ZEP CCS Market Economics Report

8/12/2019 ZEP CCS Market Economics Report

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Creating a secure environmentfor investment in Europe

CO 2 Capture and Storage (CCS)


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CCS Creating a secure environment for investment in Europe

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This document has been prepared on behalf of the Advisory Council of the European Technology Platform for ZeroEmission Fossil Fuel Power Plants. The information and views contained in this document are the collective view ofthe Advisory Council and not of individual members, or of the European Commission. Neither the Advisory Council,the European Commission, nor any person acting on their behalf, is responsible for the use that might be made of theinformation contained in this publication.

European Technology Platform for Zero Emission Fossil Fuel Power Plants


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Advisory Council Membersof the Zero Emissions Platform (ZEP)

Olivier Appert , IFP Energies nouvellesPompilio Caramuscio , ENELCarmencita Constantin , ISPE

Vicente Cortes-Galeano , CIUDENFranois Dmarcq , BRGMStan Dessens , Dutch National Taskforce on CCSJill Duggan , Doosan Power Systems LtdReinhold Elsen , RWE Power AG

John Michael Farley , RetiredPierre-Etienne Franc , Air LiquideGeorg Gasteiger , Babcock Borsig Steinmueller GmbHFranois Giger , EDF/DPITLewis Gillies, 2Co EnergyOscar Graff , Aker Clean CarbonArcadio Gutirrez Zapico , Gas Natural FenosaFrederic Hauge , The Bellona FoundationGardiner Hill , BPArto Hotta , Foster Wheeler Energia OyEmmanuel Kakaras , CERTH/ISFTAAles Laciok, CEZ GroupRose de Lannoy , GDF SUEZKai Bjarne Lima, StatoilChris Littlecott , E3GJorge Martnez Jubitero , ENDESA Generacin

Vesa Maso , Fortum Power and Heat OyGrard Moutet , TOTALKlaus-Dieter Rennert , Hitachi Power Europe GmbHNils Rkke, NTNU-SINTEFCharles Soothill , ALSTOM PowerGraeme Sweeney , Royal Dutch ShellKazimierz Szynol, PKE S.A.Antonio Valero , Fundacin CIRCEMart van Bracht , TNO EnergyNicolas Vortmeyer , Siemens AGDavid White , SchlumbergerErik Zizow, E.ON


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The Zero Emissions Platform (ZEP)

Founded in 2005, ZEP represents a unique coalition of stakeholders united in their support for CCS as a criticalsolution for combating climate change. Indeed, CCS is the single biggest lever for reducing CO 2 emissions providingalmost 20% of the global cuts required by 2050 (IEA). Members include European utilities, oil and gas companies,equipment suppliers, national geological surveys, academic institutions and environmental NGOs. The goal: to makeCCS commercially available by 2020 and accelerate wide-scale deployment.

www.zeroemissionsplatform.eu


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Contents

1. WHY ADDITIONAL ECONOMIC MEASURES FOR CCS ARE ESSENTIAL 6

1.1 EU Energy Roadmap con rms critical role of CCS in decarbonisingEurope cost-effectively 6

1.2 CCS can deliver but a weak EUA price threatens demonstration and deployment 6

1.3 Correcting the policy framework to give a strong price signal for investment 7

1.4 Urgent, short-term measures are needed to enable demonstration projects to take FID 7

2. KEY PRINCIPLES 8

2.1 CCS measures should be exible, but stable 8

2.2 Key criteria for the assessment of measures 10

2.3 Preventing carbon leakage 10

3. STRATEGY 11

3.1 Address issues speci c to CCS 11

3.2 Correct the de ciencies of the ETS with temporary, complementary measures 11

3.3 Revise the mix of measures as the technology matures 12

4. ASSESSMENT OF AVAILABLE MEASURES 13

4.1 Options for the short, medium and long term 13

5. CONCLUSIONS 18

5.1 Short-term measures (2012 - 2020) 18

5.2 Medium-term measures (2020 - 2030) 19

5.3 Long-term measures (2030+) 19

5.4 Summary table of recommended CCS measures 20

5.5 Additional actions required to ensure the timely demonstration anddeployment of CCS 22

ANNEX: Members of the ZEP Temporary Working Group Market Economics (TWG ME) 23


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The critical role of CO 2 Capture and Storage(CCS) in meeting European Union (EU) and globalclimate targets is now indisputable: it can not onlyabate at least 90% of emissions from the worldslargest emitters, but complement the large-scaledeployment of intermittent renewable energysources with low-carbon base-load power generation

and balancing capacity.

Indeed, the International Energy Agency (IEA)declares that The scale of potential futuredeployment of CCS is enormous, spanningmanufacturing, power generation and hydrocarbonextraction worldwide. 1 Combined with sustainablebiomass, CCS can even withdraw CO2 from theatmosphere already recognised as a signicant andattractive abatement solution. 2

The EU Energy Roadmap 2050 3 therefore conrmsthat For all fossil fuels, Carbon Capture and Storagewill have to be applied from around 2030 onwards inthe power sector in order to reach decarbonisationtargets. The IEA goes even further, warning thatIf CCS is not widely deployed in the 2020s, anextraordinary burden would rest on other low-carbon

technologies to deliver lower emissions in line withglobal climate objectives: 4 the costs of achievingsuch objectives without CCS would be over 70%higher.

