On September 21, the United States Energy Association (“USEA”), on behalf of the Department of Energy Office of Fossil Energy, released a comprehensive report on the current state of carbon capture, utilization, and sequestration (“CCUS”). It details the roadblocks and federal and state tax incentives that aim to smooth the way towards large-scale CCUS adoption and deployment. With CCUS, a key element to energy transition and the race towards zero carbon emission, the stakes are high to find solutions to bureaucratic and economic hurdles.
The report, titled “Review of Federal, State, and Regional Tax Strategies and Opportunities for CO2-EOR-Storage and the CCUS Value Chain” (the “Report”) is the most comprehensive study on the subject and provides a number of solutions and opportunities for market participants. Co-authored by Orrick tax attorneys, Peter Connors and Joshua Emmett, and FTI, a leading consulting group, the report will be the topic of a USEA Webinar on October 1, 2020.
The underlying data makes it clear; the market potential for CCUS in the United States is enormous. With an average CCUS project size of 500,000 metric tons there is potential for more than 6,000 project opportunities. The Great Plains Institute estimates that there are more than 400 near- and medium-term capture opportunities using the Section 45Q tax credit in the United States.
Petra Nova CO2Capture and Sequestration Project Layout
Source: Petra Nova
The report is a complete compendium of federal and state incentives, programs and agencies focused on promoting CCUS, including an explanation of Section 45Q, Section 43 credits, DOE grants and loan programs. It also includes case studies and examples of deal structures anticipated to utilize Section 45Q credits. But roadblocks persist. The authors discuss how government bureaucracy, idiosyncratic or unclear guidelines, market and financial inefficiencies, technical complexities and public opinion are interconnected obstacles that slow large- scale adoption.
Governmental/Regulatory Roadblocks. The Governmental/Regulatory roadblocks exist at the federal and state levels.
States Active in CCUS Incentives
Source: FTI Consulting and Orrick Research
The Public Perception Roadblock. Public Perception is a combination of awareness and positive perception.
Market/Financial Roadblocks. Market/Financial roadblocks center around the levelized cost of energy for electricity generating facilities with a CCUS component. This will be the key to whether CCUS projects will attract investors and developers.
Coal-fired Generation Capture-only Costs
Source: FTI Consulting Analysis
Technical Roadblocks. Technical Improvements will be required to decrease the cost of capturing CO2 below the value of the Section 45Q Credit and other incentives.
For example, reducing governmental and regulatory roadblocks and hurdles that lower permitting costs and timelines would improve the financial and market viability of projects. As more projects become financially viable and come online, learning by doing will increase, resulting in further cost reductions along with an improved public perception of CCUS as a clean-energy technology.
Major solutions to CCUS roadblocks and hurdles will include items such as those listed below.
Clarifying IRS guidance on the Section 45Q Credit:
Addressing Class VI permitting and cost challenges:
Lowering the barriers to entry by addressing roadblocks and hurdles facing various stakeholders will accelerate CCUS deployment. As a commercially proven technology, CCUS is ready for substantial scale-up and deployment in the United States with the federal Section 45Q tax credit and complementary state incentives providing strong financial support. Project sponsors, tax-equity investors, owners, and operators are ready to tap into federal, state, and local tax and non-tax incentives to bridge the gap of CCUS costs and the market value of CO2.
For additional information regarding the Section 45Q Credit program, see the article linked below.
Abramson, Elizabeth, McFarlane, Dane, and Brown Jeff, “Transport Infrastructure for Carbon Capture and Storage: Whitepaper on Regional Infrastructure for Midcentury Decarbonization,” Great Plains Institute, June 2020.
Utilizing Significant Emissions with Innovative Technologies (USE IT) Act: