The recent extension and expansion of a tax credit for carbon capture have many taking a second look at carbon capture technologies for many industries, including power plants.
Because the program is designed as a carrot (tax credit) rather than a stick (carbon tax), the most polluting plants have the most incentive to retrofit.
Given that dynamic, will fossil fuel interests and environmental groups alike see this as a win-win?
According to the Global CCS Institute, there are 17 large Carbon Capture and Sequestration (CCS) units operating worldwide today, with another 20 in various stages of development. Of those, 11 are in the U.S., and only one, Petra Nova, is connected to a power plant. The other 10 U.S. facilities are associated with chemical production and natural gas processing. Just one of the U.S. facilities sequesters CO2 for the long-term and the other 10 use or sell the CO2 for enhanced oil recovery (EOR).
All of the power plant with CCS projects in the world utilize post-combustion capture (the CO2 is removed after the fuel is burned), while some future plants are considering pre-combustion or oxy-fuel combustion capture methods, each their own relative advantages and disadvantages.
Passed as part of the Federal budget, the tax credits are intended for power plants and industrial facilities that capture and sequester CO2 (or sell it for enhanced oil recovery, EOR) that would otherwise be emitted. Each will receive up to $50 or $35/MT for 12 years.
These credits have received little fanfare, but they have potential to radically change the economics of some power plants, and might put some back in the black.
Using publically available datasets, we find that there are 27 existing coal and natural gas combined cycle (NGCC) power plants in the U.S. within 10 miles of existing CO2 pipelines. While retrofit applications (or new builds) might be found in other locations, close proximity to existing infrastructure offers some cost advantages.
The power plants are separated by region and type, with about 6,700 MW of coal plants between Oklahoma and Wyoming, and about 11,500 MW of NGCC plants in the New Mexico/Oklahoma/Texas/Louisiana region. If all of these power plants were to retrofit their existing facilities and capture 90% of the CO2 they emit, they could keep about 1 gigaton of CO2 out of the atmosphere over the 12-year credit lifetime, although other types of emissions could still be a problem.
The map below shows existing CO2 pipelines in red, existing coal power plants (with 10 miles of the pipelines) in orange, and existing NGCC power plants in blue. The size of the bubble indicates the nameplate capacity of the power plant.
Tax credit pathways
If a plant captures and sequesters the CO2, it will receive a higher value for the credit ($50/MT). However, the facilities would also bear the cost of disposal. Many factors go into the cost of sequestering the CO2; compression, transmission, and the actual process of disposing of the CO2 down hole. Our best estimates indicate the disposal cost could be as high as $7-10/MT.
A plant also could opt to sell the captured CO2 for EOR. The tax credit for EOR is lower ($35/MT), but the power plant also might receive a payment for the CO2 from an exploration and production (E&P) company which uses CO2 to push more oil out of existing “depleted” wells.
But do the economics pencil out?
Of the 27 power plants we examined, it appears the economics might work for at least 22. In fact, all nine coal plants now operating likely could make a profit by sequestering the CO2, or selling it off for EOR. Some plants could earn as much as $3.7B over the 12 years of the credit, possibly even more if a market remains for CO2 after it expires. Our estimates range from $1.5-2.5M profit per MW of nameplate capacity over the 12 years of the tax credit for EOR sales or $1-2M/MW for sequestration.
Of the 21 NGCC plants, 12 appear likely to be profitable, with up to $1M/MW via EOR, but only five look profitable through the straight sequestration pathway. Interestingly, no NGCC plant with a sub 7,000 heat rate could make money because there is not enough CO2 in their flue gas to make it worth extracting. That amounts to a possible win-win for plant owners and environmentalists, since the least efficient plants are the most economic to retrofit.
Because the tax credit is tied to CO2 production, factoring it into the marginal bid behavior of the power plants vastly changes the economics. As is the case for wind plants that bid negative $23/MWh into wholesale markets (because of the production tax credit), coal and NGCC plants taking advantage of the carbon capture tax credit could do the same.
In the case of the coal plants, the estimated pre-credit bid would have been about $29/MWh, but the post-credit bids could be negative $9-16/MWh. This low bid would allow these plants to better compete in areas that have depressed wholesale market prices because of wind and solar. In fact, they could beat solar’s $0/MWh cost bids. NGCC marginal bidding behavior could change from about $26/MWh to around $12/MWh, significantly increasing these plants’ capacity factors.
Most of the power plants we examined (17 out of the 27, 16 NGCC and 1 coal) are listed as behind the meter or are cogeneration power plants. That means that even though they might report low existing capacity factors, they could operate more frequently since they use the power they generate and/or steam for other processes. If these plants are already economical, capturing the CO2 might make them even more so.
The tax credit is generous, and if capital costs are roughly in line with current estimates, some plants might be able to make a lot of money. For some plants, the tax credit will more than pay for itself and also could serve as a hedge against future climate policy.