The result: Europe will not only enjoy a climate-friendly economy, but new industrial growth creating jobs and boosting competitiveness fuelledby a diverse and reliable energy supply.

The EU has responded swiftly, moving rapidlyfrom development to demonstration on the roadto wide deployment: billions of euros have beeninvested or pledged by industry, funding has beenachieved for a CCS demonstration programme andan EU-wide legal framework has been established.As importantly, the ZEP cost reports 5 now givecondence that following a successful demonstration,the current suite of CCS technologies will be cost-competitive 6 with the full range of low-carbon poweroptions, including on-/offshore wind, solar powerand nuclear.

In short, there is no doubt that CCS can deliver, asconrmed by international developments where nalinvestment decision (FID) has already been takenon large-scale demonstration projects in Australia,Canada and the U.S.

However, while condence in the technologyremains high, the fall in the price of Emission UnitAllowances (EUAs) could have a severe impact onboth CCS demonstration and deployment: not only issignicantly less funding available for the NER 300 7 scheme, but the long-term business case for CCS hasbeen seriously undermined. It means CCS has nowreached a tipping point in Europe and urgentaction is needed at EU and Member State level tocounteract these developments. As the IEA hasdeclared, Deploying CCS requires policy action;it is not something the market will do on its own.

A successful demonstration of CCS is aprecondition for commercial deployment;but without a secure environment for long-term investment, demonstration projectswill not happen.

1 Why additional economic measures for CCSare essential

1.1 EU Energy Roadmap 2050 con rms critical role of CCS in decarbonising Europecost-effectively

1.2 CCS can deliver but a weak EUA price threatens demonstration and deployment

1 A Policy Strategy for Carbon Capture and Storage, 2012: www.iea.org/papers/2012/policy_strategy_for_ccs.pdf 2 Special Report on Renewable Energy Sources and Climate Change Mitigation, Intergovernmental Panel on Climate Change, 2011:

www.srren.org; Technology Roadmap Carbon Capture and Storage in Industrial Applications, 2011:www.unido.org/leadmin/user_media/News/2011/CCS_Industry_Roadmap_WEB.pdf

3 December 2011: http://ec.europa.eu/energy/energy2020/roadmap/doc/com_2011_8852_en.pdf4

2011 World Energy Outlook5 Zero Emissions Platform, July 2011: www.zeroemissionsplatform.eu/library/publication/165-zep-cost-report-summary.html6 70-90/MWh for CCS with coal, 70-120/MWh with gas, operating in baseload (7,500 hours equivalent full load each year)7 In 2008, the EU agreed to set aside 300 million Emission Unit Allowances from the New Entrant Reserve under the EU ETS Directive

to demonstrate CCS and innovative renewable energy technologies


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When the EU set out to establish a CCSdemonstration programme, the price of EUAs inthe EU Emissions Trading Scheme (ETS) was ~ 30.This provided a signicant stimulus for action, bothdirectly as a result of the EUA price (which wouldunderpin long-term deployment) and indirectly viathe NER 300 (which would therefore have a reserveof ~ 9 billion). In addition, with the ETS past thePhase I doldrums and a robust Phase II under way and the prospect of signicant allowance scarcityextending through Phase III the business case forCCS was both real and sustainable.

However, a variety of factors, including the economiccrisis, has depressed the EUA price to ~ 8 today anddecreasing. As the long-term economic viability ofCCS depends on a strong EUA price, it is thereforeessential to correct the current policy framework withadditional nancial incentives and ensure a levelplaying eld for all low-carbon energy technologies.It also means strengthening the EUA price whichis expected to continue to be weak, despite theprospect of deep CO 2 reduction targets: the ETSunderpins not only the long-term, but also partly theshort-term business model as every CCS project willneed to recover its investment over the medium tolong term.

However, as this may take some years to deliver andthe need to demonstrate and commercialise CCSis a short-term imperative, short-term measures arealso urgently needed in order to enable developersof demonstration projects to take FID. Nationalgovernments are already moving in this direction,underlining the urgency of the situation.

Industry has already demonstrated its willingness

to take on a major portion of the costs and risksof investing in CCS technology. However, as theNER 300 may now deliver as little as 2.5 billionin total for CCS and innovative renewable energytechnologies, additional nancial support fromMember States is also vital. 8 It must be rememberedthat as well as delivering key learnings, technologyadvances and cost reductions, demonstrationprojects will be operating for some decades,capturing and storing CO 2 that would otherwisebe released into the atmosphere. Their operationmust therefore remain economical, at acceptablerisk, over a planned life of up to 30 years.

Timing is crucial: CCS is on the critical pathwith no margin for delay. Indeed, companieswhich have invested heavily in CCSdemonstration projects must take FIDimminently to secure the NER 300 and/orother funding or the window of opportunitywill be missed.

This report therefore aims to nd the right balancebetween funding support in the short term to driveearly deployment and achieve key learnings, whileat the same time ensuring that investments canachieve a sufcient level and certainty (predictability)of market-based revenues in order to supportinvestment decisions and ensure actual economicoperation of CCS assets. Both are currently highlyuncertain and require the immediate attention ofpolicymakers.

The result of in-depth analysis by expert economists, 9 ZEPs proposals are fully in line with the recent workof the IEA (see footnote 1). However, they are uniquein that they provide clear recommendations for actionby both the European Commission and MemberState governments.

1.3 Correcting the policy framework to give a strong price signal for investment

1.4 Urgent, short-term measures are needed to enable demonstration projects to take FID

8 Even if Member States replicate the contribution of NER 300 funding, a gap of hundreds of millions of euros in incremental costs couldremain per project (except under specic conditions such as the use of CO 2 for Enhanced Oil Recovery (EOR))

9 See Annex


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In its recent report, A Policy Strategy for CarbonCapture and Storage (see footnote 1), the IEAexplains why public incentives for CCS dependon technology maturity and must therefore havethe exibility to adapt, yet be sufciently stable toprovide predictability for investors. It assesses someof the most widely discussed options against a set ofcriteria, but refrains from ranking them.

ZEP agrees with this general approach and concludes

that measures should be targeted at one or severalof the following market failures that block thedeployment of CCS:

Externality : Primarily, the negative externality ofCO2 emissions at current prices; but also possible,positive externalities of CO 2 transport and storageinfrastructure. 10 In a grid with a high proportionof intermittent energy sources, CCS-equippedpower plants could provide both low-carbon base-load power generation and balancing capacity,representing a positive externality for the energy

system.Public good : Mainly related to knowledge andinnovation, which has wider societal benetsbeyond those enjoyed by individual actors payingfor the innovation. CCS is still at the start of thelearning curve: the technology is proven, but thereis still a great deal of potential to drive costs down.Society, too, is still at the start of the learning curve:while it is clear that under the right conditions CO 2

storage should be supported by the public, theremay be concerns due to lack of experience.Imperfect competition : Particularly for transportand storage, there is a risk in the short tomedium term that in many regions the numberof companies will be too few for competition todeliver a socially optimal supply.Information asymmetry and imperfectinformation : In the short to medium term, dueto unequal distribution of information, capital

providers may be unable to distinguish goodprojects from bad, thereby increasing the cost ofcapital. Because CCS projects require very capital-intensive investments around 1 billion each, withpotentially corresponding prot and loss margins most investors will be reluctant to take them on inan uncertain environment.Complementary markets : A decient coordinationof planning and performance guarantees for CO 2capture plants, pipelines and storage sites (e.g.due to distinct ownership) introduces substantialrisks. The contrasted situation of EOR in the U.S.

and Europe testies to such a market failure.Different measures should therefore be designed toaddress each of these market failures and the IEAprovides an overview of several potential options, i.a.,the ETS, feebate systems and tax incentives. Figure 1below illustrates how a likely evolution of the variousmarket failures will impact the relative importance ofdifferent measures.

2 Key principles

2.1 CCS measures should be exible, but stable

Figure 1: Evolving rat ionale for policy intervention

Market failure Example policies Importance over timeEmissions externality

Carbon tax or emissions trading scheme

Knowledge as a public good Feed in tariff, portfolio standards

Information asymmetry andimperfect information

Provision of debt, equity,insurance, grants, tax credits

Complementary markets Regulation

Imperfect competition Competition authority

Source: IEA, 2012

10 The existence of a pipeline and a storage site may have network effects, reducing the costs of CCS for nearby CO 2 sources


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It is crucial that measures are designed with clearsunset clauses to phase them out when the marketfailures they are created to address diminish in

importance as the technology matures. Figure 2describes how gateways can be dened upfront forthese transitions.

Some argue that additional incentives may becounter-productive because they act to reducedemand for EUAs: if the ETS cap is not adjustedaccordingly, non-ETS incentives to support CCSwill lead to an EUA price that is lower than it wouldotherwise have been. 11

Given the critical importance of CCS in addressingclimate change, ZEP recommends that in theshort term (2012-2020) and medium term (2020-2030),the ETS should be adjusted to take the impact ofadditional, non-ETS measures into account.Together with a clear plan for phasing them out,these adjustments will provide a credible, long-term trend for the EUA price and a strong signalto investors. ETS adjustments may consist of moreambitious emission reduction targets for the ETS andpossibly a more exible design in order to mitigatethe effects of macro-economic volatility on the price.(For further details on the design of the ETS, pleasesee Chapter 3.)

It is possible that some non-ETS measures will beadopted at national level in the short to mediumterm. ZEP accepts that the resulting uneven playingeld for CCS is preferable to the absence ofadditional incentives. However, the EU should play acoordinating role in phasing out national measureswhen predened gateways for CCS are attained.

The key imperative for any package ofmeasures is to provide a credible andpredictable pathway for the gradualdeployment of CCS from demonstrationprojects, through to commercial-scaleprojects, to those that will ultimately replaceunabated, fossil fuel alternatives. It meansthat such measures must be implemented assoon as possible as they will impact the short-,medium- and long-term prospects for CCS.

Figure 2: Gateways within a CCS policy framework

C C S c o s

t / c a r

b o n p r

i c e

Time

CCS unit costs

Carbon price

TECHNICAL DEMONSTRATION SECTOR-SPECIFIC DEPLOYMENT WIDE-SCALE DEPLOYMENT

Quantity supportmechanism

Carbon price

Capital grants

Operating subsidies

Loan guarantees

FIRST GATEWAY

Technical feasibility

First cost threshold

Availability of requiredstorage capacity confirmed

SECOND GATEWAY

Further cost reductions

Infrastructure development

Availability of requiredstorage capacity confirmed

Source: IEA, 2012

11 For an extensive discussion of the effects of interactions of renewable energy and climate policies, see Interactions of Policies for RenewableEnergy and Climate by the IEA and Cedric Philiber t, 2011


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CCS incentives, like those for any scalable low-carbontechnologies, add costs that are proportionallysignicant and there are few countries wheretaxpayers will shoulder that bill beyond a fewdemonstration projects. This means that consumerswill have to pay, at least in the medium to longterm. Most products from industries where CCSis a potential solution can easily be traded acrossborders. This raises the risk of leakage of investmentsand production (carbon leakage) to countries thatdo not enforce stricter climate protection, thusundercutting prices. In this case, there would belittle CCS deployment and simply a movement ofproduction and emissions across borders.

