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Webinar: Financing large scale integrated CCS projects

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One of the key issues facing the roll out of carbon capture and storage (CCS) will be the availability of commercial finance to support the significant capital investment needs of the industry. Whilst …

One of the key issues facing the roll out of carbon capture and storage (CCS) will be the availability of commercial finance to support the significant capital investment needs of the industry. Whilst a small number of projects have begun early discussions with debt finance providers, the appetite for, and understanding of, CCS in the financial sector has not been widely tested to date. With this in mind, the Global CCS Institute recently commissioned Societie Generale to take the pulse of the international finance community to determine the awareness, understanding and appetite for financing CCS projects with debt.

In this webinar, Allan Baker, Global Head of Power Advisory & Project Finance at Societe Generale, presented the findings of this exercise and discuss key issues for financial institutions in the CCS sector, potentially available sources of finance for projects and how to unlock this liquidity.

Published in: Economy & Finance, Business
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  • 1. Financing large scale integrated CCS projects Webinar – 23 June 2013, 1800 AEST
  • 2. Allan Baker Allan Baker Managing Director, Global Head of Power Advisory and Project Finance has worked at Société Générale for six years and has been involved in the power sector for more than 25 years, initially as an engineer and then in finance. During his career he has advised on and financed projects in Europe, MENA, the US and Asia, and in sectors ranging from green-field renewable energy to the acquisition of large thermal power portfolios. This experience has also encompassed regulated, partially deregulated and merchant power markets. In recent years he has become a leading figure in the CCS area, having been instrumental in bringing the financing perspective to the policy debate based on his experience of advising on to two of the world’s largest carbon capture and storage (CCS) projects. Allan was also a member of the UK Government’s CCS Development Forum and led the commercial section of the UK CCS Cost Reduction Task Force, whose results were published in a report in 2013. Allan is currently advising the Managing Director, Global Head of Power Advisory and Project Finance White Rose CCS project in the UK, which has recently been shortlisted for the FEED stage of the UK CCS Commercialisation scheme. Allan has a BSc (Hons) in Mechanical Engineering, an MBA, is a Fellow of the Institution of Mechanical Engineers and a Chartered Engineer.
  • 3. QUESTIONS  We will collect questions during the presentation.  Your MC will pose these question to the presenter after the presentation.  Please submit your questions directly into the GoToWebinar control panel. The webinar will start shortly.
  • 4. Global CCS Institute webinar Financing Large Scale Integrated CCS Demonstration Projects Allan Baker Managing Director Global Head of Power 25 June 2014
  • 5. 507/07/14 This presentation has been prepared by Société Générale Corporate & Investment Banking ("SG CIB"), a division of Société Générale. 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. 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. 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 Société Générale in providing finance or entering into any other transactions do not constitute any offer of finance or any commitment from Société Générale 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. SG CIB conducts its business in the UK through Société Générale London Branch (“SGLB”). Société Générale is a French credit institution (bank) authorised and supervised by the Autorité de Contrôle Prudentiel (the French Prudential Control Authority). SGLB is subject to limited regulation in the UK by the Financial Services Authority.
  • 6. 607/07/14 Agenda 1. Background 2. The Financing Challenge 3. What Makes a Project Financeable? 4. How Does CCS Measure Up? 5. Can CCS Benefit From Lessons Learned in Other Sectors 6. Will Financial Institutions Support CCS? 7. Financing Approach 8. Conclusion
  • 7. 707/07/14 Background  Financial will be essential to the development of CCS: ● Large scale demonstration projects to date have been financed by the public sector/government ● Commercial terms and risk allocation probably do not align with requirements of the finance sector ● Financial sector have not engaged with CCS to date – see it as experimental, expensive, long term, not interesting  Methodology for this engagement exercise: ● Comprehensive review of published material and experience ● Extensive engagement with commercial banks, ECAs, multi-laterals and other potential financing sources ● Evaluation of their understanding and perception of CCS ● Perceived and real financing related issues  Objectives: ● Understand where the finance community stand on CCS now ● Understand the challenges facing demonstration projects wishing to access external financing ● Understand what will be required to close a financing for a large scale demonstration project Commercial challenges could be more significant than technical challenges
