Does $85 per ton for carbon capture pencil out?
The $85 per ton tax credit for permanent CO2 sequestration was lauded as a huge win for the carbon capture industry when it was introduced through the Inflation Reduction Act. But as the realities of project development come into clearer focus, it still might not be enough to reach FID on certain projects.
“We are focusing on small to mid-sized emitters,” said Krishna Kumar Singhania, of Carbon Clean, a CCS technology provider. “More than 50% of industrial sites emit less than 500 tons per day of CO2. So for them it’s extremely challenging to do capture and compress and transport and sequester at $85. So that’s where we are working very hard as a technology provider to continuously reduce the cost of capture, which is 50 to 60 percent of the total cost.”
He added: “As of today, I would say it’s rare that $85 is enough for small to mid sized emitters, but we hope we can get there in time.”
Spencer Young, of Enchant Energy, a CCS project developer, said the $85 threshold places limits on where the technology can go in, which is further restricted by geology and other potential offtake opportunities.
“But the real issue is not general inflation. It’s the inflation we’re seeing in the construction and power industry that’s at 30 to 40 percent,” he said. “And without that factor, I think we’d be very bullish on it.”
Bret Logue, CEO of Elysian Carbon Management, added that projects for emitters with higher concentrations of CO2 are more likely to pencil out.
“There are certainly projects that are on the left side of that scale in terms of the concentration of CO2 that are well in the money for $85,” he said. “I think some of the hard-to-abate ones are right on the cusp.”
There are additional factors related to specific projects that will determine if they are in the money, Logue said, such as a customer that is willing to pay a premium that generates incremental value from decarbonization.
Development capital is precious
While development capital for a range of energy transition sectors has been difficult to come by, several panelists specifically referred to challenges in raising development capital for CCS projects.
Casey Keller, of USA BioEnergy, which is seeking to raise $85m in development capital, said the company’s experience so far has only led them to investors willing to put in money at the FID stage and later. The company was working with Citi last year to raise capital but is now running the process internally.
Logue, of Elysian, noted that raising development capital has always been difficult, but that it was also important to use it as efficiently as possible. Elysian was acquired by IFM Investors-backed Buckeye Partners last year. But even though they ostensibly have deep-pocketed backing, the company is still required to justify its expenses to its board of directors.
“The ‘always be closing’ mantra is a good one around development capital, but also, [you want to] make very good and effective use of it,” he said, “be very oriented towards the milestones that take you to the next stage.”
Technology is still evolving
Singhania, of Carbon Clean, a technology provider, said his firm is focused on innovation to address some of the main challenges for the CCS industry: reducing costs and reducing plant size.
“In the last 15 years, we have managed to develop the next generation of carbon capture plants through the 110 patents that we have,” he said. “And two of such plants are being delivered this year,” he added, with the company seeking to scale up its offering in the next few years.
On the first point, Carbon Clean is seeking to bring the cost of carbon capture down to “well within $85” per ton as it scales up. On the second point, Singhania noted that “more than 50 percent of heavy industries don’t have enough space [for a] carbon capture plant. So we have reduced the size of the carbon capture plant by about 90%.”
Upstream help wanted
Banks are bringing in expertise from their upstream and midstream teams to help manage potential investments in hydrogen and CCUS, according to Luisa Fuentes, head of energy transition and sustainable finance at CIBC.
“Things like CCUS and hydrogen are really better for midstream expertise: the deals are more complicated, the risks are more complicated. There’s underlying geological storage risks, so it really moves institutions to bring people from both the upstream RBL space as well as the kind of more traditional fossil fuel transactions in order to kind of really understand the structures.”
Emitter quality is crucial
The commercial viability of the emitter could end up being the most critical aspect of a CCS project’s bankability, according to Noah Zerance, a director at Bank of America.
“There’s such a huge focus on recapture risk as being a predominant risk in what we’re doing. That’s not really what keeps me up at night. What’s difficult from a bankability perspective and how the institution thinks about this market is really the emitter, and the viability of the emitter.”
Zerance said recapture risk is something that’s relatively easy to manage through studying data and buying insurance products.
“What’s more difficult to address is industry and industry performance and who survives the next 12 years and continues to emit,” he said. “That’s why these transactions are almost underwriting two to three different projects because you’re not just looking at a capture company, but you’re also looking at the emitter – taking a view on profitability of the emitter.”
Hybridization of tax equity
The tax equity market has taken advantage of the IRA to introduce more flexibility in the form of hybrid deals.
“The flexibility of the tax equity market has evolved [from] what has traditionally been a fairly dinosaur business of kind of rinse and repeat transactions, [and] moving more towards these hybrid transactions that allow de-risking of the tax liability,” said Zerance.
“Institutions that can forecast long-term tax attributes looked at the IRA, and saw there’s hundreds of billions of new credits that are being created out of this market. And the banks simply just don’t have deep enough pockets to be able to service everybody from the traditional lens.”
He continued, “And so I think we’ve seen kind of a massive revolution in traditional tax equity, in that almost every transaction these days is going to be a combination of transfer and tax equity. And I think there’s still some limited capacity in the market for people with all traditional tax equity.”
Nick Knapp, of CRC IB, an investment bank, said progress in the tax equity market has been slow and steady, but the introduction of transferability and the combination with traditional tax equity has opened up the market significantly.
The decades-long process of creating and optimizing tax structures can now be harnessed for the CCS market across a much deeper investment base, he said.
“And I think one of the bigger benefits of that is that what we’re finding as an advisor is there’s a home for any kind of project that has a reasonably good risk return profile,” he said. “There used to be 10 investors and that’s your entire audience. If the risk profile didn’t work for their specific parameters, it was a tough situation. And now, with transferability, you can look at smaller check sizes, smaller projects, merchant projects, right? There’s a solution, depending on your business model, that wasn’t there before.”
