A new whitepaper from Deloitte Netherlands explores in detail emerging carbon capture and storage (CCS) business models in Europe and the US specifically focusing on their bankability – financial viability and attractiveness for potential private-sector investors (i.e. banks and infrastructure funds).
The paper, authored by Kirill Kalinkin and Stefano Ferri, focuses on the two main stakeholders – the emitters of CO2 and the developers of the future CO2 transport and storage infrastructure.
“CCS is a nascent technology and there are just a few operational projects, so there are limited empirical data on CCS technical performance. What if CO2 capture rate is lower than expected, resulting in less CO2 going through the network? What if CO2 starts to leak during the injection or from the storage? Major oil & gas companies, currently pursuing CCS projects, are taking such risks on their balance sheets, but this is not really acceptable for a private investor,” says Kalinkin when discussing the current views of private investors on CCS projects.
Mitigation of specific risks associated with CCS projects is one of the main themes in the whitepaper. An overview of the CCS project life-cycle highlights specific technical risks, the realization of which, even with low probability, might lead to an unattractive business case for investors.
The report also provides a deep dive for the CCS business models being implemented in the most progressed CCS regions – the US, UK and Europe. The analysis highlights different approaches to make CCS financially viable for emitters and acceptable for investors.
Kalinkin comments on the different financial models being deployed by saying “There are various financial instruments, in forms of subsidies and tax credits to make CCS business case acceptable for industrial companies (i.e., CO2 emitters) and service-providers (i.e., transportation and storage of CO2) across the EU, UK and US. The structure of contract for differences-type of subsidies, which closes a gap between EU / UK ETS price and the total CCS costs for an emitter, seems like a reliable and workable solution. However, it is not yet universally rolled out across the EU. In the US, emitters can receive a tax credit ($85 per ton of CO2 captured and stored), which looks attractive at first glance, but it falls short for some hard-to-abate emitters (like cement). Also, there is significant uncertainty after the tax credit realization period and whether the allocated tax credit budget is sufficient.”
According to the authors, CCS projects are deemed investable only in the UK due to implementation of a comprehensive regulatory and commercial framework. One aspect is the government protection in case of low probability high impact events, which makes CCS more attractive for private investors.
The US is also progressing with multiple projects bolstered by the Inflation Reduction Act (IRA) and its 45Q tax credit but the authors feel that it doesn’t provide enough incentive for some emitters. Moreover, a lack of risk-sharing mechanisms seems to be limiting the bankability.
We can also see what the situation in Europe is, with reviews of the Netherlands, Denmark and Norway, noting the progress that has been made but also some of the challenges that have already emerged.
An example of these challenges is the Northern Lights CCS project which has seen one of its initial customers withdraw due to cost increases. Although the project continues due to significant government support, if such a situation were to happen in a project financed by private investors, it might lead to significant financial losses. The whitepaper is very likely one of the few (publicly available) deep dives into the financial aspects of carbon capture and the challenges that emitters and project developers are facing across the Atlantic. You can download the full 30-page version of the carbon capture whitepaper for free via the Deloitte Netherlands website by clicking this link.