Final report for One North East And NEPIC 21/12/10 - The Carbon ...

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The case for a Tees CCS networkFinal ReportDrawing on the above analysis and drawing on stakeholder consultation, a range ofsensitivities for CCS deployment have been modelled for each scenario to understand theimpacts from different phasing of connections i.e. utilisation of different networks 73 .The higher the utilisation of the network, the lower the average cost per user, as fixedcosts are shared more widely. This is illustrated in Figure 11 for a „Medium‟ CCS network.Figure 11 also shows that the cost of service is highly sensitive to the discount rate (orweighted average cost of capital). Networks funded with high cost of capital are particularlysensitive to reduced utilisation (shown in Figure 11 as the position where the cost ofservice exceeds £10/t). The economic modelling shows that where networks are fundedwith a cost of capital of 5% (i.e. where public finance is likely to be the dominant source ofcapital), then an eleven year delay can be tolerated between the first and subsequentemitters joining 74 .Figure 11 Interplay of % utilisation and % discount rate on cost of service of TeesValley Medium CCS network.The full sensitivity analysis includes:Reduced utilisation (modelled as 50% of projected emissions, either becausesome sites fail to adopt CCS or adopt CCS but provide lower CO 2 supply becauseof efficiency improvements)Delayed utilisation (for example if it takes an additional five years for CCStechnology to be adopted by other sources in the Tees Valley)Delays in construction, so that this takes five years instead of three years.Onerous financial obligations, for example short payback times (10 years) or highweighted average cost of capital (15%).The analysis also considered potential benefits to the network economics that might arisefrom73 See Appendix II74 If the weighted average cost of capital is 10% and emitters join in two waves, only four years delay can betolerated. If the cost of capital is 15%, then less than one year delay between emitters can be tolerated.28
The case for a Tees CCS networkFinal ReportProvision of demonstration funding for an anchor project, so that remainingemitters pay only the marginal costs of the pipeline instead of the average costs.Stable regulatory and market environment and publicly-backed financialarrangements that allow access to long payback times (e.g. 40 years), lowweighted average cost of capital (e.g. 5%).Figure 12 Cost of service of investment in offshore CO 2 pipeline infrastructurecompared to baseline scenario.The impacts on these sensitivities on the cost of service for the „Medium‟ transport networkare shown above (Figure 12, baseline scenario shown in green). The actual cost of serviceclearly depends on a range of inter-related factors. Use of nearby sinks, favourablefinancing conditions and early connections of subsequent sources could each reducenetwork cost of service below £5/t CO 2 . In contrast, reduced utilisation, long offshorepipelines or high risk premia could each drive cost of service above £10/t CO 2 . Theanalysis identifies that the network could remain economic with up to an eleven year delaybetween the first and subsequent sources connecting.Combinations of these factors would obviously have a more profound impact on overalleconomics than individual factors alone. For example, a combination of expensive finance,low utilisation and delays in sources connecting would result in excessive tariffs for usersthat would not be economic for any of the networks modelled in this study even at carbonprices above £60/tCO 2 .3.6 Comparison of system costs and performanceThe average abatement cost of a „Medium‟ sized CCS system connecting eight pointsources is estimated at ca. £48/t CO 2 abated inclusive of financing (see Table 5). Of this,29
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