Stakeholder Views on Financing Carbon Capture and Storage

Dec 9, 2011 - Judge Business School, University of Cambridge, Trumpington ..... (15, 16) Even though small CCS projects (i.e., those of less than 10 M...
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Stakeholder Views on Financing Carbon Capture and Storage Demonstration Projects in China David Reiner*,† and Xi Liang‡ †

Judge Business School, University of Cambridge, Trumpington Street, Cambridge, UK, CB2 1AG Department of Geography, University of Exeter, Exeter, Devon, UK EX4 4SB

‡

S Supporting Information *

ABSTRACT: Chinese stakeholders (131) from 68 key institutions in 27 provinces were consulted in spring 2009 in an online survey of their perceptions of the barriers and opportunities in financing large-scale carbon dioxide capture and storage (CCS) demonstration projects in China. The online survey was supplemented by 31 follow-up face-to-face interviews. The National Development and Reform Commission (NDRC) was widely perceived as the most important institution in authorizing the first commercial-scale CCS demonstration project and authorization was viewed as more similar to that for a power project than a chemicals project. There were disagreements, however, on the appropriate size for a demonstration plant, the type of capture, and the type of storage. Most stakeholders believed that the international image of the Chinese Government could benefit from demonstrating commercial CCS and that such a project could also create advantages for Chinese companies investing in CCS technologies. In more detailed interviews with 16 financial officials, we found striking disagreements over the perceived risks of demonstrating CCS. The rate of return seen as appropriate for financing demonstration projects was split between stakeholders from development banks (who supported a rate of 5−8%) and those from commercial banks (12−20%). The divergence on rate alone could result in as much as a 40% difference in the cost of CO2 abatement and 56% higher levelized cost of electricity based on a hypothetical case study of a typical 600-MW new build ultrasupercritical pulverized coal-fired (USCPC) power plant. To finance the extra operational costs, there were sharp divisions over which institutions should bear the brunt of financing although, overall, more than half of the support was expected to come from foreign and Chinese governments.

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INTRODUCTION Coal-fired power generation units supply more than threequarters of China’s electricity.1 The International Energy Agency expects coal-fired power plants to remain the largest source of CO2 emissions globally through 2050, and a substantial fraction of those emissions will come from Chinese coal-fired power plants.2 Carbon capture and storage (CCS), by which CO2 is captured when generating power and is injected underground for storage, can significantly reduce greenhouse gas emissions from coal-fired power plants while allowing coal to meet increasing energy demand.3 To decarbonize the Chinese power sector, CCS technologies will be needed, but first must be demonstrated at large scale before clear financial incentives or strong domestic climate legislation is ready. Since 2006, several studies have been conducted to identify Chinese stakeholders’ perceptions with regard to the deployment of CCS technologies,4−6 but no study has focused on CCS demonstration or on financing. The high cost of capture and a lack of explicit financial mechanism are key challenges in developing CCS projects.4 On the other hand, the process of financing a large-scale CCS project is much more complicated than that for conventional power plants. For example, the © 2011 American Chemical Society

authorization process for pipeline infrastructure and storage sites, investment in capture units, and contract risks of CO2 capture, transportation, and storage all need to be addressed when financing a large-scale CCS demonstration project. Although many of the technical aspects have been under investigation for many years, work on the business models needed for deploying CCS has only just begun to be explored.7,8 Our work also complements efforts to build up “roadmaps” that detail both technical and nontechnical challenges and opportunities for wide-scale deployment of CCS, whether in China or globally.9,10 We identified the parties that would be directly involved in providing finance for CCS projects including investors, sponsors, and creditors. The distinction is important because of the necessity of subsidy to first-of-a-kind plants. Investors provide equity and management for CCS project and issue nonrecourse debt (a type of loan that is secured by collateral, Received: Revised: Accepted: Published: 643

