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Transcript of 1 Xi Liang, David Reiner Judge Business School University of Cambridge International Conference on...
1
Xi Liang, David Reiner
Judge Business School
University of Cambridge
International Conference on Climate ChangeHong Kong
May 29th – 31st 2007
Financing Capture Ready: Issuing a
Tradable Capture Option
Jon Gibbins, Jia Li
Mechanical Engineering Dept.
Imperial College London
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
Capture Site
Storage Site
Transportation
Storage Site
(IPCC CCS Special Report, 2005)
(IPCC, 2006)
Introduction
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 CO2 Capture for Injection (CSLF, 2006)
Introduction
5
‘In fair weather prepare for foul’
“Capture Ready” is a design concept that will enable foss
il fuel plants to be more easily and economically retrofitte
d 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
Introduction
14. We will work to accelerate the development and commercialization of Car
bon 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
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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
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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 CO2 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
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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
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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
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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.
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Assumptions of Technical Performance (Cont.)
Pricing
Time period 2012-2020 2021-2030 2031-2040 2041-2050
Load Factor 85% 80% 75% 70%
Output/yr (MWh) 4,467,600 4,204,800 3,942,000 3,679,200
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
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Performance after Retrofitting to Capture
Pricing
Potential Retrofitting Timing (Routine Maintenance Year)
(Gibbins et.al, 2005) Capture un-Ready
Capture Ready
Additional capital outlay 75% 50%
Efficiency penalty 9.5% 8.5%
Additional O&M cost 70% 43%
Average Capacity Load +5% +5%
No. 1st 2nd 3rd 4th 5th 6th 7th
Year 2017 2022 2027 2032 2037 2042 2047
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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…
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Valuation Results Snapshot
Pricing
10% Discount Rate (CNY:million) Mean NPV Std dev Std err
No Retrofitting Option 2016.61 2265.73 22.66
With Retrofitting Option 2238.56 1521.40 15.21
Option Value 221.95 - -
With Retrofitting Option with CR 2321.85 1338.79 13.38
Option Value with CR 294.03 1196.03 11.96
Gross Capture Ready Value 72.09 - -
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Gross Value of Capture Ready
Pricing
Val ue of Capture Ready before Prei nvestment Cost(CNY: mi l l i on)
288
126
7248
0
50
100
150
200
250
300
350
5% 8% 10% 12%Rate
NPV
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Value of the Capture Option
Pricing
Val ue of Capture Opti on (CNY: mi l l i on)
0200400600800
100012001400
5% 8% 10% 12%Di scount Rate
NPV Capture Ready
Capture un-Ready
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Cumulative Probability of Retrofitting to Capture
Pricing
Cumul ati ve Probabi l i ty of Retrofi tti ng to Capture
0%
5%
10%
15%
20%
25%
30%
2017 2022 2027 2032 2037 2042 2047
Year
% 10%_base10%_Capture Ready
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Conclusions
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
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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