Carbon leakage could occur both between MemberStates (in the medium term) or between the EU andcountries without similarly ambitious climate changepolicies (in the medium to long term). Compensatorymeasures are therefore required. Ideally, theseshould ensure that imported goods or kilowatt-hours

are treated the same way as domestically producedones (and, conversely, exports are exempted fromthe climate change policy measures). For electricity,it should therefore be investigated if and howclimate policy obligations could be put on electricitydistribution instead of generation . For manufacturingindustries, it should similarly be investigated if andhow European emission benchmarks could beapplied to imports as a default value from whichderogations are possible.

However, for electricity-intensive industries, othercompensatory measures may be suitable, e.g.state aid, which is already being considered by theEuropean Commission through the elaboration ofstate aid guidelines for industries affected by ETS-induced price increases. Any such measures must beconsistent with EU and World Trade Organization lawin order to prevent the fragmentation of the singlemarket or international trade wars.

2.3 Preventing carbon leakage 12

In order to select the measures, ZEP has establisheda list of criteria, inspired by the IEA report citedabove:

on CCS projects (from investors point of view)

: how much will theinstrument reduce CO 2 emissions?

: what is the cost per tonne ofCO2 abated?

: how easily can the instrumentbe applied?

: how can it gain supportfrom a political majority? This may vary stronglybetween countries.

ZEP has also formulated its preferences for keycategories of measures:

CCS is a key CO 2 mitigation option with signicantpotential not only in the power sector, but acrossa range of industrial applications (e.g. iron andsteel, chemicals, cement and fuel transformation).

Yet to date, most CCS measures have been aimedat the power sector only. ZEP therefore stronglyrecommends that measures are aimed at allsectors delivering more CCS learning at a lower

cost. However, different sectors have varyingexposure to non-EU markets. As a consequence,the mix of politically feasible sticks and carrotswill need to be tailor-made.

ZEP favours measures that attach monetary

value to low-carbon production/CO 2 abatement,as opposed to being based on regulatorycompliance/non-compliance. This is particularlyimportant in order to encourage not only CCS forcoal, but also for gas, as well as in combinationwith biomass. Regulatory measures which addsignicant costs to power generation with CCS, onthe other hand, will delay investment in CCS until

the market rewards such costs.

ZEP favours a global incentive, but in its absence

favours one at EU level. However, as long as an EU-level incentive is not strong enough, it welcomesappropriate measures implemented by individualMember States. This may increase overall costs ofCCS deployment, but ZEP believes this approachis useful to help break the deadlock in adoptingEU-level incentives that will be sufciently strongfor CCS.

2.2 Key criteria for the assessment of measures

12 Carbon leakage refers to the relocation of investment in carbon-intensive activities to countries where there are fewer constraintson emissions


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Clearly, policy for the development and deploymentof CCS must be viewed within the wider framework oflow-carbon emission reduction policies. However, asdescribed in Section 2.1, CCS is not only inuencedby specic market failures, but has unique aspectsthat must be addressed by specic policy measures:

only for CO 2 capture, but also CO 2 transport andstorage infrastructure. N.B. timelines for individual

elements of the CCS value chain differ, withstorage requiring much longer lead times (up to7 years).

up to large integrated projects, with signicantpotential to drive down costs. Society, too, is atthe start of the learning curve: while it is clear thatunder the right conditions CO 2 storage should besupported by the public, there may be concernsdue to lack of experience.

energy mix if decarbonisation targets are to be

met: unlike intermittent renewable energy sources,CCS can deliver both base-load power generationand balancing capacity; CCS marginal costs arealso highly dependent on fuel costs (fossil fuel orbiomass).

The ETS is currently the key instrument forincentivising the reduction of CO 2 emissions inthe EU and ZEP believes it should be the principal

mechanism for driving long-term deployment:

industry in Europe and through a reducingissuance of EUAs, delivers a carbon price to theeconomy.

leaves the market to select the most cost-effectiveabatement options, with the knowledge that theemissions cap will be met. It also encouragesthe most efcient use of all available resourcesand technologies once mature such as Solar,Offshore Wind and CCS.

However, the ETS also has clear deciencies:

leads to the setting of the ETS cap and its EUAprice may not reect a social optimum.

EUA price is currently signicantly lower than whenthe cap was set.

aspects of CCS development and deployment.

For the time being, the ETS therefore providesinsufcient investment security and must bestrengthened in order to deliver a sound businesscase for both CCS and other key low-carbon energytechnologies. With a gradual tightening of the cap,the ETS will ultimately ensure the market conditionsfor CCS, but until then, additional policy measuresare essential.

Additional, non-ETS measures for CCS shouldbe temporary and complement the ETS inorder to accelerate market introduction.The ETS should therefore be adjusted totake these measures into account either bysetting more ambitious targets or via a moreexible ETS design and a phasing-out plandeveloped as the technology matures.

