Making carbon capture, utilization and storage attractive in reaching net-zero
Carbon capture, utilization and storage is critical for decarbonizing hard-to-abate sectors responsible for almost 30% of GHG emissions. S&P Global identifies five key factors that determine the attractiveness of CCUS.
Published: March 13, 2024
Highlights
Consensus continues to build on the need for carbon capture, utilization and storage (CCUS) technologies to meet net-zero targets.
CCUS is key to decarbonizing hard-to-abate sectors.
Policy has driven a significant increase in the CCUS project pipeline over the past few years.
Projects under development will increase CO2 capture capacity to almost 10 times the current operating capacity.
Despite this momentum, only 18% of these projects are in the advanced stage of development. Moreover, private capital investors have deployed little capital into CCUS compared to other clean technology investments, an indicator of the uncertainty that this technology still faces.
The CCUS industry faces several barriers to its large-scale deployment: high costs, market fragmentation, limited infrastructure or storage information, and insufficient policy support. As a result, projects need multiple vectors of revenue to improve their prospects for financing. As the need for CCUS to meet climate goals becomes clearer, many governments and private participants have been working to overcome these barriers. S&P Global has identified five key components that determine the attractiveness of CCUS for a sector or a country.
Why is CCUS important?
Net-zero pledges are expanding globally, and models1 indicate the need for an exponential increase in carbon capture, utilization and storage (CCUS) from current capacity to reach climate goals by 2050. CCUS is critical to decarbonize the so-called “hard to abate” sectors (e.g., steel, cement, fertilizers, petrochemicals and heavy-duty transport) responsible for 30% of total global greenhouse gas emissions and for which zero-carbon electrification is not yet a feasible solution.
The current energy system relies heavily on fossil fuels, constituting about 80% of our energy needs. Any abrupt transition away from fossil fuels could lead to market disruptions and price spikes. CCUS offers a practical solution by enabling use of cleaner fossil energy supplies while new technologies are developed, thereby addressing security and affordability concerns, factors especially important to the developing world.
For investors analyzing the energy sector and concerned about the capacity to invest in fossil fuels while still meeting net-zero emissions commitments, CCUS presents a way to invest in business models they are comfortable with while adhering to emissions restrictions. Investing in CCUS projects and technologies as energy sector demand for emissions solutions increases gives fossil fuel investors an additional path to participation in the energy transition without abandoning familiar counterparties. Many investors and financiers already know the potential counterparties in CCUS markets — from oil and industrial companies to engineering services providers — and are comfortable with the relative financial simplicity of adding more infrastructure to existing revenue-producing assets.
What are the CCUS market dynamics?
Policy has been the main driver of CCUS project deployment. Most CCUS projects currently operating have benefited from policy support, and recent policy announcements have driven a significant increase in the CCUS project pipeline. Supercharged incentives (e.g., from the US Inflation Reduction Act) for carbon capture projects since 2021 have accelerated the momentum.
S&P Global Commodity Insights
Policy has been the main driver of CCUS project deployment.
Eduard Sala de Vedruna
Executive Director, Climate and Sustainability Group
However, most of the projects in the pipeline are in the early stages and still have to overcome multiple challenges, including limited financial incentives in some regions, permitting delays, additional guidance on government support and unclear frameworks to develop infrastructure. Only 18% of the current pipeline has moved beyond the final investment decision phase, while 28% remain in the announced stage, posing questions about the robustness of the pipeline. Oil and gas companies and industrial groups are at the forefront of this wave of CCUS developments. They are driven by strong incentives to decarbonize their operations combined with the synergies between their technical expertise and the requirements to develop CCUS technologies.
At the same time, returns-oriented investors are cautious about policymakers' commitment to CCUS amid the rapid deployment of alternative technologies. Despite dominating cleantech investing, private capital investors in the US have allocated minimal funds to CCUS. In the year following the US Inflation Reduction Act, private capital firms invested only $7 billion in CCUS, significantly less than the $100 billion directed toward renewable power projects in the same period.
Investors in CCUS have a few potentially profitable entry and exit points in the coming decade, during which a record number of CCUS projects are likely to reach operation — albeit too few to impact the needed reductions in emissions for net-zero purposes. A technological leap could make early capital commitments to CCUS a winning bet, even as the sector still struggles to find its financial model today.
What makes a market attractive for CCUS?
Evaluating the attractiveness of a CCUS project is not a simple task, unlike other technologies for which the market and the operational requirements are clear. For CCUS, these metrics vary significantly based on the application.
In the past, this technology has encountered several barriers to mass development:
High costs
Market fragmentation, as the value proposition of this technology varies by industry
No infrastructure or storage information
Lack of policy frameworks
As the need for CCUS to meet climate goals becomes clearer, multiple governments and private players have been working to overcome these barriers to increase its attractiveness.
S&P Global has identified five key factors that play a critical role in determining the attractiveness of CCUS in a country or sector:
Policy and regulation
Quality and quantity of emission profiles to create demand
Information about the availability of CO2 storage
Cost outlook
Ease of doing business
Policy and regulation
Policy is a key enabler of CCUS, and policymakers are removing barriers to CCUS development with measures to improve affordability and clarify demand, standardization, infrastructure development and CO2 storage availability. Identifying regions with a comprehensive policy and regulatory framework for CCUS will increase the attractiveness for investors.
Building demand and improving affordability: Tax credits, emission trading systems and clear carbon management strategies are providing increasing certainty around demand trajectories for CCUS.
Defining standards: Worldwide, definitions are being published for low-carbon or clean investments. Clarity on carbon intensity goals helps to identify the attractiveness of CCUS projects.
Developing infrastructure and storage availability: Frameworks for the transportation of CO2 are being developed, and the availability of CO2 storage information is improving.
Defining key regulatory areas to provide certainty to investors: Many countries have passed CCUS-specific rules offering clarity around areas such as pore space ownership, permitting processes and liability issues (see chart).
Emission profiles
Total available CO2 emissions and concentration of CO2 in emission streams by industrial sectors are critical in determining the attractiveness of CCUS as an abatement strategy. The scale of CO2 emissions affects the volume of available capturable emissions, and their purity and concentration in emission streams affect the ease of capture.
S&P Global Commodity Insights
Total available CO2 emissions and concentration of CO2 in emission streams by industrial sectors are critical in determining the attractiveness of CCUS as an abatement strategy.
Eduard Sala de Vedruna
Executive Director, Climate and Sustainability Group
Availability of CO2 storage
Identifying regions of the world most suitable for permanent underground storage of CO2 requires a deep understanding of the geological characteristics of target basins. Considering such subsurface factors in combination allows project developers to then “score” a basin’s CCUS attractiveness, which in turn can be applied to optimally match emitters with potential storage locations.
S&P Global Commodity Insights
Identifying regions of the world most suitable for permanent underground storage of CO2 requires a deep understanding of the geological characteristics of target basins.
Eduard Sala de Vedruna
Executive Director, Climate and Sustainability Group
This analysis involves first identifying subsurface characteristics that have the greatest influence on a basin’s capacity to safely store CO2 for the long term and then assigning them with an appropriate weighting. Such factors are categorized by the following:
Geological setting: A basin’s overall structure — its extent, sedimentary thickness, porosity, number of reservoirs and sealing layers — helps to assess its storage capacity and integrity. Injectivity is determined in part by geothermal gradient (with higher temperatures less desirable owing to increased buoyancy) and in part by reservoir depth (with a sweet spot between the ability to store CO2 in a supercritical state and avoiding excessive overburden pressures that reduce permeability). Finally, local stress regimes dictate the long-term seismic stability of storage sites.
Operating environment: Onshore storage sites are typically favored over offshore (and especially deepwater) sites owing to lower development costs. Additionally, while mature basins that have undergone extensive oil and gas development often yield more robust subsurface data, they also tend to have more well penetrations (i.e., potential CO2 leak pathways) that must be managed.
Understanding these factors and their relative weightings is one thing; securing the necessary data to perform the analysis is quite another. Drawing from extensive subsurface data sets from S&P Global Commodity Insights, we have developed a high-level screening tool that allows developers to score the CCUS attractiveness of over 2,750 global basins. Plotted in map form (see map), the tool offers a quick look at the most attractive CO2 storage locations around the world and helps to advance industrial decarbonization efforts.
Cost outlook
Costs for every component of the CCUS value chain vary greatly across industries and regions based on the purity of the CO2 stream, capture technology, plant size, process design, plant utilization, location, type of transportation, type of storage and cost of capital. As a result, a large range of costs associated with CCUS can be represented through the levelized cost of CO2 avoided (LCCA).2
Unlike renewable energy projects, large-scale carbon capture and storage projects have demonstrated minimal unit standardization or cost compression; however, as projects are being deployed, three key levers for CCUS cost reduction are identified:
CO2 capture technology innovation: Research and development of new capture technologies could help to reduce costs and improve efficiency.
Carbon capture storage hubs: Hubs could significantly reduce the unit cost of CO2 transportation and storage through economies of scale.
Learning by doing: Engineering and planning costs should decline as companies become more experienced in building CCUS at scale.
Understanding how these levers will accelerate cost reduction, and their implications under current policy incentives, will help rank the countries with the most promising economic landscape for this technology.
Ease of doing business
Based on S&P Global analysis, countries have been ranked on six broad nontechnical factors to analyze the ease of starting and operating a CCUS project in the country. These are general factors in many cases, but we also look at the CCUS-specific drivers in each category.
Political: The prevailing political structure and stability of the government are assessed with an eye toward the risk of institutional failure in the country.
Economic: The current and projected macroeconomic trends in the country; risk of sovereign default and the broader economic climate.
Legal: Risk of expropriation and sanctity of contract; ease of permitting.
Tax: Tax structure and stability; state of regulatory framework to incentivize CCUS deployment.
Operational: Labor availability and issues; infrastructure disruption.
Security: Risk of protests and riots, terrorism, civil war, and interstate wars.3
Looking forward: The proliferation of carbon management strategies
The recent announcement of the Canadian and European carbon management strategies with clear CO2 capture volumes is about to change the market.
Regions with carbon management strategies will provide a clear demand signal for the CCUS market, increasing the perceived attractiveness for technology development in these regions. Clear requirements of CO2 capture will lead to reducing risk for projects underway and provide clarity on the volumes the market could expect from strategies with aggressive CO2 targets. Those with aggressive targets could, through economies of scale, see cost reductions sooner. The proliferation of carbon management strategies could be the demand signal the industry needs to start a policy-deployment cost reduction cycle.
Learn more
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A tale of two carbon markets
1 Models including net-zero IEA, IRENA 1.5 S, IPCC -1.5, and S&P Global ACCS. ACCS refers to Accelerated CCS Case Scenario 2023 edition.
2 This metric assesses the CO2 capture system as a carbon mitigation option; it considers capital costs, operating costs of the system and the additional CO2 emissions as a result of operating the capture system.
3 Outlook arrows for each risk category capture whether we expect the risk level to rise, fall or remain level following that 12-month period.
This article was authored by a cross-section of representatives from S&P Global and in certain circumstances external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.
