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US budget bill may help carbon capture get back on track

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Authors: Simon Bennett and Tristan Stanley

The 2018 US Budget Bill, passed by the House and Senate in mid-February, will shape funding for energy technologies for the next decade. Alongside the extension of renewable tax credits and credits for energy efficiency, nuclear and fuel cells, the bill contains a provision that could provide the first significant stimulus to the global fortunes of carbon capture for several years. It is an example of how relatively small policy incentives can tip the scales towards investment when the infrastructure and industrial conditions are already in place, as the United States is leveraging an existing market and pipeline network for enhanced oil recovery (EOR).

The Budget Bill aims to stimulate investment in carbon capture by expanding incentives to companies that can use captured CO2 and reduce emissions as a result. It raises the existing so-called “45Q” tax credit for storing CO2 permanently underground from USD 22 today to USD 50 in 2026. The figure below shows the level of credit available for different combinations of CO2 sources and uses.

IEA analysis suggests it could trigger the largest surge in carbon capture investment of any policy instrument to date. Based on the above levels of revenue support for commercial carbon capture projects, we estimate that the tax credit could lead to capital investment on the order of USD 1 billion over the next six years, potentially adding 10 to 30 million tonnes or more of additional CO2 capture capacity, potentially increasing oil production by 50 to 100 thousand barrels per day. This would increase total global carbon capture by around two thirds and, by incentivising industry to find the lowest-cost projects, could be cheaper than projects already operating around the world. The annual cost to the US taxpayer by 2026, supporting CAPEX and OPEX, would be under USD 800 million.

Carbon capture refers to the separation of carbon dioxide (CO2) from industrial processes before it can be released to the atmosphere and contribute to climate change. It is a key part of the climate change mitigation toolbox because it can tackle emissions sources for which no other technologies are out of the lab and commercially available. These include industrial processes for production of steel, cement and a range of fuels, from gasoline to bioethanol and hydrogen. By retrofitting carbon capture to existing polluting facilities like coal power stations, they have the option of continuing operation with lower emissions, potentially overcoming political and economic obstacles to system transformation.

Of course, something must be done once the carbon is captured. Very large volumes can be injected deep underground and safely trapped for the long term. CO2 can also be trapped underground while being used in enhanced oil recovery (EOR), for which 65 million tonnes are purchased each year by the oil and gas industry and injected into oil fields to increase their productivity. Today, 80% of this CO2 comes from natural underground CO2 deposits and its use has no beneficial impact on greenhouse gas emissions reduction. Using captured CO2 that would otherwise have been emitted instead of natural CO2 therefore gives an environmental benefit and, extending the life of existing oilfields. Besides EOR, smaller volumes of CO2 can be purchased for economic use in chemical processes but may not offer the same level of emissions reduction as underground storage if the process is energy intensive or the final product is combusted, releasing CO2 again.

For achieving the goals set out in the Paris Agreement on Climate Change, any boost for carbon capture utilisation and storage (CCUS) would be welcome. The IEA recently noted that there has been a slump in new projects, with no new projects in the pipeline for construction. The US has been a clear leader accounting for around half of the total investment in CCUS in the decade to 2017.

The biggest opportunities are likely to be in the capture of CO2 from hydrogen plants at refineries and from natural gas processing facilities. Along with hydrogen production at fertilizer plants and bioethanol mills, these represent the lowest cost sources of CO2 at large scale and, unlike the fertilizer and bioethanol industries; they tend to be located close to existing CO2 pipelines for transporting CO2 to oilfields. In general, the lowest cost opportunities for avoiding emissions via CCUS reflect the concentration of CO2 in the flue gases.

Deployment of new carbon capture facilities in these sectors would reflect experience to date. Three quarters of the CO2 capture capacity built in the last decade and operating today has been on hydrogen production, gas processing and ethanol fermentation, all high purity sources of CO2. This represents almost half of all investment in CCUS made in the last decade, providing a strong indication of the sectors for CCUS that are favoured by the market. Twenty nine million tonnes of CO2 are captured today from large industrial sources, 87% of these are used for EOR, of which 78% are in the US.

