Energy Policy 54 (2013) 160–172

Contents lists available at SciVerse ScienceDirect

Energy Policy

0301-42

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journal homepage: www.elsevier.com/locate/enpol

The impact of future carbon prices on CCS investment for power generationin China

Ning Wu a,n, John E. Parsons b,1, Karen R. Polenske c,2

a Department of Urban Studies and Planning, MIT, 77 Massachusetts Avenue, 9-549, Cambridge, MA 02139, USAb Sloan School of Management, MIT, 77 Massachusetts Avenue, E19-411, Cambridge, MA 02139, USAc Department of Urban Studies and Planning, MIT, 77 Massachusetts Avenue, 9-535, Cambridge, MA 02139, USA

H I G H L I G H T S

c We collect data on CCS and power generation which best represents technologies and costs in China.c We model power plants’ net present value to find the breakeven carbon prices.c IGCC needs $72 per tonne to breakeven while PC requires $61 in China.c Capital and fuel costs impact the carbon prices noticeably.c We also examine the sensitivity, impact on return and time for investment.

a r t i c l e i n f o

Article history:

Received 27 November 2011

Accepted 5 November 2012Available online 4 December 2012

Keywords:

Carbon capture and storage

Carbon pricing

China

15/$ - see front matter & 2012 Elsevier Ltd. A

x.doi.org/10.1016/j.enpol.2012.11.011

esponding author. Mob.: þ1 617 686 0700.

ail addresses: ningwu30@gmail.com (N. Wu),

s@mit.edu (J.E. Parsons), krp@mit.edu (K.R. P

l.: þ1 617 324 3745.

l.: þ1 617 253 6881.

a b s t r a c t

Carbon capture and storage (CCS) in China is currently discussed extensively but few in-depth analyses

focusing on economics are observed. In this study, we answer two related questions about the

development of CCS and power generation technologies in China: (1) what is the breakeven carbon-

dioxide price to justify CCS installation investment for Integrated Gasification Combined Cycle (IGCC)

and pulverized coal (PC) power plants, and, (2) what are the risks associated with investment for CCS.

To answer these questions, we build a net present value model for IGCC and PC plants with capacity of

600 MW, with assumptions best representing the current technologies in China. Then, we run a

sensitivity analysis of capital costs and fuel costs to reveal their impact on the carbon price, and analyze

the risk on investment return caused by the carbon price volatility. Our study shows that in China, a

breakeven carbon price of $61/tonne is required to justify investment on CCS for PC plants, and $72/

tonne for IGCC plants. In this analysis, we also advise investors on the impact of capital and fuel costs

on the carbon price and suggest optimal timing for CCS investment.

& 2012 Elsevier Ltd. All rights reserved.

1. Introduction

Relying on coal-fueled power plants to meet the growingdemand for electricity and facing the pressure of reducingcarbon-dioxide (CO2) emissions, the People’s Republic of China(China) is actively pursuing advanced electricity generation tech-nologies. China proposed the goal of reducing carbon intensity(carbon emission per unit GDP) by 40% to 45% from 2005 levels by2020 (Finamore, 2009; ABC News, 2012). In China the coal-dominant power sector is a main source for CO2 emissions,

ll rights reserved.

olenske).

accounting for about 32% out of the total 7.6 billion tonnes ofCO2 emissions in 2007 (Wu, 2009). To meet the soaring powerdemand in a more energy-efficient way, China is encouragingboth the development of large-capacity (above 600 MW (MW))supercritical (SC) or ultra-super critical (USC) pulverized coal (PC)for new generation units in the next decade, and research anddevelopment of the integrated gasification combined cycle (IGCC)and is extensively discussing carbon capture and storage (CCS)(Duan, 2008; Chen and Xu, 2009; Zhao et al., 2008). By adoptinglarge-scale SC or USC units whose energy efficiency can be over40%, together with shutting down small-scale and inefficientunits, and improving the grids, China can reduce CO2 emissionsby 0.11 billion tonnes by 2010, about 7% of its target in theNational Action Plan for Climate Change. The research anddevelopment of USC, SC, and IGCC technologies and equipments,as well as CCS technologies, are regarded as a key field to promote

N. Wu et al. / Energy Policy 54 (2013) 160–172 161

technology innovation and the capability of tackling the Climatechange (Climate Change Department, 2007).

CCS in China is perceived as an important technology to reducecarbon emissions from power plants while meeting the growingenergy demand, and there are extensive studies on this technol-ogy (Massachusetts Institute of Technology (MIT), 2007); Liangand Weiwei, 2009; Wu, 2009). In China, real CCS installation,designed and built with the power plants from the beginning, isbeing practiced by the only one IGCCþCCS demo project, Green-Gen IGCC Project in Tianjin. This project is led by the HuanengGroup, the largest utility company in China, which joined forceswith other major Chinese utilities and Peabody Energy. ShenhuaGroup, the largest coal company in China, is also considering thefeasibility of CCS installation for its direct coal liquefactionfacilities in Inner Mongolia. However, neither of these twoprojects has developed into the stage of construction for CCS.The technological risk remains as a barrier for China as well asmany other countries to adopt CCS widely. Another obstacle canbe the fact that in the near term, there is no indication of carbon-emission regulation (in the format of carbon tax or cap and trade,for instance) for China’s power sector, thus there is no economicor regulatory incentive for utilities to adopt this expensive, butimmature, technology for their generation units (Liang andWeiwei, 2009; Wu, 2009).

Large-capacity PC or IGCC reduces carbon emissions throughhigh energy efficiency, while CCS captures and injects CO2 intounderground geological formations. For example, a 1200 MW-scale USC unit has net design energy efficiency of 42% (—295 gcoal equivalent per kilowatt hour, gce/KWh) and 200 MW-scaleIGCC’s energy efficiency is high at 41%: a significant increasecompared to the 33% average power plant efficiency in 2005 inChina (Zhao et al., 2008; Massachusetts Institute of Technology(MIT), 2007; National Development and Reform Commission(NDRC), 2007). This translates into a 27% energy-efficiencyimprovement: high-efficiency generation technology can reducecoal consumption by 27%, as well as lower CO2 emissions by thesame percentage, without carbon capture and storage. The savingof coal consumption alone can be a significant incentive forcompanies to pursue advanced generation technologies, such asUSC PC or IGCC. CCS, can capture 90% of the total carbonemissions, and considering a 30% energy penalty (additional fuelconsumption needed to maintain the same power output, due toCCS operation), this equals to about 86% of carbon reduction(Massachusetts Institute of Technology (MIT), 2007)). Thesetechnologies reduce carbon emissions in different ways and arenot mandated to be combined together.

However, should there be some carbon regulation in China,decision makers for power plants investment would face a choice:they can choose to install CCS to control their carbon emissions, inorder to reduce their payment for carbon charges; or they candecide not to install CCS to reduce carbon emission and insteadwould pay carbon charges for every ton of carbon dioxide thepower plants emit. Therefore, which choice would be better is aquestion that wise investors for power plants should consider.This impact, from future or potential carbon regulation, on theirinvestment or policy decision making, is what wise investors orpolicy makers for the power industry in China should bear inmind. There has been growing awareness and demand for inter-national or national efforts for combating global warming. Chinahas already committed to reducing carbon intensity by 40–45%from its 2005 level by 2020, and US Senators Kerry and Liebermanalso proposed new carbon legislation, the American Power Act.Although this America Power Act did not pass, it indicates thepossibility of carbon regulation in the future. Thus, investors orpolicy makers in China should bear in mind how to make theirinvestment decisions, if there is a carbon price and/or legislation

in the future: to invest in PC or IGCC, with or without CCS.Without considering CCS and carbon prices, researchers expectIGCC to be more expensive than PC technologies (Zhao et al.,2008; Massachusetts Institute of Technology (MIT), 2009)). How-ever, considering CCS and future carbon prices, according to aMassachusetts Institute of Technology (MIT), 2009), IGCC mighthave a cost advantage over PC. Therefore the carbon price plays akey role in this cost comparison. As for the case of China, costs ofIGCC and PC are expected to be different from the United States orother countries. Therefore, two key questions arise: (1) what isthe carbon price to justify the investment on CCS for IGCC and PC,should CO2 emissions be charged in the future in China? and(2) what are the risks associated with investment for CCS?

