FAQ on EU, China Plans to Finance Demo of Carbon Capture, Storage Tech
June 26, 2009 // Published as a news service by IHS
Frequently asked questions about plans by Europe and China to finance the demonstration of carbon capture and storage (CCS), as set out in a communication by the European Commission (EC) on June 25, are answered in this document.
1. What is the aim of the EC's June 25 communication?
The communication sets out concrete plans for action by the European Union (EU) and China to co-finance a CCS demonstration plant in China. This fulfills an agreement made by the EU and China in 2005.
In the context of the ongoing negotiations for an ambitious global climate change agreement for the post-2012 period, EU and Chinese cooperation on CCS could serve as an example of cooperation on financing and technology between developed and developing countries.
Such cooperation can contribute to the commitment made by developed countries under the United Nations Framework Convention on Climate Change (UNFCCC) to promote, facilitate and finance the transfer of, or access to, environmentally sound technologies and know-how to developing countries.
2. What is carbon capture and storage?
CCS is a suite of technological processes that involve capturing carbon dioxide (CO2) from the gases discarded by industry and transporting and injecting it into geological formations.
The major application of CCS is to reduce CO2 emissions from fossil fuel power plants, principally plants fired by coal and natural gas. However, CCS can also be applied to CO2-intensive industries, such as cement, iron and steel, petrochemicals, and oil and gas processing. After capture, the CO2 is transported to a suitable geological formation where it is injected, with the aim of isolating it from the atmosphere for good.
There are storage options other than geological storage, such as storage in a water column and mineral storage. Storage in a water column presents a potentially high environmental risk, and the EC's proposed directive on CO2 geological storage bans its use within the EU. Mineral storage is currently the subject of research, and developments will be kept under review.
3. Why the need for CCS?
While energy efficiency and renewables are the most sustainable solutions in the long term, both for security of supply and climate protection, global greenhouse gas emissions cannot be reduced by at least 50% by 2050 as they need to be (in order to limit global temperature increase to under 2ºC), without using other options such as CCS.
Timing is crucial. About a third of existing coal-fired power capacity in Europe will be replaced within the next 10 years. Internationally, the energy consumption of China, India, Brazil, South Africa and Mexico will lead to a major increase in global demand, which is likely to be met largely from fossil fuels. The capacity to deal with these very substantial potential emissions must be urgently developed.
The precise contribution of CCS technology to a reduction in global greenhouse gas emissions will depend on the uptake of CCS, but estimates are on the order of more than 10% by 2030.
4. Is CCS technically mature?
The separate elements of capture, transport and storage of carbon dioxide have all been demonstrated, but integrating them into a complete CCS process and bringing costs down remain a challenge.
Several projects conducting initial research to explore options for demonstrating CCS for coal-fired power generation in China - namely, the EC co-funded research projects COACH and STRACO2 and the U.K.-funded near-zero emissions coal (NZEC) assessment project - are due to conclude in the autumn of 2009.
The biggest CO2 storage projects that European companies are involved in are the Sleipner project in the North Sea (Statoil) and the In Salah project in Algeria (Statoil, BP and Sonatrach). Both projects involve stripping CO2 from natural gas - a process that is already carried out before the gas can be sold - and storing it in underground geological formations.
Other demonstration projects underway are the Vattenfall project at Schwarze Pumpe in Germany and the Total CCS project in the Lacq Basin in France.
EU leaders have committed to establishing a network of up to 12 CCS demonstration plants in the EU by 2015 (see European Council Conclusions, March 2007) in order to maximize the range of technology and storage options demonstrated and knowledge-sharing.
The EU Council and European Parliament have agreed to a directive setting out a legal framework for CCS to enable its safe operation in Europe and to provide incentives to encourage CCS demonstration - for example, through the EU's Emissions Trading System (ETS), since CO2 safely stored is not count as emitted, and through the ETS New Entrants Reserve (providing funding that can be used to co-finance CCS demonstration plants), as well as through revised state aid rules.
The European Economic Recovery Plan has allocated €1,050 million to CCS demonstration projects inside the EU. In addition, several EU companies have announced demonstration plants to be completed in the EU over the next five to ten years.
