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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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Energy

Indonesian Coal Roadmap: Optimizing Utilization amid Global Tendency to Phasing Out

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Authors: Razin Abdullah and Luky Yusgiantoro*

Indonesia is potentially losing state revenue of around USD 1.64-2.5 billion per year from the coal tax and non-tax revenues. Although currently Indonesia has abundant coal resources, especially thermal coal, the coal market is gradually shrinking. This shrinking market will negatively impact Indonesia’s economy. The revenue can be used for developing the country, such as for the provision of public infrastructures, improving public education and health services and many more.

One of the main causes of the shrinking coal market is the global tendency to shift to renewable energy (RE). Therefore, a roadmap is urgently needed by Indonesia as a guideline for optimizing the coal management so that it can be continuously utilized and not become neglected natural resources. The Indonesian Coal Roadmap should also offer detailed guidance on utilizing coal for the short-term, medium-term and long-term.

Why is the roadmap needed?

Indonesia’s total coal reserves is around 37.6 billion tons. If there are no additional reserves and the assumed production rate is 600 million tons/year, then coal production can continue for another 62 years. Even though Indonesia’s coal production was enormous, most of it was for export. In 2019, the export reached 454.5 million tons or almost 74% of the total production. Therefore, it shows a strong dependency of the Indonesian coal market on exports, with China and India as the main destinations. The strong dependency and the global trend towards clean energy made the threat of Indonesian coal abandonment increasingly real.

China, one of Indonesia’s main coal export destinations, has massive coal reserves and was the world’s largest coal producer. In addition, China also has the ambition to become a carbon-free country by 2060, following the European Union countries, which are targeting to achieve it in 2050. It means China and European Union countries would not produce more carbon dioxide than they captured by 2060 and 2050, respectively. Furthermore, India and China have the biggest and second-biggest solar park in the world. India leads with the 2.245GW Bhadla solar park, while China’s Qinghai solar park has a capacity of 2.2GW. Those two solar parks are almost four times larger than the U.S.’ biggest solar farm with a capacity of 579 MW. The above factors raise concerns that China and India, as the main export destinations for Indonesian coal, will reduce their coal imports in the next few years.

The indications of a global trend towards RE can be seen from the energy consumption trend in the U.S. In 2019, U.S. RE consumption exceeded coal for the first time in over 130 years. During 2008-2019, there has been a significant decrease in U.S coal consumption, down by around 49%. Therefore, without proper coal management planning and demand from abroad continues to decline, Indonesia will lose a large amount of state revenue. The value of the remaining coal resources will also drop drastically.

Besides the global market, the domestic use of coal is mostly intended for electricity generation. With the aggressive development of RE power plant technology, the generation prices are getting cheaper.  Sooner or later, the RE power plant will replace the conventional coal power plant. Therefore, it is necessary to emphasize efforts to diversify coal products by promoting the downstream coal industries in the future Indonesian Coal Roadmap.

What should be included: the short-term plan

In designing the Indonesian Coal Roadmap, a special attention should be paid to planning the diversification of export destinations and the diversification of coal derivative products. In the short term, it is necessary to study the potential of other countries for the Indonesian coal market so that Indonesia is not only dependent on China and India. As for the medium and long term, it is necessary to plan the downstream coal industry development and map the future market potential.

For the short-term plan, the Asian market is still attractive for Indonesian coal. China and India are expected to continue to use a massive amount of coal. Vietnam is also another promising prospective destination. Vietnam is projected to increase its use of coal amidst the growing industrial sector. In this plan, the Indonesian government plays an essential role in building political relations with these countries so that Indonesian coal can be prioritized.

What should be included: the medium and long-term plans

For the medium and long-term plans, it is necessary to integrate the coal supply chain, the mining site and potential demand location for coal. Therefore, the coal logistics chain becomes more optimal and efficient, according to the mining site location, type of coal, and transportation mode to the end-user. Mapping is needed both for conventional coal utilization and downstream activities.