To answer these two questions, I explore the current coststructure for IGCC and PC in China and the cost of a CCSinstallation. Then, I build a net present value (NPV) modelintegrating carbon prices to identify the breakeven carbon price.Currently there have been few studies focusing on the costcomparison in China for IGCC and PC, integrating CCS or thefuture carbon pricing in China. My study fills this gap andprovides implications for investors and policy makers in Chinafor their decisions related to the power industry and climatechange.

2. CCS and electricity generation technologies in China

China has her own unique characteristics for power-plantinvestment. Reviewing the current development of IGCC, large-capacity PC, CCS, and potential carbon regulation, I identify thecost structures of these technologies in China and illustrate thedevelopment and economics of these technologies in China.

2.1. IGCC and PC development in China

Although IGCC technology is still in an experimental anddemonstration stage (Zhao et al., 2008), China actually startedresearch on IGCC in the 1970s and is attaching significantimportance to this technology. In 1979, China decided to buildits first experimental 10 MW (MW) IGCC plant for technicalresearch, but it was stopped for several reasons. During theEighth, Ninth, Tenth, and Eleventh Five-Year Plans, China sup-ported research and development on the analysis and optimiza-tion of IGCC systems (Zhao and Gallapher (2007)). The 863Program is a critical policy framework among many. The 863Program or the State High-tech Development Plan, supervised bythe Ministry of Science and Technology (MOST), sponsorsadvanced technology R&D in China including clean-coal technol-ogies and IGCC. The 863 Program of the 11th Five-year Plan(2006–2010) was initiated in September 2006. MOST appro-priated a budget of 3.5 billion Chinese Yuan (CNY) for energyresearch, development, and demonstration, among which 21%was allocated for coal technologies. There is a budget of CNY 0.35billion for developing coal gasification-based poly-productionprojects (these plants produce syngas from gasification, and use

syngas for both chemicals and power generation. This poly-

generation is different from the electricity-oriented IGCC plants in

this analysis: for the purpose of comparing technologies in-kind, we

are studying electricity-oriented generation technologies, thus not

discussing poly-generation power plants). China is also activelyseeking international cooperation for this advanced technology.During the Eleventh Five-Year Plan, several IGCC plants have beenproposed or are under construction in China (Table 1). The annualworkshops co-sponsored by Energy Technology Innovation Pro-gram of Harvard University and Chinese Academy of Sciences

Table 2Performance of SC, USC, Oxy-fuel, and IGCC plants.

Source: MIT 2009.

CCS SC USC PC/Oxy IGCC

Without With Without With With Without With

CO2 emitted (g/KWh) 830 109 738 94 104 824 101

Efficiency (% HHV) 38.5 29.3 43.4 34.1 30.6 38.4 31.7

TCR ($/KW) 2159 3477 2202 3390 3332 2318 3071

COE (USD-cent/KWh) 6.1 9.9 6.0 9.4 8.8 6.6 8.4

Note: 500 MW plant net output (noted by the author, from Massachusetts Institute of Technology (MIT) (2007); Oxy: oxy-combustion; TCR: total capital requirement; COE:

cost of electricity; HHV: higher heating value. In 2010 US$, original data in 2005US$, converted into 2010 US$ via CPI of 111.4 for 2010 (2005 as 100).

Table 1Active IGCC Projects in China.

Source: Zhao et al., 2009; Xu, 2008.

Active projects Location Capacity (MW) Fuel Gasifier vendor CO2 capture

Dongguan IGCC Project (repowered) Dongguan, Guangdong 2�60 coal CAS Study

Dongguan IGCC Project Dongguan, Guangdong 4�200 coal CAS Study

Huadian Banshan IGCC Project Hangzhou, Zhejiang 200 coal ECUST Study

Huaneng IGCC/GreenGen Tianjin 250þ400b coal TPRI Study

CPIC IGCC Projecta Langfang, Hebei 2�400 coal N/A Study, 8% EOR

a ECUST, East China University of Science and Technology; CPIC, China Power Investment Corporation.b Capacities of two stages; EOR: enhanced oil recovery.

N. Wu et al. / Energy Policy 54 (2013) 160–172162

(CAS), are a powerhouse for exchanging ideas and researchbetween the United States and China (Zhao et al., 2009).

Pulverized coal, supercritical or ultra supercritical, is viewed inChina as a key generation technology for new coal-fired powerplants in the near future (Duan, 2008; Chen and Xu, 2009; Zhaoet al., 2008). The government encourages USC PC and SC PC fornew installed capacity, with 300 MW circulating fluidized bed(CFB) as a supplement. Closing small-size power plants andbuilding large-capacity PC plants, has contributed to the increaseof the efficiency of power generation, and building large-capacity(over 600 MW) SC or USC for new electricity demand can furtherstrengthen this contribution. The average coal intensity of China’spower sector has decreased from 448 g coal equivalent per kilowatt-hour (gce/kWh) in 1980 to 377 gce/kWh in 2005, and it is expected todrop to 320 gce/kWh in 2020 (National Development and ReformCommission (NDRC), 2007)). From 2004 to 2007 about 124 gigawatts(GW) of 600 MW–level supercritical units were installed in China.Some analysts estimate that by 2020 there will be 30% of the totalinstalled capacity in China that will be SC units (Chen and Xu, 2009;Duan, 2008). However, plants that install SC or USC PC units are notmandated to integrate CCS. CCS technology is still new and costlythus not suitable for deployment especially when there is no clearpolicy of carbon charges.

Given China’s strong support for research and development(R&D) of advanced/clean coal technologies, there is a possibilitythat in the medium or long term, IGCC can join PC into themainstream for the power plant fleet in China. This indicates thatChina’s power industry planners should consider wise investmentdecisions with a long-term vision of both technologies instead ofpicking only one of them. CCS installed, the cost advantagebetween IGCC and PC would largely depends on the carbon priceand the capital cost for CCS installation.

2.2. Economics of PC and IGCC

In this section I analyze China’s PC and IGCC economics,through literature review and field trips to China. Power plantseconomics in the United States and Europe were widely studied,but China’s case, especially IGCC economics, is less well

understood as IGCC is new and not in the mainstream fleet inChina yet. I also provide the power plant cost comparisonbetween China and the US based on those recent data – aconventional view is China is usually at lower costs but whatexactly is the comparison is under studied. In the end, thesepower plants economics of China pave the foundation for mymodeling for power plants’ CCS investment.

