO HELPING FIRST CCS

DEMOS

• PROJECTS THAT MOVE FORWARD HAVE A VALUE PROPOSITION VIA CO2- EOR APPLICATIONS (6 OF THE 9 US DEMOS AND ALL CANADIAN DEMOS INVOLVE EOR) – A KEY TO EARLY ADOPTION OF CCS AND CCUS

• LESSONS LEARNED FROM PROJECTS ARE IMPORTANT TO IMPART (E.G., SECURIING RIGHTS/PERMITS; COMMUNITY, STATE REGULATORY SUPPORT)

• IN U.S. , CCS CAPACITY BUILDING IS OCCURRING AT THE STATE AND REGIONAL LEVELS, IE, CAPACITY BUILDING IS NOT JUST FOR DEVELOPING ECONOMIES ANYMORE!

• CCUS- A WAY TO VALUE CARBON AS A FEEDSTOCK FOR PRODUCTS

• FINDING FUNDING FOR NEXT GENERATION OF DEMOS WILL BE DIFFICULT