Title: WORK UNDERTAKEN on ECONOMICS of CO2 CAPTURE, TRANSPORTATION, EOR, AND SEQUESTRATION in UK/UKCS Professor Alex Kemp, Dr. Sola Kasim, Linda Stephen and Professor Joe Swierzbinski
1WORK UNDERTAKEN on ECONOMICS of CO2 CAPTURE,
TRANSPORTATION, EOR, AND SEQUESTRATION in
UK/UKCSProfessor Alex Kemp, Dr. Sola Kasim,
Linda Stephen and Professor Joe Swierzbinski
2Summary
- Projections of possible availability of fields in
UKCS for EOR/storage to 2030. Need to estimate
windows of opportunity. - Possible incentives for CO2 Capture. Innovatory
proposal of long term put option contracts to
deal with CO2 market risks. - Development of dynamic linear programming
least-cost optimisation model and application to
range of power stations in UK, variety of
transportation routes in UKCS to range of fields
for EOR/Storage.
3Window of Opportunity in UKCS
- Detailed financial simulation modelling of future
prospects for fields in UKCS with emphasis on
timing of cessation of production and
decommissioning. - Modelling undertaken for range of long term
oil/gas prices. - Modelling updated to incorporate new information
and to see trends. - Modelling shows when main pipelines become
non-viable.
4(No Transcript)
5(No Transcript)
6(No Transcript)
7Incentives for CO2 Capture, EOR, Storage
- Widespread agreement on need to reduce CO2
emissions. Many sources of emissions reductions
including CO2 Capture and EOR/Storage. - Several different economic incentives have been
proposed to promote CO2 reductions, including
both carrots and sticks as follows - (a) Capital grants for relevant investments
- (b) Ongoing relevant income-related support
- (e.g. for electricity produced
from greener sources) - (c) Special tax reliefs for relevant investments
- (d) CO2 tax (e.g. Norway offshore)
- (e) CO2 emissions trading scheme (e.g. EU ETS)
8Nature of CO2 Capture/EOR/Storage Investment
CO2 Capture and EOR/Storage investments are (a)
long-term, and (b) very expensive.
Substantial risks surrounding (i) costs
of capture, transportation, injection and
storage. (ii) market uncertainties
regarding prices of (a) electricity
(where relevant), (b) gas and coal
(as likely inputs), (c) oil (from
EOR), (d) value of carbon allowances.
9- C. Long-Term Put Option Contracts
- Government (or agent) negotiates the sale of
long-term put option contracts for CO2 emissions
with investors. Government would be committed to
buy a specified amount of CO2 allowances at a
fixed price at a future date. Government receives
option value when contract agreed.
10- Key features of the scheme are
- The option contract provides a mechanism for the
Government to credibly commit to a minimum future
price for the emissions covered by the contract. - The ownership of the options provides investors
with a hedge against future price risks. - The Government raises revenue in the present from
the sale of the option contracts.
11- The future maximum cost to the Government of the
scheme can readily be calculated. If the price of
the allowance becomes sufficiently high the cost
becomes zero. - The liability of the Government is not open-ended
because it can decide how many contracts to sell.
This would be based on perceptions of how many
projects are felt desirable to incentivise.
12- A well-developed put option market is not
necessary to enable the scheme to function.
Bilateral negotiations between the two parties
suffice. The properties of the options (e.g.
exercise date and price) can be tailored to the
needs of specific projects. - The scheme is a market-related one, consistent
with the philosophy of the EU ETS.
13- The UK Government has had much experience in
negotiating emission-reducing agreements (CCAs),
and has had involvement in the bond market for a
very long time. - It is noteworthy that in the European Climate
Exchange (ECX/ICE) there is provision for option
contracts in CO2 allowances, though they are of
relatively short term duration. - Carbon-reducing investments are long-term and the
option contracts would also have to be long term
(though not as long as the life of a typical
investment project). Currently financial options
can have a duration of 2-3 years (LEAPS).
14- k) A Government which wants to minimise the
timing risk relating to its commitments may
prefer the European option where the exercise
price is only at a specified expiration date. (An
American option allows the owner to exercise his
option at any time up to the expiration date). - l) Note that CFD gives similar protection to
investor but gives away option value.
15Economics of CO2 Capture, Transportation, EOR,
and Storage in UKCS
- Development of dynamic linear programming
least-cost optimisation model of capture,
transportation, injection, EOR, storage
processes, including different market structures
(vertically-integrated participants and
non-integrated participants). - Application of model to CO2 Capture in 8 power
stations in UK for period 2008-2032. - Current work is on least-cost optimisation
modelling of transportation, EOR and storage in
fields in UKCS.
