CCS Roadmap People’s Republic of China: The business model for early stage demonstration projects Tony Wood International Team Leader Roadmap for CCS demonstration and deployment in the People’s Republic of China Final Workshop Beijing, April, 2016

CCS Roadmap  Background  Illustrative financials for CCS demonstration projects  Financial support measures  Business structures  Project selection  Summary recommendations Outline of presentation

Introduction The Roadmap for CCS demonstration and deployment in the People’s Republic of China concluded that CCS is essential for cost-effective climate change mitigation. It is crucial that the PRC should move to CCS demonstration in the 13th Five-Year Plan period and the PRC is uniquely placed to do so at low cost: o 5-10 early-stage opportunities in the coal-chemical sector o 1-3 projects in the power sector The successful implementation of these projects will depend on the choice of technology and sector and also on: o The type of available fiscal and financial support mechanisms o The selected business structures and how they are implemented o The process for selecting demonstration projects for support CCS Roadmap

Need for support: current technologies impose a cost premium CCS Roadmap Long-run cost of produced electricity (CNY/kilowatt hour) Based on current best estimates to be verified There is significant cost reduction potential and EOR provides additional revenue IGCCPre-combustion capture PCPost-combustion capture OxyOxy-fuel capture EOREnhanced oil recovery The cost premium in the power sector is currently high

The coal chemicals sector has low-cost potential in the PRC CCS Roadmap Benchmarking methanol production costs against 12 month Asian Posted Contract Price (based on best estimates, to be verified by demonstration projects) Coal chemicals and CO 2 -EOR offers a near-commercial, unique opportunity in the PRC EOR scenario assumes a CO 2 sale price of $120/t

CCS demonstration projects will require financial support CCS Roadmap CO 2 capture adds to the energy costs and reduces the output of the emitting companies. A future, carbon-constrained world may justify higher costs and costs will reduce with experience, but demonstration projects will need financial support Capital support o Capital grants could make up a limited portion of overall financial support and are best deployed at the development stage. Repayable concessional finance o A subordinated loan from the government or a development bank, at lower than commercial rates, can reduce the cost of finance for capital-intensive plants. Tax incentives o Tax incentives typically include reduced corporate tax, value-added tax exemptions, rebates and accelerated depreciation. Revenue support o Revenue support can provide revenue certainty to project developers or financial support to close the commerciality gap. The best approach would be pay-for-performance as a fixed price for each tonne of CO 2 abated.

Financial support should evolve over time CCS Roadmap Recommended financial support during the 13 th plan period: o Capital support o Concessional finance o Tax incentive o Revenue support Recommended financial support in the medium term: o While coal-chemical projects may become commercially viable between 2021 and 2030, the commerciality gap for the power sector may remain. o A CCS-specific feed-in tariff, as applied for other low-emission technologies such as wind and solar photovoltaic systems could be an effective means of support o The critical factor will be the emergence of broad, climate change policies such as a national emissions trading scheme. In the long term, stable climate change policies, research and development and cost reduction will make CCS commercially viable without financial support.

Business structures will need to address all risk factors CCS Roadmap CCS demonstration projects are high-risk in several areas: Technical o Despite each stage being technically established there are scale-up and integration risks for demonstration projects Legal and regulatory risks o There is uncertainty over the timing, completeness and stringency of future policy frameworks to drive low-emission technologies Counterparty risk o CCS projects require harmonization across unique industry sectors: power generation and manufacturing, transport and geological resources. This interdependence introduces significant counterparty risk as a failure in one part of the can impact the entire project. Long-term liability for containment o There is uncertainty as to how governments will handle the issue on long-term storage liability.

The government can play an active role in efficient structures CCS Roadmap Project developer responsible for investment and operations; government underwrites revenue certainty

Selection of demonstration projects will be critical CCS Roadmap The Government must establish a clear framework of objectives and constraints. Beyond technical merit, level of support learning, project deliverability will be a key assessment criterion: o Allow the option of incremental scale-up, e.g., from 100,000 tpa initially o Optimize infrastructure rollout via road transport or common-user CO 2 infrastructure hubs Larger state-owned enterprises are typically well-placed, but this should not be a condition on gaining access to government support. A formalized body should be appointed to assess demonstration projects against predefined criteria A detailed prefeasibility study should be a central element in project selection, A front-end engineering design (FEED) study must form a part of the final decision to support a project. This should include an assessment of the project’s maturity, innovativeness and whether there is a comprehensive management plan.

Overview of the high-level project selection process CCS Roadmap

Summary of recommendations CCS Roadmap CCS demonstration project structuring, support and selection

CCS Roadmap People’s Republic of China: The business model for early stage demonstration projects Tony Wood International Team Leader Roadmap for CCS demonstration and deployment in the People’s Republic of China Final Workshop Beijing, April, 2016