In the absence of high carbon prices and clear mandates, identifying viable business models for both emitters and transport & storage infrastructure developers is a challenge – and often requires innovative combinations from multiple sources.
The CCUS hub value chain typically consists of a hub developer, who initiates and manages the value chain, multiple emitters who guarantee to capture and supply carbon dioxide, and a single transportation and storage company (that could serve several hubs).
A hub developer can be:
Each emitter is responsible for capturing carbon dioxide from their operations, purifying it to meet specifications and then compressing it. If the carbon dioxide is being transported by ships to storage sites, the emitter may also be responsible for its safe storage in tanks and for the loading infrastructure in ports.
Transport and storage operators are responsible for transporting the carbon dioxide by pipeline, or by ship, from the emitter to the storage site, where they inject it into the subsurface geology.
Public-private partnerships are fundamental at the current stage of CCUS hub development because the financial cost of emitting carbon dioxide into the atmosphere is still low for emitters. Governments need to offer some form of upfront co-funding of capital costs and revenue to attract involvement by emitters and operators – largely motivated by the need to decarbonize heavy industry, maintaining jobs and global competitiveness.
As risks and costs fall, the implicit or explicit carbon price rises and demand for decarbonized industrial products grows, hubs will be driven by industry, supported by market-based mechanisms and commercial financing.
The business model for emitters depends on them securing revenue streams to cover both their investment in capture, purification and compression facilities (capex) and the transport and storage fees they pay to the operator (opex).
Revenue streams can come from a variety of sources, depending on the regulatory environment and the demand for carbon dioxide and related products from end-use customers. Depending on their location, emitters may be able to secure income from multiple revenue streams, a concept known as value-stacking (see table).
In the current phase of CCUS hub developments, some governments are looking to provide one-off capital grants to emitters for capture projects, for example through the CCS Infrastructure Fund in the UK and state aid for the Longship projects in Norway.
|Revenue Stream||Description and examples|
|Compliance markets||In a compliance market for carbon dioxide, such as the EU Emissions Trading Scheme (ETS), the emitter realises a value for the emissions reductions represented by the CO2 captured and stored from its operations. For each tonne of CO2 captured and sequestered it does not need to buy an emissions allowance in the emissions trading scheme. As the CO2 price in most compliance markets is currently lower than the overall cost of carbon capture and storage, governments need to step in to incentivize investment. One way to do this is with a Contract for Difference (CfD). The emitter is paid the difference between an agreed strike price and the prevailing market price for carbon dioxide in the trading scheme.|
|Tax credits||Some governments offer performance-based tax credits designed to incentivize carbon capture and storage or utilization. An example of this is the 45Q Carbon Capture Tax Credit in the US. Qualifying emitters such as power and industrial facilities can generate a federal tax liability offset per captured tonne of carbon dioxide stored securely or used in a way that prevents it from ever being released into the atmosphere. This offset can be used directly by the emitter or traded with other organizations in any US state.|
|Voluntary carbon markets||In the absence of a compliance market, emitters can potentially sell carbon credits in the voluntary carbon markets based on certified emissions avoided or reduced through their involvement in a CCUS hub. Voluntary carbon markets are expanding rapidly, stimulated by growing corporate net zero commitments. The methodologies for CCUS, however, are still evolving. Initiatives such as CCS+ and ACCU are exploring transparent ways to create carbon credits and make use of Article 6 of the Paris Agreement that regulates voluntary international trading of carbon credits. Until regulations are tightened, voluntary markets could play an important supporting role in funding CCUS.|
|CO2 as a commodity||Carbon dioxide is used in a number of agricultural, food production and industrial processes where it has a market value. It can be locked permanently into some products, for example in the production of certain types of cement and building aggregates or plastics. It can also be used in the production of zero carbon synthetic fuels. The utilization market is currently marginal, but is expected to grow rapidly.|
|Low carbon products||Emitters may be able to attract a premium for lower carbon products enabled by CCUS. Some of these are regulated markets. For example, the USA Low Carbon Fuel Standard regulations introduced by California, and now under development in 13 other states attracts a significant premium for fuels which meet lower carbon intensity standards. Canada has a similar system in place. Low carbon procurement is also starting to create a potential revenue stream for CCUS-enabled industrial products. Consumer goods industries such as the automotive sector are looking at procuring low carbon industrial inputs such as steel to meet demand for greener products. Cities and regional governments are looking at low carbon procurement for commodities such as steel and cement, for use in infrastructure projects.|
The business model for transport and storage (T&S) operators is relatively simple – they are paid a fee to transport and store the CO2 emissions captured by their industrial customers. The tariff is structured to cover the operator’s investment and operating costs and provide a return on capital employed.
The fee structure will cover the following elements:
Since carbon prices are low and demand for low carbon products is nascent, the current business model for carbon transport and storage is likely to require government support. There are three broad types of business model, reflecting different market conditions and levels of government involvement.
Contractor to the state: This model is suitable when market and policy incentives are weak.
Investments and operating costs are predominantly financed (or guaranteed) by the government, which contracts planning, development and operations to state owned or private entities. The contractor holds some ‘skin in the game’.
Phase 1 of Longship/Northern Lights is an example of the contractor to the state model. The Norwegian government is funding 80% of the investment costs and up to 95% of the operational costs for the initial transport and storage infrastructure. The Northern Lights JV is responsible for developing the market further.