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An invitation to participate was sent to each stakeholder by email. Just over 50% of the sample (131 of 256) provided complete responses and 25 other respondents started, but did not complete, the survey. The invitation letter included a covering letter explaining the objectives of the survey and the EU−UK−China near zero emissions coal (NZEC) project, which funded the survey. The letter provided assurance that the anonymity of the respondent would be guaranteed. To encourage participation, we offered a token of appreciation (a “UK−China Olympic stamp presentation pack” issued by Royal Mail) upon completion of the survey. In addition, we sent several reminder emails to all stakeholders who had not responded. Apart from the Internet-based survey, we conducted face-toface interviews with 31 stakeholders. Twenty-two were selected from the 131 online survey respondents, and 9 other senior decision-makers were consulted face-to-face as they did not participate in the online survey nor did they use e-mail frequently. We designed the questionnaire to complement past CCS stakeholder surveys and consultations.4−6 The questionnaire was path dependent (i.e., questions provided to stakeholders may depend on the outcomes of earlier questions) in order to tailor questions to different stakeholder groups. It covered a range of issues associated with demonstrating CCS in China, including: (i) perceptions of CCS technologies preferred in early demonstration projects; (ii) authorization and regulation of large-scale demonstrations; (iii) financing (ideal mix of equity and debt; required returns; perceived risks); and (iv) individual behavioral factors and institutional framework issues affecting the decision-making process. Stakeholder Perceptions and Generation Costs. We apply discounted cash flow (DCF) analysis to monetize the comparison of 16 stakeholders’ perceptions on IRR based on a 600-MW ultrasupercritical power plant located in Guangdong province, applying the cash flow model developed in Liang et al.11 The CCS project investment explored includes capture facilities, pipeline and injection facilities, but excludes the base power plant; therefore, a certain amount of cash flow is assumed to be transferred from CCS investors or sponsors to the owner of power plant to compensate for the electricity penalty (or cost of steam) associated with capture. The only financial benefit from the CCS investment derives from credit for CO2 emissions avoided relative to the baseline power plant. Demographic Information of Respondents. A total of 131 respondents came from 68 institutions in China. There were approximately equal shares of respondents from each main sector: Government (24%), Industry (24%), Academia (23%), and Other (banks, consulting, or research firms and NGOs) (29%). The survey covers 27 provinces or regions of China. Over 60% of respondents came from outside Beijing, and only two regions, Beijing (n = 49), and Guangdong (n = 16) had greater than 10 respondents. Approximately 90% of respondents claimed to spend more than half of their working time on energy and environmental issues, but less than 20% spent more than half of their working time on CCS, although two-thirds claimed that they had participated in CCS events or research activities. To understand potential financing schemes and options for CCS demonstration projects in China, 16 key financial stakeholders were selected and consulted, including 5 chief financial officers from the energy industry (3 power companies,

usually real property, but the lender has a limited amount of recourse to the borrowers’ other assets), and they rely on the free cash flow generated by the project; creditors provides commercial or concessionary loans and rely on the ability of the project to generate cash flow to repay the debt. In this context, sponsors, in contrast to investors, may provide unconditional support or subsidy for project equity and need not rely on the cash flow generated by the project. To make the hypothetical CCS demonstration project more concrete, we analyze capture from a 600-MW ultrasupercritical pulverized coal-fired (USCPC) power plant, a 500-km CO2 pipeline, and storage of CO2 in an onshore saline aquifer. As a result of the energy penalty of capture, the net installed capacity is reduced to 470 MW and 85% of annual CO2 emissions (about 2 million tonnes) is avoided. The study is not only the first effort to consider stakeholders’ perceptions of required return when analyzing investment in CCS demonstration project, but also the first study to examine the required financial return on investment in capture facilities separately from the returns needed on base coal-fired power plant. Since a majority of the investment in a postcombustion CO2 capture power plant is the conventional base power plant, which can operate as normal if the CO2 capture plant is shut down, a higher discount rate applied to both base power plant and CO2 capture facilities investments may overestimate the cost of financing a CCS project. On the other hand, the financial incentive for what is primarily a CCS demonstration program should mainly focus on the CO2 capture investment. Therefore, separating the CO2 capture investment from the base power plant can help investors and policymakers identify the required financial support for demonstrating CO2 capture. We seek to address the following three key research questions related to financing CCS projects in China: 1 What influence are Chinese government departments perceived to have over the development and financing of a large-scale CCS demonstration project? 2 What do financial officials perceive to be the required returns, capital structure, and implied generation costs needed for financing a large-scale CO2 capture plant? 3 What policy measures could facilitate the financing of a CCS demonstration power plant in China?

