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In the absence of high carbon prices and clear mandates, identifying viable business models for both emitters and transport and storage infrastructure developers is a challenge – and often requires innovative combinations from multiple sources.
Northern Lights.
The CCUS hub value chain is made up of three elements: capture, transport and storage. In the earliest hubs, the players typically consisted of a hub developer, who initiates and manages the value chain, several emitters who guarantee to capture and supply carbon dioxide, and a single transportation and storage company (that could serve several hubs).
As the industry evolves, however, the value chain has started to become more complex. In northern Europe, for example, industrial hubs are consolidating (as in East Coast Cluster) and coalitions are springing up to organize specific parts of the transport infrastructure (see Aramis, Antwerp@C). Specialized players are emerging to manage different aspects of the business: managing pipelines, retrofitting existing assets, shipping carbon, providing capture solutions.
At this stage of development, CCUS hubs will depend on government support to provide some form of upfront co-funding of capital costs and revenue to attract emitters and operators. That support is motivated by the need to decarbonize heavy industry, maintain and create jobs, and secure growth and global competitiveness.
As risks and costs fall, carbon price rises and demand for decarbonized industrial products grows, hubs will be driven by industry, supported by market-based mechanisms and commercial financing.
Hub developers can be:
Emitters are responsible for developing facilities in their plant to capture carbon dioxide from their operations, purifying it to meet specifications and getting it to a pick-up point. If specific transport services are not available, they may need to take responsibility for compressing the carbon dioxide, transporting it to loading terminals, developing loading infrastructure and even providing temporary storage in tanks.
Transport and storage operators are responsible for transporting the carbon dioxide from a designated pick-up terminal to the storage site, where they inject it into the subsurface geology. As the industry evolves, dedicated carbon transport operators are emerging to provide a smoother link between individual emitters and storage operators. In northern Europe, for example, companies and joint initiatives are emerging in key industrial areas to compress the carbon dioxide, provide temporary storage facilities and transport carbon dioxide to North Sea ports for storage operators to collect.
The business model for emitters depends on them securing revenue streams to cover both their investment in capture, purification and, potentially, compression facilities (capex) and the transport and storage fees they pay to the operator and any additional service providers (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.
In the current phase of CCUS hub developments, some governments are looking to provide one-off capital grants to emitters for first-of-a kind (FOAK) capture projects, for example through the CCS Infrastructure Fund in the UK, the European Innovation Fund, and state aid for the Longship projects in Norway.
| Potential revenue stream | Description and examples |
|---|---|
| Compliance markets |
Direct carbon taxes and carbon prices created by Emissions Trading Schemes (for example in the EU or UK) support CCUS for emitters by reducing the cost of compliance. For each tonne of carbon dioxide captured and stored, the emitter avoids having to pay carbon tax and/or buy an emissions allowance. As the carbon price in most compliance markets is currently lower than the overall cost of carbon capture and storage, governments will generally still need to top up investment incentives. One way to do this is with a contract for difference mechanism, used for example in the UK and Netherlands. 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 operators is relatively simple: they are paid a fee to transport and store the carbon dioxide 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:
As dedicated transport operators emerge, these might also change for additional services such as compressing the carbon dioxide, storing it temporarily and transporting it by truck, barge, rail or pipeline to the hub operator’s pick-up point.
Because 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 on a commercial basis.
Enabled market: This is a hybrid model comprising state intervention in some parts of the market and managed competition in other parts. A regulated entity is responsible for developing the transport and storage infrastructure and is required to take all the carbon dioxide captured by the emitters. This can be a private company although it will be strongly regulated.
The regulated asset base approach being developed by the UK government for carbon transport and storage infrastructure, including that for the East Coast Cluster, is an example of the enabled market model. Here, an operator – the Northern Endurance Partnership – 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 which considers allowable expenses, over a set period of time, to ensure costs are necessary and reasonable.
Porthos is another enabled market approach, with some capital funding from the EU and fees to emitters structured in a way that covers costs.
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 Liberty 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.
In Europe, too, a second generation of commercial hub projects is starting to emerge. In Norway, for example, Horisont Energi, Neptune Energy and E.On are working together to set up a commercial hub, initially storing emissions from E.On facilities in Europe.
For more information on transport and storage business models see these resources from the UK government on CCUS business models.
Mobilizing private finance for CCUS hub projects faces two fundamental challenges, according to a report by the Energy Futures Initiative. The first is that the application of CCUS as a decarbonization tool for many new industries is continually raising new first-of-a-kind challenges that need to be mastered to bring down costs and build commercial confidence. The second is that the value chain is complex – covering capture, transport, storage and monitoring – and each of these areas is evolving into an industry of its own but also need to collaborate closely. The result is that potential developers face multiple risks and uncertainties.
Governments have started to address some of these specific risks with targeted incentives, but to make CCUS hub projects bankable, two broad groups of investment risks need to be addressed in detail:
| Risk | Issue and potential mitigation |
|---|---|
| Volume risk |
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 and at what point in the operation: the emitter or the transport and storage 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 transport and storage operator, 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 transport and storage 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 transport and storage operator. Possible solutions include creating a take or pay contractual structure or taking a direct ownership share in the transport and storage company. |
| Risk | Issue and potential mitigation |
|---|---|
| Insufficient value on CO2 | A robust policy mechanism that places a sufficient value on carbon dioxide 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, while 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. |
It takes many different stakeholders to build a CCUS hub. Select your profile to get started:
The CCUS Hub is designed to support policy-makers, potential hub developers and emitters interested in setting up a CCUS hub by sharing learnings from the most advanced hubs and identifying new ones.
