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Is anybody in the energy sector prepared to contemplate a decarbonised future without technologies that capture and store carbon dioxide emissions? If not, then how exactly are such installations going to be paid for? As wildfires, hurricanes and floods offer early signs of just how devastating runaway climate change could be, these are two question that need frank and urgent answers.

The concept of capturing CO2 emissions from fossil fuel consumption and storing the climate-warming gas in underground reservoirs has fascinated industry and governments alike. Carbon capture and storage (CCS) presents the alluring promise that coal, oil and gas production can continue to expand while the world economy gradually decarbonises. It also throws a lifeline to carbon-intensive, hard-to-abate industries such as cement and steel production.

Construction of CCS projects has consistently fallen way short of the energy industry’s own targets. The International Energy Agency (IEA), one of the most influential and consistent advocates of greater public and private investment in carbon capture, published a roadmap in 2009 for 22 gigawatts of power generation CCS projects and 170 million tonnes in industry by 2020.

Fast-forward 11 years and actual installed capacity is less than one gigawatt and only around 40 million tonnes—just 13% of the target, according to the IEA’s recent special report on CCUS (the ‘U’ stands for utilisation, as the captured CO2 is put to economic use). Not for the first time, the IEA last month hailed an imminent “new era for CCUS”, even as it laid bare just how underwhelming carbon capture investment has been to date:

“Annual investment in CCUS has consistently accounted for less than 0.5% of global investment in clean energy and efficiency technologies… Since 2010, around USD 15 billion in capital has been invested in the 15 large-scale CCUS projects … supported by around USD 2.8 billion in public grant funding.”

The IEA talks of “growing momentum” around the technology. Unfortunately, what this means is that the gap between soaring rhetorical support for CCUS and the reality of trifling investment is widening to dangerous proportions. Oil, gas, cement and steel companies are setting ever more ambitious ‘net zero’ emissions pledges predicated on widespread deployment of CCUS while committing only paltry sums to making it a reality.

Oil and gas companies responsible for more than 20% of global production have adopted 2050 net zero commitments, with CCUS expected to play a role in every case, according to the IEA. But these companies are still struggling to justify meaningful investment of their own in carbon capture. Where projects are moving forwards today, it is thanks to governments taking an outsized proportion of capital costs and concomitant risks. Norway last month committed to bankroll three CCS projects to the tune of NOK 16.8 billion (USD 1.8 billion), meaning the state is subsidising two-thirds of project costs.

Advocates such as the IEA argue that carbon capture complements renewables by removing a large chunk of the climate emissions released during the conventional production of hydrogen from natural gas. This so-called ‘blue’ hydrogen can be mixed with the virtually zero-emissions ‘green’ alternative produced from wind and solar power via electrolysis. Ever-greater availability of clean hydrogen will drive down the cost for end-users, the thinking goes, thereby spurring uptake and the rollout of a hydrogen economy.

There is some merit to this argument. But as explored previously in Energy Flux, investment in blue hydrogen risks locking in the methane emissions footprint of natural gas in supposedly clean hydrogen, thereby undermining the ‘clean’ credentials of blue H2. On its own, CCUS does nothing to de-methanise today’s energy system.

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Expensive distraction

Governments that vigorously pursue CCUS face an eye-watering bill. With economies ravaged by Covid-19, can they realistically be expected to shoulder that burden without cutting support to other clean energy technologies? Recent events suggest CCUS funding diverts, rather than complements, support for renewables or energy efficiency.

The government of Australia last month expanded the remit of two state-funded agencies—the Australian Renewable Energy Agency (ARENA) and Clean Energy Finance Corporation (CEFC)—to fund CCUS, at the expense of wind and solar power. These zero-carbon technologies “no longer need subsidies”, prime minister Scott Morrison said, as he launched plans to subsidise natural gas pipelines and oil refineries in the hope of kick-starting an economic recovery.

Leaving aside the obvious logical inconsistencies in this argument, Australia has a patchy record on CCS. Successive governments have invested AUD 1.3 billion of taxpayers’ money but delivered “no tangible results”, according to the Australian Greens. A proposed domestic CCS coal plant, ZeroGen, went into administration in 2011 despite receiving state and federal subsidies totalling AUD 187 million.

In the United States, Congress has provided more than USD 5 billion in state funding for CCS-related activities since 2010. In May 2020, the country’s only utility-scale power station with CCS retrofit—the Petra Nova coal-fired power station in Texas—ceased operating after the oil price crash rendered it uneconomic to operate. Petra Nova was piping captured CO2 some 132 km into a Texan oil field to force up more crude oil, in a process called enhanced oil recovery (EOR).