The US and Europe power plants costs have been extensivelystudied, including the cases considering the option of carboncapture and storage (EPRI, 2000, 2003; NETL (National EnergyTechnology Laboratory), 2002); Nsakala et al., 2003; Bohm et al.,2007; Sekar et al., 2007; Massachusetts Institute of Technology(MIT), 2007, 2009). Sekar et al. (2007) establish a financial modelcomparing the cost of IGCC and PC and the break-even carbonprice under the add-on of CCS after some years’ operation of theplants, with data from several previous studies. Also, MIT hasbeen giving considerable attention to coal-generation technolo-gies research. The Massachusetts Institute of Technology (MIT),2007) study summarizes and compares a variety of analysesabout performances and costs of PC and IGCC, with and withoutcarbon capture and storage. Massachusetts Institute ofTechnology (MIT), 2009), drawing from a symposium with parti-cipants from industry, academia, and governments, provides ananalysis about performance of coal-generation technologies, assummarized in Table 2. However, the capital-cost estimates ofpower plants have significantly increased (in the case of theUnited States). Most recently, Energy Information Administration(EIA), 2010) released the updated estimates of power plantscapital costs (Table 3). The key take-away from this EIA study isthe significant increase of capital costs for power plants: about50% higher than Massachusetts Institute of Technology (MIT),2009) results (Tables 2 and 3). Noticing this trend in the UnitedStates, I also update the capital costs of power plants in Chinawith the most recent data, and reflect it in the modeling in thecoming sections,

Studies about IGCC economics in China mainly focus on thecost comparison between IGCC and PC without consideringcarbon prices and the cost of CCS. For example, Zhao andGallapher (2007) introduced research and development (R&D)

N. Wu et al. / Energy Policy 54 (2013) 160–172 163

and demonstration projects and policies for advanced coal tech-nologies in China. Chen and Xu (2009) describe coal’s role inChina’s energy system and discuss the development and policiesfor IGCC and carbon capture and storage (CCS) with no cost dataprovided. Some institutes, including Tsinghua University (2008),the Institute of Thermal Physics in the CAS (Zhao et al., 2008), andthe Thermal Physics Research Institute (TPRI) study the econom-ics of IGCC in China. Among these, Zhao et al. (2008) revealperformance and economics of PC and IGCC power plants basedon data of the design studies for 12 power plants including twoIGCC plants with capacities of 228 MW and 251 MW. Zhao et al.’s(2008) case studies, drawing upon projects in China provide thefollowing results for PC and IGCC technology options (Table 3).GreenGen, the largest IGCC development project in China considersCCS in their IGCC design for Stage II (2010–2012) and Stage III

Table 4Performance of PC and IGCC Plants in China.

Source: Zhao et al. 2008.

Performance PC 120

Coal consumption rate (gce/kWh) 290.8–

Net design efficiency (LHV) 39.5–4

TCR (Yuan/kW) 4277–

COE (Chinese cent/KWh), exclusive of pollution charges 29.7–3

COE (Chinese cent/KWh), including pollution charges 29.9–3

Note: Currency values: 2010 CNY (converted from 2006 CNY by CPI of 113.7 of 2010

ultra-supercritical units. All plants are designed without considering CCS. gce¼gram s

Table 5PC power plants economics, China Huaneng Group.

Source: 2008, 2009 Annual Reports, China Huaneng Group; for each power plant proje

Power plant Investment Capacity TechnolBillion CNY MW

Shang’an Phase III 4.55 2�600 Supercri

Rizhao Phase II 4.00 2�680 Supercri

Yuhuang Plant 15.60 4�1000 Ultra-su

Luohuang, Phase III 4.50 2�600 Subcritic

Yingkou, Phase III 4.58 2�600 Ultra-su

Hegang, Phase II 1.98 1�600 Supercri

Yangluo, Phase III 4.45 2�600 Supercri

Fuzhou, Phase III 5.3 2�600 USC

Yueyang, Phase III 4.3 2�600 USC

Pingliang, Phase II 4.4 2�600 SC

Weihai PP, Phase III 4.7 2�600 USC

Haimen PP, 7.2 2�1036 USC

a 4569 CNY/KWh, 2010 currency value, from overall PC plants, estimated by Dr. Sh

Table 3Updated capital costs, 2010 (in 2010 US$).

Source: Energy Information Administration (EIA) (2010).

Capacity (MW) Heat rate(BTU/KWH)

O(

Single unit advanced PC 650 8800 3With CCS 650 12,000 5

Dual unit adv. PC 1300 8800 2With CCS 1300 12,000 4

Single unit IGCC 600 8700 3With CCS 520 10,700 5

O&M: Operation and Maintenance.

(2013–2015), but these CCS data are preliminary in the design stageand are confidential. Therefore, these studies provide only limiteddata regarding the cost of CCS on PC or IGCC plants.

To overcome the limitation of current data in revealing theinvestment costs in China, I collected more data from my trips toChina and utility companies’ annual reports. The capital costs areincreasing, but not at a dramatic pace, and basically fluctuatearound the level of CNY 4000/KW. As shown in Table 4; Zhao et al.(2008) identified that PC power plant capital costs are in therange of CNY 4277 to 5192 per KW (2010 currency value). I alsodraw upon capital costs data from annual reports of HuanengGroup, the largest utility company in China. Most of Huaneng’snew assets are supercritical plants. As shown in Table 5, averagecapital cost is CNY 3602 per KW in 2008 and then CNY 3812in 2009, a modest increase of 6%. The most recent estimates

0 MW IGCC 251 MW IGCC 228 MW

311.4 303.9 298.5

2.3 40.5 41.2

5,192 8450 9720

1.7 40.9 43.9

1.7 40.9 43.9

vs. 100 of 2006). PC plants include 1200 MW-scale subcritical, supercritical, and

tandard coal equivalent; LHV¼Lower heating value; MW¼Mega-watt.

ct, I also searched related news on the Internet to check the consistency.

ogy Operation Construction TCR(months) (CNY/KW)

tical 2008 24 3794

tical 2008 19 2945

percritical 2008 41 3900

al 2006 27 3750

percritical 2007 29 3817

tical 2007 32 3300

tical 2007 27 3708

Average (2008) 36022010 16 4417

2010 22 3583

2010 n.a 3667

n.a n.a 3917

2009 24 3475

Average (2009) 3812

Xua 4569

isen Xu, the chief technology officer from TPRI.

vernight capital cost2010$/KW)

Fixed O&M cost(2010$/KW)

Variable O&M cost(2010$/KW)

167 35.97 4.25

099 76.62 9.05

844 29.67 4.25

579 63.21 9.05

565 59.23 6.87

348 69.30 8.04

Table 6Some IGCC Plant Designs in China.

Source: Utility companies news and Internet reports, including:

1. http://www.cecm.net.cn/news/Elec/2008/06/3527.html,

2. Phase I at http://www.chng.com.cn/n16/n26536/n26584/100382.html, and phase II at http://www.cecm.net.cn/news/Region/2007/04/1552.html,

3. http://www.cecm.net.cn/news/Region/2007/06/1786.html,

4. http://www.cftn.cn/news/cftn_1/20/2007122810545371_1153.html,

5. http://power.nengyuan.net/2008/0112/5280.html. and

6. http://zdt.cpnn.com.cn/template/WebRootj/xianshi.jsp nid¼09031313324925925265.

Power Plant Developer Budget, Capacity TCRBillion CNY MW CNY/KW

Shenyang IGCCa Datang 18.6 4�400 11,610

GreenGen, Phase I Huaneng and others 2.3 1�250 9082

GreenGen, Phase IIa Huaneng and others 5.4 400 13,416

Dongguan IGCC Dongguan Electricity and Chemical Inc. 6.3 4�200 7869

Banshan IGCCa Huadian 2.1 200 10,310

Langfang IGCC China Power Investment International 6.6 2�400 8295

Average of IGCC TCR 10,097

Note: numbers from design studies.a Planned or proposed; otherwise under construction as of May 2010; GreenGen Phase II, including CCS. The currency values are in 2010 CNY (converted from 2009

thought CPI increase of 3.2% in 2010).

Table 7Power plants capital costs comparison.

Source: Tables 2, 3–5 and 6.

PC IGCC

China (CNY) 4569 10,097Nominal exchange rate: 6.78, 2010 674 1490

Cost hiked as EIA projected (1.64 PC, 1.71 IGCC)a 1106 2548Purchasing power parity exchange rate, 3.92, 2010 1166 2576

USA, by Energy Information Administration (EIA) (2010) 3167 3565

Note: 2010 US$ otherwise noted. http://www.irs.gov/businesses/small/international/

article/0.id=206089.00.html.

010 PPP exchange rate. Available from: http://en.wikipedia.org/wiki/Renminbi#

Purchasing_power_parity.a 1.64 or 1.71 are benchmarked with PC and IGCC cost data from MIT (2009)

study, of the similar currency of those Chinese power plants data; these costs are

adopted in modeling; 2010 nominal exchange rate from IRS, URL.

