For decades, there has been a robust CO2-using enhanced oil recovery (EOR) industry in the US. In fact, by many accounts the EOR industry could use more CO2 than it has access to today and could store massive amounts of CO2.[i] Much of the CO2 currently being used for EOR is recovered from natural sources, meaning that it is not anthropogenic and, thus, does not contribute to reducing national CO2 emissions. This is because, for most point sources, the revenue from selling CO2 on the market is insufficient to cover the costs for CO2 capture and transport. That is partly true because carbon capture is an early-stage technology, with only two large-scale facilities (i.e., over 100 MW) operating on coal-fueled power plants in the world. However if the revenue-cost gap can be closed during this early stage of technology development and deployment, it represents a major opportunity to advance CCUS in the US and thereby reduce the technology costs.[ii]
The 45Q CCUS tax credit was originally passed in 2008 and provided $10/metric ton for CO2 used for EOR and $20/metric ton for CO2 injected into saline storage. However, for many reasons, including uncertainty, insufficient financial incentives, and a relatively low cap of 75 million metric tons of CO2, that initial credit did little to advance CCUS in the US.[iii]
Although the initial passage of the CCUS tax credit in 2008 was an important milestone, stakeholders knew that more would be needed. Thus, a group called the National Enhanced Oil Recovery Initiative was formed. This group, called NEORI in short, included environmental groups such as the National Resources Defense Council and the Clean Air Task Force. It also included CCUS technology developers, think tanks, power producers, unions, coal companies, such as Peabody and Cloud Peak, and others. This diversity was critical because it meant that the coalition was able to reach out to US lawmakers across the political spectrum, which is a necessity in the US partisan political environment. Whether a lawmaker was primarily interested in jobs, energy security, and/or reducing emissions, the various coalition members were able to speak to the benefits of carbon capture and by the time the bill reached the Senate floor, one quarter of US Senators were co-sponsors. Then, on February 9, 2018, the tax credit reform was passed into law.
The reformed 45Q tax credit provides:[iv]
- $35/metric ton CO2 for beneficial use, including EOR
- $50/metric ton CO2 for saline aquifer storage
- 12-year window for receiving tax credits
- Construction must begin by Jan 1, 2024
- Minimum capture rate: 500,000 metric tons per year for power plants and 100,000 tpy for industry.
- Transferrable, which means that non-profits such as cooperatives can use the tax credit.
Tax credits are a popular approach to incentivizing energy technologies in the US. This approach has been quite successful for incentivizing wind and solar energy, for example. However, tax credits are not the same as cash, which results in some headwinds for using the tax credit to build carbon capture facilities at power plants:
- Not all power companies pay enough in taxes to directly use the tax credits that would be generated.
- Due to the recent US tax legislation, overall national and corporate tax rates are lower, resulting in fewer opportunities use and/or monetize the 45Q credits.
If a power producer is unable to use the credits to lower its federal tax bill, it will have to transfer the tax credit to a project partner, such as the CO2 capture technology vendor, energy provider, or EOR producer. If none of the other stakeholders have sufficient tax liability, the project will need to monetize the tax credit and they will lose value in that process, potentially as much as 20 percent of the tax credit value. However, that loss in value could be even higher now that overall taxes are lower.
In addition, the tax credits from the reformed 45Q are not available upfront – they are generated over time as the CO2 is stored. This means that financing will likely be required for the project capital costs. For all these reasons, 45Q reform will likely not trigger a surge of projects in the power sector. However, there are reasons to be cautiously optimistic.
Most experts believe that there will be CCUS projects as a result of 45Q reform. The first movers are expected to be from industries that have a relatively low cost of CO2 capture, such as ethanol production, natural gas purification, chemicals, refining, etc. Although these projects may be smaller than projects at power plants, they will substantially advance CCUS in the US in several meaningful ways, including:
- Providing new, tangible examples that CCUS is real and provides substantial emission reductions from multiple industries.
