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As CCS investment grows, can government and industry avoid past mistakes?

05 January 2022 Kevin Adler

For the US government to break the cycle of disappointment in its first decade of support for carbon capture and storage projects (CCS), federal grant and loan programs must be revised, the Government Accountability Office (GAO) said in a report released in December.

That's part of the equation, analysts agree, and they support the reforms suggested by GAO. But just as key for the industry's future are increased tax credits for CCS, instituted in 2018, and the technological advances that have the potential to capture carbon less expensively. With new private and government funding and an urgency behind CCS, now is a prime opportunity for the technology to contribute to US decarbonization goals.

The Biden administration has made it clear that it believes CCS will be part of the nation's drive towards halving CO2 emissions by 2030 and reaching net zero by 2050.

"To reach the President's ambitious domestic climate goal of net-zero emissions economy-wide by 2050, the United States will likely have to capture, transport, and permanently sequester significant quantities of carbon dioxide," stated the Council on Environmental Quality (CEQ) in a report published in July 2021.

IHS Markit says that 71 CCS and CCUS projects are operating, in some stage of development, or have been announced in the US. Existing projects can capture up to 25 million metric tons (mt)/year of CO2-equivalent, and nearly 85 million mt/year of additional capacity is in development, IHS Markit said in a report published on 30 November.

IHS Markit believes that CCUS capacity in the US has to double every five years through 2050 to contribute meaningfully to the nation's net-zero goal, said Paola Perez Pena, principal research analyst, clean energy technology.

The Clean Air Task Force (CATF) is optimistic that such lofty goals can be hit. The US could have 125 million mt/year of capture capacity operating by 2031, said John Thompson, CATF technology and markets director.

CATF believes the Infrastructure Investments and Jobs Act, signed by President Joe Biden on 15 November, will accelerate the next stage of the industry's growth. The legislation represents "the largest single investment in carbon management provisions since DOE began funding carbon capture research in 1997," CATF said.

The provisions in the infrastructure act closely follow key CEQ recommendations, such as funding to speed up permitting reviews for pipelines to deliver CO2 to sequestration facilities and providing $3.5 billion in new funding for demonstration and pilot projects.

It's a good start—but only a start, Thompson said in an interview with Net-Zero Business Daily. "Congress needs to provide smarter economic support to CCS," Thompson said. "It needs to pair that greater oversight and accountability with more flexibility so DOE can make changes to address new conditions [such as] changing market factors, rising inflation, and technology performance improvements."

High costs and low revenues

As documented in the GAO report, DOE spent $1.1 billion to support CCS demonstration projects from 2009 through 2018. But only three projects reached the point of actually capturing and storing carbon: a single coal project and two projects tied to industrial facilities.

GAO cited DOE's poor decisionmaking on which projects to fund, the vulnerability of those projects to falling oil and natural gas prices, and the "uncertainty regarding carbon markets" as factors that impeded success.

Fixing the system begins with giving DOE more flexibility in the projects that it backs. GAO said that coal-fired power plants were the carbon source for eight of the 11 projects DOE funded from 2009 through 2018, and they took nearly $684 million of the agency's total investment of $1.1 billion.

But those are, generally speaking, very high-cost projects, said Perez Pena. "DOE was putting its money into a high-risk industry," she said. "Coal power generation is one of the most expensive technologies to capture CO2 from…. Lower cost is lower risk."

A study by CATF of the comparative costs of capturing carbon streams from different types of processing units finds coal and gas at the high end of the scale at $70-$90/mt, including $25/mt for transporting the CO2 by pipeline to the storage facility. This is because only about 12% of the flue gas coming off a coal plant is CO2 and only about 3% from a gas plant.

In contrast, the only emissions from an ethanol facility are CO2 and water. Separating the CO2 is a simpler process than purging all the impurities from coal flue gas, and this leads to a cost of $37-$55/mt (including transportation), Thompson said.

DOE staff was aware of the cost differential, but the department's hands were tied. "DOE inherited a program that could only fund coal and certain industrial plants. It did the best it could under the circumstances," Thompson said.

On top of the high costs incurred by coal-oriented projects, developers were operating under a fee structure that provided far less revenue than they needed to recoup those costs.

The key revenue stream for a CCS project is Internal Revenue Service Code Section 45Q, which provides a credit for CO2 that is captured and stored at an approved facility. From 2009 through 2018, the credit (or allowance) for CO2 stored and then used in enhanced oil recovery (EOR) was $10/mt, and the credit for CO2 stored underground permanently was $20/mt. Given the cost structure cited above, the economics were impossible, Thompson explained, and that discouraged any developer that didn't have the federal government footing pretty much all of the bill.

The Bipartisan Budget Act of 2018, which was signed into law in February 2018, changed the equation. It raised the rate for permanently stored CO2 to $31.77/mt in 2020 for new CCS facilities and set the rate at $50/mt in 2026, plus annual inflation adjustments. For storage-plus-EOR, the rate was $20.22 in 2020 and will rise to $35 in 2026. Allowances can be claimed for 12 years.

It's possible the 45Q tax credit could be raised again, as a proposal to increase it to $85/mt for permanent storage is in the Build Back Better legislation. However, that bill is stalled in the US Senate. Given that many CCS projects in the industrial space are expected to cost $60-$80/mt, this would be a major boost, Perez Pena said.

CCS works

One thing to keep in mind in considering the financial difficulties of past CCS projects is that CCS does work technologically.

"We know from completed projects that you can capture 90% of carbon, and even 98%-99% at reasonable cost. We see in DOE-funded projects … very high levels of capture above 90%," Thompson said.