3 Strategy

3.1 Address issues speci c to CCS

3.2 Correct the de ciencies of the ETS with temporary, complementary measures


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CCS incentives will vary over time as the technologymatures and climate policies evolve:

Today, individual components of the CCS value

chain are proven, numerous pilot projects areoperational worldwide and FID has been taken onlarge-scale demonstration projects in Australia,Canada and the US. Nevertheless, CCS is stillat the early stages of being scaled up to large,integrated projects, with virtually no transport andstorage infrastructure in place; little experiencein tackling stewardship transfer of storage sitesand long-term liability; signicant upfront costs forearly movers; and an uncertain environment for

long-term investment.

Once the rst CCS demonstration projects have

had some operational experience, there will begreater condence in both costs and performance.Equipment suppliers (and possibly transport andstorage operators) will be able to take on these

risks and offer contracts on ordinary commercialterms. There will also be a skeleton of pipelinesand storage sites at least some of which builtwith the capacity to take on additional CO 2streams. Unabated fossil fuel power plants willtherefore gradually be replaced with new CCS-equipped plants. During this period, non-ETSincentives will still be required and CO 2 transportinfrastructure, in particular, may require signicantgovernment intervention (on a commercial basis).

At a later stage, the value of EUAs under the ETS

will be level with the cost of CO 2 abatement withCCS at least for new fossil fuel power plants

operating in base-load while CO 2 transportand storage infrastructure will be operated andfurther developed by private companies underordinary competition rules. Non-ETS incentiveswill still be necessary for the development of newtechnologies, but a level playing eld, based onthe ETS, is the correct approach once technologiesare fully mature and normal competition applies.

3.3 Revise the mix of measures as the technology matures


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4 Assessment of available measures

There are several categories of measures whichcan make CCS more attractive to investors. In thefollowing tables, these are listed and comparedagainst the criteria outlined in Chapter 2. The resultsare then presented in a semi-quantitative way (using

qualitative assessment and scores of +, 0 and ). Therst column examines the strength of the investmentincentive for CCS, together with the degree of policy/regulatory risk.

4.1 Options for the short, medium and long term

Table 1: An assessment of short-term measures (2012 - 2020)

Policy tool Certainty ofeconomic impact Environmentaleffectiveness Cost-effectiveness Ease ofapplication Politicalacceptability Overall

Capital grants (e.g. structuralfunds, trustaccountsfor EUAexpenditures)

+Payment over shortperiod of time

No guaranteeof operations ifuneconomic incurrent marketunless combinedwith otherincentives, or aclaw-back clause isincluded

0Should be donecompetitively; lowercost of capital forgovernment

++ 0Claw-backclause for non-performancewould enhanceacceptability

+

Opex grants

(e.g. NER 300)++ ++ + +

guarantees++

No guaranteeof operations ifuneconomic incurrent marketunless combinedwith otherincentives, or aclaw-back clauseis included

++ ++ ++ +

Tax breaks + Depends on

conditions

0 ++ 0Claw-back clause

for non-performancewould enhanceacceptability.

0

Capacitypayments

++Helps to get demoprojects started

No guaranteeof operations ifuneconomic incurrent marketunless combinedwith otherincentives, or aclaw-back clauseis included

0Could bemanaged througha competitiveprocess

0Raises questionof how to dealwith moralhazard

++Already used inelectricity markets,but for differentpurpose

+

Table continued on next page


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Policy tool Certainty ofeconomic impact

Environmentaleffectiveness

Cost-effectiveness

Ease ofapplication

Politicalacceptability

Overall

Set aside avolume ofEUAs

+Should be organised asa one-off intervention,adequate in size tocancel impact of PhaseII over allocation andeconomic downturn.Helps to restorescarcity in the market,as originally intended.Could underminecondence in themarket due to increasein regulatory risk aseconomy is expected toremain volatile.

0Increasesuncertaintyin the ETS.Doubts abouteffectiveness as itis not a permanentmeasure; and it isnot clear what willhappen to EUAsset aside. Will onlybe effective as arst step towards abroader reform ofthe ETS, includingextending the capfrom 2020 to 2030.

+Lowest marginalcost, but increasedrisk premium oninvestments.

+Administrativelyrelatively easy.

++The instrumenthas gainedconsiderablepolitical traction.Still questionsto address: howmany EUAsshould bewithdrawn? Willthey be cancelledor put on themarket later? Withwhat justication?

+

Feed-in tariff

MWh)

++

Contract law guaranteesfeed-in tarifffor economic lifetime ofproject

++

Only paymentfor actualgeneration ofpower with CCS(clarity neededon verication ofactual storage)

0

Risk of under- orover-funding, butrisk premium ofinvestor very small.No upfront paymentincreases capitalcosts.Could be combinedwith electricitypurchase obligation.

+

Indemonstrationphase, needsto be moreproject-specic,evolving intoa pure feed-intariff as thetechnologymatures (i.e. inmedium-termphase seebelow).

++

Already successfulfor RenewableEnergy Sources(RES). Bill canbe passed onto electricityconsumers or tax-payers (exible)

++

CCS purchasecontractsthroughreverseauctions

++Reverse bidding forCCS leading to contractwith government has alow political risk.

++Only paymentfor actual CO 2 abatement

++Lowest-cost projectsdelivered, butsponsors need totake developmentrisk. No upfrontpayment increasescapital costs. Wouldbe enhanced iforganised as projectcontracts withgovernment.

