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

The case for a Tees CCS networkFinal ReportDebt finance. Commercial lending for project finance typically complements equity.The commercial terms upon which project finance is provided are based upon anacceptable commercial risk profile, with a cash flow model generating revenuestreams to recover capital outlay across an acceptable period. Where capital isprovided for plant and equipment, commercial lenders require solid performanceguarantees, and major project sponsors providing project equity, typicallycommensurate with the level of risk associated with the project. A syndicated loan maybe provided by a number of lenders, with one commercial arranger. This allowslenders to manage the exposure of their investment portfolio, particularly given thelarge capital requirements for CCS infrastructure and competing sources for capital,compounded by the recent financial crisis.Infrastructure investors. Infrastructure investors typically specialise in providingsignificant amounts of capital in early stages of large project developments with wellunderstoodcost and revenue models (transport, energy, utilities, andcommunications). Discussions with infrastructure fund providers confirmed the viewthat such institutions are extremely averse to technology risk and unlikely to accept the“first-of-a-kind” construction, project-on-project and operational risks associated with aCCS network investment. They can effectively place debt into lower risk projects withproven technology, known revenue streams and well understood project challenges.The present opportunity cost of investing in CCS is high, with many lower riskinvestment opportunities currently in the market for these types of players as aconsequence of various economic stimulus packages introduced by Governmentsover the last two years. That said, there is some residual interest amongstinfrastructure fund specialists in potentially being involved in early CCS projects in asmall way (e.g. 5% debt financing of investment needs), albeit with recourse to wellcapitalisedequity investors in order to insulate their risks.Private equity and venture capital. Specialised equity such as venture capital (VC)is commonly applied to emerging technologies and relatively speculative projectinvestments. Private equity funds typically operate a business model based on a largeportion of debt funding, which is unlikely in the case of a demonstrating a CCSnetwork. Also, the size of the funding required to deploy CCS at scale on Teesside isprobably in excess of typical private equity involvement, whilst typically they invest inproven industries with established business models where certain short-termmodifications to operations can lead to profitable exits typically within 3-5 year timeframes; criteria certainly not applicable to CCS at the current time. Venture capitalfinance is more suited to higher risk technology projects such as CCS and has beensuccessful in developing a range of new and emerging technologies to date, includingrenewable energy. However, the economics of the CCS network suggest that thereturns typically required from venture capital (25-35%) are highly unlikely in the shorttomedium term. Moreover, there are few if any VC funds willing to accept the level ofrisk and equity investment required for CCS at this time. As demonstrated earlier inthis report, the cost of network service required to meet such high levels of desiredreturns would likely be prohibitive to most potential network users - and connectionfrom these emitters would be required to build and operate the network at anacceptable capacity in the first instance. On this basis, it is difficult to envisage a rolefor VC in the Teesside network at this time.Multilateral public funds. Multilateral public funds provide finance for projects whichmeet policy objectives but may face significant challenges to attracting conventionalinvestment such as commercial debt finance. Loans, guarantees and other financialsupport instruments are typically provided on favourable terms compared to those50