Director, Sussex Energy Group - School of … · Sussex Energy Group SPRU - Science and Technology Policy Research Why economic comparisons are misleading, particularly for CCS •

Sussex Energy GroupSPRU - Science and Technology Policy Research

Economics of CCS

Jim WatsonDirector, Sussex Energy Group

UKCCSC Winter School, 9th Feb 2011


Overview

• CCS economics: how do they compare?

• Why economic comparisons can be misleading

• Why should government support CCS investment?

• Evaluating options for public policy support


How do CCS economics compare?Some illustrative figures

0

500

1000

1500

2000

CCGT Coal Coal +CCS Nuclear Onshore

wind

Offshore

wind

Cap

ital co

sts

(£/k

W)

Source: Committee on Climate Change, 2009

An informed guess



0

2

4

6

8

10


wind

Offshore

wind

Gen

era

tio

n c

osts

(p

/kW

h) Estimates for 2010

Carbon price: 30 Euro / tonne (CO2)




0

2

4

6

8

10


wind

Offshore

wind

Gen

era

tio

n c

osts

(p

/kW

h) Estimates for 2020

Carbon price: 51 Euro / tonne (CO2)



Why economic comparisons are misleading

• Analysing costs in p/kWh or £/tonne of carbon give a poor guide to real investment behaviour

• Risks very important too – investors may favour an option with higher costs if it has lower risks

• It also matters what other investors are doing: issue of ‘herd behaviour’ (e.g. gas fired power in the UK)

• Many new technologies subject to ‘appraisal optimism’ by advocates


Why economic comparisons are misleading, particularly for CCS

• CCS has never been implemented at full scale

• Economics subject to many uncertainties, e.g.

–Capital costs (especially for ‘first of a kind’)

–Fuel prices, carbon prices, operating efficiency

–Storage costs and liabilities (linked to legal regime)

• Theory and evidence from ‘learning curves’ suggests costs should fall with cumulative investment

• But past experience shows this isn’t always true


Costs can fall with experience

Source: Watanabe et al, 2000


But they can also rise …

0

500

1000

1500

2000

1965 1970 1975 1980 1985 1990 1995 2000

Cap

ital

Co

sts

($1996 /

kW

)

CCGT Conventional Coal

Source: Watson, 1997


SECOND TRANCHE

Commercial &Regulatory Drivers

GLOBALCCS

ROLLOUTBig prize is getting two learning cycles

from two tranches of CCS projects before

global rollout

EUCCS

ROLLOUT

PLANTSCOMINGINTO SERVICE

2015DEMO

PROJECTSIN PLACE

2020CCS

STANDARDIN EU

2025GLOBAL

CCSROLLOUT

FIRST TRANCHE

Demonstration

12 plants by 2015 in EU

CCS retrofits on existing plant

Learning process likely to be complex and long

Source: Adapted from

Chalmers and Gibbins


Costs of learning are substantial

Stage 1 (R&D) Stage 2 (early

demonstration)

Stage 3 (refinement

& cost reduction)

Stage 4 (early

commercialisation)

Fu

nd

ing

Source: Adapted from Carbon Trust

Status of CCS

‘Valley of death’


Why support CCS in the UK?

• Diplomatic rationales

–Shores up UK /EU leadership on climate change

–Early CCS demonstration in UK could help persuade China,

the USA to take action on emissions

• Geological rationale

–UK is well placed for CO2 storage in both depleted

hydrocarbon fields and saline aquifers

• Economic rationales

–UK skills, especially in offshore engineering?

–UK-based firms may benefit from ‘first mover advantage’

–Another option for emissions mitigation. Lowers costs?


Why support CCS in the UK? But progress has been slow

• UK government has taken a long time to commit to CCS demonstrations – many years to convince the Treasury

• Builds on history of debate on ‘clean coal’ demonstrations dating back to the 1990s

• Original plan for one demonstration plant inappropriate for diversity of CCS technologies / multiple uncertainties

• Coalition has confirmed plans for up to four demonstrations

• A long way to go, and many unanswered questions with respect to uncertainties


Cancelled


Why EU carbon price isn’t enough (European Climate Exchange data)


Public policy supportEvaluating options

• The UK CCS demonstration plant / programme already includes several support options

• Demonstration no. 1 funded by capital grant of up to £1bn

• Demonstrations 2-4 may be funded from CCS Levy on consumer bills, possibly via a ‘Contract for Difference’?

• But, funding for Demos 2-4 is subject to uncertainty: subject to wider Electricity Market Reform (EMR) process

• Key question: what are pros and cons of options with respect to 1) investor risks; and 2) the electricity market


Public policy supportLots of choice!

Regulations Economic incentives

Emissions Performance

Standard (EPS)

CCS Mandate

Feed-in Tariff

Capital Grant

Carbon price guaranteeCCS Quota Obligation


Public policy supportAnd they can be combined …

Regulatory options Price-based options

Emissions Performance

Standard (EPS)

CCS Mandate

Feed-in Tariff

Capital Grant

Carbon price guaranteeCCS Quota Obligation


Public policy supportEmissions performance standard (EPS)

• An EPS is proposed as part of the government’s Electricity Market Reform package

• Proposal to limit annual average emissions to 600g/kWh

• Impacts on investment risks unlikely to be significant for CCS unless accompanied by an economic incentive

• Impacts on electricity market depend on implementation:

– If applied to existing and new plants, this risks premature

closure of plant required to balance the system

–At level proposed in the UK, gas plant would still be able to operate without CCS


Public policy supportCapital grants

• Capital grant on offer for first UK demonstration of CCS

• Impacts on investment:

–Utilities want grants to lower exposure to capital cost risks (but

problem of only one bidder in the ‘competition’ for demo 1)

–Each plant requires large contribution from limited public funds

–Potential lack of incentive for effective operation: will it lead to

construction of ‘White Elephants’?

• Impacts on electricity market:

• A competitive market should encourage effective operation

since utilities expected to part-fund CCS demonstration

• But is the UK competitive enough to support this assumption?


Public policy supportFeed in tariffs

• Feed in tariffs usually support renewable electricity: a fixed payment per kWh generated

• Impacts on investment

–Simple and transparent, with lots of certainty

–Reduction in key risks (e.g. electricity & carbon price), but fuel and other operating costs still matter

• Impacts on electricity market

–No incentive for efficient plant operation in response to power

market prices (income is fixed irrespective)

– In the UK, FITs are classed as taxes despite being financed

from consumer bills: still subject to public spending constraints


Public policy supportPremium feed-in tariff

• A fixed price payment on top of the electricity price

• Impacts on investment

–Less risk mitigation than standard feed-in tariff

–Exposure to electricity prices, carbon prices and fuel prices

• Impacts on electricity market

– Incentive for efficient operation remains, and for

responsiveness to electricity market conditions

–Could be more effective at supporting innovation to improve flexibility of CCS plants


Conclusions

1. CCS economics very uncertain due to lack of experience at full scale

2. Beware of comparisons with more established technologies (risk profiles are different)

3. Process of innovation for CCS likely to be long and costly. Unlikely that all variants will survive

4. Good arguments that the UK should pursue CCS

5. Many options for public policy support, with different implications for CCS investors and electricity market

6. Electricity Market Reform has important implications


Thanks

http://www.sussex.ac.uk/sussexenergygroup

Documents

Director, Sussex Energy Group - School of … · Sussex Energy Group SPRU - Science and Technology Policy Research Why economic comparisons are misleading, particularly for CCS •