Carbon capture, use, and storage/sequestration (CCUS) is the catch-all term for a variety of methods and technologies that remove CO2 from the flue gas (exhaust) of power plants & other industrial processes or directly from the atmosphere (called direct air capture, or DAC). The captured CO2 is then deposited into products like cement, that can permanently sequester it, or injected into underground geologic formations, in trees and other plant life, or in the ocean.[1] In between the capture and use/storage of CO2 is transportation infrastructure, typically a network of pipelines.
CCUS has been around for nearly 100 years but newer technologies for both capture and use are still developing and costs remain high relative to market prices for CO2 or CO2 tax credits (around $50/ton). These technologies have yet to reach scale and benefit from Wrights Law – the cost reductions that come through cumulative experience that have benefitted solar, wind and battery technology. CO2 capture typically accounts for almost 75% of the cost of CCUS and can range from $25/t to more than $120/t, depending on the application and the concentration of CO2. DAC is even higher ranging from ~$150 – $350/t.[2]
In 2019, global CO2 emissions stood at 33 Gt/yr from fossil energy.[3] To meet climate targets, most policy makers around the world believe emissions need to fall to zero over the next 30 years. Doing so without CCUS is nearly impossible without radical changes to human behavior, industrial processes, and how we heat, cool, power and transport within the global economy at large.
What is the CCUS Opportunity?
Globally, the opportunity set is massive. The IEA estimates that CCUS deployment needed to meet the Paris Accord goals will require investment of about $9.7 trillion.[4]
Estimates about how much CO2 must be captured and stored to achieve net-zero emissions by 2050 range widely. The Intergovernmental Panel on Climate Change’s (IPCC) Special Report on Global Warming of 1.5 Degrees Celsius reviewed 90 scenarios and almost all required CCUS to limit global warming to 1.5 degrees Celsius.[5]
90% of the IPCC’s scenarios required global CO2 storage to reach 3.6 Gt per year or more by 2050.[6] The IEA’s 2050 Sustainable Development Scenario requires 5.6 Gt.[7] For perspective, in 2019, the U.S. emitted about 5.0 Gt of CO2, the world’s 2nd highest country. The amount of anthropogenic CO2 captured globally in 2019 was just 0.04 Gt, less than 1% of what these models predict is needed.
Assuming that the average facility captures about 2 million tons per year, more than 2,000 capture facilities would be needed by 2050. The current global project backlog is only about 30 projects, but it is growing rapidly. Every week seems to bring the announcement of a new project.
The most recent example of this potential occurred last month when TC Energy Corp. and Pembina Pipeline Corp. announced plans to jointly develop The Alberta Carbon Grid Project,[8] a Hub-based carbon transportation and sequestration system. This project is a combination of re-purposing existing pipelines plus new builds that at full-scale will be capable of transporting more than 20 million tons per year of CO2, or 10% of Alberta’s industrial emissions.
The U.S. is at the forefront as it accounts for 2/3rds of the world’s CCUS projects announced in 2020.[9] This is largely due to the 45Q tax credit, that increased to $50/ton of CO2 under the 2018 Tax Cuts & Jobs Act. Additionally, there are tax credits available under California’s low-carbon fuel standard (LCFS).
Investment opportunities for pipeline companies includes creating the necessary CO2 transportation hubs that connect capture facilities with end users and/or sequestration sites. The U.S. has around 5,200 miles of pipelines that transport about 80 million tons per year of CO2, mostly for enhanced oil recovery where CO2 is pumped into a mature oil reservoir to drive out more oil. Princeton University estimates that as much as 17x the current amount of CO2 could be transported by pipe, requiring 13x the current level of dedicated CO2 pipes than are in place today.[10]
The U.S. is also logistically advantaged to benefit from CCUS as around 80% of CO2 emissions from power stations and industry are sourced within a radius of 50 km from potential storage sites (vs. China and Europe at just 45% and 50% respectively). According to the IEA, the total potential U.S. based storage is estimated at 800 Gt, or 160 years of current U.S. energy sector emissions.[11]
There is a growing consensus across governments, researchers, and businesses that CCUS is a critical component to achieving deep decarbonization of power & industrial facilities and moving the world closer to a net-zero emissions scenario. The IEA calls CCUS one of the four key pillars of the global energy transition, along with bioenergy, hydrogen, and renewables-based electrification.[12] According to the IEA, the global coal fleet accounted for almost 1/3rd of global CO2 emissions in 2019, and 60% of the fleet could still be operating in 2050. Most of this fleet is in China where the average plant age is less than 13 years, and in other emerging Asian economies where the average plant age is less than 20 years.
Therefore, in many cases, CCUS is the only alternative to retiring existing power and industrial plants before the end of their useful lives and at great expense to the owner. Retrofitting them with CO2 capture equipment would enable the continued operation of existing plants, as well as associated infrastructure and supply chains, but with significantly reduced emissions and in the timeframe allotted.
CCUS in the Broader Context of Carbon Emissions and Climate Change
Climate change and the energy transition are often framed around reaching net-zero carbon emissions by 2050 and to limit the rise in global temperatures to 1.5 degrees Celsius above pre-industrial levels. These targets are based on climate models that attempt to predict the impact of carbon dioxide and methane emissions on the Earth’s temperature.
In our view, the precision of these estimates underlies some of the political rancor around climate policies as there is a range of outcomes possible from a system as complex as climate. While there are still those that think global warming and climate change is a hoax – or as one petroleum industry executive said to me – “a false narrative forced down the throats of the American public by the mainstream media”, serious, educated people know that the greenhouse effect is not in dispute, and that CO2 and methane are greenhouse gasses. The greenhouse effect – which explains how the atmosphere raises the equilibrium temperature of the Earth – has been identified and studied by scientists since 1824.[13] That climate models may not be 100% accurate in their predictions of temperature does not negate the mechanism of the greenhouse effect.
While some of us at EIP have had some science and engineering education, we are not climate scientists. We are investors. And as investors, we are trying to earn a superior return on ours and our clients’ capital by making sense of a complex world, cutting through the noise, and getting to a portfolio that depends on patterns of behavior that are recognizable and robust. We seek to avoid making investments in high-cost technologies that might have a short term or transient advantage due to a tax credit that may be temporary. On the other hand, we seek to gain confidence that the politics and policies that do affect our portfolio companies have strong elements of longevity based on real and perceived facts.
It is in this context that we analyze all energy policy developments driven by climate concerns. While climate models are trying to predict a single outcome for each scenario of carbon and methane emissions (the same way sell side analysts have single point earnings estimates to the penny four years out), there is a range of possible outcomes and it is the extreme negative outcomes that are capturing attention and driving policies. Yes, I know the media tends to exaggerate every news story, but they are in the business of selling advertising and have been incentivized to exaggerate ever since there have been news companies. That said, the probability of a disaster scenario is not zero.
The climate system is complex and while we know that CO2 and methane emissions raise the Planet’s temperature, that temperature increase has uncertain second-order effects or feedback loops. Some believe that more cloud cover from more water vapor could provide a cooling effect that offsets the warming impact of carbon. Maybe, but since water vapor accounts for about 60-70%[14] of the greenhouse effect (CO2 is about 25%),[15] a pernicious feedback loop arising from more water vapor in the atmosphere is also a distinct possibility that could in turn unleash other feedback loops. Among these feedback loops are smaller ice caps that reflect the sun’s energy back into space and the decomposition of organic matter as the Earth’s permafrost thaws which would release both methane and CO2.[16] In our view, no one knows for sure what the probability is of these feedback loops, but they are greater than zero and less than one hundred percent and the result could be more extreme weather events, dramatic changes in precipitation patterns and rising sea levels, etc. And as long as that is true, policies will be forthcoming to address the risk even if no one can agree on the probability of those risks.