Enabled market: This is a hybrid model comprised of state intervention in some parts of the market and managed competition in other parts. A regulated entity – the ‘Market Maker’ – is responsible for developing the transport and storage infrastructure and is required to take all the CO2 captured by the emitters. The Market Maker can be a private company although it will be strictly regulated.
Porthos/Rotterdam is a variation on the enabled market approach, with some capital funding from the EU and fees to emitters structured in a way that covers costs.
The regulated asset base approach being developed by the UK government for carbon transport and storage infrastructure, including that for Net Zero Teesside, is an example of the enabled market model. Here, an operator receives a licence from the government regulator, which grants it the right to charge a regulated price, or fee, to users in exchange for delivering and operating the transport and storage network. The charge is set by the regulator who considers allowable expenses, over a set period of time, to ensure costs are necessary and reasonable.
Liberalized market: This model is suitable where market and policy incentives are strong and private companies develop and manage pipelines and storage sites without specific state direction. Individual participants are free to decide how their business will be structured – whether to pre-invest in over-sized transport and storage capacity, and how to allocate risk and return.
This is how CCUS infrastructure is currently being developed in the US, for example in the Louisiana hub, where the initial storage sites are likely to be onshore and lower cost. Transport and storage infrastructure development in the US may follow the oil and gas industry where hubs emerge on the back of infrastructure developed by the private sector for CCUS point-to-point projects.
There is growing demand from investors for opportunities to invest in zero and low carbon infrastructure projects, driven by stakeholder pressures and Environmental, Social and Governance (ESG) criteria. Macquarie Group, the world’s largest infrastructure asset manager is investing in the Acorn CCUS hub project in Scotland. Private equity firms, such as Starwood Energy Ventures, are developing investment vehicles in the US (alongside OGCI Climate Investments) tied to 45Q-related federal tax credits.
To make CCUS hub projects bankable, two broad groups of investment risks need to be addressed in detail among the hub partners and government:
Project risks around technology, construction, price and operations, which are common to any infrastructure investment. For hubs, the specific risks are around volume, leakage and multi-stakeholder project development. These will be mitigated over time through learning by doing: as more CCUS hubs are built, technologies and supply chains mature and prices are driven down through competition; and hub developers and T&S operators gain more project experience.
Hard-to-reduce risks include revenue risk, relating to an insufficiently high carbon price, cross-chain risks arising from the interdependency of the CCUS value chain, and long-term storage liability risk. These require government support to manage at present. Regulators also need to factor in subsurface risks that impact capital, operational and performance risks.
For more information on unlocking private finance for CCUS investments see this report by the GCCSI.
The Clean Energy Ministerial (CEM), working with public and private finance organisations, has developed a number of financing principles for CCUS. These provide a useful generic framework for stimulating the CCUS industry.
|Category||Risk||Issue and potential mitigation|
A key risk for CCUS hub projects is that the promised carbon dioxide does not arrive. This has two elements:
Possible contractual solutions to volume risk include:
|Leakage risk||Leakage of carbon dioxide is a small risk during operations, taking place along the injection well bore or during maintenance, for example. That could result in carbon price exposure, depending on the regulatory regime. The contract should address who bears the liability: the emitter or the T&S operator, or is it shared? This is more complex if it is across state or international boundaries.|
|Impurities risk||This relates to the consequence of impurities in the capture stream, like mercury, which can cause the pipelines to erode. The contract should address who bears the liability, the T&S developer, because they should have anticipated this, or the customer – or shared.|
|Project development risk||This relates to the timing risk on Final Investment Decision (FID) since multiple parties need to take their FIDs at the same time for the CCUS hub development to proceed. On the T&S operator side, the risk can be managed by having a portfolio of emitter companies. For emitters, this risk is more challenging as they are generally working with only one T&S company. Possible solutions include creating a contractual structure where the T&S company guarantees to take the carbon dioxide, or taking a direct ownership share in the T&S company.|
|Insufficient value on CO2||A robust policy mechanism that places a sufficient value on CO2 is needed to support investments in capture facilities that can then pass on a share of the benefit to transport and storage providers. This may take the form of a carbon tax, tax credit, emissions trading scheme, CCS obligation, emissions performance standard, or government procurement standards. In markets where carbon prices exist, these prices may not be sufficiently high enough to incentivize investment in CCS projects and governments may need to introduce additional levels of support, through instruments such as a Contract for Difference.|
|Interdependency of the CCUS value chain||CCUS projects require the coordination of multiple investment decisions in different parts of the CCUS value chain, each with long lead times. This creates risks associated with relative timing and capacity management. This interdependency continues during the operational phase where failure of one element of the CCUS value chain may affect the costs and revenues of other participants and prevent the value chain from performing as a whole. Government ownership of the transport and storage infrastructure, or capital support can help mitigate the timing risk. As more emitters connect to the network the interdependency risk will be reduced. Government may then choose to sell the infrastructure to the private sector for a profit. Hubs are also cooperating with each other to provide storage back-up if needed, for example in the North Sea region.|
|Long term storage liability||Legal and regulatory frameworks may place limits on private investors’ exposure to any long-term storage liabilities. This can be managed by transferring these liabilities to the state after a specified period post-closure, subject to transparent monitoring and acceptable performance of the storage facility. Jurisdictions may specify a minimum number of years for which operators will have to continue post-closure monitoring of a site. Another way long-term storage liability can be managed is through a risk capping mechanism. This would allow the private sector operator to take responsibility for risks incurred below a cap, whilst the government would take responsibility for all additional risks above that cap. The value of the cap could be a function of the balance of public and private equity in the storage operation, with higher private equity translating to a higher cap.|
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