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SURVEY METHODOLOGY AND DEMOGRAPHIC INFORMATION Survey and Interviews. The target population was stakeholders with significant current or potential influence on CCS demonstration projects or in deployment in China. We set seniority criteria to select stakeholdersfor example, stakeholders from national government departments needed to be of at least director level (two grades below Minister); energy company stakeholders had to be at least of the rank of regional deputy general manager or experienced department manager; academic stakeholders were professors or senior researchers on energy and environment. We also aimed to have regional and sectoral diversity and avoid bias from those currently working on CCS, so we set a target of roughly one-third for each of the three major types of institution (i.e., (i) government, (ii) private sector (primarily energy/financial), and (iii) academia and NGOs) and ensured that less than one-fifth of the overall sample worked directly on CCS. The target group included 256 stakeholders from 129 institutions. 644

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Table 1. Chinese Government Departments and Their Potential Roles in CCS Demonstration Projectsa percentage of stakeholders naming institution as most important in authorizing a CCS project

percentage of stakeholders naming institution as second most important in authorizing a CCS project

perceptions of potential role(s) in authorizing and financing a large-scale CCS demonstration power plant in China

National Development and Reform Commission (NDRC) Local governments

64%

4%

9%

33%

Ministry of Environment Protection (MOEP) The State Council Ministry of Finance (MOF) Ministry of Science and Technology (MOST) State Electricity Regulatory Commission (SERC)

7%

8%

6% 4%

17% 12%

3%

14%

2%

2%

Authorize the project at the national level. Provide financial and policy incentives. Issue guidance on technology options. Provide fiscal and other forms of support. Authorize the project at the provincial and municipal level. Monitor and verify operations. Assess the environmental impact. Influence the decision of NDRC and other ministries. Approve and audit the financial incentive needed for demonstrating CCS. Provide scientific research grants to partially support CCS demonstration project. (no consensus) Review and regulate the electricity tariff for CCS project approved by NDRC. (no consensus)

institution

A small percentage of stakeholders selected “other” or “unsure”. The percentages are drawn from the 131 responses to the online questionnaire. The column on the potential role of Chinese government departments is drawn from results during the 31 face-to-face interviews.

a

CCS, climate change, or energy) was found to have a statistically significant impact on the perceived necessity of CCS, but those who believed climate change to be a serious problem were found to be more likely to view CCS as necessary (at 99% confidence level). After providing brief descriptions of the three main capture technologies, the two most commonly discussed options, postcombustion capture technologies (such as scrubbing by amines) and precombustion capture technologies (such as gasification) together received the bulk of support (41% and 31%, respectively).14 Energy industry respondents were much more likely to favor precombustion capture. Oxyfuel, as a relatively new technology, received little support. Fully onequarter of respondents (including 40% from government) claimed they were “unsure” about which capture technology option they preferred. In the face-to-face interviews, the rationale for postcombustion capture was linked to the fact that essentially all current or planned coal-fired capacity was pulverized coal. By contrast, supporters of precombustion technology argued it was “clean, high efficiency, and more advanced technology, and potentially applicable to polygeneration and coal to liquids”. Similar to capture technology options, there was no agreement over the preferred storage methods. The potential for both enhanced oil recovery (EOR) and enhanced coal bed methane recovery (ECBM) was seen as beneficial aside from any potential to reduce emissions and so were supported by over two-thirds of stakeholders in roughly equal measure. There were significant regional differences in preference for storage methods: for example, almost all stakeholders from coal-rich provinces (such as Shanxi and Inner Mongolia) prioritized ECBM, which has the side benefits of reducing explosions in coalmines. It should be noted that there is limited storage capacity for ECBM and EOR and coal cannot be extracted once CO2 has been injected for ECBM, but these effects were not described to stakeholders. One oil company respondent even noted that more corporate funding might become available if the project included an EOR component. Less than one-sixth of respondents expressed a preference for a storage-only alternative; the large majority of respondents preferred storage in depleted oil and gas reservoirs over storage in saline formations.

2 oil companies), 7 commercial bankers, and 4 energy specialists at development banks. Of these, 5 also participated in face-to-face interviews.