+In principleeasy followingcost discovery,providedsufcientcompetition.

++Already usedfor RES. Bill canbe passed onto electricityconsumersor taxpayers(exible)

++

time-limited company-specic trust accounts,could be an attractive way to provide capexgrants.

purchase contracts combine high certaintyof revenues for the economic lifetime of plantsand strong performance incentives (as for feed-in tariffs) with the cost-efciency of competitiveprocesses. Such contracts could also incentiviseCCS outside the power sector.

environmental impact effectiveness.

current surplus (now ~1.4 billion EUAs) comparedto expectations, on the basis of which Phase III ofthe ETS was adopted. This would help to restorethe ambition level, or scarcity in the market, asoriginally intended.

213

and the Industrial Emissions Directive 14 will actas drivers for a new investment cycle in powergeneration and it is important that Member Statesimplement strict CCS-readiness requirements toreect this. This can signicantly reduce the costsof retrotting CCS.

13 2009/31/EC14 2010/75/EU

Table 1 (continued from previous page)


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Policy tool Economic impacteffectiveness


Cost-effectiveness

Ease ofapplication


Overall

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Policy tool Economic impacteffectiveness


Cost-effectiveness

Ease ofapplication


Overall

CF: 7=


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scores relatively poorly on economic impact,cost-effectiveness and, in some circumstances,environmental effectiveness and would thereforeonly be considered as part of a package ofmeasures once CCS has been demonstrated.An EPS could potentially provide a forwardmarket signal for future demand for CCS whenset sufciently low and combined with othermarket incentives. This could be of particularvalue for those Member States looking to achievepower sector decarbonisation at an acceleratedtimescale.

When matured CCS technology is available, thiswill result in new-build and retrot CCS capacity. Itmay happen that some old, unabated power plantswill be reserved for peak and upper intermediateload range. However, it can be expected that theoperational ranking in the merit order will prioritiseCCS-equipped plants due to the higher efciencyof new-build and the avoided CO 2 penalty ofnew-build and retrotted power plants. An EPSthat does not recognise the different operatingregimes needed for power supply (peak-, medium-and base-load) will compromise the exibility ofelectricity supply.


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5 Conclusions

In the short term, the aim is to build and operate CCSdemonstration projects, requiring mainly additional,tailor-made carrots for individual projects.

are effective in providingpredictable revenues ZEP recommends a slidingpremium scheme which is kept between a oorand a ceiling in order to create predictability forboth investors and government. In any case, suchcontracts should be set for 20 years, funded either

by taxpayers via the public treasury (through EUArevenues) or by energy consumers via a levy ontariffs. (N.B. in the demonstration phase, feed-intariffs need to be more project-specic, evolvinginto a pure feed-in tariff as the technologymatures, i.e. in the medium term.)

would combine theeconomic certainty of feed-in tariffs with greatercost-efciency and the potential for applicationbeyond the power sector.

.17

Some say that this would reduce the predictabilityof the ETS as a precedent for political interventionis set. In order to achieve full impact, it musttherefore represent a rst step towards a broaderreform of the ETS, including setting an ETS capfor 2030.

Further capital and operating grants are neededin the form of long-term contracts negotiated

between project sponsors and public authoritiesbased on a certain volume of CO 2 stored. Thiscould either be funded by taxpayers via the publictreasury or by energy consumers via a levy ontariffs. Alternatively, EUA revenues from companiescould be held in a trust account and released forCCS capital expenditure only, within a certaintimeframe (a use-it-or-lose-it clause).

In many markets, there is uncertainty over the role

of fossil power generation with or without CCS inthe power mix: if it is not called upon to providebase-load capacity, costs increase signicantlyand investments are discouraged. This couldbe addressed by forward contracts for CCSgeneration capacity .

Due to higher debt levels/equity ratios and thegovernments lower cost of capital, public loanguarantees with performance or capacityguarantees could be a cost-effective way ofreducing the capital cost of projects.

CO 2 capture from power generation or industrialprocesses for Enhanced Oil Recovery (EOR),Enhanced Gas Recovery (EGR) and EnhancedCoalbed Methane (ECBM) offers a revenue streamfrom hydrocarbon extraction which is generallytaxed at high rates. Tax breaks for EOR, EGRand ECBM with anthropogenic CO 2 could be areasonable and attractive way to incentivise suchintegrated projects.

5.1 Short-term measures (2012 - 2020)

17 As proposed by the Environment Committee of the European Parliament, December 2011


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In the medium term, general CCS-specic supportregimes are recommended, the details of whichmay need to be set at Member State level. Sometype of EU-binding targets could prevent this fromcreating unequal conditions amongst MemberStates, e.g. national, effort-sharing targets for thedecarbonisation of the power sector. This couldreplace specic EU policy targets for renewableenergy, post-2020. As with any non-ETS measures,it could decrease the overall cost-efciency of EUclimate change policy.

Some second-generation CCS technologies particularly for CO 2 capture will not have haddemonstration experience and should therefore

continue to receive incentives, as described for theshort term.

should continue as a slidingpremium scheme (as in the short term, see above).

could be attractiveoptions for the medium term.

in line with the EU Low-Carbon

Economy Roadmap 2050 a legally binding EUtarget for reducing the CO 2 intensity of all sectors,including power, is a strong driver for investmentby Member States. By increasing the EUA price,it also makes CCS for fossil fuel power plantseconomically viable. (Measures may be needed toprevent carbon leakage.)

should continue (as in the shor t term, see above).

would continue to lowerthe overall cost of projects and should thereforealso be available. These are indirect debt-nancingmeasures for commercial-scale coal- and gas-redpower plants with CCS.

