xi liang, david reiner judge business school university of cambridge

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Xi Liang, David Reiner

Judge Business School

University of Cambridge

International Conference on Climate ChangeHong Kong

May 29th – 31st 2007

Financing Capture Ready: Issuing a

Tradable Capture Option

Jon Gibbins, Jia Li

Mechanical Engineering Dept.

Imperial College London

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Contents

• Introduction: ‘Carbon Capture and Storage’ & ‘Capture Ready’

• Challenge: Obstacles in Financing Capture Ready

• Benefit: Advantages of Issuing a Tradable Capture Option

• Pricing: Value of a Capture Option

• Conclusions

Contents

Financing Capture Ready: Issuing a Tradable Capture Option

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Capture Site

Storage Site

Transportation

Storage Site

(IPCC CCS Special Report, 2005)

(IPCC, 2006)

Introduction

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Capture Site

Storage Site

Transportation

Storage Site

(IPCC CCS Special Report, 2005)Current (dark lettering), proposed (light lettering) and possible (cross-hatched) projects involving CO2 Capture for Injection (CSLF, 2006)

Introduction

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‘In fair weather prepare for foul’

“Capture Ready” is a design concept that will enable foss

il fuel plants to be more easily and economically retrofitte

d with Carbon Capture and Storage (CCS) technologies

during their life time, and avoid ‘Capture lock-in’.

Measures includes space reservation, plant siting, safety

consideration, base plant selection


Introduction

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Introduction

14. We will work to accelerate the development and commercialization of Car

bon Capture and Storage technology by:

(a) endorsing the objectives and activities of the Carbon Sequestration Leadership

Forum (CSLF), and encouraging the Forum to work with broader civil society

and to address the barriers to the public acceptability of CCS technology;

(b) inviting the IEA to work with the CSLF to hold a workshop on short-term

opportunities for CCS in the fossil fuel sector, including from Enhanced Oil

Recovery and CO2 removal from natural gas production;

(c) inviting the IEA to work with the CSLF to study definitions, costs,

and scope for ‘capture ready’ plant and consider economic incentives;(d) collaborating with key developing countries to research options for geological

CO2 storage; and

(e) working with industry and with national and international research

programmes and partnerships to explore the potential of CCS technologies,

including with developing countries.

G8, Gleneagles Plan of Action, 2005


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Obstacles in Financing Capture Ready

No carbon credit

Poor incentive prospect

The power industry’s pessimistic opinion

Challenge


Therefore, Capture Option is suggested to boost

new fossil fuel plants the chances of being made

Capture Ready

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What’s a Capture Option

A Capture Option is an option contract that stipulates that

one party (the option holder) has the right (but not the

obligation) to exercise the contract to capture CO2 on or

before a future date (the exercise date or expiration) while

the other party is the underlying fossil fuel plant.

Benefit


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Issuing Capture Options – a win-win scenario

Financing Capture Ready

Optimizing Capture Ready

Exclusive CCS investment opportunity

Power Industry Benefit

Political Benefit

Academic benefit

Benefit

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Valuation Methodology Highlight

Pricing

Real Option Analysis (ROA) in a Cash Flow NPV model

Monte-Carlo Simulations: 10,000 trials

Value of a Capture Option: Comparing mean NPV of the

project with and without the retrofitting option

Timing of retrofitting to Capture

Retrofitting probability in each timing

Gross Value of Capture Ready: subtracting the option

value without Capture Ready from the option value with

Capture Ready

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Assumptions of Technical Performance

Pricing

Plant Type: 600MW Supercritical Pulversied Coal-fired

Timing to Start Construction: Beginning of 2010

Construction Cycle: 2 years

Projected Life: 2012-2050

Location: China

Operator: China Huaneng Power International Co.

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Assumptions of Technical Performance (Cont.)

Pricing

Time period 2012-2020 2021-2030 2031-2040 2041-2050

Load Factor 85% 80% 75% 70%

Output/yr (MWh) 4,467,600 4,204,800 3,942,000 3,679,200

Projected Average Capacity and Load Distribution of a 600MW SCPC

Coal Type: 2.1%S bituminous coal

Fixed Capital Cost: 3750/kW (2003 base)

Power Supply Efficiency (LHV): 42%

Carbon Emissions factor: 0.79 ton CO2/MWh (Rubin et,al)

O&M cost base: CNY141.6m in 2005

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Performance after Retrofitting to Capture

Pricing

Potential Retrofitting Timing (Routine Maintenance Year)

(Gibbins et.al, 2005) Capture un-Ready

Capture Ready

Additional capital outlay 75% 50%

Efficiency penalty 9.5% 8.5%

Additional O&M cost 70% 43%

Average Capacity Load +5% +5%

No. 1st 2nd 3rd 4th 5th 6th 7th

Year 2017 2022 2027 2032 2037 2042 2047

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Other Assumptions Highlight

Pricing

• Tax considerations

• Inflation factors

• Required return of capital

• Coal price projections

• Electricity on-grids price estimation

• Local CERs price (Carbon Cost) projection

• Projection of Interrelations among coal price, carbon

cost, on-grids electricity price…

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Valuation Results Snapshot

Pricing

10% Discount Rate (CNY:million) Mean NPV Std dev Std err

No Retrofitting Option 2016.61 2265.73 22.66

With Retrofitting Option 2238.56 1521.40 15.21

Option Value 221.95 - -

With Retrofitting Option with CR 2321.85 1338.79 13.38

Option Value with CR 294.03 1196.03 11.96

Gross Capture Ready Value 72.09 - -

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Gross Value of Capture Ready

Pricing

Val ue of Capture Ready before Prei nvestment Cost(CNY: mi l l i on)

288

126

7248

0

50

100

150

200

250

300

350

5% 8% 10% 12%Rate

NPV

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Value of the Capture Option

Pricing

Val ue of Capture Opti on (CNY: mi l l i on)

0200400600800

100012001400

5% 8% 10% 12%Di scount Rate

NPV Capture Ready

Capture un-Ready

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Cumulative Probability of Retrofitting to Capture

Pricing

Cumul ati ve Probabi l i ty of Retrofi tti ng to Capture

0%

5%

10%

15%

20%

25%

30%

2017 2022 2027 2032 2037 2042 2047

Year

% 10%_base10%_Capture Ready

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Conclusions

Conclusions

• Issuing a tradable Capture Option help financing Capture Ready

• A Capture Option has plenty of potential benefits

• The value of a Capture Option is significant

• The feasibility of Capture Ready depends on the additional

capital outlay for Capture Ready and risk exposure after adopting

Capture Ready


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Beyond Conclusions

The Capture Option is a valuable ‘asset’, while

Capture Ready is an important investment

opportunity.


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Q&A

Xi Liang

Email: [email protected]

Financing Capture Ready:

Issuing a Tradable Capture Option

xi liang, david reiner judge business school university of cambridge

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