16Summary of study objective and approach
- The global objective To add relative realism to
discussions on CO2 capture costs and early
deployment of carbon capture technology in the
UK. - The study proposes a methodology for determining
the least-cost options for introducing carbon
capture technology under the overarching
assumption of increasingly stringent emission
caps on fossil-fuelled power plants, which are
universally recognised as large point sources of
carbon emission. - The approach entails formulating and solving an
optimisation model with clearly stated goals,
and, explicit provisions for the various
regulatory, technological and market conditions
which offer opportunities and/or restrict
corporate decision-making and action-taking,
while using public-domain data on selected power
plants proposed CO2 capture investment
programmes combined with relevant data available
in the literature. - More specifically, the objective of the study is
to minimize the cost of CO2 capture, using the
well-tested optimizing techniques of linear
programming (GAMS model) to scan through all the
possible cost-output combinations before
selecting one as being the optimal. The model is
applied to the UK but has a wider applicability.
17Summary of results and future plans
- Determination of the nature of the CO2 capture
cost curve. - Establishment of a dynamism in the cost
relativities of alternative carbon capture
technologies. - Establishment of the importance of Government
incentives. - Demonstration of the need for increasingly
stringent emission allocation rights, to enhance
and sustain the profitability of CO2 capture
operations. - Current work is formulating and solving a
transportation problem that would determine the
least-cost option of matching the supply of the
captured CO2 at the power plants with the
potential demand for CO2 at the fields, for
value-added (EOR, ECBM) and non-value added
(permanent storage) uses.
18A summary of the model
- Formally, the objective is to minimise the PV of
a generalised environomic cost function -
- where
- kt capital recovery factor of plant type i at
time t - ait unit CAPEX of the core power generating
plant type i at time t - xit effective electricity generating capacity
of plant type i at time t - bit unit CAPEX of the CO2 capture equipment of
plant type i at time t - uit installed CO2 capture capacity in plant
type i at time t - fit unit fuel OPEX of plant type i at time t
- yit the operating level (or output) of plant
type i at time t - eit unit non-fuel OPEX of plant type i at time
t - hit unit CO2 capture OPEX
- qit amount of CO2 capture in plant type i at
time t - mit unit emission penalty cost to plant type i
at time t - vit excess CO2 emission in plant type i at
time t - git unit Government intervention (tax or
subsidy) rate in plant type i at time t - r discount rate
19Model summary (continued)
- The aforementioned objective function is
minimized subject to the satisfaction of a number
of constraints determined by demand, supply,
technological and capacity factors. These can be
summarized broadly into two sets of constraints
namely - Supply and/or maximum capacity constraints
- Demand and/or minimum capacity constraints
20Application to the UK (continued)Key results
(1a) The total cost curve of CO2 capture has 3
distinct phases
21Application to the UK (continued)Key results
(2) In terms of picking a winning technology,
no capture technology has a permanent relative
cost advantage or disadvantage.
22Application to the UK (continued)Key results (2)
(contd)
- The main driver of the switch in the cost
relativities of different capture technologies is
excess emission penalty charges. - The 2 PCSCFGD plants (Drax and Teesside) are less
expensive than the higher efficiency, less CO2
emitting plants (Peterhead and Killingholme) only
as long as they avoid incurring heavy emission
penalty charges. - However, once penalty charges have reached
57/tCO2 (carbon price 29/tCO2) (from 2025
onwards), the larger emitters incur high emission
penalty charges, switching the cost relativities
in favour of the CCGT and IGCC plants. - The least costly plant throughout is Ferrybridge,
but it is likely that the projects capital
investment cost was underestimated. The SSE seems
to agree as much in its Preliminary Results for
the Year to 31 March 2007
23Analysis of alternative carbon abatement policies
- Higher emission penalty charges vs
- Deeper cuts in EUA ratios
24 3 scenarios distinguished as follows
- (i) Baseline scenario The assumption is that
the Government introduces a cost-sharing
incentive scheme and the objective function and
accompanying constraints in the original model
hold. - (ii) Higher penalty scenario The same
assumptions are maintained as in the baseline
scenario, except that, consistent with EU-ETS
Phase 2 there is a 2.5 times increase in the unit
emission penalty from 40/tCO2 to 100/tCO2 and a
corresponding increase in the carbon price from
21 to 53/tCO2, rising at the same annual rate
as in the baseline case. - (iii) Deeper EUA ratio cut scenario The same
assumptions are maintained as in the baseline
except that in this case there is a 2.5 times
reduction in the individual plant emission
allowance allocation ratios. - The performance criteria to use in assessing the
relative efficacy of the alternative policies
include (a) the amount of CO2 captured, (b) the
capture cost, and (c) the level of Government
support required.
25Future Work
- Economics of CO2 Capture Systematic risk
analysis, particularly on (1) plant costs, (2)
primary fuel costs, and (3) EU ETS allowances
(e.g. 100 power plant auction, price) - Economics of CO2 Transportation, EOR and Storage
Systematic risk analysis of investment costs of
above, and EOR response of reservoirs. - Incentives and Regulations for CO2 Capture,
Transportation and EOR/Storage Systematic
comparison of merits of long term put option
contracts compared to other incentives such as
CFDs, tax reliefs, feed-in tariffs etc.
Legislative/regulatory changes required to
facilitate the activities, including change of
use of assets and liability in North Sea, and
related taxation arrangements.