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

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The case for a Tees CCS networkFinal Report7. Government support will be critical to attracting private capital 88 . Given theconcerns of private lenders in relation to the commercial risk profile of a CCS networkprojects, it is likely that some of the project challenges can only be accepted and/oraddressed by the public sector. In addition to the demonstration funding required tooffset some of the incremental capital costs of CCS, Government can potentiallyprovide support through the creation of stable revenues streams (carbon floor prices 89 ,revenue guarantees, decarbonised obligations, energy performance standards),providing additional support throughout the project cycle (Regional Growth Fund 90 ,CCS Levy, performance-based funding) and providing soft loans, structured financeand project underwriting/guarantees to cover technology risk (e.g. via the GreenInvestment Bank). There may be an option to use the free allowances for industry andcash compensation for indirect emissions to finance the development of CCS. Publicsupport will be required to de-risk those aspects that are unmanageable and thereforedeemed too risky by commercial lenders; use of public funds to support projects willprovide the confidence in the emergence of effective policies and regulations uponwhich the commercial success of the project is contingent, potentially providing a routeto leverage private capital into CCS demonstration. Once the concerns of lenders arereduced, the role of government can be lessened.Finally, the revenue streams provided by enhanced oil recovery (EOR) could significantlychange the economics of the CCS network and therefore the availability of privateinvestment. EOR can provide a revenue stream that could enhance overall projecteconomics. Once a significant and predictable volume of CO 2 is captured from Teessideand the offshore storage is proven, the potential for diverting CO 2 for tertiary oil productionusing EOR may serve to attract additional sources of private finance. However, given thelimited window of opportunity and high complexity for EOR, unless EOR activities can beguaranteed up front, it should only be viewed as the „icing on the cake‟ providing additionalpotential upside for network sponsors.There is considerable activity to develop financing mechanisms to support large scale lowcarbon infrastructure beyond the above established mechanisms, so that it will benecessary to review the conclusions contained within this chapter on an on-going basis.Financing for higher risk projects typically comes from public grants, equityinvestment, and guarantees. Capital providers will dictate required returns on thebasis of quantitative examination of scenarios. Up-front public grant support to ananchor project is required. Debt finance (e.g. through syndicated loans) is likely to belimited, although over time once risks have been reduced there would be a number ofoptions for refinancing with lower cost of capital. Strategic equity investment will berequired from a coalition of willing sponsors – who will need good track records.Government can leverage private finance through removing risks. Unless EORcommitments are made up-front, they should only be viewed as providing upsidepotential.88 Just prior to this report being published, the Government issued a Call for evidence on long term developmentof CCS infrastructure, available athttp://www.decc.gov.uk/en/content/cms/consultations/ccs_3rd_party/ccs_3rd_party.aspx89 Interestingly the wide range of prices for individual businesses highlights the challenge to Government insetting a single carbon floor price, i.e. any given price more than required for some emitters (dead weight losses)and insufficient for others.90 http://www.bis.gov.uk/policies/regional-economic-development/regional-growth-fund54
The case for a Tees CCS networkFinal Report6 Project structuring and ownershipThe previous two chapters highlighted the nature of commercial risks, how these can bemanaged and how these play out in terms of financing challenges for a CCS network inthe Tees Valley. Finding the right balance between risk, reward (revenues) and thesources of finance will be critical to creating a commercially viable project proposition forthe CCS network. This may be achieved through appropriate structuring of the project withrespect to its promotion, ownership, financing, design, construction and operation.This section sets out how the project could be structured in different ways to take accountof the risks and sources of finance in order that an optimal solution may be delivered. Anoptimal solution is one where all parties are effectively insulated against the risk of failureof one another, and where the risks (and rewards) are effectively distributed to thoseparties most able to accept them (or for rewards: are merited on the basis of risk appetite).However, it should also be noted that in reality, the most optimal solution may not bepossible due to prevailing policies of key stakeholders at the current time.Options for project structuringFigure 16 highlighted the number of actors and agreements that need to be in place, andby inference the complexity involved and coordination needed to get a CCS network offthe ground. Finding an appropriate structure for the project will help to manage,consolidate and reduce counter-party risk between the different actors involved, andtherefore significantly influence the ability of the project to attract private finance, and thecost of that funding.Appropriate structures can consolidate and simplify relationships between parties, reducethe number of entities involved and the number of counter-party agreements needed, andallow for common commercial linkages between entities to evolve. To illustrate this, wecan envisage two scenarios which cover options at each extreme of a spectrum availablefor project structuring:1. The laissez-faire model. At one end of the spectrum, the laissez-faire approachrequires each entity to operate independently with an absence of centralisedcoordination (i.e. no promoter). The web of agreements and contracts would needto evolve organically, financing for each component would need to be obtainedindependently, and the design, construction and operation of pipeline networkwould need to evolve with limited foresight, with each operator taking onresponsibility for their own segment to the point where another operator takes onthe responsibility. This is a very challenging prospect indeed.2. The centrally planned model. At the opposite extreme of the spectrum, acentrally planned approach would involve a single entity stepping in and takingresponsibility for to promote, design, build, finance, and operate the onshorenetwork, the offshore pipeline, and the storage/EOR (a design-build-financeoperate- DBFO - model). An extreme variant could also see the same entitytaking on responsibility for investing in and operating capture plant at connectinginstallations.The laissez-faire approach probably corresponds more closely to the current situation inthe Tees Valley. It relies on the organic development of the system amongst interested55
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