Financing the future of CCS - Is a CCS project a bankable investment?


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Allan Baker, Managing Director and Global Head of Power at Société Générale, lead a Global CCS Institute webinar on Barriers to Project Finance for CCS on 6 October 2011.

Mr. Baker has been heading the effort to position Société Générale as the leading financial institution in the CCS sector as part of the overall low carbon financing strategy of the bank. Despite a number of significant barriers to overcome from a financing perspective, Mr. Baker will outlined why CCS is still considered as an interesting area for his organisation’s future deployment of capital and resources.

After reviewing perceived barriers and risks facing the industry at the moment, including technology, uncertain regulatory environment, project-on-project risk across the full CCS chain and liability management, Mr. Baker outlined the potential rationale for various investors in large-scale CCS demonstration projects, the role for government, and the potential availability of project financing from Banks.

A recording of the webinar can be accessed here

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Financing the future of CCS - Is a CCS project a bankable investment?

  1. 1. Financing the future of cCs<br />Is a CCS project a bankable investment?<br />Allan Baker<br />Managing Director Global Head of Power<br />
  2. 2. This presentation has been prepared by SociétéGénérale Corporate & Investment Banking ("SG CIB"), a division of SociétéGénérale.<br />In preparing this presentation, SG CIB has used information available from public sources. No express or implied representation or warranty as to the accuracy or completeness of such information is made by SG CIB, nor any other party.<br />The contents of this presentation are subject to amendment or change at any time and SG CIB will not notify the recipients of any such amendment or change. No responsibility or liability (express or implied) is accepted for any errors, omissions or misstatements by SG CIB except in the case of fraud or any other liability which cannot lawfully be excluded. <br />Any views, opinions or conclusions contained in this presentation are indicative only, are not based on independent research and do not represent any commitment from SG CIB. This presentation and any expressed interest of SG CIB in arranging or of SociétéGénérale in providing finance or entering into any other transactions do not constitute any offer of finance or any commitment from SociétéGénérale to enter into any other transactions, such an offer being subject to contract, the completion of satisfactory due diligence and all necessary credit, management and other approvals being obtained. <br />SG CIB conducts its business in the UK through SociétéGénérale London Branch (“SGLB”). Société Générale is a French credit institution (bank) authorised and supervised by the Autorité de ContrôlePrudentiel (the French Prudential Control Authority). SGLB is subject to limited regulation in the UK by the Financial Services Authority.<br />
  3. 3. Ccs could become an attractive market for banks...<br />CCS could be an essential part of the strategy to decarbonise power:<br />It allows for the continued use of coal, one of the most abundant fuel sources<br />It does not suffer from the “intermittency” issues associated with wind /solar<br />It is applicable to existing and new fossil fuel generating plant<br />Geography is important - UK has a unique advantage for CCS:<br />Clusters of emissions<br />Ample offshore storage opportunities in depleted oil and gas fields and saline acquifers <br />And most importantly, attractive scale for lenders:<br />Global investment requirement of US$2.5-3.0 trillion (2010-2050 - IEA)<br />US$1.3 trillion of additional investment for capture<br />US$0.5-1.0 trillion of additional investment for transport<br />US$88-650 billion of additional investment for storage<br />Globally 500+ CCS projects by 2030 and in Europe 100+ projects<br />Significant part of the future energy landscape<br />If implemented properly, CCS could make a major and cost effective contribution to CO2 reduction<br />
  4. 4. ... If it meets the typical financing requirements<br /> Strong market fundamentals<br /> Clear public financing and regulatory framework<br /> Strong project economics<br /> Proven technology and low execution risk<br /> Favourable market conditions <br />Uncertainty remains in all of these <br />
  5. 5. Uncertain Market fundamentals – Some signs of progress<br />Share of CCS in energy mix in the UK potentially important but still uncertain<br />No targets set in the Electricity Market Reform (EMR)<br />No CCS targets at European level either<br />Various support mechanisms to encourage low-carbon electricity generation need further clarification from government<br />Feed-in Tariff /Contracts for Difference<br />Emissions Performance Standard<br />Will the government pick up the risks that market participants cannot take?<br />Putting in place a transparent, enduring, robust and credible institutional framework to deliver the EMR package critical to ensure investors confidence<br />Nth-of-a-kind cost trajectory of CCS<br />Will industry improvements decrease the cost of CCS to make it competitive with other low-carbon technologies?<br />Source: Department of Energy and Climate Change<br />