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SURVEY RESULTS When stakeholders were asked about the understanding of climate change issues in their institutions, more than half of respondents claimed climate change was a “very important” or an “important” issue in their institution. On the other hand, more than three-quarters of respondents believed it would be “difficult” or “very difficult” to achieve deep cuts in CO2 emissions globally in the next two decades and over 80% anticipated it would be “difficult” or “very difficult” for China to achieve deep cuts in the next 20 years. During follow-up interviews, the most quoted reason given by those with optimistic positions was that the current national energy conservation policy, which was seen as ambitious, would result in emissions reductions as well as increased political attention to climate change. Those who were more skeptical were concerned about rising energy demand following from increased GDP, constraints on implementation within the current environmental regulatory framework, and the perceived greater urgency of serious local pollution problems, such as water pollution and air quality. Most stakeholders believed that coal’s dominance in the electricity sector would not change in the near future. Preferred Configurations for CCS Demonstration Projects. There has been much recent discussion over how necessary CCS is for deep reductions in greenhouse gas emissions in the context of developed countries.12,13 Most respondents (62%) claimed CCS was “probably necessary” or “very necessary” to achieve “deep cuts in greenhouse gas emissions”.14 Relative to other stakeholder groups, representatives of the power industry and the national government were less likely (at 95% confidence level) to believe CCS was as important for deep cuts. Nevertheless even among industry and government respondents, more believed CCS would be necessary for deep cuts than believed it was unnecessary. Stakeholders from eastern China were more positive toward CCS than in the west, but a larger share of respondents from eastern China worried about the challenge of energy security as a result of the energy penalty imposed by CCS. No other demographic variables (such as region, time spent working on 645

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did not observe any correlation (at 95% confidence level) between stakeholder preferences for project scale and the perceived role of NDRC in authorizing large CCS demonstration plants. Stakeholders who preferred precombustion were more likely to select NDRC as the most important institution in authorizing a CCS demo plant, which might be attributed to the need for IGCC demonstration projects to have NDRC’s permission before construction whereas existing pilotscale postcombustion CCS projects in China did not need NDRC approval. NDRC’s approval can be viewed as an endorsement of at least the potential for financial incentives from the Chinese national government such as capital subsidies, feed-in-tariffs, or favorable tax rates. Most pilot scale environmental projects are financed using the internal resources of large state-owned energy companies. The reliance on internal funding may help explain why existing pilot-scale CO2 capture projects are not seen as requiring the NDRC approval, because it is not essential. However, environmental pilot projects have often been partly financed by provincial or municipal science bureaus or the Ministry of Science and Technology (MOST). There may also be a proxy effect at work, since energy industry stakeholders were both more likely to select precombustion and to name NDRC. During face-to-face interviews, a few local government officials suggested that key national institutions would need to be involved in large-scale demonstration projects, but that local departments, the Ministry of Science and Technology (MOST), and/or grid and power companies could act as the primary decision-makers for smaller demonstration projects. An experienced executive at a state-owned power company believed it would be easy to receive approval if the capture investment were labeled as an environmental extension of a power plant, similar to a FGD device, but that approval would be more complicated if it were classified as a chemical process which generates products for sale (such as food grade CO2). Answers to the second most important institution in authorizing a CCS were more diverse, as local governments, MOST, MOF, and NDRC were all popular options. During face-to-face discussions, a large number of respondents believed that the importance of institutions lay in their potential power to offer financial and political support. In contrast to conventional thermal power projects, where regulation and monitoring are primarily carried out by local authorities, a large proportion of respondents believed that either NDRC (34%), MOEP (25%), MOST (21%) or even the State Council (11%) should be heavily involved in regulating and monitoring the first large-scale CCS demonstration project. In addition, some believed MOF (13%) should be involved because of its ability to provide financial support. Despite its nominal responsibility, the State Electricity Regulatory Commission (SERC) was only identified by 6% of respondents. Though more stakeholders considered NDRC to be important in monitoring, during face-to-face interviews, a number of officials from power companies and NDRC itself suggested that MOEP and local governments would be more heavily involved in daily monitoring, especially on environmental protection and safety issues. One oil company stakeholder believed monitoring a large-scale CCS demonstration project would be more difficult than any conventional power or oil production project and worried about which institution would accept the legal liabilities of maintaining the CO2 stored underground.

