Policy and carbon pricing are critical to incentivising investment

Simon Flowers
Chairman, Chief Analyst at Wood Mackenzie and author of The Edge

Carbon capture and storage, still a tiny niche in the push to net zero, has its sceptics. The power industry gained little reward for risking US$10 billion of investment earlier this century testing the technology and its commerciality. Yet CCS has to be made to work – capturing and storing CO2 accounts for 20% of the emissions reduction needed to achieve global net zero by 2050, based on our analysis.

A massive new industry, as big as today’s annual global oil and gas production capacity, must be built almost from scratch. Mhairidh Evans, principal analyst, sees three reasons to be bullish on the prospects for CCS.

First, there has been a flood of new CCS projects over the last year. There’s a mere 61 Mtpa of operating capacity globally, and the 200 CCS projects announced in 2021 lift development capacity to around 700 Mtpa. There’s still a long way to go to reach the 6.5 Btpa needed by 2050 in our accelerated energy transition 1.5 scenario, which sees a temperature rise limited to 1.5 °C by the end of the century. But we’re off to a flying start.

The pace of new project announcements might slow in 2022 as developers shift their focus to FIDs and maturing the pipeline. The trend through the rest of this decade is clear, barring technical setbacks: sustained growth as CCS is scaled up to play a major role in decarbonisation.

The 200 CCS projects announced in 2021 lift development capacity to around 700 Mtpa – we’re off to a flying start.

Second, high costs will progressively fall. The technology is expensive and capital-intensive – two-thirds of lifetime costs are upfront expenditure. Every project is unique, requiring a bespoke spec to capture the CO2, transport the gas and store it.

Individual project costs vary from US$20/tonne of CO2 to US$150/tonne, with an average weighted cost of US$58/tonne for the projects being considered today. That’s the breakeven carbon price to meet a pre-tax target IRR over the project life. It compares with a current average global carbon price of around US$28/tonne and prices in Europe of near US$100/tonne.

Today’s projects target mainly the lower hanging fruit. These include natural gas processing (US$25/tonne, only, more costly if expensive new wells have to be drilled); blue hydrogen production (mainly in refineries, US$60/tonne); and natural gas processing (US$75/tonne, post-combustion). Our modelling implies the average CCS project in the power sector needs a carbon price of US$100/tonne.

We forecast that project costs will fall by 20% to 25% over the next two decades. The build-out of projects will lead to the streamlining of design and execution, modularisation and competition in the supply chain.

The shift of investment from individual projects to CCS hubs will be a gamechanger. Multi-industry hubs take longer to plan, fund and develop. But they will deliver huge economies of scale, potentially reducing costs by as much as 25% below individual projects. Hubs will dominate the CCS landscape beyond 2025.

In 2021, 50 hubs accounted for around half of the new capacity added to the pipeline, each varying in size and scope. Hubs will spring up around existing industrial complexes, allowing refineries, petrochemical plants, power plants and steelworks, for example, to save costs by sharing transport and storage infrastructure.

Third, policy is evolving rapidly to underpin future investment in CCS. It’s no coincidence that over half of operational and planned capacity is in the US, Canada and the UK. These three countries have supportive policies, incentivising investment through tax breaks, carbon pricing or a combination of the two.

The 45Q tax credit has proved highly effective in positioning the US as the global leader in CCS, with 180 Mtpa of planned capacity, offering up to US$35/tonne for EOR projects and U$50/tonne for storage.

The CATCH Act, part of the Biden Administration’s Build Back Better plan, is at risk in its current form and may be subject to delays. The Act’s proposals as they stand extend support to industrial applications (US$85/tonne), which on their own would lead to an investment boom. There are also incentives for storage in oil and gas fields (US$60/tonne) and direct air capture (US$130 to US$180/tonne). Canada (95 Mtpa) offers specific funding packages for projects, as well as state and federal carbon pricing.

The UK (80 Mtpa) launched its post-Brexit emissions trading scheme (UK ETS) on 1 January 2021 and prices have soared to around £75/tonne (US$99). The UK government states specific CCS targets by 2030 as part of its net zero strategy and has committed £1 billion to back at least four industrial CCS clusters.

Asia is lagging today, but with high emissions from fossil power and heavy industry, it will ultimately be the biggest market for CCS. Policy and carbon pricing across the region need to catch up quickly to get investment mobilised.

KeyFacts Energy Industry Directory: Wood Mackenzie