- These projects may result in the states, US federal government, and possibly even inter-governmental (for example, the US and Canada) developing standards for CO2 storage monitoring, verification, and well-closure rules. This would represent a major advancement for CCUS.
- They will lead to real infrastructure investments, including pipelines, which is especially important for CO2 transport.
While, it may be too early to be sure what 45Q reform will mean for the US coal power sector, insight can be gained by looking at the numbers. Using the Petra Nova project as an example for the scale of a new carbon capture project at an existing coal-fueled power plant, a 240-MW capture project could yield about 1.4 million metric tons per year for enhanced oil recovery. Over the 12-years of eligibility the tax credits generated would be worth about $588 million. Although the Petra Nova Project, by comparison, is often cited to have cost about $1 billion this includes the pipeline and a capital project to get the oil field ready to receive CO2, costs that would not necessarily be incurred by all projects. The capital for the carbon capture facility, by comparison, were approximately $635 million for Petra Nova.[v] Importantly, if the power producer could use these tax credits directly, they are clearly comparable to the upfront capital costs, without the impact of the financing.
Considering the operating costs, the Petra Nova project, which is the first of a kind project for the CO2 capture technology vendor Mitsubishi Heavy Industries, has claimed the project is able to cover expenses through oil sales when oil prices are at least US$50/bbl.[vi] This is possible, in part, because the Petra Nova Project does not sell the CO2, but instead sells the oil that is produced from CO2 injection. With the capital costs nearly covered by the reformed 45Q and the operating costs covered by oil sales, it seems that a new integrated CCUS project could be viable at coal-fueled power plants. However, many utilities would not be comfortable buying into all or part of an oil field, and selling the CO2 on the open market would yield less to cover the operating expenses.
Thus, the economic requirements to incentivize new carbon capture projects at coal-fueled power plants are nearly met, which is impressive considering the early stage of the technology deployment. Still, due to the challenges explained, there is uncertainty on if and how the reform of 45Q will result in new projects at coal-fueled power plants. In addition, there are some regulatory barriers that pose a non-financial hurdle.
Even so, there are projects being considered today. Project Tundra, which would be at a coal-fueled plant in North Dakota, seems committed to moving forward if they can make the economics work.[vii] There are also other projects under discussion, but no announcements to date.
For the benefits to the broad CCUS efforts mentioned previously, the work put into 45Q reform has been worthwhile. For coal, the benefits of another large CCUS are difficult to overstate. When a technology is first being deployed, there is a steep learning curve and costs can decrease rapidly. According to NRG, if the Petra Nova Project was started today and the team was able to incorporate the lessons learned, the price tag would be substantially less expensive, to the tune of about 10 to 20 percent lower.[viii] Each carbon capture facility that is built will similarly yield lessons that can reduce the costs, a phenomenon observed across time and across industries.
The passage of The FUTURE Act has resulted in renewed momentum for CCUS in the US and is expected to result in new, emission-reducing carbon capture projects. Peabody pursues win-win approaches with both government and non-government organizations around areas of possible interest and overlap. We call that our “Common Ground” approach and contributing to the passage of The FUTURE Act is a prime example of a successful endeavor in this area. We and others know there is more to be done and we look forward to continuing to engage with other stakeholders to advance technologies such as high-efficiency, low-emissions power plants and carbon capture that will allow us to simultaneously meet energy and environmental objectives, in the US and around the world.
[ii] Notably, EOR may not be the only use for CO2. There is also a nascent industry aiming to scale up to use some emissions to produce materials, such as plastics, building materials, fuels, etc., although for the foreseeable future EOR will remain a significantly larger opportunity as a CO2 sink.
[iii] Carbon Utilization Research Council, IRC §45Q Carbon Sequestration Tax Credit Reform,
[v] Petra Nova Parish Holdings, LLC, W.A. Parish Post-Combustion CO2 Capture and Sequestration Project, www.osti.gov/servlets/purl/1344080