Assessing the Value of CCS Ready - geos.ed.ac.uk fileWhere is the position of CCS projects on energy...

Content

1. Introduction

2. Methodology & Assumption

3. Simulation Results

4. Investment & Operational Flexibilities

What does an investor care?

• Return (i.e. NPV, IRR or payback)

• Risks (incl. market, credit, operational, legal and regulatory)

• Investment opportunities

• Availability of financial resource (incl. cost of capital)

• Technical capacity

• Social cost and benefits

Where is the position of CCS projects on energy companies’ project opportunities dash board?

Invest, only if the ‘risk adjusted return’ > ‘marginal cost of capital’

Proposed Electricity Market Reform Measures

• Carbon price support

• Feed-in tariffs

• Capacity payments

• Emissions performance standard

Key Research Questions

• What is the impact of EMR on the economics of CO2

capture retrofit in a NGCC base load power plant (NOAK)?

• What is the benefit of capture readiness investment to avoid carbon lock-in (i.e. the value of a retrofitting option)?

2. Methodology & Assumptions

• Retrofit investment decision criteria

• Scenarios

• Assumptions

Three Decision Criteria in CO2

Capture Retrofit Investment

Overall Economies

• The base power plant with CO2 capture will generate positive operating cash flow.

Return of CO2 Capture Investment

• Investing in CO2 capture facilities could generate a satisfied risk-adjusted return.

Retrofit Timing

• Whether it is an optimal timing to exercise the retrofitting option is assessed at each decision node.

Methodology Highlight

Scenarios

• Scenario 0: Business-as-usual

• Scenario 1: £1/tCO2e on top of EU ETS price from 2013, 2020 £20/tCO2e floor price; £70/tCO2e in 2030

• Scenario 2: £1/tCO2e on top of EU ETS price from 2013, 2020 £30/tCO2e floor price; £70/tCO2e in 2030

• Scenario 3: £1/tCO2e on top of EU ETS price from 2013, 2020 £40/tCO2e floor price; £70/tCO2e in 2030

• Scenario 4: 2020 £40/tCO2e floor price; £70/tCO2e in 2030; with £2p/KWh premium feed-in tariff

Business-as-usual Simulated Carbon Price

Simulated Graph: drift = 8%, variance = 4%, reverting ratio = 0.2, 50 Trials

Scenario 1: £1/tCO2e on top of EU ETS price from 2013, £20/tCO2e floor price; £70/tCO2e in

2030

Simulated Graph: drift = 8%, variance = 4%, reverting ratio = 0.2, 50 Trials

Scenario 2: £1/tCO2e on top of EU ETS price from 2013, 2020 £30/tCO2e floor price;

£70/tCO2e in 2030

Simulated Graph: drift = 8%, variance = 4%, reverting ratio = 0.2, 50 Trials

Scenario 3: £1/tCO2e on top of EU ETS price from 2013, 2020 £40/tCO2e floor price;

£70/tCO2e in 2030

Simulated Graph: drift = 8%, variance = 4%, reverting ratio = 0.2, 50 Trials

Key AssumptionsRisk Free Rate 3%Base Plant Discount Rate 8%CCS Plant Discount Rate 12%Plant Operating Period 30 yearsAverage efficiency 59%Net Output 830 MWe (a retrofitable NGCC power plant)Average Load factor 85% 65% in the first year Base plant fixed capital cost 718.3 GBP/kW

Fuel Cost in 2011 22 GBP/MWh therm - GBM + Mean Reverting

Carbon Price in 2011 12 GBP/tCO2e - GBM + Mean Reverting

Wholesale Electricity Price in 2011 62 GBP/MWh - GBM + Mean Reverting Base plant non-fuel O&M cost 36000 GBP/MW/yearInsurance cost 6000 GBP/MW/yearCO2 Emission 0.38 tCO2e/MWhCapture ratio 90%CO2 capture plant extra capital cost for retrofit 378 GBP/kWCO2 capture plant extra fixed O&M 82000 GBP/MW/yearCO2 TSM Cost 6 GBP/per tonneEfficiency penalty 9%Average efficiency with CO2 capture 50%Net Output with CO2 capture 703 MweCO2 Captured 2.11 mill tCO2 paCO2 Emission after capture 0.045 tCO2e/MWh

Reference: Mott-MacDonald, 2010; IPCC, 2005; IEA GHG, 2005

3. Simulation Result

• Potential retrofit schedule

• Probability

• Option value

Distribution of Retrofit Probability

Probability of Retrofit in Lifetime

Retrofit Option Value

4. Flexibilities to Improve Return

• Upgradability (benefit from technology improvement)

• Solvent storage at peak load (potentially combined with capacity mechanism)

- the naturally oversized steam turbine in the retrofit case could possibly be reserve capacity

They are NOT investigated in this study.

Reference: Lucquiaud et al, 2011; Chalmers and Gibbins, 2007

Final Remark• Carbon floor price alone has little impact on the retrofitting

investment decision of a base load NGCC power plant

• The combination of carbon floor price and premium feed-in-tariff (or other possible incentives) would be necessary to improve the retrofit prospect

• CO2 Capture ready investment to keep the retrofitting option open has significant economic value

• Other investment or operational flexibilities (such as upgradability and solvent storage) should be assessed in CO2

capture retrofit investment appraisal

• Investors should also evaluate the cost evolution of other generation technologies

Thanks

Xi Liang

x.liang@exeter.ac.uk