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

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The case for a Tees CCS networkFinal ReportTable 7 Potential sources of commercial finance for a CCS networkPublic financePrivate financeGrantsMultilateral fundsProject financedebtInfrastructure fundinvestorsCorporatefinance (equity)Private equity and VCfundsView of keycommercialrisksMade available due to high capitalcosts and project risk for CCS.Successful NER300 proposalsmust meet certain criteria (incl.demonstrating realistic prospect ofproject operation within requiredtimeframe; permits and nationallegal framework being in place)Multilateral investors such asthe EIB employ a range offunding instruments to supportpolicy-driven project financedeemed high-risk bycommercial lenders. Loansare subject to an assessmentof viability and bankability.„First of a kind‟ technology risk,„project on project risk‟ andabsence of robust long-termrevenue streams would likelyrestrict most lenders in absenceof significant governmentfinancial support / guaranteesLow appetite for providingproject finance to unproventechnology with significantcommercial riskOpportunity risks associated withinvesting in CCS compared toother capital projects. Numerousproject-on-project risks(including sequencing andsupply/take risks)Unlikely to attract privateequity due to large scale andmultiple risks. Venture capitalwell suited to newtechnologies withcorresponding commercial riskprofileTypicalproject returnrequirementsNot applicable. However, futuregrant schemes may includeprovision for public sector returnsin event of project return achievingcertain levels.Loans provided by multilateralbanks such as the EIB aretypically based on low andfavorable terms i.e. overallreturns, repayment periodsand conditions. Debt may alsobe subordinated to other(senior) debt providers.Investment considered only withtechnology risks addressed andlarge share of equity from majorsponsor(s); likely to required IRRof 15-20%.In view of project risks, likelyto require IRR of 15-20%Varies according to size ofinvestment and company. Whererisks can be addressed, mayrange from around 10% to inexcess of 20% IRR. Potentialsize of investment per corporatelikely to be limited to £10m‟s formostIRR in excess of 30%required, given technology riskand large size of investmentPotentialinvolvementwith NetworkNER300 applicable to the anchorproject(s) only. Up to 50% of theCCS costs can be funded throughthe NER300. To be awardedNER300 funding, the project mustdemonstrate the full CCS chain(capture, transport and storage).The funding can therefore be usedto support investment across thefull anchor project chain.Support via funds such as theEIB RSFF could potentially beused to match other financesources (commercial debt,equity, UK support) used tobuild the over-sized offshorepipeline, and potentially theon-shore network. EIB loansare capped at 50% of totalproject capital requirements.Potential for non-recourse orlimited recourse finance withpossible mezzanine andsyndicated arrangements.However, large risks of projectfailure and stranded asset risk.Potential for involvement inonshore and/or offshore pipelineinfrastructure based on revenuemodel (tariff; off-takeagreements etc.). Some banksmay have interest in CO 2 offtakearrangements.Commercial business modelmost suited to investing inpipeline infrastructure withreturns based on tariffs fromconnectors and/or EORoperatorsOffshore pipeline infrastructurelikely to attract equity from largecompanies and project sponsorsonly. Smaller companies andsecondary connectors mayinvest in capture plant andonshore network through a jointventure (e.g. special purposevehicle, SPV).Likely limited to specificelements of captureequipment demonstrationSuitability tofinancingNetworkGrant support to anchor project(s)finance needs is an absoluterequirement for CCS networkdevelopment within foreseeablefuture.Suited to providing up-frontcapital requirements fornetwork development, andpotentially on-going lendingsupport.May provide limited amounts ofdebt where project sponsors canprovide bulk of capitalrequirement through equity.Potential involvement as part ofrefinancing after Network andstorage is provenPotentially small-scaleinvolvement via provision ofa small amount of seniordebt. Potential involvementas part of refinancing afterNetwork and storage isprovenAbsolute requirement in absenceof government entirely financingCCS Network. Emitters havemost to gain from successfulproject deployment and strongtrack record of investing in jointinfrastructure on TeessideUnsuitable52
The case for a Tees CCS networkFinal Report5.3 Conclusions on financing optionsIn terms of potential finance sources, the following key conclusions can be drawn:1. Up-front grant support to the anchor project is required for the networkdevelopment. Because of the considerable capital requirements, the technology riskinvolved, and, at present, the insufficient carbon price signal upon which to base along-term stable cash-flow model, up-front EU- and/or UK-level support will beessential to help offset investment requirements and attract additional private financeand participation from potential network connectors.2. Commercial debt is unlikely to be available to get the project off the ground.„First of a kind‟ projects without business models built on steady and predictable cashflows are unlikely to attract significant commercial debt finance. Even under favourableeconomic conditions, it is likely that only 5-10% of the required up-front capital costsfor building a network might be available as commercial debt finance, and only thenwith recourse to well capitalised equity players.3. Refinancing is possible once a successful network is demonstrated. The networkcould be refinanced at a later date (in which project equity is converted into debt),when key project milestones have been overcome, the value chain and storage site isproven and the project is suitably de-risked. Refinancing would reduce the cost ofproject capital, thereby improving the overall economics of the project and potentiallyallowing for a reduced cost of network use. The UK government has undertaken thiskind of action through the privatisation of a number of key public assets over the years.4. Equity investment will be essential. Financing and building a network on Teessidewill need a „coalition of the willing‟ able to provide significant equity into the projectdevelopment. Equity takers would likely allow large companies with a strategic interestin CCS to finance their share of a network project from their balance sheets (or viacorporate finance or share issues), subject to scale and the business casefundamentals (or technically off-balance sheet, through the use of special purposevehicles; SPVs). Equity from established and committed participants will be critical tounlocking additional sources of finance, including the various options for refinancingonce the network is proven. The level of money sponsors are prepared to invest willprovide a measure of how serious they are about the success of the project. However,the scale of investment, coupled with the counter-party risks to equity holders posesan enormous challenge to most companies, particularly given the on-going pressureon capital budgets in the current economic climate.5. Project sponsors must have good track records. Project sponsors/equity takers willneed to be large companies with strong proven track records in managing anddelivering large complex projects. The commercial credit rating of potential networkusers is also a key issue, determining their ability to participate in the CCS network (interms of their ability to invest in on-site capture plant as well as providing equity in theonshore - and potentially offshore - network). Discussions with financiers confirmedthat commercial lenders prefer financing projects where project sponsors „have deeppockets‟ - there is good experience on Teesside from several large well-capitalisedcompanies developing and investing in joint infrastructure projects.6. Private equity and venture capital. Considering the level of technology riskassociated with CCS, specialist finance such as private equity and venture capitalwould require project returns unacceptable to the project economics (and networkusers). The scale and timeframe of the investment required is also unsuited to privateequity and venture capital.53
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