  6. 6. Key PUBLIC FINANCING and regulatory issues still need to be addressed<br /><ul><li>At a more global level, significant activity but limited progress</li></ul>Global CCSI “status” report will be interesting – some progress but some projects cancelled<br />Many projects in the departure lounge waiting for take off <br /><ul><li>There is no fully defined policy template for CCS patchwork of policy or incentive regimes</li></ul>Integration of CCS support mechanisms into the existing renewable and thermal market is a challenge<br />NER300 is a very promising development but national regulation is lagging<br />Government funding (NER matching + Demo Programme) needs to be clarified<br />Long term CO2 liability regime still to be addressed by legislation<br /><ul><li>UK EMR proposals could provide the structure for implementation of CCS </li></ul>Is CCS a long term business or an interesting experiment?<br />
  7. 7. Uncertain project economics<br />Lack of clarity in key drivers lead to uncertain economics of CCS <br />Sources of revenues are uncertain<br />CO2 certificates , power sales and other incentives are unclear?<br />Will incentive support be linked to “capped” return – all downside but no upside?<br />Impact of Enhanced Oil Recovery?<br />Cost structure is not fully predictable <br />What are the capital costs and the operational costs incurred to build and run a CCS plant?<br />What will be the cost of managing a chain with several independent operating businesses?<br />Will there be a necessity to provision for carbon liabilities?<br />Competition may threaten the future of CCS<br />Can CCS compete economically with other sources of low-carbon electricity and unabated thermal power plants?<br />Can Governments /consumers afford CCS?<br />Tension between environmental and budgetary objectives<br />Justification of huge capital grants in an environment of austerity<br />
  8. 8. CCS technology has not been proven to work at commercial scale<br /><ul><li>Lenders don’t generally like unproven technologies – large scale demo plants are several years into the future
  9. 9. Offshore storage in depleted gas reserves is better understood than storage in saline aquifers but CO2 remains a liability
  10. 10. Integrating capture, transport and storage with power generation creates “Project-on-Project” risks that potential lenders will find difficult to assess</li></ul>Impact of capture on the flexibility / economics of the power plant ?<br />Impact of non-availability of one element of the chain on the remainder ?<br />Ability to reach a commercial risk allocation over differing elements of the chain (see next slide)<br />Structure number of risks that have yet to be addressed or fully understood<br />Banks will be concerned that technology never gets past the demonstration phase<br />
  11. 11. Limited execution experience – what looks simple can be complex!<br />Co-Completion Risk (?)<br />Operational Risk (?)<br />Sponsor<br />Support<br />Network Co Lenders<br />Capture Co Lenders<br />Debt Service $<br />Debt Service $<br />Oil Co<br />Third Party Flue Gas Emitters / CO2 Capture Plants<br />CCS Co<br />Loan $<br />Loan $<br />CO2 End User<br />Network Co<br />Capture Co<br />Process gas<br />CO2<br />Industrial Emitter #1<br />Capture Plant<br />CO2<br />Process gas<br />CO2<br />Industrial Emitter #2<br />Capture Plant<br />EOR<br />CO2 Network<br />Flue gas<br />CO2<br />Power Emitter #1<br />Capture Plant<br />Flue gas<br />CO2<br />Power Emitter #2<br />Capture Plant<br />Hydrogen Power<br />CO2<br />Third Party CO2<br />CO2<br />Ship or Pay Based<br />Network Fee $<br />Take or Pay Based Offtake $<br />Take or Pay Based Offtake $<br />Take or Pay Based Offtake $<br />Single CO2 Buyer<br />Appropriate Credit Support<br />
  12. 12. Current market conditions are not favourable to CCS financing<br /><ul><li>Market Liquidity: Financial institutions still have issues and are dedicating capital to core clients and standard project
  13. 13. Risk Appetite: Safety first so why devote time to development of a new sector which is itself not fully developed?
  14. 14. Knowledge: Most financial institutions are aware of the CCS debate but have no understanding of the potential or challenges of the business
  15. 15. Vision: What are we being asked to finance?</li></li></ul><li>conclusions<br />Certainty and confidence is needed – without this there will be no financing<br />All stakeholders need to work together to make CCS happen<br />Government need to provide the platform to encourage investment<br />Remember, lenders will always have the flexibility to finance other sectors, products or geography<br />Is PF available for the demonstration phase ? Possibly, if the risk structure is acceptable<br />Is PF available for CCS roll out ? Possibly, if its economic viability is demonstrated <br />