5.2 Medium-term measures (2020 - 2030)

5.3 Long-term measures (2030+)

In the long term, non-ETS incentives will still benecessary for the development of new technologies,

but a level playing eld, based on the ETS, is thecorrect approach once technologies are fully matureand normal competition applies.

as early as possible well before the end of thepreceding phase, with a view to making the EUAprice an effective part of the long-term businesscase for CCS. Banking should continue to beallowed in order to establish a long-term forwardmarket for EUAs. Provided that the risk of carbonleakage is addressed (see page 10), the cap shouldbe based on the scenario outlined in the EuropeanCommissions Low-Carbon Economy Roadmap205018 which sets the required emission reductiontarget at 88%-91% for ETS sectors between 2005and 2050. This scenario is also the basis for the EUEnergy Roadmap 2050, which conrms the criticalrole of CCS in the energy system towards 2050(see footnote 3).

designed to stabilise ex ante the EUA price in theface of (expected) economic volatility: a centralcarbon bank , to be capitalised by the revenues

from EU auctions, with a remit to buy and sell EUAsin order to stabilise the price. Such a bank should

be independent of other political entities, suchas the Commission, to avoid political interferencein the market. However, the inuences of themacroeconomy on the ETS system would haveto be estimated in advance, in order to link theindicators sufciently to the cap.

reserve price auctions would provide investors with long-term securitythat the EUA price will not fall below a certain level.However, some ZEP members consider that thiswould not have sufcient impact on the businesscase for CCS and that it would undermine thefundamentals of the EU ETS which is a volume-based instrument as an imposed price would notresult in lowest-cost emissions reductions.

impact, cost-effectiveness and, in somecircumstances, environmental effectivenessand would therefore only be considered as partof a package of measures once CCS has beendemonstrated. An EPS could potentially provide aforward market signal for future demand for CCSwhen set sufciently low and combined with other

18 SEC(2011) 288 nal, p. 54, March 2011


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market incentives. It may happen that some old,unabated power plants will be reserved for peakand upper intermediate load range. However, itcan be expected that the operational ranking inthe merit order will prioritise CCS-equipped plantsdue to the higher efciency of new-build and theavoided CO 2 penalty of new-build and retrottedpower plants. An EPS that does not recognisethe different operating regimes needed forpower supply (peak-, medium- and base-load) willcompromise the exibility of electricity supply.

However, some ZEP members believe an EPS couldpromote the development of CCS investments ifimplemented at an earlier juncture. Its potentialeffectiveness would be strongly impacted by themanner in which it would be applied.

Long-term, advanced warning of emissionsregulations is essential to enable industry toprepare for deployment. Other members ofZEP consider that imposing an EPS on new andexisting power plants before the technology isfully demonstrated would be injurious to its properdevelopment and timely investments.

While recommendations for policy packagesare divided into short, medium and long term,the earlier they are all adopted, the greaterthe impact on earlier stages due to anticipationeffects, e.g. a tight ETS cap adopted in

investments in the medium term.

5.4 Summary table of recommended CCS measures

Recommended options for nancial assistance measures for CCS are summarised below:

MEASURE DESCRIPTION KEY BENEFITS

Short term, 2012-2020 Feed-in tariffs A sliding premium scheme whereby

a premium indexed on fuel price isguaranteed above the market price

Provides predictable revenues (indemonstration phase needs to be moreproject-specic, evolving into a pure feed-intariff as technology matures, i.e. medium-termphase).

CCS purchase contracts Government sets an amount ofanthropogenic CO 2 to be captured andstored over the next 25 years; competitivebidding process for 20-year CCS contractsto reach the desired volume (excludesproject construction time).

Combines contract certainty of feed-in tariffswith competitive and cross-sectoral elementsof a CCS certicate scheme.

Set aside a volume of EUAs(as proposed by theEnvironment Committee ofthe European Parliament,December 2011)

EUA surplus is not placed into the marketin order to restore scarcity as originallyintended

One-off measure to help increase EUA price(which places a cost on emissions) which inturn can be avoided through CCS. Will onlyachieve full impact as a rst step towardsa broader reform of the ETS, includingextending ETS cap to 2030. This measureshould be carefully managed to avoid politicalrisk associated with the ETS.

Earmark EUA revenues for CCScapital grants

50% of EUA expenditure of ETSinstallations is placed in company-specictrust accounts for CCS capex with a5-10 year use it or lose it clause

Simple and predictable for companies and inline with the spirit of the ETS Directive (50%earmarking).

Capacity payments TSO holds reverse auction for forwardCCS-equipped power generation capacity(with set requirements for availability,exibility etc) payments are madeannually as long as capacity is available( /MW). The contractual terms forpayments should be set for a number ofyears in advance.

Reduces the risk to return on capex that thetrend towards reduced base-load entails forCCS.

Loan guarantees to commercial-scale coal-and gas-red power plants with CCS

Indirect debt nance measure to help lowerthe overall cost of CCS projects.

Tax breaks for EOR Reduction in tax liability for companiesoperating a CCS asset for EOR projects.

Lowers cost of projects that employ CCStechnology.


