A couple of months ago we spoke to Frank Pluta and Aymeric Chauveau about the basics of Carbon Capture Usage and Storage (CCUS) and the ways in which it could help progress energy transition (Read here).
Following a recent webinar on the progress being made across the CCUS universe, Aymeric joins Ivan Pavlovic and Yash Anand to take a deeper dive into this fast-growing industry and the key developments as it cements the role it can play in the global pathway to Net Zero.
In our previous article, we discussed how CCUS is necessary to reach net zero, what has prevented it from being more prominent than it is today?
CCUS initially emerged as a means to meet the needs of the oil and gas industry to remove CO2 from the natural gas and inject it to recover more oil. Diffusion across other heavy and emissive industries has indeed long faced a number of economic and regulatory challenges.
From an economic perspective, capture remains a costly technology to develop and depending on the technology employed and the underlying point source industry, it can range any where from USD 25 to over USD 100 per ton. The act of capturing the carbon itself is also energy intensive, which further increases costs. Once the Co2 is captured, to transport and store the Co2 you need the relevant infrastructure – again, another cost. The levelized costs of the full process from capture to final storage can range from USD 50 to over USD 250 per ton and these costs will only come down with standardization and economies of scale.
From an economic perspective, CCUS remains a costly technology to develop… yet incentives and supportive policy schemes are emerging across the globe and in combination with the rising cost of carbon are framing the supporting rationale for this much needed technology.
Aymeric Chauveau, Industry Banker, Energy Transition & Natural Resources
On top of this, you also have regulatory challenges. Historically, there has been a lack of proper carbon pricing signals, a lack of proper policy frameworks, and socially, it has been challenging to gain public acceptance with the perception of a new technology that might be too cost and energy intensive, with leakage risk, and potentially
triggering further carbon lock-in among emissive industries.
Yet, despite these challenges, supportive policy schemes are emerging across the globe and around 15 countries now have CCUS policies that go beyond simple R&D initiatives.
That sounds like very positive momentum, what is the driving mechanism behind this progress?
An increased level of climate awareness. Since 2018, we have seen an expansion of the variety of industries that make use of CCUS in their production processes – in addition to natural gas processing, many chemical processes are also making use of carbon capture. We expect to see further diversification to industries which are not capturing Co2 today, but for which it is the utmost importance – such as power generation, or steeland cement for which there are no immediate alternatives. Beyond this, we expect to see an emergence of ‘new’ areas, such as blue ammonia, blue hydrogen.
To put the size of the expansion into perspective, investment into CCUS is anticipated to reach USD 146bn by 2035, from USD 21bn in 2021.
Are there varied approaches to incentivizing the deployment of CCUS?
There are several frameworks that aim to respond to the key challenges in CCUS deployment – that generally can be classified into two categories – incentives or penalties.
To be fully supportive of the CCUS uptake, mechanisms must be deployed with a view to address the specific needs of each stage of the value chain: Carbon Capture, Transport & Storage (T&S), and utilization. Yet the challenges are in fact intertwined – carbon capture cannot be successful for example, without sufficient transport and storage capacity, but transport and storage costs will remain high if carbon processes are not diffused, allowing for cost mutualization.
To be fully supportive of the CCUS uptake, mechanisms must be deployed with a view to addressing the specific needs of each stage of the value chain: Carbon Capture, Transport & Storage, and utilization.
Ivan Pavlovic, Energy Transition specialist, Natixis CIB Research
At the capture stage, we see already a mix of penalty-based approach (namely carbon tax/emissions trading schemes) and incentive-based approaches (cost reduction mechanisms, strategic signaling -supporting the utilization of carbon through sectoral regulations, and revenue support schemes typically in the form of contract for difference mechanisms).
In terms of the transport and storage assets, progress towards a fully regulated model is going to be instrumental in the successful diffusion of CCUS in some jurisdictions as it will support the development of a new, large scale and shared infrastructure network. - This model has two complimentary components: a regulated asset base (RAB) model , which requires operating licenses and fees to be in place, and third-party access, which is the key to ensuring cost mutualization .
That said, as an alternative to the RAB model and Third-Party Access, there is also the option of tax credits and grants to support the deployment of T&S assets. The assets then are run as part of bilateral contracts between source activities and T&S owners and operators.
While there are more than 15 countries CCUS policies on the books that go beyond R&D initiatives, the EU, the UK and the US stand out for having devised three specific models supporting CCUS uptake.
