Capturing Investment: Policy Design to Finance CCUS Projects in the U.S. Power Sector

While other kinds of low-carbon power receive widespread policy support aligned with today’s capital markets, CCUS projects lack sufficient policy support to obtain conventional financing. This suggests additional policies are needed to bring CCUS forward in commercial power market deployment.

The authors undertook an analysis to help predict which policy configurations would incentivize widespread deployment of CCUS in the US electric generation industry. We examined a set of options and applied them to representative existing US power plant types—supercritical pulverized coal and natural gas combined cycle—with two ownership/revenue structures: traditionally regulated, vertically integrated investor owned utilities (IOUs) and independent power producers (IPPs) selling to IOUs under regulator-approved contracts. We used conventional models typical of a project finance assessment and determined which policies would be effective at attracting financing.

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The government broadly has two options to make an energy project more economically feasible: It can lower the owners’ costs through capital incentives (such as an investment tax credit or accelerated depreciation) and provide revenue enhancements (such as production tax credits, contracts for differences, or guaranteed power contract requirements). We modeled the financial performance of policy designs on various power plants based on fuel, generation technology, and ownership type. The analysis yielded these key findings:

• Effect of ownership structure: While most techno-economic analyses provide engineering information about unit construction and operating costs associated with CO2 capture for any given facility and technology, the all-in full cost per ton of CO2 captured varies substantially as a function of capital cost, debt-equity ratio, and other financial factors. The nature of ownership and the associated financial structures greatly influenced the full costs associated with carbon capture. In turn, those financial factors affect the full cost of energy and capacity of generators fitted with carbon capture equipment.
• 45Q tax credit: Recent amendments to the US tax code included amendments of the 45Q tax credit, which provides a nonrefundable, transferable tax credit to taxpayers that capture CO2 and either store or use it. The value of the 45Q credit is statutorily expressed in $/MT CO2: the value per metric ton captured and injected in enhanced oil recovery (EOR) is $35/MT when the credit rises to its full level. A per-metric-ton-based CO2 capture incentive is less powerful for a gas plant than a coal plant because an unabated gas plant inherently produces far less CO2 per megawatt-hour (MWh) than an unabated coal plant. Enhancements to the current 45Q tax credit are necessary to support financeable projects, ranging between values of $60-$110 for all-in total credit value.
• Capital cost incentives: Because coal plants emit more CO2 per megawatt-hour than gas plants, CCUS retrofits on coal plants require more capital investment dollars up front: 90% capture requires approximately $1.8 million per megawatt for a coal plant and $800,000 per megawatt for a natural gas combined cycle plant. Perhaps unsurprisingly, capital incentives like bonus depreciation, master limited partnerships, and investment tax credits have a disproportionately large positive impact on coal plant CCUS investment compared to natural gas combined cycle plant CCUS investment. This was true for both investor owned utilities and independent power producers.
• Revenue enhancement incentives: Among the policy options assessed, revenue enhancement and guarantees like production tax credits or contracts for differences appear to have the best finance and deployment outcome. Such approaches also can be transactionally easier for investors, owners, and operators and could have simpler deal structures. They also provide clear public benefit in that payment is contingent upon performance of CO2 emissions reduction through carbon capture and storage.

Download publication: Capturing Investment: Policy Design to Finance CCUS Projects in the U.S. Power Sector by Dr. Julio Friedmann, Emeka Ochu And Jeffrey D. Brown; Columbia | SIPA

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