IEEFA warns of worsening inflation in power sector with carbon capture and storage in the mix – Long read

(OEM) In a world besieged by energy and climate crises, carbon capture and storage (CCS) technology is often presented as a net-zero solution. However, a new report by the Institute for Energy Economics and Financial Analysis (IEEFA) points out that adding CCS to fossil-fired power plants will have unsustainable implications on electricity prices, with the public, businesses and governments “likely to suffer the immense cost.”

According to IEEFA, CCS in the power sector – which directly captures carbon dioxide (CO2) from a power plant, then compresses, transports and stores it – faces many challenges, including environmental concerns, as cheaper choices call into question the optimism bias favouring this technology as a net-zero solution.

Capital Cost Estimates for Carbon Capture Without Transport, Storage or Other; Source: IEEFA
Capital Cost Estimates for Carbon Capture Without Transport, Storage or Other; Source: IEEFA

Christina Ng, IEEFA’s Research and Stakeholder Engagement Leader, Debt Markets and report co-author, commented: “The economic case for CCS in the power sector is weak, considering input cost and funding uncertainties, continued failures of the technology, and the constantly improving alternatives. Yet, policymakers are recognising it as a sustainable investment or providing generous financial incentives too easily to CCS producers and developers.”

IPCC’s report puts CCS low on climate mitigation options‘ list

The International Panel on Climate Change (IPCC) states in the Synthesis Report under the Sixth Assessment Report – published on 20 March 2023 – that there are “multiple, feasible and effective options to reduce greenhouse gas emissions and adapt to human-caused climate change,” currently available.

The report brings into focus the impacts the world is already experiencing and how these are hitting the most vulnerable people and ecosystems, emphasising the need for accelerated action to both mitigate and adapt to climate change in the coming years. It also underlines that emissions of greenhouse gases will need to be cut almost in half by 2030.

Based on IEEFA’s statement, the International Panel on Climate Change’s Synthesis Report placed CCS as “the least preferable mitigation option,” by way of marginal abatement cost or potential contribution to net emission reduction by 2030 for the energy sector while higher priority solutions include wind and solar energy.

Indicative Costs for CCS Value Chain Components; Source: Global CCS Institute
Indicative Costs for CCS Value Chain Components; Source: Global CCS Institute

Following the IPCC report, Neil Poxon, CEO at Oxford Flow, highlighted: “IPCC report demonstrates an urgent need to reduce GHG emissions, now. An often-overlooked contributor of GHG emissions are valves, which account for approximately 60 per cent of fugitive emissions, and not enough is being done across high-emitting industries, like gas networks or fossil fuel production, to remove, replace and innovate.

“Our goal has always been to create valves that not only eliminate emissions but go beyond that, enabling the energy transition by getting ahead of the problem to develop solutions that are suitable for emerging sectors like hydrogen. If we are to meet targets and avoid the damning findings of the latest IPCC report, we need to think about every aspect of our energy systems, instead of overlooking what is deemed to be ‘fine’ or only a small part of the puzzle. Every piece of the puzzle needs to be scrutinised for long-term change to be possible.”

In line with this, Stockholm Environment Institute (SEI) claims the Synthesis Report underscores the urgent need to ramp up climate action to avoid climate breakdown, because “the current pace and scale of action is far from sufficient.”

In response to IPCC’s report, Francis X. Johnson, Senior Research Fellow at SEI and member of the extended writing team, states: “If we want an equitable and sustainable future that limits global warming and addresses its ongoing impacts, the ambitions for climate action need to be increased significantly and the implementation of climate mitigation and adaptation measures need to be deeper and more sustained across all sectors and systems and across all world regions.

“These measures need to be transformative and equitable to ensure the most effective societal response, including not only technological advances and broader deployment of best practices, but also behavioural changes and institutional reforms.”

What about CCS cost trajectory and optimism bias?

Previously, IEEFA reported that carbon capture technologies were not yet ready to warrant them investable while its latest report – called CCS for power yet to stack up against alternatives – focused on CCS in the power sector, diving into the economics, including its impact on the cost of power. As a result, the report finds that with limited practical experience, the actual costs of deploying CCS and its cost trajectory remain unclear.

Currently, no known new power plants have been built with CCS installed and operating at a commercial scale. While two major retrofit power projects – the Boundary Dam in Canada and Petra Nova in the United States – have been implemented, Petra Nova has since suspended operations, and both projects had performed well below target capture rates of 90 per cent.

Source: IEEFA
Source: IEEFA

JX Nippon recently described the Petra Nova CCUS project in the U.S. as one of the largest CCUS projects in the world. The Japanese player says this project aims to increase crude oil production by capturing 1.6 million tons of CO₂ annually from flue gas of thermal power plants and injecting it into oil fields near Houston.

Regardless of this, IEEFA’s report outlines that applying carbon capture technology to coal and gas power generation, even before considering the required transport and storage of CO2, will significantly increase the facility capital expenditure and operating and fuel costs, affecting the investment case.

Source: IEEFA
Source: IEEFA

Michael Salt, a guest contributor with IEEFA, report co-author, and an energy economics and finance analyst, said: “The cost of CCS as a decarbonisation option is more than just the cost of the carbon capture technology. The transport, storage, monitoring and verification, plus any additional compliance and liability costs will need to be taken into account for CCS to be considered a climate solution.”

As optimism bias is rampant, IEEFA points out that proponents of CCS provide low-cost forecasts that are “a long way” from the estimates of prominent organisations and “significantly more hopeful than the likely reality.”

In addition, estimates generally do not include a range of other costs including transport, storage, monitoring and possible remediation or penalties, which have a high degree of variability, and so they only paint part of the picture of carbon capture expenses.

Source: IEEFA
Source: IEEFA

While IEEFA highlights that the real cost of applying CCS in the power sector is uncertain, the report considers how it could be recovered through embedding the cost in increased wholesale electricity prices, which would be passed through to retailers and then consumers; or having the government subsidise or find alternative sources of funding to bear the cost of CCS.

If not directly passed on to energy consumers, any significant government spending or subsidization of CCS would ultimately be borne by the public through, for example, income taxes. IEEFA says that the public may be “unwilling to accept subsidizing unproven CCS technologies and, in turn, express their views through public elections.”

“Consumers, businesses, industry and retailers alike would logically seek out the most affordable electricity options that meet their needs, a more immediate priority for many than environmental and social factors,” explained Salt.

Renewables and battery storage outrank CCS

Moreover, IEEFA’s report elaborates that government subsidies contradict the need to use public funds responsibly in light of more technically sound options and the economical, rapidly improving and deflationary nature of renewable and battery storage alternatives.

Additionally, the report shows that the levelized costs of electricity (LCOEs) for thermal power generation with CCS are at least 1.5-2 times above current alternatives, which include renewable energy plus storage. In lieu of this, IEEFA underscores that it is difficult to contemplate electricity users willing to support the use of CCS on power generation when affordable decarbonised options exist.

Comparison of Energy Resources’ LCOEs; Source: IEEFA
Comparison of Energy Resources’ LCOEs; Source: IEEFA

Although solar and wind LCOEs have recently crept up, they are expected to return to a downward trajectory while battery storage system prices and the resultant LCOEs will also likely improve dramatically as technology is deployed more widely at a much larger scale and displaces gas-fired firming in the longer term.

“Until a viable source of funding is available, who ends up paying for the cost of CCS in power generation is yet another uncertainty,” says Ng.

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