CCS Policy DevelopmentApproach & Preliminary Results

Agenda

Clarify what to do in Phase 1?

– Make sure everyone is on the same page!

Illustrate how to complete Phase 1?

– Approaches (Methodology)

– Preliminary findings on “Relevant Issues of Concern for Policy Making” (i.e. the Drivers)

Propose meeting schedule

What to do in Phase 1?

Review on Existing Policy in Other Economies

Review on Existing Legislation & Development

Generic Drivers Local Gaps CCS PolicyEconomic Analysis

Alternative 1

Alternative 2

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Economic & Finance Theory

Review on Existing Policy in Other Economies

Review on Existing Legislation & Development

Generic Drivers Local Gaps CCS PolicyEconomic Analysis

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Economic & Finance Theory

MC inputs

MC inputs

suggested

FrameworkMain drivers

– Asset

– Finance

– Technology

Source

Capture

Transport

Usage & StorageLicensing

Development

Operation

Closure

Licensing

Development

Operation

Closure

Licensing

Development

Operation

Closure

• Main interactions– Renewable Energy– Int’l Carbon Offsetting– Int’l Law– Electricity & Water Markets

Post-Closure

Time

Asset

Asset

CO2

Facility

Access

Ownership

Ownership

Monitoring & Reporting

EHS Liability

Usage (e.g. EOR)

Specification

Offtaker

Int’l Law

Finance

Finance

Cost

Revenue

CO2 Value

Scale

Int’l Carbon Offsetting

Domestic Supply & Demand on CO2

Risk SharingUncertainty & Volatility

Electricity

Water

Public Engagement

Oil

Gas

Technology

Technology

Next generation

Commercially Feasible

Diffusion

Pilot Program

Development

Domestic R&D

Int’l Collaboration

Tech Transfer

Existing Tech

Next Steps

Step 1: Identify Driver Associations

– Couple the three dimensions of drivers

– Develop a Matrix to illustrate the associations

Step 2: Identify Working Packages

– Criteria of Parceling:

– Interdependency

– Substitution of association

– Time

Step 3: Develop Terms of Reference

Matrix

Licensing Development Operation Closure Post-Closure

Source Drivers Drivers Drivers Drivers Drivers

Capture Drivers Drivers Drivers Drivers Drivers

Transport Drivers Drivers Drivers Drivers Drivers

Storage Drivers Drivers Drivers Drivers Drivers

DRAFT HEI Confidential

Development of a framework for regulating CCS projects in should be guided by…

Emerging international principles:– To ensure the high quality green reputation of projects currently under development

– To ensure technology developed can be successfully exported

– To ensure qualification for credit via international carbon trading schemes (i.e. CDM)

The framework must strike a balance:– If too stringent then the potential for large scale storage will not be realised.

– If not stringent enough then public acceptance will not be achieved

DRAFT HEI Confidential

has choices for regime design but the end result must provide assurance along the value chain…

CO2 capture on site

Regulated by authority

CO2 capture on site

Regulated by authority

CO2 transportRegulated by authority in cooperation

with authority

CO2 transportRegulated by authority in cooperation

with authority

CO2 storage underground

Self-regulation by authority with 3rd party verification

CO2 storage underground

Self-regulation by authority with 3rd party verification

Central

Amend existing regimes

Assurance required across the entire value chain

Create an umbrella framework that all sectors must comply with or, if amending existing regimes, central agency to provide assurance of

value chain

Allow relevant agencies to create their own framework consistent with current regulatory arrangements

DRAFT HEI Confidential

There are a number of international regulatory mechanisms under development that can guide , particularly in the area of storage…

…which one of these will meet CDM requirements is still uncertain but third party verification of anything short of regulation may be required.

• Government regime developments:

• US Federal legislation, Australian Commonwealth legislation and the EU Directive

• CDM New Methodologies

• being developed by private industry for specific projects such as the BP Insalah Project new methodology.

• International standards

• IPCC Guidelines, DNV Guidelines

DRAFT HEI Confidential

When considering framework development, it is useful to understand what this will practically involve…take the upstream gas storage example as follows…

This draft framework has been developed by BP Alternative Energy, Rio Tinto and Hydrogen Energy that explores issues which would need to be included in an upstream regulation, guideline or CDM Methodology to give the relevant levels of assurance in that sector. This was created to:

– Facilitate assessment of new framework proposals

– Provide a generalised example that can be adapted to local situations

It is based on EU Draft CCS Directive (January 2008) and aims to comply with IPCC 2005 guidelines for storage regulation

It covers what are traditionally seen as the hauthorityline issues that will have to be covered by any framework that intends to receive international acceptance:

– Permitting storage reservoirs

– Reservoir characterisation and risk assessment

– Operation and monitoring of CO2 storage reservoirs

– Reservoir closure and transfer of responsibility

The following summarises key points under consideration; these are presented to illustrate scope of coverage, rather than any firm recommendation

DRAFT HEI Confidential

Permitting CO2 storage reservoirs

Reservoir Evaluation Permit (may not all have direct relevance for )

– Exclusive right to evaluate for fixed term (one extension)

– Defined area, all depths

– Competent Authority assures no conflicting uses

– Exclusive right to apply for a Storage Permit

Storage Permit– Previous Reservoir Evaluation Permit not required

– Exclusive right for single operator to inject a CO2 stream

– Estimated maximum injection volume (can be amended)

– 20 year term, renewable for multiple periods of 10 years

– Financial and technical capability of Operator

– Not required for EOR, but needed for emissions avoidance credit and continued injection, post oil production

DRAFT HEI Confidential

Reservoir characterisation & risk assessment

Identify potential pathways for surface leakage or contamination of subsurface resources by stored CO2 (or displaced fluids)

Dynamic model(s) to predict CO2 behaviour over short (decades) and long (centuries) term