There was widespread disagreement over the scale of the first CCS demonstration project in China. Roughly equal numbers (∼20%) expressed a preference for 10−30-MW, 30−100-MW, and 100−300-MW units, with slightly lower numbers supporting even larger or smaller units. Although most new unabated coal-fired power plant generation capacity is 600 MW or greater, a majority of respondents believed the scale of the capture unit should be less than 100 MW, because of the significant uncertainties associated with CCS technologies and existing financing schemes.15,16 Even though small CCS projects (i.e., those of less than 10 MW or 40 000 tonnes CO2e) might better be designated as an experimental or pilot project rather than a commercial-scale demonstration, 13% of respondents still selected this option, including two stakeholders involved in developing capture pilot projects in China. Perceived Role of Institutions. A large number of institutions at the national, provincial, and municipal levels share responsibility for making and implementing energy policies in China and the authorization process for energy projects has evolved rapidly over the last half century.11,17 We therefore asked stakeholders about the importance of different institutions in authorizing the first commercial-scale CCS demonstration project. Almost half of respondents stated they were “familiar” or “very familiar” with the authorization process, with energy company stakeholders being most familiar. Over 60% believed authorizing CCS demonstration projects would be “similar” or “very similar” to IGCC (i.e., classified as part of power generation project), but only 33% felt similarly with regard to current coal-to-liquid (CTL) demonstration projects (i.e., treated as a chemical project). Studies of China have found the bureaucracy governing energy issues to be both fragmented and poorly coordinated.17 As shown in Table 1, more than 60% of respondents named the National Development and Reform Commission (NDRC), the principal agency responsible for formulating and implementing medium and longer term economic development plans, as the most important institution in authorizing the first commercial CCS demonstration project. Interestingly, although NDRC was the clear majority view, the State Council, local governments, Ministry of Finance (MOF), Ministry of Science and Technology (MOST), and Ministry of Environmental Protection (MOEP) were each named by a number of respondents (2−9%). Perhaps surprisingly, energy industry stakeholders were much more likely than government stakeholders to choose NDRC as the key institution. Local governments were viewed as second most important by over 30% of respondents, whereas MOF, MOST, MOEP, and the State Council all were seen as second most important by 8−18%. During a face-to-face interview, a senior official in the national government expressed the view that local government interest could drive a first CCS demonstration project although not all projects with support would be allowed to proceed: “we will not block the first commercial-scale CCS project in China if the local government is very keen to go ahead. However, if ten provinces were going to demonstrate CCS at scale, national authorities would reverse most of their plans.” Stakeholders from more developed provinces, such as Guangdong, Zhejiang, and Shanghai were more likely to list local governments as most important. Although the authorization process for conventional energy projects normally depends on scale, for example power plants larger than 300 MW must receive a permit from the NDRC, we 646

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Figure 1. Preferred sources of debt and equity to finance CO2 capture at a 600-MW coal-fired power plant.

Finance. We asked 16 bankers and financial officials in energy companies their views on the capital structure scheme and risk-return profile of a first large-scale CCS demonstration project in China, which was described as involving capture from a 600-MW ultrasupercritical coal-fired power plant, a 500-km CO2 pipeline, and storage in a saline aquifer onshore. As a majority of capital and operating costs are associated with capture, we started by focusing on the capital structure of capture facilities. The average suggested ratio of equity capital to total capital was 46% (as illustrated in Figure 1), whereas much higher leverage (i.e., lower than 20−25%) is common in conventional thermal power projects in China. Every commercial banker believed significantly lower capital leverage (or higher equityto-debt) would be required to create a more stable capital structure in order to compensate for the extra operating risks involved in the demonstration project. However, most financial officials from the power sector perceived that a higher than normal equity to debt ratio would be necessary. Furthermore, they believed that a “policy loan”, similar to a concessionary loan, which was endorsed (or guaranteed) by government with favorable terms for debtors, should be considered for developing CCS demonstration projects in China. Financial officials from energy companies were asked about the desired mix of sources for the initial equity capital investment assuming CNY 1.5 billion ($221 million) would be required for capture at a 600-MW coal-fired power plant. On average, the preference was for just over 50% of equity, of which the largest preferred sources were foreign governments and development banks. Not surprisingly, commercial and development banks and power companies consistently favored providing a much lower share themselves and supported a significantly higher share of the funding coming from other sources. Similar results were found when asked about the whole