5. Is China committed to limiting its emissions with CCS?
China is engaging strongly in clean coal technologies. In June 2007, China adopted a National Climate Change Programme, which specifically mentions "the development and dissemination of advanced and suitable technologies," including "carbon dioxide capture, utilisation, and storage technologies."
China plans to publish CCS technology guidelines in the course of 2009. In addition, a group of seven state-owned energy sector enterprises has established the GreenGen project to build an integrated gasification in combined cycle (IGCC) coal power plant and also plans to add CCS technology.
6. Why is there an urgent need to develop a demonstration project in China?
Because of abundant resources, coal is China's predominant energy source, contributing around 70% to the energy mix. Coal is expected to remain the primary energy source in the medium term - in 2007 alone, China built the equivalent of one 500-megawatt (MW) coal-fired power plant every two and a half days. This represents an increase in Chinese emissions from coal-fired power generation alone of around four megatons of CO2 a week.
The rationale for co-financing this CCS demonstration plant in China is to accelerate the development of the technology. Experience in China shows that costs will go down once the technology is deployed on a broad scale.
The development and deployment of CCS in China can play a vital role in helping achieve global sustainable development, but would be significantly delayed without immediate assistance from developed countries. The EU's commitment, coupled with technological and financial assistance, is a unique offer that can help maximize the potential for CCS in emerging economies.
The failure of the market to reflect the real cost to society of the use of fossil fuels to generate electricity (such as via a CO2 price) means that CCS is not economically viable in the demonstration phase. EU public financing can help overcome some of the barriers outlined above and leverage private financing, which would not otherwise be available for large-scale CCS demonstration projects.
7. How much will the demonstration plant in China cost?
The cost of a CCS demonstration plant involves capital investment in equipment to capture, transport and store CO2, plus the cost of operating this equipment to store the CO2 - in particular, for the energy required to capture, transport and inject the CO2.
At current technology prices, the additional capital and operational costs over a lifetime of 25 years for this first-of-a-kind 400-MW demonstration plant in China is estimated at around €730 million for an IGCC plant (about €125 million for capital costs, €340 million for operational costs, and €265 million for transport and storage costs) and around €980 million for a pulverised coal plant (about €235 million for capital costs, €445 million for operational costs, and €300 for transport and storage costs).
Within the period of operation of the CCS plant, a strengthening of the global carbon market and the emergence of a domestic carbon price in all major economies can be expected. Therefore, a carbon price of €10 per ton of CO2 avoided is assumed in 2015, which gradually increases to €20 per ton of CO2 avoided by 2040.
Taking account of such a carbon price and without pre-judging the technology choice, the financing gap is estimated at roughly €300 million for an IGCC plant and at €550 for a pulverised coal plant. Should the carbon price reach higher levels, this financing gap would decrease and public support could be downsized.
8. How can the necessary resources be made available?
The EU can contribute through public funding as well as the use of carbon crediting mechanisms or other instruments, such as the Clean Development Mechanism (CDM) of the Kyoto Protocol. The CDM is a project-based approach offsetting emissions from developed countries through clean development projects in developing countries.
Another option is the introduction of sector-wide, company-level emissions trading in sectors where the capacity exists to monitor emissions and ensure compliance, particularly for energy-intensive sectors, such as power generation, aluminum, iron, steel, cement, refineries, and pulp and paper, most of which are exposed to international competition.
Such schemes would be either global or national; if national, schemes in developing countries should be linked with schemes in developed countries, with targets for each sector covered being gradually strengthened until they are similar to those set in developed countries. This would also limit the transfer of high-emission installations from countries where they are subject to reduction commitments to countries where they are not.
So far, the EC has earmarked €60 million for cooperation on clean coal technologies and CCS with emerging economies. A small proportion of this funding (about €3 million in 2009) will be used to build capacity for CCS and other clean coal technologies in other emerging economies, while €7 million will be used for the feasibility phase of the EU-China project.
Provided there is continued political support from China and satisfactory progress with the NZEC project, additional financial resources of up to €50 million would be made available for the construction and operation of the demonstration plant.
In addition, EU and European Economic Area (EEA) member states are invited to co-finance this project, and finally, co-financing from China will be important.