The overall impact of the 45Q tax credit on stimulating a more sustainable CCUS industry will depend on a number of uncertain factors. We think the following factors are mostly upside risks:

CO2 demand for EOR

Our estimate of the impact of the tax credit assumes that neither CO2 demand nor supply are strongly limiting factors. The 45Q incentive should reduce the price of CO2 from carbon capture facilities to a level in line with that from natural CO2 deposits and unlock demand that is currently limited by the constraints on natural CO2. Taking these constraints into account, the shift of the supply curve resulting from this price reduction should ensure that any future EOR growth is based on captured CO2, not further production of natural CO2 that is already trapped harmlessly underground. From the supply side, it seems feasible that the construction of carbon capture projects could ramp up quickly enough by 2024 to meet much of this demand as long as CO2 offtake contracts and pipeline extensions can be put in place to trigger investment. Ultimately, however, this will depend on the evolution of the oil price – which is currently below the level needed for some, but not all, EOR projects – and the allocation of capital between light tight oil plays and EOR at mature fields.

CO2 demand for non-EOR uses

While the new legislation opens up the tax credit to industrial uses of CO2 – and, by changing the terminology, to industrial uses of carbon monoxide (CO) – the extent of uptake from these businesses is uncertain, and will likely be limited. In addition to being in construction by 2024, three conditions need to be satisfied to claim the credit: the carbon oxide would have otherwise been released to the air; over 25 000 tonnes per year from each carbon capture facility must be converted to products; a life cycle assessment by the regulator must show a benefit to the climate and the tax credit reduced accordingly if the benefit is lower than for long-term CO2 storage.

For carbon monoxide, which already has economic value as a fuel and chemical, we think the tax credit will not be high enough to divert much to new uses. For example, $35 per tonne of CO is around $12 per MWh, so it would not outbid the fuel value of CO. Using CO2 to convert hydrogen to hydrocarbon fuels could potentially exceed the annual volume condition by 2026, to help overcome the difficulties with storing electricity as hydrogen, but this will have a harder time with the life cycle assessment condition. Because the carbon is released when the fuel is burned, we foresee less than half of the tax credit (no more than $17) being available for such uses, which would probably need to be combined with other incentives to kick start an industry (a price of €300 per tonne was suggested by German industry).

The speed with which dedicated CO2 storage sites can be developed

Given that it can take 5-10 years to develop a storage site, with considerable capital put at risk upfront, we expect most CO2 captured to be used for EOR in the near term. Dedicated storage sites, particularly in regions without CO2 pipelines or EOR production, may start to come on line as the tax credit approaches $50. One of the biggest opportunities for using the 45Q tax credit is to capture CO2 from bioethanol plants, which are not only numerous in the United States but emit CO2 of biogenic origin –as a result, storing this CO2 effectively pumps CO2 out of the atmosphere. Many of these plants are not near CO2 pipelines for EOR but the CO2 could be stored permanently underground and qualify for the higher level of tax credit, as at Decatur in Illinois. $22-52 is certainly enough to cover the levelised costs of CO2 storage over the long term, but the geology is not ideal in every location.

Longer term developments

The level of credit rises over time, and then is inflation linked after 2026. As such, 45Q will have limited uptake in the next few years and investment will target carbon capture projects coming online in the mid-2020s, when the higher level of tax credits will be available. Any electricity sector projects – such as coal or gas power plants – would not be expected until the second half of next decade and, even at USD 50, would be limited in number without additional policy measures. Policy measures that could combine with 45Q to significantly multiply its uptake include low carbon fuel standards, in discussion in California, and modifications to the treatment of private activity bonds and master limited partnerships in this area. For direct capture of CO2 from the air, which has estimated costs well in excess of $200 per tonne, a higher level of additional policy support would likely be needed. Technologists with plans to remove carbon from the atmosphere will likely see 45Q as a “nice-to have”, rather than a cue to establish a market for guilt-free CO2. In a supportive move on the other side of the Atlantic, EU legislators agreed in January 2018 to let fuels produced from hydrogen combined with CO2 count towards renewable policy goals only if the CO2 is captured from ambient air.

