1. 1 Xi Liang, David Reiner Judge Business School University of Cambridge International Conference on Climate Change Hong Kong May 29 th – 31 st 2007 Financing Capture Ready: Issuing a Tradable Capture Option Jon Gibbins, Jia Li Mechanical Engineering Dept. Imperial College London

2. 2 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

3. 3 Capture Site Storage Site Transportation Storage Site (IPCC CCS Special Report, 2005) (IPCC, 2006) Introduction

4. 4 Capture Site Storage Site Transportation Storage Site (IPCC CCS Special Report, 2005) Current (dark lettering), proposed (light lettering) and possible (cross-hatched) projects involving CO 2 Capture for Injection (CSLF, 2006) Introduction

5. 5 ‘In fair weather prepare for foul’ “Capture Ready” is a design concept that will enable fossil fuel plants to be more easily and economically retrofitted 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 Financing Capture Ready: Issuing a Tradable Capture Option Introduction

6. 6 14. We will work to accelerate the development and commercialization of Carbon 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 Financing Capture Ready: Issuing a Tradable Capture Option

7. 7 Obstacles in Financing Capture Ready  No carbon credit  Poor incentive prospect  The power industry’s pessimistic opinion Challenge Financing Capture Ready: Issuing a Tradable Capture Option Therefore, Capture Option is suggested to boost new fossil fuel plants the chances of being made Capture Ready

8. 8 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 CO 2 on or before a future date (the exercise date or expiration) while the other party is the underlying fossil fuel plant. Benefit Financing Capture Ready: Issuing a Tradable Capture Option

9. 9 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

10. 10 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

11. 11 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.

12. 12 Assumptions of Technical Performance (Cont.) Pricing Time period2012-20202021-20302031-20402041-2050 Load Factor85%80%75%70% Output/yr (MWh)4,467,6004,204,8003,942,0003,679,200 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

13. 13 Performance after Retrofitting to Capture Pricing Potential Retrofitting Timing (Routine Maintenance Year) (Gibbins et.al, 2005)Capture un- Ready Capture Ready Additional capital outlay75%50% Efficiency penalty9.5%8.5% Additional O&M cost70%43% Average Capacity Load+5% No.1 st 2 nd 3 rd 4 th 5 th 6 th 7 th Year2017202220272032203720422047

14. 14 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…

15. 15 Valuation Results Snapshot Pricing 10% Discount Rate (CNY:million)Mean NPVStd devStd err No Retrofitting Option2016.612265.7322.66 With Retrofitting Option2238.561521.4015.21 Option Value 221.95 -- With Retrofitting Option with CR2321.851338.7913.38 Option Value with CR 294.03 1196.0311.96 Gross Capture Ready Value 72.09 --

16. 16 Gross Value of Capture Ready Pricing

17. 17 Value of the Capture Option Pricing

18. 18 Cumulative Probability of Retrofitting to Capture Pricing

19. 19 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 Financing Capture Ready: Issuing a Tradable Capture Option

20. 20 Beyond Conclusions The Capture Option is a valuable ‘asset’, while Capture Ready is an important investment opportunity. Financing Capture Ready: Issuing a Tradable Capture Option

21. 21 Q&A Xi Liang Email: x.liang@jbs.cam.ac.uk Financing Capture Ready: Issuing a Tradable Capture Option