CCS system rather than only capture facilities. In spite of the repeatedly stated preference for foreign funding, it should also be kept in mind that the large Shanghai Shidongkou pilot project was financed entirely using domestic financial resources. All five chief financial officers (CFOs) from power and oil companies argued that the CCS demonstration projects should be primarily supported by public funding, because the extra operating, credit, and market risks brought by the CCS projects would reduce the value of their base plants. In other words, the fuel price risks increase significantly by adopting CCS. Two commercial bankers, citing the recent experiences in financing large-scale energy demonstration projects in China, believed that both management and operating quality could be enhanced if power companies or other private parties partially financed the initial equity capital to create a structure similar to that of a public-private partnership (PPP). Measures such as net present value (NPV), internal rate of return (IRR), and payback period are commonly applied in evaluating the economics or capital budgeting of a power project in China. We provided a 10% reference rate as the hurdle rate of total capital for a large conventional thermal power investment and then asked about the appropriate hurdle rate for investing in CCS projects. The hurdle rate, in practice, should relate to the financial leverage ratio. However, to simplify, we assume here that the hurdle rate is constant regardless of the debt to equity ratio, in line with the Modigliani and Miller capital structure theory. As shown in Figures 2 and 3, responses split into two clusters: 7 respondents, all from development banks and state-owned power companies, suggested that hurdle rates lower than 10% and payback periods of greater than 10 years were appropriate, as they would consider CCS projects to be noncommercial investments; 9 respondents, exclusively from commercial banks, oil companies, and private power firms, not only required safer 647

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surprising since the power sector is usually considered to be more risk-averse than the petroleum sector. This finding might be attributed to two quite different reasons. Because oil companies are typically more risk seeking they may perceive that a higher rate of return is required from the project even though we provided a range of 8−12% as a reference return for a conventional power plant. Alternatively (or additionally), state-owned power companies are the primary CO2 emitters in China and so may be more likely to view a CCS demonstration project as a socially responsible investment and therefore require a lower return. Discounted Cash Flow Analysis. We modeled the expected return on investment for capture at a typical 600MW USCPC power plant in China and found the required IRR ranged from 5% to 20%, which would lead to a 56% higher levelized cost of electricity (3.6 at 5% versus 2.3 at 20%), or 40% higher cost of CO2 avoided (66.4 versus 47.4) (as shown in Figure 4). The total levelized cost of electricity would increase from 5.9 US cents to a range from 10.6 cents (5%) to 11.9 cents (20%), while the total cost of CO2 avoided would be between $70.2 and $89.1/tonne. In other words, though private finance generally has higher efficiency, stronger incentives are needed to satisfy the private investors in CCS demonstration. As shown in Figure 4, for a hypothetical cash flow analysis, the up-front cost of the capture facilities is only a small fraction of the total cost, and a CCS demonstration project will need additional revenues to cover the operating costs of CCS, including extra O&M for capture, extra fuel costs, and the cost of CO2 transportation and storage. Most respondents believed a subsidy from foreign governments should provide the largest single share of the financing on average (36%) followed by the Clean Development Mechanism (CDM) (23% on average). It should be noted that at the time of the survey, CCS was not included in the CDM, but even so, typical prices for CDM projects in China were between $10 and $15/tonne CO2, much less than the $70−90/tonne CO2 that would be required. In December 2011, the seventh Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol (COP 17/ CMP 7) of the UN Framework Convention on Climate Change (UNFCCC) adopted the procedures needed for CCS to be considered as CDM project activities. In addition to foreign government and the CDM, stakeholders believed that the Chinese national government (15%) and multilateral banks

Figure 2. Financial stakeholders’ views of appropriate hurdle rate of total capital for investing in CCS projects.

Figure 3. Financial stakeholders’ views of appropriate payback period of total capital for investing in CCS projects.

financial leverage but also asked for higher reference rates and shorter return periods to reflect the risk premium they placed on a CCS demonstration plant relative to conventional thermal power investment. State-owned oil companies are found to be more risk averse than state-owned power companies, which is somewhat

Figure 4. Estimated levelized costs of electricity generation versus stakeholders’ views on required rate of return for capture investment (US$/kWh). 648

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Figure 5. (A) Stakeholder level of agreement with possible benefits of CCS demonstration projects. (B) Stakeholder support for alternative decisionmaking criteria.

more apparent for state-owned power companies than private sector firms. In our survey, even among respondents from government and academia, there was evidence of an endorsement effect, as a large number of stakeholders (including development bankers) believed that projects “proposed and supported by national authorities” were better investments than projects which used traditional economic parameters or modern portfolio theory (Figure 5). Nevertheless, stakeholders from academia, research institutions, commercial banks, and private firms placed greater importance on traditional economic measures. Respondents from governments, NGOs, and energy companies paid more attention to the location and scale of the project. We also observed that respondents from western China and from Beijing were more likely to support larger-scale projects and projects which received the endorsement of national authorities.