Table 8CCS Incremental Capital Costs Index.

Source: 1. Hamilton (2009) summarizes costs data from various sources including

CERA, NETL, EPRI, AEP, and others. 2. PC data from Massachusetts Institute of

Technology (MIT) (2009) are the average of SC and USC technologies.

PC (%) IGCC (%)

Hamilton (2009) 61 51

80 16

82 32

39 40

35

Sekar et al., 2007 73 30

Massachusetts Institute of Technology (MIT) (2009) 57 32

Zero Emissions Platform (ZEP) (2011) 66

Average 66% 34Energy Information Administration (EIA) (2010) 61 50

Note:

1. The incremental capital cost resulted from CCS related to the capital cost of

the power plant.

2. International Energy Agency (IEA) (2011) conducted a similar review, based

on literature review of data published during 2007 and 2010, obtained an

average of 75% of incremental costs for CCS. A same recent study by Zero

Emission Platform (2011) shows an incremental of 66% (average unit Capex

with CCS 2600 vs. without CCS 1600, i.e. increased by 66% due to CCS). These

numbers are still close to 61% the assumption I adopted in the analysis.

Considering inevitable error in the experiments, therefore, I believe our

assumption 61% based on EIA study, is based on a most recent update

reflecting the current technology.

N. Wu et al. / Energy Policy 54 (2013) 160–172164

show the average capital cost of CNY 4569/KW for all types ofpower plants in China (Table 5). The costs in China are signifi-cantly lower than those in the United States, as summarized inTable 7. However, as Energy Information Administration (EIA)(2010) estimates, power-plant capital costs have experienced asignificant increase in the past two years (Tables 2 and 3, 64%increase for PC and 71% for IGCC, benchmarked by MassachusettsInstitute of Technology (MIT) (2009) study). Considering this, (andalso bearing in mind that 2008 and 2009 are years with aneconomic slowdown and lower commodity prices), I believe thecapitals costs for PC plants in 2010 and 2011 should also beincreased noticeably. Therefore, in the model, I adopt the samepercentage increase as EIA projected, based on the most recentestimate CNY 4569/KW or $674/KW, to $1106/KW (Table 7).

For IGCC plants, Zhao et al. (2008) estimate the capital costs oftwo plants (based on data of design studies) at CNY 7433 and8842 per KW (Table 4). Other sources show that the unit costs fordifferent IGCC plants vary in a range from CNY 7625 to CNY11,250, averaging at CNY 10,097 (2010 currency value) or $1490/KW (Table 6). As these studies were conducted a few years ago,costs might actually have increased since then, as EnergyInformation Administration (EIA) (2010) projects. Therefore,I adopt the increase percentage of 71% from Energy InformationAdministration (EIA) (2010) for IGCC capital costs, which gives$2548/KW (Table 7 and 8).

As seen from the above tables, and also expected by manyanalysts, Chinese power plants have much lower cost or capitalinvestment compared to the United States (Zhao et al. (2009).Benchmarked by the market exchange rate, the capital costs forPC in the United States is $3167/KW for SC and $3565/KW IGCCaccording to the most recent estimates by Energy InformationAdministration (EIA) (2010), while in China the numbers are 674and 1490 (benchmarked by the market exchange rate), less thanhalf those of the USA. Even if I assume that during the past twoyears, power plants capital costs have increased significantly(Energy Information Administration (EIA), 2010), China’s powerplants’ costs are still only $1106/KWh for PC and $2548/KWh forIGCC. Figs. 1–3 shows this comparison.

However, what is the cost comparison if benchmarked to thereal exchange rate, purchasing power parity (PPP) exchange rate?Given the long-lasting debate about the under-valuation of the

20

40

60

80

100

$/KW

PC

IGCC

60% less

$/To

nne

40% less 20% less Base 20% more

Fig. 3. Capital costs and CO2 price.

6741,106

2,548

3,1673,565

1,490

-

1,000

2,000

3,000

4,000

IGCCPC

2010

US

$

China (exchange rate)China (increased as EIA projected)USA

Fig. 1. Market exchange rate based costs comparison: China vs. USA. Note: Costs

are total cost requirement, TCR.

1,166

3,1673,565

2,576

-

1,000

2,000

3,000

4,000

IGCCPC

2010

US

$

China (purchsing power parity)USA

Fig. 2. PPP exchange rate based costs comparison: China vs. USA. Note: Costs are

total cost requirement, TCR.

N. Wu et al. / Energy Policy 54 (2013) 160–172 165

Chinese Yuan, this PPP-based comparison might yield differentresults – this is not the focus of this paper, but it can provideanother perspective for the readers to understand the costs ofpower plant investment in China. The PPP exchange rate is deducedby finding goods available for purchase in both currencies andcomparing the total cost for those goods in each currency – thus a‘real’ exchange rate. China’s IGCC plants costs, if benchmarked bythe PPP exchange rate of 3.92 in 2010, would be more expensive,but still lower than the United States. As shown in Figs. 2 and 3, thetotal capital requirement for PC in China is $1166/KW, and IGCC’scost estimates in China now becomes as high as $2567/KW: stillmuch less expensive than in the United States Although currentlythere is no more recent data available (e.g., 2010 power plantscosts), I am inclined to the view that the costs should also besignificantly higher compared to a couple years ago when the globaleconomy was in a recession, as Energy Information Administration(EIA) (2010) estimates. Therefore, in this analysis, I adopt the‘increased’ cost estimates, i.e., $1106/KW for PC, and $2548/KWfor IGCC, as the base scenario in modeling.

Given the above cost estimates, an analyst might wonder whypower plants in China are much cheaper to construct than in theUnited States. This can be another interesting question to explore.However, given the limited time and resources, I will leave thisquestion, which is not the purpose of this study, for future research.

2.3. Carbon prices and CCS

Currently, there is no legislation on CO2 emissions in China,but there is a goal of carbon-intensity reduction by 40% to 45%from 2005 levels by 2020. Therefore, China relies on increasing

energy efficiency, developing renewable energy, developingadvanced coal-fired generation technologies, and other measures.Although China does not set any explicit regulation for the CO2

emissions, her current efforts might imply a possibility of carbonregulation in the future.

To reduce CO2 emissions from the power sector, in addition toencouraging those large-capacity and high-efficiency generationunits, Chinese policy makers perceive CCS as a critical (althoughcurrently unsuitable for commercialization) technology. However,each stage of CCS, capture, transport, and storage, is capital andenergy intensive, and will impact the cost of electricity or otherindustrial commodities as materials for CCS equipments (McCoy,2008). In China, although many experts agree that CCS should beconsidered a method for combating climate change because of theincrease of coal consumption and the compatibility with currentcoal-dominant energy system, they hold that currently CCS is farfrom being deployable on a commercial scale due to high cost andtechnological uncertainties, and other reasons (Liang and Weiwei,2009; Wu, 2009).

In China CCS research focuses on the capture stage. There are afew enhanced oil recovery (EOR) and enhanced coal bed methaneprojects, but China lacks the integrated technology for transpor-tation, injection, monitoring, and risk control (Liang and Weiwei,2009; Wu, 2009).