Participation beyond government funding can be of two types:
- Concessional loans from international financial institutions or public banks, such as the European Investment Bank.
- Private investment.
Private sector involvement falls into two categories: active equity investors (operators, contractors, equipment suppliers) and passive equity investors (investment funds, institutional investors).
The prospect of revenues from the carbon market should attract private investors. Depending on the storage site chosen, it may be possible to source an additional revenue stream from enhanced oil recovery (EOR), which is already commercially viable. EOR refers to a variety of processes to increase the amount of oil removed from a reservoir, typically by injecting a liquid or gas (such as nitrogen or carbon dioxide).
9. How should these various sources of funding be coordinated?
In order to bring together sufficient public and private funds and use them effectively, the intention is to develop a public-private partnership, probably in the form of a "special purpose vehicle" (SPV).
SPVs are highly flexible investment vehicles that can be designed for a one-off project and have a relatively light legal and managerial structure, which means that they can be established quickly and with minimal overhead. The rules governing the SPV are set down in advance and carefully define its activities. This mechanism allows the limitation of financial risk for the investor. Hence, the SPV model offers several advantages and can be tailored to suit the needs of the CCS demonstration project.
An advantage of this structure would be that the public donors can set out the investment policies to ensure full coherence with public policy objectives. Through a specified investment policy, this structure would offer an investment platform that can combine public and private funding.
Private investment in CCS is attractive only if there are prospects for a revenue stream - such as from the carbon market and/or enhanced oil recovery.
10. Why should European public funds, and not China's own resources, be used to subsidize the development of the already booming power sector in China?
In countries with abundant coal reserves, security of supply concerns dictate that coal will continue to be used to generate electricity, particularly in China. CCS is thought to be a key technology enabling the continued use of coal during a transitional period on the path to a low-carbon future.
Therefore, it is in Europe's interest to develop a means of supporting the demonstration of CCS in coal-dependent emerging economies in order to exploit the economies of scale and ensure that, once demonstration is completed, deployment happens rapidly and at scale.
This was the motivation behind the 2005 EU-China Summit Joint Declaration on Climate Change, which has as one of its objectives, the aim "to develop and demonstrate, in China and the EU, advanced, near-zero emissions coal (NZEC) technology through carbon capture and storage."
Chinese investment will be essential to increase China's support of the project and the development of the technology. This will ensure greater ownership by China, familiarity with the technology and an increased likelihood of further deployment. But the European contribution is necessary to speed up demonstration and subsequent commercial deployment of the CSS technology.
11. When will widespread deployment happen?
Uptake of CCS will depend on the price of the technology compared to alternatives and on the carbon price. If the CCS cost per ton of CO2 avoided is lower than the carbon price, then CCS will begin to be deployed.
Putting a price on carbon through the establishment of domestic cap-and-trade systems for greenhouse gas emission allowances is economically the most efficient way of ensuring that private and public sector investments are consistent with achievement of the global mitigation objectives.
The aim of demonstration is to learn from practical integration of the process components on a commercial scale. With demonstration projects in place, the price of the technology should decrease substantially over the next ten years.
According to the EC's projections, the uptake of CCS on a commercial scale is likely to begin some time around 2020 and increase substantially after that.
12. How will CCS be treated under the CDM?
Currently, CCS is not eligible for CDM credits, but it might be eligible under a post-2012 carbon financing scheme - for example, through a sectoral crediting mechanism (that is, a mechanism to credit emissions reductions at sector level) or through a specific CDM scheme for CCS demonstration plants.
13. What are the next steps?
The EC's June 25 communication will be studied by the EU's legislative institutions (the EU Council and European Parliament). The EU's Environment Council will also discuss the communication.
Working closely with European and Chinese stakeholders, the EC proposes to determine, with international financial institutions, the setting up of an appropriate financial structure to support the construction and operation phase of the project
The EC invites EU member states, interested EEA states and China to pledge financial and political support for this innovative initiative and also invites political support from the European Parliament.
Considering that this is a new approach, the European Commission Services will continue to develop the detailed implementation arrangements together with entities that express a formal interest in co-financing this initiative.
For more information, see:
Source: European Commission (EC).