The EOR business model, which has underpinned 16 of the 21 CCS projects in operation around the world today, relies on a firm oil price (>USD 65/barrel in the case of Petra Nova) to cover costs. Also, it results in captured CO2 driving production of oil that might otherwise be left in the ground. In a decarbonising world awash with hydrocarbons and slack demand due to pandemic travel restrictions, this model has proven to be flawed.

Little surprise, then, that the EOR model seems to be falling out of fashion. Around half of new carbon capture projects propose dedicated storage of the captured CO2 rather than using it to pump oil, according to the IEA. Yet CCS with dedicated storage still leaves two major issues unresolved: how to pay for up-front and ongoing costs; and the long-term risk that carbon dioxide could leak from storage reservoirs.

Photo: Petra Nova’s mothballed post-combustion carbon capture boondoggle (credit NRG Energy)

Unintended consequences

In the UK, the government is proposing to decarbonise the offshore oil and gas industry using CCUS to make the North Sea the world’s first ‘net zero’ hydrocarbons basin. This project is now at the heart of government’s plan to hit net zero emissions by 2050, but how will it be paid for?

The UK continental shelf (UKCS) is among the world’s more expensive oil producing regions, and the North Sea industry is already under immense economic pressure from lower prices since the pandemic-induced oil crash earlier this year.

Hamish Wilson, co-founder at energy consultancy BluEnergy, estimated in March 2020 that capturing the entire carbon emissions from UKCS output will cost around USD 20 billion every year. At the time of writing, that was equal to almost half of the USD 41 billion value of the industry’s total hydrocarbons production. At today’s oil price, UKCS output is worth around USD 25.5 billion. Wilson wrote:

“The prevailing assumption is that consumers will accept this additional charge in return for the convenience of using hydrocarbon energy and its asset base (e.g. pipelines and petrol stations) … The challenge for the 50% increase in fossil fuel prices, is that the cost of renewable energy is continually reducing.”

So, either the government picks up the USD 20 billion tab and subsidises UKCS carbon capture, or consumers pay more to cover the cost via a very high carbon tax.

If the latter, market forces will favour the cheapest source of clean energy available. Unsubsidised ‘net zero’ oil and gas from the UKCS might well struggle to compete in this market against clean energy imports or domestically-produced renewable fuels.

Therefore, by pursuing a CCUS-based strategy to create the world’s first ‘net zero hydrocarbons basin’, the UK oil and gas industry could actually become the first to price itself out of the market.

If government opts to subsidise CCUS, it will need to justify politically why it is propping up an industry that would struggle to compete on a level playing field.

Forever is a long time

On the issue of carbon leakage, both the UK government and the IEA are notably relaxed. Leakage risk “is considered to be very low and the magnitude of any associated CO2 loss is estimated to be low and manageable through existing and proven corrective measures,” the government concluded in 2014. “The overall financial consequences of leakage are therefore considered to be both definable and manageable.”

The IEA took a similar line in last month’s CCUS special report:

“Decades of experience with large-scale CO2 storage has demonstrated that the risk of seepage of CO2 to the atmosphere or the contamination of groundwater can be managed effectively. The probability and potential impact of such events have been studied comprehensively and have been found to be generally low, with risks declining over time.”

Sounds reassuring. But consider this: the world’s oldest operational CCS project has been in operation for 48 years. The CO2 it captures will need to stay in place until the end of human civilisation. What guarantee can there possibly be that this will happen?

The long-dated risk inherent in CO2 storage cannot be brushed aside. Who is underwriting that risk? If governments take succour from the IEA’s advice and fail to impose sufficiently robust contractual obligations upon CCS project operators to monitor leaks and plug them for many decades to come, the risk is socialised. In the event of a CO2 blowout, either governments pay to fix it or the carbon savings are lost.

Photo by Pixabay from Pexels

Disingenuous debate

Hopes in the early 2000s that a global carbon price would bridge the CCS funding gap and unleash a wave of investment proved hopelessly optimistic. The full-cycle cost of CCS is estimated at between USD 100 and USD 235 per tonne of captured CO2. Even the European Union, a pioneer in carbon trading, is many years away from such a price being deemed politically acceptable.

The EU carbon price has rallied from around EUR 7 per tonne in late 2017 to highs of EUR 30 per tonne this year, which still leaves carbon capture projects requiring massive up-front state subsidies. The willingness of governments to commit large funds has been tempered by past failures.