So far, government policies in the U.S. that affect the energy industry have resulted in significant technological advances that have driven down costs significantly.[17] These policies have been at the state and federal levels and have included renewable power generation mandates, R&D spending, and tax credits. Connecting the dots between these policies and the costs of shale gas, wind and solar power and batteries indicates that so far U.S. energy policies have resulted in significant cost reductions for consumers, not cost increases.
In large part, our view is that this success stems from three attributes. The first is the recognition that there is a public private partnership between the government and private industry. The second is that most of these policies, taken as a whole, have been technology agnostic in their effect. True, a subsidy for wind power is not technology-agnostic, but in our system of government, the constituencies for all sources of energy have a say and that leads to the third and perhaps most important attribute, the democratic process.
The constant disagreements, name-calling and moral indignation that permeate the political debate are, in our view, characteristics of a well-functioning democracy. This can be seen in the evolution of the Biden Administration’s jobs/energy/infrastructure bill as they negotiate to garner the votes from House and Senate members who represent unionized labor, fossil fuels, environmentalists, farmers, etc. It is also important that these policies not only benefit the environment but address other issues that each have their own constituencies such as national security, job creation, income equality, etc. When we analyze these policies, we see that they are – taken as a whole – technology agnostic and technology driven. To us this means more cost reductions which may not be good for producers of energy but is good, in our view, for the buyers and shippers of energy.
And if we do it right, this energy technology initiative can have the same types of ancillary benefits the space program had. While we do not have military bases or colonies on the Moon, we have enjoyed significantly accelerated technological innovations such as integrated circuits and microprocessors, advancements in battery and solar panel technology, satellite communications and GPS, fire protection equipment for firefighters, innovations in kidney dialysis and pacemakers for the heart.
Nonetheless, there is always the risk of bad policies that can hurt our portfolio companies. So, we keep a sharp eye out and put in the time to understand the facts behind the headlines and when those facts become newsworthy, we will share our views on them and how they fit into the economics of the energy system, the energy policy debate and our investment strategy as we have here on the topic of CCUS.
[1] American Institute of Chemical Engineers. https://www.aiche.org/ccusnetwork/what-ccus
[2] IEA (2020a), CCUS in Clean Energy Transitions, IEA, Figure 2.18, Paris. https://www.iea.org/reports/ccus-in-clean-energy-transitions
[3] IEA (2020b), CCUS in Clean Energy Transitions, IEA, Paris. https://www.iea.org/reports/ccus-in-clean-energy-transitions
[4] IEA (2019), The Role of CO2 Storage, IEA, Paris. https://www.iea.org/reports/the-role-of-co2-storage
[5] Intergovernmental Panel on Climate Change (IPCC). Special Report on Global Warming of 1.5 °C (SR15), 8 October 2018.
[6] IBID.
[7] International Energy Agency. (2019). World Energy Outlook 2019. Flagship Report. https://www.iea.org/reports/worldenergy-outlook-2019
[8] Pembina Pipeline Corp. https://www.pembina.com/operations/projects/alberta-carbon-grid-proposed/
[9] Global CCS Institute, 2020. The Global Status of CCS: 2020. Australia. https://www.globalccsinstitute.com/resources/global-status-report/
[10] Princeton University, Net-Zero America: Potential Pathways, Infrastructure, and Impacts, interim report, Princeton, NJ, December 15, 2020. https://netzeroamerica.princeton.edu/img/Princeton_NZA_Interim_Report_15_Dec_2020_FINAL.pdf
[11] IEA (2020c), CCUS in Clean Energy Transitions, IEA, Paris. https://www.iea.org/reports/ccus-in-clean-energy-transitions
[12] IEA (2020), Energy Technology Perspectives 2020, IEA, Paris. https://www.iea.org/reports/energy-technology-perspectives-2020
[13] Encyclopedia Britannica.
[14] Source: NOAA, National Resources Defense Council, American Chemical Society, International Environmental Data Rescue Organization.
[15] IBID.
[16] NOAA “Permafrost and the Carbon Cycle” by T. Schuur, Center for Ecosystem Science and Society.
[17] Lazard, EIA and EIP estimates.
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