What can you tell us about how the EU is approaching deployment of CCUS?
While still largely in the making, and involving a fairly complex distribution of powers, the EU recently released its strategic roadmap for CCUS through the “Industrial Carbon Management” which looks set to be a comprehensive support toolkit based on penalty and incentive mechanisms, considering carbon pricing, funding, and T&S asset regulation in order to reach the planned 450 million tonnes for CO2 capture capacity by 2050.
The Pricing (by and large the most developed mechanism in the EU’s policy) mechanism has set out to: 1. end free quota allocations in industrial source activities by end-2034; 2. Introduce the Carbon Border Adjustment Mechanism (CBAM) from 2026, which aims to replicate the carbon constraints for non-EU producers of industrial goods; 3. Incentives to use captured carbon in air and maritime transport. Future work will include an assessment of how removals and permanent storage could be accounted for under the EU Emissions Trading System (ETS)
On the funding front, there is potential for a combination of grants and Carbon Contracts for Difference (CCfD’s). CCfDs are currently in play at a member-state level (rather than EU-wide).
T&S asset regulation is lagging behind but does have an initial regulatory framework in place for storage assets, and policy targets as part of the 2023 Net Zero Industrial Act.
How does the UK’s approach compare to that of the EU?
The UK’s CCUS business model is strongly backed and regulated by the UK government in selected clusters. It is among the most advanced models and relies on a wide combination of policy instruments.
The government has signaled strong ambitions to store between 20 and 30 million tons of Co2 per year by 2023, and to be able to achieve this, a number of commitments have been made.
In early 2021, the UK government launched its CCUS cluster sequencing process – two Track-1 ‘clusters’ have been selected already, and two more clusters are in development as part of Track-2. In early 2023, GPB 20bn were earmarked to support the initial deployment of CCUS, including the GBP 1bn CCUS Infrastructure Fund.
Other supporting actions include the enactment of the Energy Act 2023, which creates a robust regulatory framework for CCUS, managing cross-chain risks and enabling the deployment of projects.
Later this year, the UK ETS cap will be aligned with the net zero trajectory, and from 2027 the target is to implement a CBAM, applying charges to the carbon emissions embodied in imports from a number of sectors.
Through heavy government support, the intention is to develop the carbon capture and transport & storage aspects simultaneously, to mitigate risks.
And last, but by no means least, the US?
The US has taken a notable departure from the approach employed by the EU and to a certain extent, the UK, and largely relies on an open access program of incentives and grants to spur on the development of CCUS projects – the incentives are encoded in two separate regulatory acts.
The US has taken a notable departure from the approach employed by the EU and to a certain extent, the UK, relying on incentives and grants to spur the development of CCUS.
Yash Anand, Industry Banker, Energy Transition & Natural Resources
Perhaps the most notable – and most often cited – example is the 45Q tax credit. While the credit itself has existed for decades, the increase of 70% quantum in capture tax credits under the recently passed inflation reduction act, has made CCUS an economically profitable exercise for a wide range of sectors.
Other incentives operate as a system of grants, loans and hub creation programs to help early stage CCUS projects. This particular aspect should have an even greater impact than the 45Q tax credit on the eventual development of CCUS.
On the other side of the coin, late last year the Environmental Protection Agency decreed that coal units that intend to remain operation in 2040 must begin capturing 90% of the carbon they produce by 2030. Natural gas plants with at least 300mW capacity running at least 50% of the time, similarly, must use CCUS to capture 90% of their carbon by 2035, or use low carbon hydrogen by 2038.
Does one approach have an advantage over the others in terms of progressing CCUS?
There is no one-size-fits-all solution and countries will be relying on the most adapted combination of the various policy toolkits available to them, potentially mixing carrot and stick mechanisms. At this stage of their maturation, UK and US frameworks seem better placed to initially tackle specific risks & challenges facing CCUS projects than their EU peer.
The UK has taken a systemic approach to all challenges across the value chain. The US framework meanwhile benefits from its simplicity, particularly the tax benefits. The US also benefits from a large existing asset base for transport and storage as a result of legacy gas and oil activities.
While the EU is lagging behind both the UK and the US at the moment, we see that through the deployment of its CCUS roadmap, the EU commission is committed to tackling the challenges facing the industry – with a particular focus on the development of a framework for T&S assets.