  • 8. 807/07/14 the CCS Financing challenge - perception Lack of an industry – lack of precedent – lack of interest  Familiarity: ● Perception is that there are no CCS projects in operation ● Coverage of CCS in industry press is sketchy ● Cancelled flag-ship projects imply that industry is speculative  Precedent: ● Technology: CCS technology perceived as “new” ● Integration: complex inter-dependent chain ● Storage: outside comfort zone and unaware of existing sites ● Risk: no precedent risk allocation Demonstration projects are predominantly in power – operating projects are not and have not been externally financed
  • 9. 907/07/14 the CCS Financing challenge – clarity & structure Regional differences in policy and approach impact on financing  US is Carbon Capture, Use & storage: ● Established infrastructure for CO2 collection and transportation ● Established market for CO2 for EOR and even a projected shortage of supply ● Contractual precedent and risk allocation to underpin the industry  Europe is Carbon Capture, use & Storage: ● No pre-existing infrastructure – has to be established which has cost implications ● No pre-existing EOR industry as anchor buyer for CO2 ● Vast offshore storage potential but resistance to onshore storage Policy Implications:  CO2 is a valuable commodity in the US and a liability in Europe – impacts on regulatory environment  EOR is established in the US and a revenue source to off-set the cost of CCS  Poly-gen projects offer potentially more revenue streams = Significant difference in policy approach Financing Implications:  Structure of the US industry looks more like a commercial financing opportunity, albeit with some DOE support  Europe has a very different risk profile and cost base so more dependent on capital and operating subsidy = Confusion on the financing opportunity and approach
  • 10. 1007/07/14 What makes a project financeable...? Some fundamentals apply to finance what ever the sector  Policy and Regulatory Support: ● Clarity and consistency are key for confidence in the finance community ● Even more so when an industry requires heavy subsidy for early deployment of long life capital intensive assets  Technology: ● The finance community is not good at “first-of-a-kind” projects ● Availability of finance is usually inversely proportional to new technology  Risk Allocation: ● Project finance is all about identifying and pricing risk ● Some risks cannot be taken at any price !!  Opportunity: ● Different institutions have different drivers but “one-off” projects are usually not good targets ● Opportunity could be in terms of multiple follow-on projects and client relationships (commercial banks), support for manufacturing/exports (ECAs), development of a sector/technology/policy (multi-laterals & policy banks) Developing a new sector is an investment for financial institutions
  • 11. 1107/07/14 How does ccs measure up ...? ≈ Policy and Regulatory Support: ● Policy and regulatory support varies significantly region by region and even country by country ● In many cases policy, and particularly regulation, are evolving ● Emergence of very supportive regulatory templates – still need to be proven ≈ Technology: ● It is evident that much of the technology for CCS exists but in some cases at a different scale in a different context ● EOR, and to a certain extent storage, have been proven context is important ● Integration remains a concern – many financial institutions do not have integrated teams to look at CCS Risk Allocation: ● Risk allocation on operating projects and large scale plants in development may not be adequate for finance ● CCS specific risks, and ultimately stranded asset risk remain a material concern for the finance community ● Early commercially financed projects will require conservative “bespoke” risk allocation or extensive support  Opportunity: ● CCS increasingly being seen as a key component of decarbonisation ● Increasing awareness of the opportunity “recognisable” projects heading for commissioning – Kemper, Boundary Dam Three years ago all four would have been a thumbs down – so progress !
  • 12. 1207/07/14 Can ccs benefit from lessons learned in other sectors ...? Offshore wind seems most relevant  Key drivers for take off: ● Strong policy support in Europe ● Specific subsidy regime to compensate for cost ● Specific targets for deployment in some areas ● Strong support from large OEMs and developers ● Favourable risk allocation  Finance successfully mobilised: ● Started small but now $1bn deals done ● Financial institutions taking more risk ● Wide variety of institutions involved But..... ● It took 5 years from the real start of offshore wind to the first financed project ● Debt finance growth has lagged capacity installed ● Early mover finance ahead of significant capacity ● Finance increased significantly with improved incentives ● Early projects have very conservative risk allocation
