Juho Lipponen - CCS incentive policies: lessons and strategies - Presentation at the Global CCS...

Incentive policies for Incentive policies for

Carbon Capture and Storage:Carbon Capture and Storage:Lessons and StrategiesLessons and Strategies

© OECD/IEA 2010

Lessons and StrategiesLessons and Strategies

5 October 20115 October 2011

Juho LipponenJuho Lipponen

Head of Unit, Carbon Capture and StorageHead of Unit, Carbon Capture and Storage

International Energy AgencyInternational Energy Agency

International Energy Agency

IEA countries

OECD countries, but not IEA members

© OECD/IEA 2010

� Inter-governmental body founded in 1973, currently 28 Member Countries

� Policy advice and energy security coordination

� Whole energy policy spectrum and all energy technologies

� Key publications: World Energy Outlook and Energy Technology Perspectives

� Host to more than 40 technology-specific networks (“Implementing

Agreements”)

� Operated independently with their own membership and financing

� Includes IEAGHG, IEA Clean Coal Centre etc.

� Active in CCS since 2000; dedicated CCS unit created in 2010

� Provides policy advice

� Supports broader IEA cross-technology analysis

CCS @ IEA:

WORK PROGRAMME

CCS Strategy & Policy Technical & Economic

© OECD/IEA 2010

Legal & RegulatoryCapacity-Building &

Collaboration

Global Policy Fora

CCS in Industrial Applications:� 4Gt of reductions potential in 2050

© IEA/UNIDO 2011

POLICY IS CRITICAL FOR CCS

1. Enabling CCS as part of energy portfolio

2. Making CCS a legal activity & clarifying

responsibilities

3. Ensuring safety and environmental

© OECD/IEA 2010

3. Ensuring safety and environmental

viability of operations

4. Providing incentives for demonstration

and deployment

� Business models & financing of projects

5. Contributing to public acceptance

INCENTIVES?

FINANCING?

INCENTIVE

Policy push or market pull mechanism

that provides an earning logic for CCS

© OECD/IEA 2010

that provides an earning logic for CCS

projects (”ensures bankability”)

FINANCING

Becomes possible when the earning

logic or bankability is established

Business

© OECD/IEA 2010

Government

WHY DO WE TALK ABOUT INCENTIVES?

1. LEVEL OF ECONOMY / SOCIETY:

To meet the IEA CCS Roadmap ambitions, almost USD 5 trillion will need to be invested in CCS installations.

0

500

1,000

1,500

2,000

2,500

$b

n

© OECD/IEA 2010

02010-2020 2020-2030 2030-2040 2040-2050

Other OECD USA China India Other Non-OECD

Fuel Coal

(similar for all capture routes;

relative to a pulverized coal

baseline)

Natural gas (post-

combustion)

Efficiency

penalty 10 %-points 8 %-points

Capital

costs

3 800 USD/kW

(74% increase)

1 700 USD/kW

(82% increase)

Cost of CO2

avoided55 USD/tCO2 80 USD/tCO2

2. PROJECT / COMPANY LEVEL:

Investment in early CCS facilities represents prohibitive capital cost and decreases efficiency leading to increased operating cost.

WHY DO WE TALK ABOUT INCENTIVES? (2)

© OECD/IEA 2010

Source: EU

Zero-Emissions

Platform

ECONOMIC CHARACTERISTICS OF CCS

TECHNOLOGY WILL EVOLVE

CCS Costs/

carbon

price

The cost of most applications of CCS is currently significantly above carbon prices/penalties (where they exist); by 2050 it is expected that this will reverse.

© OECD/IEA 2010

Carbon price or

tax

CCS unit costs

Early stageMiddle stage Late stage

Time

ARE POLICY OBJECTIVES CLEAR?

� Reducing emissions

� Ensuring technology learning

Ensuring access to capital markets

© OECD/IEA 2010

� Ensuring access to capital markets

CCS POLICY OBJECTIVES WILL EVOLVE

Policy objective Example policies Importance over time

� Short to mid term focus on learning and access to

capital

� Long term focus shifts towards emissions cuts

� Different objectives – different policy tools

© OECD/IEA 2010

Emissions reductionCarbon tax, emissions trading

Technology learning Feed-in tariff

Access to capital market

Provision of debt, equity, insurance

Optimised Infrastructure

Regulation

POLICIES TO ADDRESS DIFFERENT

OBJECTIVES

Reducing emissions

Technology learning

Access to capital markets

Cap and trade Capital grant Co-investment

equity

Carbon tax Production

subsidy

Provision of debt

Baseline and Investment tax Credit guarantees

© OECD/IEA 2010

Baseline and

credit

Investment tax

credit

Credit guarantees

Feebate Production tax

credit

Insurance

products

Emissions

performance

Standard

Feed-in tariff

CO2 purchase

contract

Premium feed-in

tariff

Portfolio standard

TOWARDS A POLICY STRATEGY

INCENTIVE POLICY ARCHITECTURE

Long-term framework of how different

policies are employed

POLICY TOOLS

© OECD/IEA 2010

POLICY TOOLS

Individual policy tools responding to

relevant objectives

POLICY GATEWAYS

Breakpoints in time/development when

policy moves from one stage to next

� CCS a challenging area for policy-makers

� Ability to adapt and modify policy as technology changes

or new information comes to light...

� ...but the (perception of) changing policy may damage

investment

� “Policy gateways” might help overcome this

challenge:

POLICY “GATEWAYS”

© OECD/IEA 2010

challenge:

� policies employed in each stage

� Criteria defining when or if policy will move to next stage

� an outline of the reaction if gateways are missed

� Can lower government risk from imposing

poor value for money

� Can lower policy risk for investors

POLICY ARCHITECTURE AND GATEWAYS

Carbon

price

CCS Cost/

carbon price

Technical

demonstrationSector-specific deployment Wide-scale deployment

Long-term policy architecture can enhance credibility and effectiveness

© OECD/IEA 2010

‒ Quantity support

mechanism

price

CCS unit

costs

‒ Carbon price

Time

‒ Capital grants

‒ Operating

subsidies

‒ Loan

guarantees

First Gateway Second Gateway

‒ Technical feasibility

‒ First cost threshold

‒ Availability of firm

storage capacity

‒ Further cost reductions

‒ Infrastructure development

‒ Availability of firm storage

capacity

EXAMPLES OF CURRENT INCENTIVE POLICIES

US: Demo funding

EU: NER300, EEPR

AUS: Flagship pr.

UK: CCS competition

NO: Mongstad

Etc..

UK: 2011

Electricity

Market Reform

NO: Carbon tax

US: EOR projects

© OECD/IEA 2010

‒ Quantity support

mechanism

Carbon

price

CCS unit

costs

CCS Cost/

carbon price

‒ Carbon price

Time

‒ Capital grants

‒ Operating

subsidies

‒ Loan

guarantees

Technical

demonstrationSector-specific deployment Wide-scale deployment

FURTHER ANALYSIS

� Incentives suited for industry-CCS

� Quantifying the value of

transferring long-term liability

� Extra incentives for biomass-CCS

© OECD/IEA 2010

� Extra incentives for biomass-CCS

(”valuing a ton removed vs.

reduced”)

� Innovative solutions esp. for

developing countries

CONCLUSION:

”Generic policy advice”

1. Be clear about policy objectives

2. Suit incentive policy to technical

maturity

© OECD/IEA 2010

maturity

3. Plan incentive strategy long-term

4. Plan for a coherent mix of

incentives, not just one

5. Create certainty!

Juho Lipponen - CCS incentive policies: lessons and strategies - Presentation at the Global CCS...

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