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

The case for a Tees CCS networkFinal ReportInvestment in a CCS network must proceed along a challenging critical path. Importantmilestones include (i) selection of projects for CCS demonstration; (ii) reaching a finalinvestment decision for anchor projects, sizing of the offshore pipeline and storagestrategy; (iii) construction of infrastructure; (iv) sequential connection of emitters to thenetwork; (v) eventual handover of the storage site back to the State.The capital requirement for the onshore pipeline network falls within the range oftypical investments made in infrastructure in the Tees Valley, can be shared andphased so that capacity matches demand.Up-front investment in an initially „over-sized‟ offshore pipeline may add up to £200million in costs, exposing lenders to significant commercial risk, particularly from lowutilisation.The interconnectedness of the different components and parties across the CCSnetwork creates „project-on-project‟ risks that will need to be managed before anyinvestments are made.4.2 Economic and market risksNumerous risks may impact the fundamental economic performance of the network as awhole, and also the separate investments made within it across the project cycle.Traditional project finance, whether based upon debt or equity - or various combinationsand forms of both - requires a robust business model rooted on a thorough understandingof all costs (capital and operating expenditure) and income streams (up-front orperformance-related grants, financial incentives, revenues) arising throughout the entireproject cycle (the “cash-flow” model).Many of these elements are subject to significant uncertainties outside the direct control ofthe network developer/operator, investors and potential users. Some are macro-economicin nature, influenced by international or national market factors; others are project-specificand intimately linked to the technical and operational performance of the CCS network andits constituent components. These uncertainties however need to be factored into anyanalysis providing the basis for decisions made in relation to capital lending and corporateinvestment.Key economic and market risks associated with the project include:Cost overruns. CCS has high capital costs and a variety of unforeseen technical andengineering factors that could result in significant cost (and time) overruns, leading togreater lending requirements and therefore potentially reduced project returns to assetowners and capital providers. Cost overruns could apply across the project chain(capture plant, pipeline infrastructure, storage site facilities) at the start, duringoperation 79 , or on decommissioning.Carbon prices within the EU ETS. In the absence of policy instruments such ascarbon price floors or contract for differences (CfD) 80 , investors will be subject to the79 Under-performance e.g. reduced efficiency of capture or need for additional storage infrastructure could lead tohigher costs during operation.80 Just prior to publication of this report, the Government has announced that it will consult on providing certaintythrough a carbon floor price. HM Treasury and HMRC (2010) Carbon price floor: support and certainty for lowcarbon investment, available at http://www.hm-treasury.gov.uk/d/consult_carbon_price_support_condoc.pdf38