(17%) might also provide some financial support to fill in the gap in operating costs. During face-to-face discussions, all the financial stakeholders interviewed believed incentives from governments or public sources would be essential to keeping a CCS demonstration project operating. One financial official from a state-owned power company cited the lesson of market disorder in wind farm tendering, and he suggested setting up a funding pool to purchase certified carbon emissions reductions from CCS demonstration projects at a guaranteed premium price, which would be similar to a “put option”.18 Before exploring potential financing schemes for CCS demonstration projects, we asked stakeholders whether they agreed with several statements on potential advantages of developing CCS demonstration projects in China. On average, CCS demonstration projects were viewed as best placed to demonstrate Chinese governmental effort in combating climate change as well as in potentially creating an advantage for Chinese power companies investing in CCS technologies (Figure 5). Almost half of the respondents (including more than three-quarters of stakeholders in wealthier regions such as Beijing, Shanghai, Shandong, and Guangdong) disagreed with the statement that the CCS demonstration projects would attract foreign investment, probably because more generally foreign investors have encountered regulatory challenges in entering the Chinese power sector. A few argued that indigenous Chinese equipment manufacturers are unprepared to compete in the CCS equipment or technology market. During one face-to-face interview, a manager from an equipment manufacturer in Shanghai expressed the belief that “the future market for CCS equipment is invisible”. In a question posed specifically to participants from academia and research institutes, approximately half believed that demonstrating CCS in China may increase their R&D funding, but 41% were unsure. We were also able to investigate the presence of an “endorsement effect”, which in the financial sector refers to the faith and endorsement of the participants who simply assume that the investment alternatives provided by the sponsors or their employers are good investments, for example under a defined contribution pension plan. Liang and Reiner analyzed behavioral patterns in the Chinese power sector and found that a common belief was that projects proposed by national authorities are “good projects”.19 This trust was more important than conventional economic measures such as NPV, IRR, or the payback period. The endorsement effect was also

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DISCUSSION The National Development and Reform Commission (NDRC) was perceived as the most important institution in authorizing the first commercial scale CCS demonstration projects, followed by local governments, the Ministry of Science and Technology (MOST), and the Ministry of Finance (MOF). NDRC and Ministry of Environment Protection (MOEP) were deemed to be likely to be heavily involved in regulating and monitoring the operations of CCS demonstration projects. Clear support for CCS from NDRC is therefore an important signal that would be needed for larger-scale development, although in spite of its widely accepted preeminence in national policy, provincial and local governments were seen as playing an important role. Respondents in the wealthier coastal provinces appeared to view the role of local governments as more important and place less importance on the endorsement by national authorities. In the absence of policy incentives sufficient to encourage deploying CCS in China such as a feed-in-tariff or emission performance standard, financing the initial capital investment is a priority issue in demonstrating a large-scale CO2 capture project at a coal-fired power plant. (CCS demonstration power plants have the flexibility of suspending CO2 capture operations under unfavorable economic conditions, thus, arguably, financing the initial capital investment is more important.) With regard to the capital structure, power firms were reluctant 649