*Tristan Stanley, IEA Energy Technology Analyst

Source: IEA

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U.S. Government Likely Perpetrated Biggest-Ever Catastrophic Global-Warming Event

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On September 28th, the AP headlined “Record methane leak flows from damaged Baltic Sea pipelines” and reported that “Methane leaking from the damaged Nord Stream pipelines is likely to be the biggest burst of the potent greenhouse gas on record, by far. … Andrew Baxter, a chemical engineer who formerly worked in the offshore oil and gas industry, and is now at the environmental group EDF …  said, ‘It’s catastrophic for the climate.’” The article pointed out that methane “is 82.5 times more potent than carbon dioxide at absorbing the sun’s heat and warming the Earth.”

Russian President Vladimir Putin had been aiming ultimately (and maybe soon) to get the gas to Europe flowing again, and said to EU nations on September 16th, “Just lift the sanctions on Nord Stream 2, which is 55 billion cubic metres of gas per year, just push the button and everything will get going.”

Here is what U.S. President Joe Biden had already promised about that on February 7th:

If Germany — if Russia invades — that means tanks or troops crossing the — the border of Ukraine again — then there will be — we — there will be no longer a Nord Stream 2.  We will bring an end to it. 

Q    But how will you — how will you do that exactly, since the project and control of the project is within Germany’s control?

PRESIDENT BIDEN:  We will — I promise you, we’ll be able to do it

He had promised to cause permanently the end of Nord Stream if Russia invaded, which it did on February 24th. He fulfilled on that promise on September 27th.

Radek Sikorsky, who is a Member of the European Parliament and had been Poland’s Foreign Minister and is the husband of the famous writer against Russia Anne Applebaum, and has been affiliated with Oxford Universisty, Harvard University, and NATO, tweeted on the day of the explosions, “Thank you, USA.” He also tweeted explanations: “All Ukrainian and Baltic sea states have opposed Nordstream’s construction for 20 years. Now $20 billion of scrap metal lies at the bottom of the sea, another cost to Russia of its criminal decision to invade Ukraine.” And: “Nordstream’s only logic was for Putin to be able to blackmail or wage war on Eastern Europe with impunity.”

Furthermore on September 27th, Germany’s Spiegel magazine reported that, as Reuters put it, “The U.S. Central Intelligence Agency (CIA) had weeks ago warned Germany about possible attacks on gas pipelines in the Baltic Sea” 

On September 28th, SouthFront headlined “No Way Back for Europe” and reported

It is reasonably suspected that the pipeline was blown up by the special services of the United States in order to finally stop the gas supplies to Germany from Russia.

On September 27, a detachment of warships led by the US amphibious assault ship USS Kearsarge reported on the completion of their tasks in the area of the alleged sabotage in the Baltic Sea and headed for the North Sea.

Since the beginning of September, suspicious activity by anti-submarine helicopters of the US Navy has been observed in the area. In the last few days, reconnaissance activities of NATO aircraft have significantly intensified in the Baltic Sea area. In particular, a US Boeing E-3 Sentry reconnaissance aircraft was on constant patrol over the Baltic States, and a US Joint STARS was spotted over Germany and Poland.

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Solar Mini Grids Could Power Half a Billion People by 2030 – if Action is Taken Now

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Solar mini grids can provide high-quality uninterrupted electricity to nearly half a billion people in unpowered or underserved communities and be a least-cost solution to close the energy access gap by 2030. But to realize the full potential of solar mini grids, governments and industry must work together to systemically identify mini grid opportunities, continue to drive costs down, and overcome barriers to financing, says a new World Bank report.

Around 733 million people – mostly in Sub-Saharan Africa – still lack access to electricity. The pace of electrification has slowed down in recent years, due to the difficulties in reaching the remotest and most vulnerable populations, as well as the devastating effects of the COVID 19 pandemic. At the current rate of progress, 670 million people will remain without electricity by 2030.