In terms of the cost of CCS, a literature review shows a range of$30-$70 per tonne, based on studies conducted some years ago.For instance, Massachusetts Institute of Technology (MIT) (2007)estimates that the cost of CO2 capture and pressurization is about$25/tonne, and the transportation and storage cost is about$5/tonne, which requires a carbon-dioxide price of $30/tonne tomake CCS economically viable. Similarly, the Boston ConsultingGroup (2008) estimates that then-current CCS implementationcost would be 45 Euro per tonne, and by 2030 it can be decreasedto 30 Euro per tonne if 500 billion euro investment fromgovernment subsidies and company during this period. Al-Juaied and Whitmore (2009) estimate a range of 35 to 70 USdollars per tonne (2008$) for carbon-capture costs. In China,laboratory data shows that the cost of CO2 capture is 0.19–0.25Yuan/KWh, or $38–50/tonne CO2, assuming 0.6 t CO2/MWh cap-tured (Sekar et al., 2007) and an exchange rate of 7 for USD/CNY.However CO2 transportation and storage cost is less studied andknown in China’s case (Liang and Weiwei, 2009; Wu; 2009).Currently there are no data available to reveal incremental capitalinvestment for CCS installation in China. GreenGen, theIGCCþCCS demo project in China, shows a gross unit cost ofCNY 13,000 for the second stage 400 MW IGCC plus CCS. ButGreenGen is still at the designing stage, and no specific data areavailable for CCS. Even TPRI (Thermal Power Research Institute),

Table 9Energy penalty.

PC (%) IGCC (%) Source

31 16 Rubin et al. (2007) (Carnegie Mellon)

21–24 19 MIT 2009

28 14 Herzog and Golomb, 2004 (MIT)

– 20 NETL (2010)

30–40 – IPCC (2005)

28 17 Aggregated average

Table 10China CPI.

Source: NBS, Measuringworth. Available from: http://www.measuringworth.com,

N. Wu et al. / Energy Policy 54 (2013) 160–172166

the leading power generation technology institute that is devel-oping IGCC for the GreenGen Project in China, had to cite the USCCS cost data in their presentation about the GreenGen(IGCCþCCS) project (Xu, 2006, 2008).

Therefore to overcome the limitation of data availability, Iidentify CCS cost from the incremental capital investment topower plants. I devise a CCS Incremental Index, as summarized inthe following table. The average incremental cost percentages ofseveral studies are 66% for PC and 34% for IGCC. I separate EIAdata as they are the most recent estimates, different from otherstudies in this summary in considering the likely augmentedcapital costs. Given that EIA numbers are in line or not signifi-cantly different from the average, i.e., 61% vs. 66%, and 50% vs.34%, I adopt the EIA numbers for modeling, in order to reflect themost recent cost structure.

and http://www.chinamining.org/News/2010–01–21/1264055685d33624.html.

Year CPI (2006¼100) Year CPI (2006¼100)

2000 92.4 2006 100.02001 92.8 2007 104.8

2002 92.1 2008 110.9

2003 93.2 2009 110.2

2004 96.8 2010 113.7

2005 98.6

Note: CPI, Consumer price index.

Table 11Power plants assumptions.

Performances and assumptions Without CCS With CCS

PC IGCC PC IGCC

3. Methodology and data

To calculate the costs and identify the optimal investmentdecision under carbon prices, I adopt the standard net presentvalue (NPV) methodology, which, as a profitability indicator,calculates the net value of an investment for investors’ decisions.Appropriate assumptions for China’s case are critical to build thisNPV model, but it is also challenging to do so, given the limitationof current data and literature. Through communicating withscholars, engineers, and government officers during my field tripsin China, combined with data from the literature review, I madeassumptions which best represent the situation in China.

The power plants of question have the following character-istics for both PC and IGCC, based on review of many newprojects, literature, and communication with experts in this fieldin China:

Capital cost (Million $) 663 1529 1068 2293

Capital cost ($/KW) 1106 2548 1780 3822

�

incr

util

201

num

pla

(20

IGC

installed capacity, 600 MW,

Net heat rate (BTU/KWH) 8441 8361 11,724 10,074 � Fuel input (Annual, Million MMBTU) 30.4 30.1 42.2 36.3

Fuel costs($Million) 157.8 156.3 219.1 188.3

annual operation hours, 6000, according to Zhao et al. (2008)design data3,

O&M costs ($Million) 16.6 53.5 42.2 95.6

� operational life, 40 years,

CO2 emissions (Tonne/MWH) 0.669 0.663 0.086 0.078

� CO2 emissions (Million tonnes/year) 2.41 2.39 0.31 0.28

energy penalty with CCS, 28% for PC, and 17% for IGCC(Tables 9 and 10),

� tax rate, 40%,

Note: based on 600 MW capacity power plants.

� 1. Based on TCR data from Table 7, US$ 1106/KW for PC and US$ 2548/KW

for IGCC. CCS installation increases the capital costs by 61% for PC, and 50% for

depreciation, linear, 6.3% per year for 15 years, then 5% salvagevalue remains,

IGCC, based on Energy Information Administration (EIA) (2010) estimates.

� discount rate of 6%4, and Total capital costs (Million $)¼Unit cost ($/KW)�600/1000. �

2. The coal rates are 304.1 gCoe/KWh and 301.2 gCoe/KWh for PC and IGCC

(Zhao et al. 2008), without CCS. Multiplying 27.76 Btu/gCoe, to get the net

heat rates. For with CCS, considering 28% energy penalty for PC and 17% for

IGCC, i.e., fuel¼net heat rates/ (1-energy penalty).

3. Fuel input¼net heat rate�Annual operation hours� capacity factor� capacity�

unit conversion.

4. Fuel costs¼fuel input� coal price. The coal price is assumed to be CNY 700/

Metric Tonnes of raw coal at 2010 prices (thus, CNY 980/Metric Tonnes of

standard coal), equals to $5.2/MMBtu, considering a heat content of 27.76

MMBTU/Metric tonnes of standard coal.

5. Assuming 2.5% and 3.5% of Capex for annual O&M Costs for PC and IGCC (from

Zhao et al. (2008) design studies data). With CCS, the O&M costs include $5/

tonne for all the CO2 emissions. e.g., for IGCC with CCS, O&M¼3.5%�Capexþ

$5�CO2 emissions/(1-energy penalty)� capture rate.

6. Without CCS, assuming 60% carbon content and 27.76 MMBTU per tonne for

thermal coal price, CNY 700/tonne, equal to $5.2/MMBTU.

More performance parameters are summarized and explainedin Tables 11 and 12. Based on an extensive literature review andsurvey in China, I believe the following assumptions adequatelyrepresent the performance of typical power plants in China.

For the NPV model, the breakeven CO2 price is the price thatmakes the saving of carbon charge from installing CCS on par withthe incremental investment for CCS. With CCS installation, apower plant would have a higher capital expense, higher fuelcosts and O&M costs due to the energy penalty and operating theCCS unit, and also different cash-flow elements including depre-ciation, taxes, tax shields, and others. But the savings from paying

standard coal. CO2 emissions per MWH¼net heat rate/1000/

27.76�60%�44/12; with CCS, consider energy penalty and 90% capture rate,

i.e.,¼emissions� (1þpenalty)�10%.

7. Annual CO2 emission¼CO2 emissions/ MWH� capacity� annual operation

hours� capacity factor.

3 In 2010, average operation hours of thermal power plants are 5329, 5% of

ease from 2009, according to China Power International, one of the major

ities in China. CPI also projects 2011 operation hours will stay the same as

0. See http://www.china power.hk/gb/ir/faq.htm. Therefore, 6000 is not a low

ber, as power plants usually need days for maintenance, etc.4 6% is the discount rate widely used in budgets for most Chinese power

nts, according to discussion with Dr. Zhao and her published paper (Zhao et al.

08)). Adopting other discount rates, e.g. 5% (which gives $62.2 of PC $73.5 of

C) or 7% ($60 for PC and $71.1 for IGCC) does not change our conclusions.

a lower carbon charge can offset this additional cost. I attach theNPV models in the Appendix, and the spreadsheets are alsoattached separately for readers’ reference.

Table 12Capital costs and CO2 prices.

TCR($/KW)

PC($/KW)

CO2 Price,for PC

Elasticity IGCC($/KW)

CO2 price,for IGCC

Elasticity

�60% 442 46.3 1019 42.3

�40% 663 51.2 1529 52.3

�20% 885 56.1 2038 62.2

Base 1106 61.0 0.4 2548 72.2 0.7

þ20% 1327 65.8 3057 82.1

Note: other assumptions remain unchanged while conducting this sensitivity

analysis.

