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

POLICY & REGULATORYTECHNICAL & OPERATIONALECONOMIC & MARKETThe case for a Tees CCS networkFinal Reportexpected lifetime. As it is extremely unlikely that insurance for technology failure will beavailable, commercial lenders will therefore require equipment vendors to stake theirreputation on providing performance guarantees for equipment. This will ensure that it is inthe vendor‟s interest to overcome any operational problems. To the best of our knowledge,few if any of these conditions are in place at present.A further element to consider for shared infrastructure is the risk of change of ownership.This could affect incumbent contracts, and potentially prevent access to the system. Useof non-disturbance agreements will typically be required to manage this risk.Table 6 summarises some of the key project risks associated with developing the CCSnetwork and the range of potential approaches to managing them. The table shows thatwhile many of the risk management options can be dealt with primarily by the privatesector (through various commercial and legal arrangements typical of large multi-partyinvestment projects), other areas of risk will likely require government policy and regulatorysupport. In this context, it is important to note that some CCS risks are viewed by investorsas potential „deal-breakers‟ unless addressed by the policy framework (e.g. EU Allowanceprice, long-term liability) whereas others can be managed through well understood existingapproaches (CO 2 supply and demand risk, tariff arrangements).Table 6 Summary of project risk and risk management optionsKey risk factorCommercial & legal (private sector)Risk management approachPolicy instruments (public sector)Uncertain CCS policy framework Contingency planning and insurance Long-term policy committmentsUncertain CCS regulatory framework Contingency planning and insurance Robust regulatory regime for CCSInsufficient EOR incentives - Fiscal support for tertiary O&G productionLong-term liability arrangements - Arrangements acceptable to CCS operatorsPlanning process challenges Coordinated approach to planning procedures -Lack of public acceptance Communicating benefits of CCS Communicating benefits of CCS"First of a kind" technology riskEquipment vendor performace guaranteesEPC contractor insuranceGovernment guaranteesDisruption of plant operation Contingency planning and insurance Compensation for loss of outputNon-supply risk Long-term supply contracts Government guaranteesNon-demand risk Long-term supply contracts Government off-take agreementsPhasing and sequencing risksProject-on-project riskLoss of CO 2 containmentTemporary tanker storage in initial stagesCompletion guarantees / arrangementsCommerical and legal insulation fromcounterparty risk and project failture (nondisturbanceclauses, completion guaranteesetc)Financial provision arrangements / liabilitytransfer--Financial provision arrangements / liabilitytransferProject cost overruns Completion guarantees Government guaranteesLow carbon price & price volatilityEUA price hedging instrumentsGovernment carbon price guarantees (pricefloors, contract for differences etc)Increased stringency of EU ETS capsEconomics of EOR - Fiscal support for tertiary O&G productionEnergy price increases Energy price hedging instruments -Sector-specific cost risks Contingency planning and insurance Compensation for loss of outputRevenue risk (cost recovery) Robust cost recovery and tariff arrangements Government guaranteesBarriers to markey entry and exitNetwork capacity rights with secondarymarketThird party access arrangementsGovernment, if it wishes to leverage private finance into CCS projects, clearly needs toprovide the required framework for addressing those risks that are genuinely46