– Static description based on reservoir-specific data

– Consider coupled geomechanical and geochemical processes

– Periodically re-calibrated to monitoring data

Hazard characterisation and risk assessment

– Range of scenarios covering subsurface uncertainty

– Likelihood of leakage or contamination events

– Magnitude of leakage or contamination

– Potential impacts on human health, safety and environment

DRAFT HEI Confidential

Operation of CO2 storage reservoirsCO2 stream

– No addition of “waste” substances for disposal

– Annual reporting of quantity and composition

Monitoring

– To mitigate key risks of surface leakage or subsurface contamination

– Monitoring Plan approved by Competent Authority and updated as necessary

– Report any significant deviation from expected behaviour and provide volume estimates of leakage or subsurface contamination

Remediation

– Corrective measures for any significant leakage or contamination, according to plan approved by the Competent Authority

– Corrective measures carried out by Competent Authority if Operator fails to implement

– Financial security from Operator

DRAFT HEI Confidential

Monitoring PlanMonitoring Plan links identified risks to measurement technologies with spatial, temporal sampling rationales

Monitored parameters include

– Fugitive emissions from facilities

– Volume and mass of CO2 injected

– CO2 composition

– Reservoir pressure and temperature

Monitoring strategy based on reasonable best practice, considering

– Surface detection and flux measurement of CO2

– Subsurface location of CO2 and migration pathways

– Volumetric distribution of CO2 saturation

Monitoring Plan updated when new CO2 migration pathways or flux rates are identified

DRAFT HEI Confidential

Reservoir closurePermission to commence Decommissioning

– Monitoring observations required after final cessation of injection

– Final risk assessment and specific technical criteria defined in Storage Permit to demonstrate: all leakage or contamination characterised and mitigated; stabilising CO2 plume within license boundaries; no significant risk of future leakage or contamination

– Competent Authority issues permission to decommission when criteria are met

– No further monitoring or intervention capability required after permission to decommission

Transfer of responsibility

– Once decommissioning complete, Operator applies for transfer of responsibility

– Criteria are satisfactory abandonment

– No further liability for CO2 leakage nor contamination or other liabilities

– Financial security ends with transfer of responsibility

DRAFT HEI Confidential

Financial Incentives & Mechanisms to Support CCS Projects Application of Funds(Note: Effective support will need to address initial capital increment, ongoing cost penalty and carbon risk)

Mechanism Examples Application Strengths WeaknessesCapital Grant for capture project

UK Competition; EEPR; DOE; Australian Flagship ProgramUK and US programs may include Opex subsidy

Directly, and usually partially, funds the incremental initial capital and/or operating costs for early mover projectsCould be CCS specific or available to low emission technologies in general

Addresses the initial capital hurdle to the extent of the funding, averaging 50%Justified public funding for early stage technology risks

Criteria can be complexOften incomplete.Needs to be complemented by some form of carbon pricing and risk management. Competitive bidding and conditions can be onerous

Direct funding of storage characterisation and assessment

Australian Government; Victorian Government

Logical point for Government involvement.Addresses the time-critical element in large-scale CCS projects

Ahould be part of a comprehensive package

Loan Guarantees DOE Can reduce up-front capital costs

Can be cost-effective, depending on accounting treatment

Often too small to make a real differenceCan be unacceptable in some jurisdictions from an accounting treatment perspective unacceptable

Tax credits/Tax deductibility

US Treasury/DOE Can reduce some combination of capital or operating costs

Fills the gap created by policy uncertainty

Does not address the initial capital hurdle

DRAFT HEI Confidential

Financial Incentives & Mechanisms to Support CCS Projects Application of Funds(Note: Effective support will need to address initial capital increment, ongoing cost penalty and carbon risk)

Quantifiable Emissions constraint

Cap and tradeCarbon Tax

Effectively addresses initial capital on ongoing operating cost penalty

If set properly should drive lowest cost mitigation outcomeActs as both a source and application of funding by pricing emissions

Target uncertainty makes it difficult for the market to price effectivelyPolitical risks mean that targets or tax levels are set too low, leading to worst outcomeDoes not address early-mover cost penalty

Direct government equity

Norway/Gassnova Lowers cost of finance Requires government balance sheet involvementMay not address operating cost penalty

Off-take Agreement/Power Purchase Agreement

Victoria, AustraliaState of Indiana Gas Authority, USA

Applied to outputAddresses the ongoing cost penaltyPurchase gas at a fixed price from a coal-to-methane plant

Similar in effect to feed-in tariff but for larger scale projectsProvides a guaranteed price for the output

Who pays?Requires direct government intervention on projectsDoes not address the initial capital cost premium

Feed-in Tariff Has been commonly used to support imbedded solar, at both the domestic and utility scale; Spain, Germany, Australia.Several Asian countries

Applied to output Attractive to investors, provided counter-party is secureEnables costs to be averaged across a large market leading to relatively low cost impact, at least initially

Very difficult to scale and targetCan be expensive to government or to consumers over time

DRAFT HEI Confidential

DRAFT HEI Confidential

Conclusions

The key drivers and objectives of any framework must include:

– protecting green reputation of projects currently under development

– gaining any value available under CDM.

Any framework will have to:

– avoid crippling the industry by setting the standard too high

– ensure public support for the technology by being sufficiently robust and transparent

Consider whether centralises the framework of CO2 capture, transport and storage along the value chain or amends existing frameworks to cover this area and whether external verification is required.

Framework must be sufficiently flexible to:

– Protect projects currently under development

– Ensure that framework allows for CDM compliance should CCS be included under the CDM regime

– Accommodate technical development and international regulatory developments

Work with industry to maximise leverage from work alrauthorityy done such as the BP/HEI/Rio Tinto draft framework.