Particularly for the downstream activities, the roadmap needs to include a map of the low-rank coal (LRC) potentials in Indonesia, which can be used for coal gasification and liquefaction. Coal gasification can produce methanol, dimethyl ether (a substitute for LPG) and, indirectly, produce synthetic oil. Meanwhile, the main product of coal liquefaction is synthetic oil, which can substitute conventional oil fuels. By promoting the downstream coal activities, the government can increase coal’s added value, get a multiplier effect, and reduce petroleum products imports.

The Indonesian Coal Roadmap also needs to consider related existing and planned regulations so that it does not cause conflicts in the future. In designing the roadmap, the government needs to involve relevant stakeholders, such as business entities, local governments and related associations.

The roadmap is expected not only to regulate coal business aspects but also to consider environmental aspects. The abandoned mine lands can be used for installing a solar farm, providing clean energy for the country. Meanwhile, the coal power plant is encouraged to use clean coal technology (CCT). CCT includes carbon capture storage (CCS), ultra-supercritical, and advanced ultra-supercritical technologies, reducing emissions from the coal power plant.

*Luky Yusgiantoro, Ph.D. A governing board member of The Purnomo Yusgiantoro Center (PYC).

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Engaging the ‘Climate’ Generation in Global Energy Transition

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photo: IRENA

Renewable energy is at the heart of global efforts to secure a sustainable future. Partnering with young people to amplify calls for the global energy transition is an essential part of this endeavour, as they represent a major driver of development, social change, economic growth, innovation and environmental protection. In recent years, young people have become increasingly involved in shaping the sustainable development discourse, and have a key role to play in propelling climate change mitigation efforts within their respective communities.

Therefore, how might we best engage this new generation of climate champions to accentuate their role in the ongoing energy transition? In short, engagement begins with information and awareness. Young people must be exposed to the growing body of knowledge and perspectives on renewable energy technologies and be encouraged to engage in peer-to-peer exchanges on the subject via new platforms.

To this end, IRENA convened the first IRENA Youth Forum in Abu Dhabi in January 2020, bringing together young people from more than 35 countries to discuss their role in accelerating the global energy transformation. The Forum allowed participants to take part in a truly global conversation, exchanging views with each other as well as with renewable energy experts and representatives from governments around the world, the private sector and the international community.

Similarly, the IRENA Youth Talk webinar, organised in collaboration with the SDG 7 Youth Constituency of the UN Major Group for Children and Youth, presented the views of youth leaders, to identify how young people can further the promotion of renewables through entrepreneurship that accelerates the energy transition.

For example, Joachim Tamaro’s experience in Kenya was shared in the Youth Talk, illustrating how effective young entrepreneurs can be as agents of change in their communities. He is currently working on the East Africa Geo-Aquacultural Development Project – a venture that envisages the use of solar energy to power refrigeration in rural areas that rely on fishing for their livelihoods. The project will also use geothermal-based steam for hatchery, production, processing, storage, preparation and cooking processes.

It is time for governments, international organisations and other relevant stakeholders to engage with young people like Joachim and integrate their contributions into the broader plan to accelerate the energy transition, address climate change and achieve the UN Sustainable Development Agenda.

Business incubators, entrepreneurship accelerators and innovation programmes can empower young people to take their initiatives further. They can give young innovators and entrepreneurs opportunities to showcase and implement their ideas and contribute to their communities’ economic and sustainable development. At the same time, they also allow them to benefit from technical training, mentorship and financing opportunities.

Governments must also engage young people by reflecting their views and perspectives when developing policies that aim to secure a sustainable energy future, not least because it is the youth of today who will be the leaders of tomorrow.

IRENA

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The Urgency of Strategic Petroleum Reserve (SPR) for Indonesia’s Energy Security

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Authors:Akhmad Hanan and Dr. Luky Yusgiantoro*

Indonesia is located in the Pacific Ring of Fire, which has great potential for natural disasters. These disasters have caused damage to energy infrastructure and casualties. Natural disasters usually cut the energy supply chain in an area, causing a shortage of fuel supply and power outages.