Now more than ever, solar mini grids are a core solution for closing the energy access gap,” said Riccardo Puliti, Infrastructure Vice President at the World Bank. “The World Bank has been scaling up its support to mini grids as part of helping countries develop comprehensive electrification programs. With $1.4 billion across 30 countries, our commitments to mini grids represent about one-quarter of total investment in mini grids by the public and private sector in our client countries. To realize mini grids’ full potential to connect half a billion people by 2030, several actions are needed, such as incorporating mini grids into national electrification plans and devising financing solutions adapted to mini grid projects’ risk profiles.”

The deployment of solar mini grids has seen an important acceleration, from around 50 per country per year in 2018 to more than 150 per country per year today, particularly in countries with the lowest rates of access to electricity. This is the result of falling costs of key components, the introduction of new digital solutions, a large and expanding cohort of highly capable mini grid developers, and growing economies of scale.

Solar mini grids have become the least-cost way to bring high-quality 24/7 electricity to towns and cities off the grid or experiencing regular power cuts. The cost of electricity generated by solar mini grids has gone down from $0.55/kWh in 2018 to $0.38/kWh today. Modern solar mini grids now provide enough electricity for life-changing electric appliances, such as refrigerators, welders, milling machines or e-vehicles. Mini grid operators can manage their systems remotely, and paidsmart meters enable customers to pay as they use the electricity.  Connecting 490 million people to solar mini grids would avoid 1.2 billion tonnes of CO2 emissions.

Further acceleration is needed, however, to meet Sustainable Development Goal 7 (SDG7). Powering 490 million people by 2030 will require the construction of more than 217,000 mini grids at a cumulative cost of $127 billion. At current pace, only 44,800 new mini grids serving 80 million people will be built by 2030 at a total investment cost of $37 billion.

Produced by the World Bank’s Energy Sector Management Assistance Program (ESMAP), the new book, Mini Grids for Half a Billion people: Market Outlook and Handbook for Decision Makers, identifies five market drivers to set the mini grid sector on a trajectory to achieve full market potential and universal electrification:

  1.  Reducing the cost of electricity from solar hybrid mini grids to $0.20/kWh by 2030, which would put life-changing power in the hands of half a billion people for just $10 per month
  2. Increasing the pace of deployment to 2,000 mini grids per country per year, by building portfolios of modern mini grids instead of one-off projects
  3. Providing superior-quality service to customers and communities by providing reliable electricity for 3 million income-generating appliances and machines and 200,000 schools and clinics
  4. Leveraging development partner funding and government investment to “crowd in” private-sector finance, raising $127 billion in cumulative investment from all sources for mini grids by 2030.
  5. Establishing enabling mini grid business environments in key access-deficit countries through light-handed and adaptive regulations, supportive policies, and reductions in bureaucratic red tape.

The handbook is the World Bank’s most comprehensive and authoritative publication on mini grids to date.

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Price Cap on Russian Oil: The Mechanism and Its Consequences

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G7 countries are working hard to coordinate a sanctions regime to cap prices on Russian oil and oil products. The United States is already drafting a mechanism for applying these sanctions, which its allies and partners will use as a guideline. The new sanctions in the form of legal arrangements are expected to be formalised very soon. How will this mechanism work, and what consequences can this lead to?

An unprecedented range of economic sanctions has been used against Russia since the beginning of the special military operation in Ukraine in February 2022. Their primary aim was to deal the largest possible economic damage to force Moscow to revise its policy and to undermine its resources provision. Since energy exports are extremely important for funding the Russian economy, sanctions against its oil and gas sector were more than just predictable. However, the United States, the EU and other initiators had to act cautiously, because Russia is a major player on the global market. US restrictions on the export of Iranian oil had little impact on the global market, whereas blocking sanctions against Russian oil companies could lead to uncontrollable price hikes. This could accelerate inflation, which was growing fast on the back of COVID-19 and other factors.

