Carbon Capture Utilization and Storage (CCUS)

Waqar Syed, MBA

Since the publication of our report, Bet on CCUS as a Vehicle to Reach Climate Goals, published on March 17, 2021, we have seen an acceleration in CCUS projects under consideration in energy-intensive industries. Currently, these projects are going through their feasibility studies, with the biggest question mark around how to make the investments in carbon capture economically feasible. Alberta is blessed with superior CO2 sequestration potential, and the infrastructure for transporting CO2 either exists or can be developed. In this report, we study the factors that drive the economics of CCUS projects and how governments can help in incentivizing CCUS investments. We also discuss the role and the needs of the public and private sectors in CCUS developments and highlight some private and public companies engaged in CCUS development.  

Why CCUS Matters 
There is no practical way of achieving global net zero by 2050 goals without CCUS being a major part of the solution. International Energy Agency’s Sustainable Development Scenario requires 70-100 new CCUS facilities each year, requiring US$655bn to US$1,280bn in investments, meaning that the size of the financial pie is very large. For sustainable development of Alberta, CCUS provides a path to reaching climate goals while preserving and creating high paying jobs. The importance of CCUS is becoming increasingly obvious as the world grapples with the trilemma of challenges: energy poverty, energy security, and environmental protection.  

Setting Up the CCUS Development Context
In 2021, nearly 100 new CCUS projects were announced globally, with the number well in excess of 150 currently. In Canada, several major projects are in advanced stages of consideration, of which the Oil Sands Pathways to Net Zero is the largest, targeting 40mm T/year of CO2 sequestration at an estimated cost of C$75bn. More projects are needed if 2030 goals are to be met, as IEA in its Sustainable Development Scenario requires 840mm T/year of CCUS capacity by 2030 and 5,600mm T/year by 2050 compared to roughly 40mm T/year today. 

Key Factors Impacting CCUS Project Economics 
A CCUS project’s IRR calculations are heavily dependent on assumptions of project revenues, which are driven by carbon prices, incremental revenue generated through the sale of low-carbon products, and the sale of any excess electricity (energy) generated to run the CCUS process. The cost side of the IRR equation can be heavily influenced by the project’s capital costs, government incentives in the form of grants, tax credits, accelerated depreciation, and operating costs, which are heavily impacted by assumptions around energy costs.  

Government Has A Major Role to Play in CCUS Project Feasibility 
Along with a project’s capital cost, driven primarily by the concentration of CO2 in the stream from which it is being captured, government policies and government financial support are the biggest drivers in ascertaining a CCUS project’s economic feasibility. The Government of Canada (GOC) is raising carbon prices from $50/T in 2022 to $170/T by 2030 and has proposed Investment Tax Credits (ITC) also, but the gold standard remains the recently ramped up US 45Q tax credits and the incentives announced in the Inflation Reduction Act (IRA). While government financial help is needed to make projects economical, one key step the GOC can take is simplifying the process of receiving and monetizing carbon credits, as this will lower entry barriers for private capital. In our view, the GOC should replicate some of the CCUS/hydrogen-related incentives announced in the IRA. 

The writers wish to acknowledge the contribution of James Shou, PhD, CFA in the preparation of the report.

Waqar Syed, Head of Research 720.683.6704