Table 13Fuel Costs and CO2 prices.

Price scenarios Coal price($/MMBTU)

CO2 Price for PC CO2 pricefor IGCC

�50% 2.596 46.3 64.6

�20% 4.153 55.1 69.1

Base 5.192 61.0 72.2þ20% 6.230 66.8 75.2

þ50% 7.787 75.6 79.8

þ100% 10.383 90.2 87.4

20

40

60

80

100

2.596$/MMBTU 2010

$/To

nne

PC

IGCC

4.153 5.192 6.230 7.787 10.383

Fig. 4. Coal and CO2 prices.

N. Wu et al. / Energy Policy 54 (2013) 160–172 167

4. Results and discussion

A carbon price of $61/tonne is necessary to justify the CCSinvestment for PC plants, while for IGCC plants the breakevenprice is higher, at $72/tonne. The price gap between the twotechnologies is mainly caused by the difference in capital costs.As shown in Table 11, without CCS, the IGCC capital requirementis $2548 per KW and PC is $1106 per KW: IGCC is 130%more expensive than PC. With CCS installation, IGCC is 110%more expensive than PC. IGCC, with gasification technologies, ismore complicated than PC plants, thus more expensive. Highercapital costs explain the bulk of this difference of breakevencarbon prices.

The estimates of carbon prices are slightly above the range ofestimates by other analysts. For example, costs for CCS areestimated at $35–70/tonne by Harvard (Al-Juaied and Whitmore(2009)), and Euro 45/tonne in the near term and Euro 30/tonne by2030 (BCG, 2008), and or $30/tonne by Massachusetts Institute ofTechnology (MIT) (2007). Sekar et al. (2007) identified the break-even price at $21/tonne for PC while $45/tonne for IGCC, forretrofit for CCS after 4 years’ operation. Given the cost increasesduring the past years as Energy Information Administration (EIA)(2010) estimates, the results about carbon prices are basically inline with this upward trend and can reasonably reflect thesituation in China. However, the prices from our analysis aresignificantly higher than the recent international carbon price, forinstance, the CER price of 10–20 Euro per tonne (Future priceCertified Emission Reduction, CER, traded at European ClimateExchange). This high CO2 price threshold, then, indicates apotential financial barrier to make CCS investment in China inthe near term, as the lower carbon price would be insufficient tojustify investment for CCS if the carbon charge savings are themain profit source for CCS installation.

The breakeven carbon prices are subject to the impacts ofseveral parameters. Volatility of each parameter would introducethe variation of breakeven carbon prices, thus, different profit orloss scenario for investors. It is worthy to explore how some keyparameters impact the carbon prices, in order to highlight therisks for investment and provide implications for investors.

4.1. Capital costs

Power plants’ capital costs are a key factor that affects thecarbon price. As shown in the following table, for PC plants, if theunit capital cost decreases by 20% to $885/KW, the breakevencarbon price becomes lower by about $5, or 8%, which translatesinto an elasticity of 0.4. In the case of IGCC, a 20% lower Capexintroduces a carbon price of $10, about 14%, an elasticity ofroughly 0.7. IGCC, which incurs higher capital costs, is moresensitive to the change in capital costs. When the capital cost islow, for example, 40% less than the base scenario, the breakevencarbon prices for PC and IGCC are approximately similar: $51 and$52. The lower the capital costs are, the narrower the carbon

prices between PC and IGCC. Whereas IGCC requires a highercarbon price to justify CCS installation when the capital costs arelarger, as shown in Fig. 3.

4.2. Fuel cost

Another key factor is the fuel cost, or the price of coal. SteamCoal is the main fuel for power plants in China, thus accountingfor a significant portion of operating costs. Thus, variation in theprice of coal also determines the volatility of carbon price neededto justify CCS investment. As shown in Table 13, if the coal priceincreases by 20% to $6.2/MMBTU, the breakeven carbon priceincreases by about $6 for PC (10%) and $3 for IGCC (4%). Thisimplies an elasticity of coal price at 0.5 for the breakeven carbonprice for PC, while 0.2 for IGCC: IGCC is less sensitive to coal pricevolatility than PC, due to the fact that it has more energy efficient(net heat rate of 8361 BTU/KWh vs. 8441 BTU/KWh) and its lowerenergy penalty (17% vs. 28%), both of which cushions some of thecoal-price volatility shock, compared to PC. If the coal price keepsincreasing, as shown in Fig. 4, we would expect IGCC to demand alower breakeven carbon price than PC. For example, if the price isdoubled to CNY1, 400 per tonne, or $10.4/MMBTU, IGCC requires$87.4/tonne CO2 price to justify its CCS investment, while PCneeds $90. In general, PC is more sensitive to fuel costs variationthan IGCC as it faces more fuel demand due to the relatively lowerenergy efficiency.

The coal price in China has been high for the past couple years,above CNY 700/tonne. Bohai-rim steam coal price index (BSPI),China’s first government-backed coal price index to reflect thecoal prices for major ports around the Bohai-rim in China, for2010 and early 2011 is fluctuating between CNY 700 and 800 pertonne, as shown in Fig. 5. Given the growing demand due toeconomic development and increasing net coal imports since2008, there is a good chance that this ‘high’ price is unlikely totumble in the near future. Feng Ping, an official from National

Fig. 5. BSPI weekly average price. Note: BSPI, Bohai-rim steam-coal price Index; prices for 5500 Kcal/kg steam coal. Source: http://www.osc.org.cn/CoalIndex/chs/new/

index.html#bohai_1.

(800)

(600)

(400)

(200)

-

200

400

600

800

1,000

40$/Tonne

$Mn

PCIGCC

50 60 70 80 90 100

Fig. 6. CO2 price and CCS investment return.

0

10

20

30

40

50

60

70

80

2010

Breakeven CO2 Price (PC)Breakeven CO2 Price (IGCC)K-L CO2 Price, medium

2015 2020 2025 2030 2035 2040

Fig. 7. When to invest for CCS.

Table 14CO2 Price and CCS Investment Return.

CO2 Price($/Tonne)

Profit for CCS Investment,PC ($Mn)

Profit for CCS Investment,IGCC ($Mn)

40 (397) (612)

50 (208) (421)

60 (18) (231)

70 171 (41)80 361 149

90 551 339

100 740 529

N. Wu et al. / Energy Policy 54 (2013) 160–172168

Energy Administration under NDRC, expects that ‘‘in 2011 [thecoal price] is expected to stay around the level registered at theend of 2010’’ (Hellenic Shipping News (HSN), 2011). NDRC inDecember 2010 ordered ‘‘the price of the country’s 2011 majorcoal-supplying contracts to remain unchanged from 2010’’ and‘‘no excuse for a price increase’’ would be allowed (Chen, 2010),which also reflects the pressure from soaring coal prices.

Therefore, bear in mind that a coal price of $5.2/MMBTU, equalto CNY 700/Tonne of raw coal in China, is still a modest coal-priceassumption for China. If the coal price continues to augment inthe future, the breakeven CO2 price will also increase with thistrend, whereas IGCC might be gaining an advantage for CCSinvestment due to its saving in coal consumption.

4.3. Investment return

In addition to capital costs and fuel prices, investors might alsoneed to understand how their investment return is affected underdifferent carbon price scenarios. PC and IGCC plants call fordifferent breakeven carbon prices to justify CCS investments,which indicate that, under one carbon price, PC and IGCC plantshave different investment returns. As shown in Table 14 andFig. 6, under the low carbon price scenarios, e.g., $40 per tonne,both PC and IGCC have losses, and IGCC has a larger loss due to itshigher capital investment for both power plants and CCS installa-tion. As the carbon price increases, both types of power plantsgain improving investment returns. Table 14 summarizes thereturn profile under different price scenarios. From this table, wecan see that all other factors being equal, under the same carbonprices, CCS investment on PC bring investors better return thanIGCC. However, in practice investors need to consider otherfactors to make the investment decision: for example, capitalexpenses, fuel costs, etc.