"What's wrong [has been] the policies to support it," he continued. "Carbon capture isn't free. You add it to a factory, to a power plant, and it costs money. We just weren't realistic about the cost of CCS for most applications."

The experience with the one completed coal CCS project, known as Petra Nova, illustrates this problem. Petra Nova is designed to treat and capture at least 90% of the CO2 emissions, or 1.4 million mt/year, from a 240-MW unit at the W.A. Parish Electric Generating Station in Thompsons, Texas. The captured CO2 was to be compressed and transported through an approximately 80-mile pipeline to an operating oil field and used for EOR. Petra Nova began commercial operations in early 2017, but it halted operations in May 2020, according to GAO's report.

The culprit was low oil prices, which killed the price that the developer, NRG Energy, could get for CO2. Without a strong and steady price for that CO2 from oil companies using it for EOR or a higher 45Q credit from the government, it couldn't overcome the high cost of operating the facility.

"The Petra Nova plant … never claimed 45Q credits," Thompson said.

Reducing costs

While a higher 45Q tax credit can help to solve the revenue side of the equation, developers and government also can address the cost side of CCS. New technologies such as enzymatic absorption are showing promise in making carbon capture less expensive.

"There are technologies on the capture side that aren't far enough advanced yet—such as membranes and metal oxides—and for those you will need a lot of government support to get to commercial scale," Thompson said. "And you need [them to be used on a] commercial scale in order to bring the costs down."

Another way to reduce costs in the capital-intensive industry is to leverage technical knowhow. Oxy Low Carbon Ventures, Mitsubishi Heavy Industries, Sumitomo Corp., and venture capitalists have invested in Cemvita Factory, which is developing "synthetic biology solutions" for carbon removal for oil and coal producers.

ExxonMobil's 2019 investment in Mosaic Materials is another example in which an oil company with deep pockets could move innovative CCS technologies into commercial applications.

Another idea that's gained momentum in the last year is to create projects large enough that economies of scale come into play. That's the model ExxonMobil is following in its much-publicized, $100-billion CCS hub concept for the Houston area, announced in April 2021. The hub could capture up to 50 million mt/year of CO2 by 2030, and 100 million mt by 2040 from an array of sources, ExxonMobil said.

The Infrastructure Investment and Jobs Act signed by Biden in November provides $2.1 billion for low-interest loans for shared CO2 transport infrastructure, addressing exactly that issue. Two proposals to gather CO2 from as many as 30 Midwest ethanol plants and sequester the carbon at a central location are examples of projects that could take advantage of those loans.

Adding CCS capability to existing power or industrial facilities is another way to keep down costs, compared with the unsuccessful DOE programs, Thompson said. He noted that all of the DOE-funded coal power projects, except one, were coal gasification, which itself was an expensive technology. When the costs of a coal gasification plant ballooned and projects were delayed, it had a devastating effect on the CCS project associated with it.

It's not a coincidence that the two successful industrial CCS projects funded by DOE were add-ons to existing operations: an ethanol facility owned by Archer Daniels Midland in Illinois, and methane steam reformers owned by Air Products & Chemicals in Texas. They each store carbon onsite, which reduces transport costs as well. "Focusing on retrofits takes out an enormous chunk of capital risk," Thompson said.

There's another reason that those industrial projects succeeded where power projects didn't, said Perez Pena: less competition. She recommends focusing CCS investment on hard-to-abate sectors for which few alternatives exist, such as the cement or steel industries. "Those industries don't have many options to remove carbon. In power generation, you have renewables, so that's a different decision," she said.

A coal or gas-fired power plant, plus CCS, is not likely to be cost competitive against renewable power. And yet it's still surprising that about half of the announced CCS projects are supporting coal generation. "We know these are high risk and high cost, and we are still trying to push these projects because there is a lot of state support for the coal industry," she said.

Thanks to carbon taxes, Europe is farther along on pushing CCS to the sectors where there's no other attractive option, she said. "The US is not penalizing you if you produce CO2. It's a 'carrot' strategy. We are giving incentives for CCS projects with … higher revenue streams [as 45Q allowances are raised]," she said. "But in Europe it's more of a 'stick'—that if you don't reduce emissions, you will be penalized."

Integrated approach

GAO and the analysts said that an integrated approach in which the government and industry work together is essential to bringing CCS into the US' climate mitigation mainstream.

This begins by giving DOE the flexibility to adjust as new technologies, opportunities, and needs emerge. "We might find there's a clear CCS technology winner. Don't lock yourself in," Thompson said.

The same goes for the projects for which carbon is being sequestered. The infrastructure bill instructs DOE to support two coal plants, two gas plants, and two industrial plants. That's a slightly better balance than the coal focus in the past.

Also, DOE is not likely to repeat its prior mistakes in selecting projects too quickly and then adding funding even if targets are not met. GAO said in its report that the decisions in 2009 were made in the unusual circumstance of money coming through the American Recovery and Reinvestment Act, which was passed in the wake of the 2008-09 financial crisis. This led to pressure on DOE to select CCS projects in as little as three months, and then senior management did not enforce cost controls over ensuing years.

GAO recommended a different approach with more oversight, and Thompson said he's confident that will occur, even as DOE will shoulder a smaller share of a project's costs.

If DOE is providing less funding, then developers will have to risk more private capital. But this comes with benefits as well, Thompson said. "I think there's no substitute for strong market forces like 45Q that doesn't require the government to 'OK' a particular project," he said.

Posted 05 January 2022 by Kevin Adler, Chief Editor

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