Nevertheless, the sanctions noose on the oil sector was tightening. Some sectoral sanctions have been applied since 2014, such as restrictions on loans and on the supply of products, services, technologies and investment in the Arctic shelf oil projects. Blocking sanctions were adopted against a number of co-owners, owners and top managers in the fuel and energy sector. In March 2022, Washington prohibited the import of Russian energy resources to the United States. Canada acted likewise. The EU started with banning Russian coal imports and later spread the ban, with a few exceptions, to oil and oil products. The bans are to come into force on December 5, 2022, and February 5, 2023, respectively. The UK plans to stop the import of Russian oil this year. Overall, Western countries are working to gradually banish Russian oil and oil products from their markets.

However, Moscow has quickly redirected its deliveries to Asian markets, where Western countries cannot easily impose similar restrictions, especially since Russian companies are selling their products with large discounts. The idea of a price cap has been proposed to be able to influence Russian oil prices outside Western countries.

The essence of the proposed mechanism is very simple. The United States, G7 and any other countries that join the coalition will legally prohibit the provision of services which enable maritime transportation of Russian-origin crude oil and petroleum products that are purchased above the price cap. The US Treasury has issued a Preliminary Guidance to explain the essence of the forthcoming bans, to be formalised in a determination pursuant to Executive Order 14071 of April 6, 2022. Section 1 (ii) of the executive order empowers the US Treasury and the Department of State to prohibit the export or re-export of “any category of services” to Russia. The upcoming Determination will explain the ban for American parties to provide services which enable the transportation of Russian-origin crude oil and petroleum products above the price cap. The US administration plans to enforce the ban on oil on December 5, 2022, and the ban on oil products on February 5, 2023, simultaneously with the EU bans on Russian oil imports.

But what is the exact meaning of the phrase “services which enable maritime transportation”? The US will most likely offer an extended interpretation. In other words, such services will include transportation, related financial transactions, insurance, bunkering, port maintenance and the like. This would allow Washington to influence a broad range of service providers outside the United States. For example, the US administration might consider dollar-denominated transactions on oil transportation to fall under US jurisdiction, so that very many players outside the US will face fines or prosecution. Punishment for avoiding the price cap, as well as for using deceptive shipping practices, have been set out in the new Guidance.

It is another matter how strictly the other coalition countries will implement this guidance and how large this coalition can be. The level of coordination within the initiator countries will likely remain very high, which means that the allied countries will do this in accordance with their national legislations. The coalition will include the countries that have already adopted sanctions against Russia.

The biggest question is whether the countries that have not adopted such sanctions, including Russia-friendly countries, can be convinced to join the coalition. The answer is most probably negative, but this will not settle the problem. Despite the official position of the friendly countries, their businesses could surrender to the US demand to avoid the risk of persecution.

The G7 statement and the new Guidance of the US Treasury imply that the sanctions are being imposed out of concern for the international community rather than solely for the purpose of punishing Russia. They say that the price cap is designed to stop the growth of oil prices that have been artificially inflated by the conflict in Ukraine. However, this “concern” can lead to unpredictable consequences.

To begin with, the latest attempt at the political mandating of prices will increase uncertainty, which will further drive the prices up. Prices can grow on expectations of problems with signing deals on the delivery of Russian oil and oil products over excessive compliance, which will lead to temporary shortages. Another problem is that the other oil producers will have to lower prices as well. They will not like this.

In fact, the sellers’ market is being changed into the buyers’ market by artificial political methods rather than for economic reasons.

And lastly, Russia is being forced to become the leader of dumping. Demand for its oil could be higher than for the products of other suppliers, and Moscow can make up for its profit shortfall by increasing deliveries. If the Western countries that prohibit the import of Russian oil and oil products buy other suppliers’ oil at higher prices while Asian countries continue to buy Russian products, this will artificially increase the competitiveness of Asian economies.

It is time for Russia to start thinking about adjusting to the Western restrictions, including by developing its own tanker fleet and abandoning the US dollar in oil deals. The latter is the prevalent task of Russia’s foreign trade in the new political conditions.

From our partner RIAC

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