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

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