5. When to invest in CCS?

For investors, it is critical to acknowledge the timing to investon CCS. There are two important factors to bear in mind for CCS

Table 15Technology innovation and carbon pricing.

Year PC IGCC K–L Price

Cost ($/KW) Breakeven CO2 price ($/Tonne) Cost ($/KW) Breakeven CO2 Price ($/Tonne) Medium ($/Tonne) Floor ($/Tonne) Ceiling ($/Tonne)

2010 1106 61.0 2548 72.2

2011 1051 59.8 2459 70.8

2012 998 58.6 2373 69.3

2013 948 57.4 2290 68.0 16.9 11.0 22.8

2014 901 56.3 2210 66.6 17.6 11.3 24.0

2015 856 55.1 2132 65.3 18.4 11.6 25.2

2016 813 54.0 2058 64.0 19.2 12.0 26.4

2017 772 53.0 1986 62.7 20.0 12.3 27.7

2018 734 51.9 1916 61.4 20.9 12.7 29.1

2019 697 50.9 1849 60.2 21.8 13.1 30.6

2020 662 49.8 1784 59.0 22.8 13.5 32.1

2021 629 48.8 1722 57.8 23.8 13.9 33.7

2022 598 47.9 1662 56.7 24.8 14.3 35.4

2023 568 46.9 1603 55.5 25.9 14.7 37.2

2024 539 46.0 1547 54.4 27.1 15.2 39.0

2025 512 45.1 1493 53.3 28.3 15.6 41.0

2026 487 44.2 1441 52.3 29.6 16.1 43.0

2027 462 43.3 1390 51.2 30.9 16.6 45.2

2028 439 42.4 1342 50.2 32.2 17.1 47.4

2029 417 41.6 1295 49.2 33.7 17.6 49.8

2030 396 40.7 1250 48.2 35.2 18.1 52.3

2031 377 39.9 1206 47.2 36.8 18.6 54.9

2032 358 39.1 1164 46.3 38.4 19.2 57.7

2033 340 38.3 1123 45.4 40.2 19.8 60.52034 323 37.6 1084 44.5 42.0 20.4 63.6

2035 307 36.8 1046 43.6 43.9 21.0 66.72036 291 36.1 1009 42.7 45.8 21.6 70.1

Note: Power plants costs and CO2 prices are all at 2010 value. K–L prices start in 2013 with then-current value of $12 and $25 for floor and ceiling, benchmarked to 2010 by

annual CPI of 3%, then the flooring and ceiling grow at 3% and 5%, respectively, according to the CPI. The medium price is the average of the floor and the ceiling prices.

N. Wu et al. / Energy Policy 54 (2013) 160–172 169

investment: the technology innovation, which can reduce thecapital expense, and the carbon price, which can be affected byinternational or national efforts for combating climate change.Investment for CCS for coal-fueled power plants can becomecheaper as more technology innovation is achieved. Also, thedebut of international climate change protocol or the US climatechange legislation, if any, can be a bullish driver for internationalcarbon prices. For example, the American Power Act proposed byUS Senators Kerry and Lieberman (2010) suggested a price collarfor carbon charges of $12 and $25/T in the first year (2013), withannual escalations according to CPI at a rate of 3% and 5% for thefloor and ceiling, respectively. This indicates the carbon price canbe as high as $43 in 2020 and $93 by 2030, assuming a 3%increase in the CPI.

To answer the question when to invest in CCS, I conduct ascenario simulation based on the following assumptions:

�

arg

cap

wh

inv

a re

an annual 5% decrease for unit capital costs due to technologyinnovation5,

� an annual 2% decrease for breakeven carbon price for PC at the

elasticity of 0.4 discussed previously, and 3.5% for IGCC at theelasticity of 0.7.

� international carbon prices in line with the medium of the

price scenarios suggested by Kerry–Lieberman.

5 5% annually is not meant to be an accurate assumption. Readers can always

ue for a different percentage. Instead it is for the purpose of illustration of how

ital costs affect the entry time of investment. Also, we are simulating for China,

ere many power plants are being built each year, and a significant amount of

estment is made for energy technology innovation. In this context, 5% might be

asonable assumption.

There are a couple takeaways from this simulation, based onthe above assumptions as shown in Fig. 7 and Table 15. First, therequired breakeven CO2 prices, for PC and IGCC, decreasesaccordingly when the capital costs is decreased due to technologyinnovation. Second, during the period of 2033 and 2035, CCSinvestments on PC or IGCC are financially justified as the marketcarbon price grows higher than their breakeven prices. In practice,investors should examine the trend of real market price and theirbest current estimates of CCS and power plant costs to decide theentry time for this type of investment.

6. Conclusion

This study shows that, given the current technology and costs,a carbon price of $61/tonne is required to justify the investmenton CCS for a typical PC plant in China, and a higher price of $72/tonne is necessary to make the similar investment for an IGCCplant feasible. Under the same CO2 price with all others beingequal, PC shows a better investment return than IGCC for CCSinvestment in China.

Both capital costs and coal prices affect the breakeven CO2

prices significantly. PC has a capital cost elasticity of 0.4 for thebreakeven carbon price, while IGCC has an elasticity of 0.7: whichindicates IGCC’s breakeven carbon price is more sensitive to thevariation of capital costs. From the perspective of fuel costs (forexample, the coal price in China), PC has an elasticity of 0.5 whileIGCC has elasticity of 0.25: PC is impacted by fuel price to agreater extent.

I also conduct a simulation to determine the investors’ entrytime for CCS investment assuming 5% annual capital cost reduc-tion and elasticity mentioned above. It shows that CCS investment

N. Wu et al. / Energy Policy 54 (2013) 160–172170

can be justified by the market carbon prices during the 2030s(2033 for PC and 2035 for IGCC).

In this study, I have laid a foundation to understand thebreakeven carbon price for CCS investment in China. This researchcan be advanced with data from real projects in China as theybecome available. Currently the GreenGen project is being built inChina, and China, Europe, and the United States are building orplanning more ‘‘power plantsþCCS’’ projects: more data based onthese real projects can help improve the study of the breakevenCO2 price and make it more valuable for investment decisions and

Table A1Evaluation of a typical PC plant in China, w/ and w/o CCS.

0 1 2 3

PV of costs exclusive of carbon charge

($ million)

Without capture

1 Capital investment �663

2 Depreciation �41.8 �41.8 �

3 Insurance and property taxes �11.8 �11.8 �

4 Fuel cost �157.8 �157.8 �1

5 O&M cost �16.6 �16.6 �

6 Tax shield at 40% 91.2 91.2

7 Total cash flow �663 �95.0 �95.0 �

8 Present Value at 6% �663 �89.6 �84.5 �

9 NPV, 40 years �2182

With capture

10 Capital investment �1068

11 Depreciation �67.3 �67.3 �

12 Insurance and property taxes �19.0 �19.0 �

13 Fuel cost �219.1 �219.1 �2

14 O&M cost (incl. CO2 trans & strg.) �42.2 �42.2 �

15 Tax shield at 40% 139.0 139.0 1

16 Total cash flow �1068 �141.3 �141.3 �1

17 Present value at 6% �1068 �133.3 �125.7 �1

18 NPV through 40 years �3337

19 PV incremental cost of capture �1156

PV of carbon charge at a certain prices, $1/tCO2, ($ mil)

Without capture

20 cash flow per $1/t CO2 carbon tax �2.4 �2.4 �

21 after tax �1.4 �1.4 �

22 Present Value at 6% �1.4 �1.3 �

23 NPV, through 40 years �22

w/ carbon capture from the first

operation year

24 cash flow per $1/t CO2 carbon tax �0.3 �0.3 �

25 after tax �0.2 �0.2 �

26 Present Value �0.2 �0.2 �

27 NPV through year 40 �3

28 PV savings from capture per $1/t charge 19

29 Carbon price required to warrant CCS 61.0

Note:

2 Linear depreciation, 6.3% per year until Year 15, then 5% salvage value

3 1.78% of initial capital investment (1.78% adopted from Sekar. et al (2

4 from assumptions

5 from assumptions

6 ¼40%� sum (Row 2:5)

7 ¼sum (Row 3 : 6)

8 ¼Row 7/(1þdiscount rate)^# of years

9 sum of all the present values at Row 8

11–18 similar to the above 2–9

19 ¼Row 18–Row 9

20 ¼$1/t� annual CO2 emission from assumptions

21 ¼(1–40%)�Row 20

22 ¼Row 21/(1þdiscount rate)^# of years

23 ¼sum of values in Row 22

24–27 similar to the above 20–23

28 ¼Row 27–Row 23

29 ¼Row 19/Row 28

policy making. I also note that power plants costs are significantlylower in China than in the United States: why this is the case canbe a topic for future research.