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to provide a significant proportion of initial equity capital for CCS demonstration. Foreign governments, the Chinese government, and multilateral banks were perceived as the primary sources of finance. Concessionary loans from multilateral banks were considered to be the most promising source of debt finance for CCS projects but, as might be expected, those from development banks were less enthusiastic about the scale of their contribution. Some suggested CCS equipment and technology providers and venture capitalists should also provide some vendor finance, although stakeholders from power equipment vendors were not optimistic about any potential contribution. A lower leverage (debt to equity ratio) was proposed by commercial bankers to manage the extra risks of CCS demonstration projects. Governments were called upon to bear some of the operating risks, but clearly there are still fundamental disagreements among different stakeholder groups over the nature and magnitude of those risks. The concern over the level of potential government subsidy must also be understood in the context of wider efforts to address existing energy subsidies20 and more generally the impact of clean coal technologies on the Chinese energy sector.21 The finger pointing at other actors and unwillingness to shoulder a larger share of the financing on the part of all actors is not surprising, but ultimately, compromise will need to be reached among the different parties. Perceptions of the appropriate project hurdle rate fell into two distinct clusters, making the average IRR of 11.3% effectively meaningless. Stakeholders from development banks believed it should be much lower than the reference rate for conventional thermal units (below 8%), whereas commercial bankers argued that a higher than normal rate (greater than 12%) was needed to address the extra risks in demonstration projects. Based on our case study of a 600-MW new USCPC power plant in Guangdong province, these differences would lead to up to 40% higher cost of CO2 avoided and 56% higher levelized cost of electricity. The extra operating costs for CCS were expected to mainly come from foreign and Chinese governments through subsidies or mechanisms such as “put options”, and stakeholders perceived that the CDM, if available, would cover less than one-quarter of the extra costs of CCS. Most stakeholders believed that the international image of the Chinese Government might benefit from developing the first commercial CCS demonstration. Demonstration projects were also seen to have the potential to create an advantage for Chinese power companies. Chinese and foreign funding of CCS demonstration plants in China may therefore come to play an important role in the international climate change negotiations since both Chinese and foreign governments would have a strong interest in decarbonizing the Chinese power sector. If there is ever agreement on the inclusion of CCS in the CDM, the CDM may have a relatively small role to play, but it is ultimately direct investment from the governments that was seen as having a more important role to play in financing CCS demonstration. Finally, following on from our findings, we identify a number of policy implications that could help reduce the uncertainties associated with financing a large-scale CO2 capture power plant in China. (1) The cost to industry need not be prohibitive. Overall, the perception of the equity capital investment needed from energy companies is less than 10% or US$22 million.

(2) (3)

(4)

(5)

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The implied investment by an energy company is therefore similar to the capital cost of the largest CO2 capture pilot power plant in China (the 120 000 tonne/ year, 600-MW supercritical unit in Shidongkou. (The Shidongkou CCS pilot was at the planning stage when our survey was conducted and began operation in 2010. The capital cost was obtained through a face-to-face interview with China Huaneng Group, but we have not received consent to disclose the actual figure in the public domain.) Moreover, because most power plants are owned by the state, whether via national, provincial, or municipal governments, a CCS demonstration project endorsed by NDRC may encourage state-owned power companies to contribute a higher proportion of equity capital. Foreign financial support is perceived to be very important, thus the possibility of a Chinese-foreign equity joint venture should be evaluated. Multilateral banks, foreign commercial banks, and Chinese domestic banks could all play a key role in providing debt finance for the demonstration, therefore it is crucial to study the possible structure of syndicated loans for CO2 capture investments. There is the potential for competition across regions or actors (such as large power companies) to help drive the development of CCS in China. Because technical or institutional barriers may prove challenging for any particular project, competition and multiple developments in parallel should be encouraged. Bilateral and/or multilateral initiatives with an aim of demonstrating CCS power plants in China should carefully assess the potential and feasibility of accessing different domestic sources of finance to reduce the uncertainties that impact upon industry’s willingness to undertake CCS projects.

ASSOCIATED CONTENT

S Supporting Information *

List of respondents' institutes and list of provinces and regions covered by this study. This material is available free of charge via the Internet at http://pubs.acs.org.

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AUTHOR INFORMATION

Corresponding Author

*Phone: +44-1223-339616; fax: +44-1223-339701; e-mail: [email protected].

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ACKNOWLEDGMENTS We appreciate the financial support of the UK Department of Energy & Climate Change through the UK-China NZEC project. We acknowledge the assistance of Heather Haydock at AEAT and Jon Gibbins at the University of Edinburgh for help with questionnaire design and for providing useful comments, Bill Senior and Dan Ulanowsky for help on questionnaire design and suggesting contacts, Hongliang Yang at Asian Development Bank for nominating stakeholders, Jia Li at Imperial College London for help arranging face-to-face interviews, Andrew Minchener, Paul Freund, Chris Hodrien, Philip Curry, and three anonymous reviewers for detailed comments to improve the paper, and Min Feng at LINKSCHINA Advisory Services for implementing the online survey system design and administration. 650

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Policy Analysis

REFERENCES

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