Having lost a decade of investment, the energy industry, academics, policymakers, investors and energy ministers now need to confront the issues that still prevent money flowing in—and arrive at some sort of consensus about the amount of emissions reductions we can realistically expect to be delivered from this technology out to 2030 and beyond.

Advocates continue to argue the case for ever-greater state subsidies and tax incentives while hoping for a different outcome, without presenting credible justification. The IEA’s vaunted “new era” for carbon capture is just as likely to be a false dawn leading to another lost decade of investment. Theoretical posturing about the emissions reductions potential of a technology that has repeatedly failed to prove its economic case will no longer do.

Net zero promises heroically assume deployment of CCS and CCUS will magically spark into exponential growth mode, from today’s flatlining baseline. While the pipeline of proposed projects is bigger than it was, concrete capital commitments are nowhere near the scale required to put companies, countries and the world on something resembling a pathway towards ‘net zero’ emissions by 2050 or even later.

When will that change? If a global consensus on carbon capture only goes as far as ‘we need more CCUS’ but falls short of ‘and it will be paid for this way’, then the answer is ‘never’—meaning the world urgently needs a Plan B. Yet there are precious few energy incumbents prepared to contemplate publicly that CCS and CCUS might never fulfil their potential, let alone disclose credible contingency plans for a decarbonised energy system without it. They might be doing it in private. Either way, an honest conversation about this in the public sphere is long overdue.

Photo by Eunice Lui from Pexels

The role of natural gas

In the immediate term, there are significant emissions savings to be made from replacing coal-fired power stations with cleaner-burning gas-fired generators, or coal heating boilers with gas-fired systems—known in the industry as ‘coal-to-gas switching’. This potential lies predominantly in Asia, particularly China, where coal remains a major source of primary energy supply.

With the pandemic-induced crash in energy commodities, there are signs that cheaper natural gas is making some inroads into the most carbon-intensive energy systems. China, for example, appears to be entering a decade of strong growth in gas consumption as Beijing and regional authorities push to drive coal out of power, industrial and heating end-uses.

This fuel switching effort was given greater urgency when Chinese president Xi Jinping last month set a target for China, which is responsible for around one quarter of global CO2 emissions, to achieve ‘net zero’ emissions by 2060. But once that switching potential is exhausted, other ways must be found quickly to remain on track. If Beijing is serious about its new climate goal, and if CCUS again fails to materialise, it is hard not to see Chinese natural gas consumption peaking in the early 2030s.

This puts China, the world’s biggest natural gas importer and the gas industry’s great saviour in a decarbonising world, on a not-dissimilar energy trajectory to Europe—the bastion of anti-gas sentiment. The gas industry thus has at most a decade to come up with a plausible explanation as to how global methane consumption can grow while the global emissions envelope progressively shrinks. In reality, that explanation will need societal buy-in before 2030 to give it the best possible chance of being adopted. The clock is ticking.

Photo by Giallo from Pexels

Emissions impossible

The lingering promise of the CCUS ‘get out of jail free card’ for fossil fuel producers and carbon-intensive industries continues to divert precious stimulus funds from more deserving carbon abatement initiatives, not least energy efficiency—which offers the best ‘bang for buck’ in emissions savings but is perennially underfunded.

No credible energy pundit disputes the need to decarbonise hard-to-abate sectors. Nor should anyone overlook the inconvenient truth that the energy density of fossil fuels will be extremely challenging to replace with renewable sources alone.

Moreover, the world is on track to exceed its carbon budget for a 1.5-degrees global warming pathway within seven to 12 years, depending on which ‘climate clock’ you trust. Either way, we will need to remove CO2 that is already in the atmosphere, not just curb how much we are releasing today. This means relying on an even less convincing technology: direct air capture, which sucks CO2 out of the air and pipes it underground.

This is essentially what trees do. Some oil companies are looking at offsetting emissions via ‘nature-based solutions’ such as tree-planting. While this is beneficial for the climate and ecosystems, it needs to happen in tandem with a material reduction in fossil fuel emissions, rather than enable more consumption. There are also legitimate concerns around scalability and the veracity of carbon credits generated.

The unsettling reality that too few energy leaders seem prepared to discuss openly is that the world does not yet have the right solutions to both meet growing energy demand and decarbonise economies quickly enough to avoid runaway climate change.

Carbon capture will play a role in the energy transition and could prove valuable in some niche applications. But it is no silver bullet to tackling the impossible emissions challenge.

As a first step towards recalibrating our approach, the energy debate must move on from comforting decarbonisation targets based on wishful thinking. Anything short of this threatens to undermine the quest to find alternative solutions that might actually work.

Seb Kennedy | Energy Flux | 5th October 2020

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