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MEASURE DESCRIPTION KEY BENEFITS

Medium term, 2020-2030 Feed-in tariffs A sliding premium scheme whereby

a premium indexed on fuel price isguaranteed above the market price

Provides predictable revenues

CCS purchase contracts Government sets an amount ofanthropogenic CO 2 to be captured andstored over the next 25 years; competitivebidding process for 20-year CCS contractsto reach the desired volume (excludesproject construction time).

Combines contract certainty of feed-in tariffswith competitive and cross-sectoral elements ofa CCS certicate scheme.

(in line with EU

Low-Carbon Economy Roadmap2050)

A legally binding EU target for reducingCO 2 intensity of all sectors, including power,is a strong driver for investment by MemberStates.

Increases EUA price, making CCS for fossil fuelpower plants economically viable. (Measuresmay be needed to prevent carbon leakage.)

Capacity payments TSO holds reverse auction for forwardCCS-equipped power generation capacity(with set requirements for availability,exibility etc) payments are made annuallyas long as capacity is available ( /MW).The contractual terms for payments shouldbe set for a number of years in advance.

Reduces the risk to return on capex that thetrend towards reduced base-load entails forCCS.

Loan guarantees to commercial-scalecoal- and gas-red power plants with CCS

Indirect debt nance measure to help lower theoverall cost of CCS projects.

Long term, 2030+

Adjust EUA supply/ETS cap Reduces the total quantity of CO 2 emissions

and equivalent EUAs. Set the cap for 2050in line with EU Low-Carbon EconomyRoadmap 2050; banking should be allowed.

Increases EUA price, making CCS for fossil fuel

power plants economically viable. (Measuresmay be needed to prevent carbon leakage.)

EUA reserve price auction EUAs are not auctioned below a certainprice. A carbon central bank could be a wayto achieve this.

Gives the investor greater certainty regardingthe EUA price and revenues. (Complementarymeasures to adjust EUA supply are neededto prevent speculation and eliminate adverseinteraction between ETS and non-ETSmeasures.)


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Industry has already demonstrated its willingnessto take on a major portion of the costs and risks ofinvesting in CCS technology. However, as NER 300funding will now be signicantly reduced, additionalnancial support for CCS demonstration projectsfrom Member States is vital (see page 7).

In addition to economic measures for CCS, thefollowing actions must therefore also be taken asa matter of urgency in order to enable the timely demonstration and deployment of CCS and deliverthe EU Energy Roadmap:

for example, on the precise modalities for site

hand-over and nancial security at MemberState level. CCS investments need to be de-risked.

2 storage is signicantly cheaperthan offshore and key to the long-term businesscase for CCS in most Member States. As theremay be insufcient demonstration projects withonshore storage, large R&D pilot projects withCO storage should also be supported, with aprimary focus on onshore.

storage is urgently required as this is on thecritical path for the large-scale roll-out of CCS. Balanced attention should be paid to all storageoptions (onshore, offshore and EOR) each has itsrole to play.

deployment, early strategic planning of large-scale CO infrastructure is key due to thelong lead time and its importance in achievingeconomies of scale. EU policy should thereforesupport the development of National CCSMaster Plans in which key clusters are identiedand a long-term CO 2 pipeline infrastructure planestablished. This will necessitate complementarystudies and could require nancial incentives/support for over-sizing infrastructure. Thepreferred regulatory regime and businessmodel for CO 2 pipeline infrastructure shouldalso be claried, including transparent andnon-discriminatory rules and tariffs for third

party access.

States engaged in CCS demonstration projectsand a public that remains largely unaware of CCSand why it is urgently needed. support for CCS is essential , focusing on thecritical role it has to play in decarbonising Europe within a portfolio of solutions, including greaterenergy efciency and renewable energy; the use ofnatural mechanisms that have already stored CO 2,oil and gas underground for millions of years; and

the decades of relevant experience that alreadyexists within the industry including successfulsmall-scale demonstrations of CO 2 storage thathave been taking place in Europe since 1996.

5.5 Additional actions required to ensure the timely demonstration and deployment of CCS


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Annex: Members of the ZEP Temporary WorkingGroup Market Economics (TWG ME)

Name Country Organisation

Heinz Bergmann Germany RWE and Chair of ZEP Coordination Group

Christian Bos The Netherlands TNO

Christina Hatzilau Greece National Technical University of Athens

Peter Heijmans The Netherlands Shell and Co-chair of ZEP TWG ME

Eivind Hoff Belgium The Bellona Foundation

Emmanuel KakarasGreece CERTH

Hans Knippels The Netherlands Rotterdam Climate Initiative

Jean-Francois Leandri France Alstom

Goran Lindgren Sweden Vattenfall

Guy Maisonnier France IFP Energies nouvelles

Emilie Mouren-Renouard France Air Liquide

Philippe Opdenacker Belgium GDF SUEZ

Anca Popescu Romania ISPE

Charles Soothill Switzerland Alstom and Co-chair of ZEP TWG ME; Vice-Chair of ZEP Advisory Council

Hermione St. Leger U.K. Shell, Editor

Bart Stoffer France General Electric

Asgeir Tomasgard Norway SINTEF

Marc Trotignon France EdF

Robert van der Lande The Netherlands ZEP Secretariat

Viviana Vitto Italy ENEL

Karl-Josef Wolf Germany RWE

Gerhard Zimmermann Germany Siemens


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Documents

ZEP CCS Market Economics Report