Appendix. The NPV model

See Appendix Tables A1 and A2.

4 5 6 7 38 39 40

41.8 �41.8 �41.8 �41.8 �41.8 0.0 0.0 0.0

11.8 �11.8 �11.8 �11.8 �11.8 �11.8 �11.8 �11.8

57.8 �157.8 �157.8 �157.8 �157.8 �157.8 �157.8 �157.8

16.6 �16.6 �16.6 �16.6 �16.6 �16.6 �16.6 �16.6

91.2 91.2 91.2 91.2 91.2 74.5 74.5 74.5

95.0 �95.0 �95.0 �95.0 �95.0 �111.7 �111.7 �111.7

79.7 �75.2 �71.0 �67.0 �63.2 �12.2 �11.5 �10.9

0

67.3 �67.3 �67.3 �67.3 �67.3 0.0 0.0 0.0

19.0 �19.0 �19.0 �19.0 �19.0 �19.0 �19.0 �19.0

19.1 �219.1 �219.1 �219.1 �219.1 �219.1 �219.1 �219.1

42.2 �42.2 �42.2 �42.2 �42.2 �42.2 �42.2 �42.2

39.0 139.0 139.0 139.0 139.0 112.1 112.1 112.1

41.3 �141.3 �141.3 �141.3 �141.3 �168.2 �168.2 �168.2

18.6 �111.9 �105.6 �99.6 �94.0 �18.4 �17.3 �16.4

2.4 �2.4 �2.4 �2.4 �2.4 �2.4 �2.4 �2.4

1.4 �1.4 �1.4 �1.4 �1.4 �1.4 �1.4 �1.4

1.2 �1.1 �1.1 �1.0 �1.0 �0.2 �0.1 �0.1

0.3 �0.3 �0.3 �0.3 �0.3 �0.3 �0.3 �0.3

0.2 �0.2 �0.2 �0.2 �0.2 �0.2 �0.2 �0.2

0.2 �0.1 �0.1 �0.1 �0.1 0.0 0.0 0.0

without depreciation (Zhao et al. 2008)

007); our interview with Banshan Power Plant showed a rate from 0.65%–3.7%)

Table A2Evaluation of a typical IGCC plant in China, w/ and w/o CCS.

0 1 2 3 4 5 6 7 38 39 40

PV of costs exclusive of carbon

charge ($ million)

Without capture

1 Capital investment �1529

2 Depreciation �96.3 �96.3 �96.3 �96.3 �96.3 �96.3 �96.3 0.0 0.0 0.0

3 Insurance and property taxes �27.2 �27.2 �27.2 �27.2 �27.2 �27.2 �27.2 �27.2 �27.2 27.2

4 Fuel cost �156.3 �156.3 �156.3 �156.3 �156.3 �156.3 �156.3 �156.3 �156.3 �156.3

5 O&M cost �53.506 �53.51 �53.5059 �53.506 �53.5059 �53.51 �53.51 �53.51 �53.51 �53.51

6 Tax shield at 40% 133.3 133.3 133.3 133.3 133.3 133.3 133.3 94.8 94.8 73.0

7 Total cash flow �1529 �103.7 �103.7 �103.7 �103.7 �103.7 �103.7 �103.7 �142.2 �142.2 �109.5

8 Present Value at 6% �1529 �97.8 �92.3 �87.0 �82.1 �77.5 �73.1 �68.9 �15.5 �14.7 �10.6

9 NPV, 40 years �3291

With Capture

10 Capital investment �2293

11 Depreciation �144.5 �144.5 �144.5 �144.5 �144.5 �144.5 �144.5 0.0 0.0 0.0

12 Insurance and property taxes �40.8 �40.8 �40.8 �40.8 �40.8 �40.8 �40.8 �40.8 �40.8 �40.8

13 Fuel cost �188.3 �188.3 �188.3 �188.3 �188.3 �188.3 �188.3 �188.3 �188.3 �188.3

14 O&M cost (incl. CO2 trans & Strg.) �95.6 �95.6 �95.6 �95.6 �95.6 �95.6 �95.6 �95.6 �95.6 �95.6

15 Tax shield at 40% 187.7 187.7 187.7 187.7 187.7 187.7 187.7 129.9 129.9 129.9

16 Total cash flow �2293 �137.0 �137.0 �137.0 �137.0 �137.0 �137.0 �137.0 �194.8 �194.8 �194.8

17 Present Value at 6% �2293 �129.3 �122.0 �115.1 �108.5 �102.4 �96.6 �91.1 �21.3 �20.1 �18.9

18 NPV through 40 years �4663

19 PV incremental cost of capture �1372

PV of carbon charge at a certain prices, $1/tCO2, ($ mil)

With Capture

20 cash flow per $1/t CO2 carbon tax �2.39 �2.39 �2.39 �2.39 �2.39 �2.39 �2.39 �2.39 �2.39 �2.39

21 after tax �1.43 �1.43 �1.43 �1.43 �1.43 �1.43 �1.43 �1.43 �1.43 �1.43

22 Present Value at 6% �1.35 �1.27 �1.20 �1.13 �1.07 �1.01 �0.95 �0.16 �0.15 �0.14

23 NPV, through 40 years �22

w/ carbon capture from the first operation

year

24 cash flow per $1/t CO2 carbon tax �0.28 �0.28 �0.28 �0.28 �0.28 �0.28 �0.28 �0.28 �0.28 �0.28

25 after tax �0.17 �0.17 �0.17 �0.17 �0.17 �0.17 �0.17 �0.17 �0.17 �0.17

26 Present Value �0.16 �0.15 �0.14 �0.13 �0.13 �0.12 �0.11 �0.02 �0.02 �0.02

27 NPV through year 40 �3

28 PV savings from capture

per $1/t charge

19

29 Carbon price required to warrant CCS 72.2

Note:

2 Linear depreciation, 6.3% per year until Year 15, then 5% salvage value without depreciation (Zhao et al 2008)

3 1.78% of initial capital investment (1.78% adopted from Sekar. et al (2007); our interview with Banshan Power Plant showed a rate from 0.65% – 3.7%)

4 from assumptions

5 from assumptions

6 ¼40%� sum (Row 2:5)

7 ¼sum (Row 3 : 6)

8 ¼Row 7/(1þdiscount rate)^# of years

9 sum of all the present values at Row 8

11–18 similar to the above 2–9

19 ¼Row 18–Row 9

20 ¼$1/t� annual CO2 emission from assumptions

21 ¼(1–40%)�Row 20

22 ¼Row 21 / (1þdiscount rate)^# of years

23 ¼sum of values in Row 22

24–27 similar to the above 20–23

28 ¼Row 27–Row 23

29 ¼Row 19/Row 28

N. Wu et al. / Energy Policy 54 (2013) 160–172 171

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