Besides natural disasters, energy crisis events occur mainly due to the disruption of energy supplies. This is because of the disconnection of energy facilities and infrastructure by natural disasters, criminal and terrorist acts, escalation in regional politics, rising oil prices, and others. With strategic national energy reserves, particularly strategic petroleum reserves (SPR), Indonesia can survive the energy crisis if it has.

Until now, Indonesia does not have an SPR. Meanwhile, fuel stocks owned by business entities such as PT Pertamina (Persero) are only categorized as operational reserves. The existing fuel stock can only guarantee 20 days of continuity. Whereas in theory, a country has secured energy security if it has a guaranteed energy supply with affordable energy prices, easy access for the people, and environmentally friendly. With current conditions, Indonesia still does not have guaranteed energy security.

Indonesian Law mandates that to ensure national energy security, the government is obliged to provide national energy reserves. This reserve can be used at any time for conditions of crisis and national energy emergencies. It has been 13 years since the energy law was issued, Indonesia does not yet have an SPR.

Lessons from other countries

Many countries in the world have SPR, and its function is to store crude oil and or fuel oil. SPR is built by many developed countries, especially countries that are members of the International Energy Agency (IEA). The IEA was formed due to the disruption of oil supply in the 1970s. To avoid the same thing happening again, the IEA has made a strategic decision by obliging member countries to keep in the SPR for 90 days.

As one of the member countries, the US has the largest SPR in the world. Its storage capacity reaches a maximum of 714 million barrels (estimated to equal 115 days of imports) to mitigate the impact of disruption in the supply of petroleum products and implement US obligations under the international energy program. The US’ SPR is under the control of the US Department of Energy and is stored in large underground salt caves at four locations along the Gulf of Mexico coastline.

Besides the US, Japan also has the SPR. Japan’s SPR capacity is 527 million barrels (estimated to equal 141 days of imports). SPR Japan priority is used for disaster conditions. For example, in 2011, when the nuclear reactor leak occurred at the Fukushima nuclear power plant due to the Tsunami, Japan must find an energy alternative. Consequently, Japan must replace them with fossil fuel power plants, mainly gas and oil stored in SPR.

China, Thailand, and India also have their own SPR. China has an SPR capacity of 400-900 million barrels, Thailand 27.6 million barrels, and India 37.4 million barrels. Singapore does not have an SPR. However, Singapore has operational reserve in the form of fuel stock for up to 90 days which is longer than Indonesia.

Indonesia really needs SPR

The biggest obstacles of developing SPR in Indonesia are budget availability, location selection, and the absence of any derivative regulations from the law. Under the law, no agency has been appointed and responsible for building and managing SPR. Also, government technical regulations regarding the existence and management of SPR in Indonesia is important.

The required SPR capacity in Indonesia can be estimated by calculating the daily consumption from the previous year. For 2019, the national average daily consumption of fuel is 2.6 million kiloliters per day. With the estimation of 90 days of imports, Indonesia’s SPR capacity must at least be more than 100 million barrels to be used in emergencies situations.

For selecting SPR locations, priority can be given to areas that have safe geological structures. East Kalimantan is suitable to be studied as an SPR placement area. It is also geologically safe from disasters and is also located in the middle of Indonesia. East Kalimantan has the Balikpapan oil refinery with the capacity of 260,000 BPD for SPR stock. For SPR funding solution, can use the state budget with a long-term program and designation as a national strategic project.

Another short-term solution for SPR is to use or lease existing oil tankers around the world that are not being used. Should the development of SPR be approved by the government, then the international shipping companies may be able to contribute to its development.

China currently dominates oil tanker shipping in the world, Indonesia can work with China to lease and become Indonesia’s SPR. Actually, this is a good opportunity at the time of the COVID-19 pandemic because oil prices are falling. It would be great if Indonesia could charter some oil tankers and buy fuel to use as SPR. This solution was very interesting while the government prepared long-term planning for the SPR facility. In this way, Indonesia’s energy security will be more secure.

*Dr. Luky Yusgiantoro, governing board member of The Purnomo Yusgiantoro Center (PYC).

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