  • 13. 1307/07/14 Will financial institutions support CCS ...?  There is clear interest in CCS developing in the finance community  Interest does not equate to understanding  Mobilising finance will require stakeholder cooperation, education and careful structuring  The finance community currently see risk in CCS but have not fully evaluated this risk CCS has an open door – success breeds success
  • 14. 1407/07/14 Will financial institutions support CCS ...? Financing is likely to come from various different sources.....  Commercial (Project Finance) Banks: ● Experienced in risk analysis, financing complex projects and active in sectors where CCS is applicable ● Huge global liquidity – Over US$400bn of funding to more than 1,000 transactions globally in 2013 ● Will focus heavily on issues previously discussed  Export Credit Agencies (ECAs): ● Significant role in risk enhancement to increase liquidity ● Involvement will be based on national interest ● Already showing significant interest  PFIs and Multilaterals: ● Strategic role in development of clean energy ● Significant interest in CCS ● Provided substantial support to offshore wind for example  Other sources: ● Capital markets – usually reluctant to take new technology risk ● Scope for credit enhancement structures – Infrastructure UK, EU 2020 etc ECAs & Multi-laterals play a significant role in offshore wind
  • 15. 1507/07/14 financing approach – the financial institution process Financial institutions will go through defined steps to a greater of lesser extent.....  Identification: ● Institutions have to identify CCS as an opportunity ● Undertake high level research & due diligence on the sector  Education: ● Undertake more extensive due diligence on market and opportunity ● Prepare a business case for inclusion in strategy ● Internal education process  Buy-in: ● Internal management support for dedicating resource to the sector ● In principle support to lend to the sector  Execution: ● Detailed assessment and structuring of an actual transaction ● Full management and credit approval Understanding and fully supporting this process is essential
  • 16. 1607/07/14 financing approach – how it could work in practice In reality........  The process is likely to be more iterative, with feed back into structuring  Close cooperation with potential lenders is essential to inform commercial/risk negotiations  This is an untested process for CCS so a pragmatic approach will be required Simplistically, a CCS financing process may incorporate the following
  • 17. 1707/07/14 Real projects now looking for commercial finance Texas Clean Energy, USA Polygen project targeting potential Chinese bank and ECA financing with some backing from DOE. Multiple revenue streams to underpin the financing needed to complete the project. White Rose, UK Oxy-combustion project currently at FEED study stage (partly UK government funded). No EOR angle but expected to benefit from UK Government grant funding and ongoing operating revenue support through a CFD mechanism. Currently engaged with a number of financial institutions and multilaterals on potential financing.
  • 18. 1807/07/14 Conclusion  The work undertaken for this report highlights a significant change in the perception in the minds of the finance community who are now interested in the potential of CCS  At the same time we are seeing the completion of large-scale CCS projects which, whilst not commercially financed, are none the less providing precedent for technology, costing and commercial structures  The current divergence of project technology, business model and policy/regulatory landscape is still a cause for confusion for the finance community but some core clients are now leading projects  There is in our view sufficient capacity to allow for commercial finance of large-scale demonstration projects but risk allocation and commercial structure will be key to mobilising this funding – inevitably this will translate into conservative structures for early project which in turn equates to additional costs (contingencies, financial support etc) for implementing early projects  Costs should fall as follow on projects are executed but the pace of cost reduction depends to a certain extent on replication of technology, the number of projects executed and timeframe. In the same way financing should become more available and more competitive as precedent develops as we have seen in other industries  The positive message from this report is that the finance community is now turning its focus to CCS based on: o The emergence of tangible projects on which to start commercial debt structuring o The availability of firm revenue streams whether commercial (EOR) or policy driven (incentive tariff mechanisms) o Policy development – particularly evident in the UK with substantial political and financial support For the finance community CCS has moved from ‘too difficult’ to ‘potentially interesting’ The key is to maintain the building momentum to turn demonstration into an industry
  • 19. QUESTIONS / DISCUSSION Please submit your questions in English directly into the GoToWebinar control panel. The webinar will start shortly.
  • 20. Please submit any feedback to: webinar@globalccsinstitute.com View the report: www.globalccsinstitute.com/publications/targeted-report-financing-large-sca

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