The role of CCUS in low-carbon power systems

Actions for policy makers

Carbon capture, utilisation and storage, one element in an array of technologies enabling countries to achieve the Paris Agreement goals, has an important role to play in the least-cost transformation of power generation systems for a low-carbon future.

However, its deployment will rely on policy makers taking action to give direction to utilities and investors. Policy actions will need to take into account local and regional power market characteristics and the anticipated role of CCUS-equipped plants in the market, which may evolve over time as flexibility requirements increase. The availability of CO2 transport and storage infrastructure or demand for CO2 from users will be critical to underpin investment in CO2 capture facilities at power plants.

Policy makers are likely to need a range of approaches to support successful business cases and accelerate deployment of carbon capture technologies in power generation, including:

  • Capital support, including grants and provisions from government or state-owned enterprises. Grant funding was instrumental in early deployment of carbon capture technologies in power, with Boundary Dam receiving CAD 250 million (USD 170 million) from the Canadian government and Petra Nova benefiting from almost USD 200 million from the United States Department of Energy.
  • Public procurement, where the government is involved directly or indirectly in the project, including through contracts to purchase power from CCUS-equipped plants. This approach may be particularly relevant in countries or regions with state-owned energy utilities, including in Asia.
  • Tax credits, such as the Section 45Q tax credits in the United States, which provide USD 50 t/CO2 for dedicated geological storage or USD 35 t/CO2 for use of CO2 in enhanced oil recovery; or the Section 48A credit, which applies to a percentage of capital expenditure for retrofitting carbon capture technologies to a coal-fired power plant.
  • Regulatory standards and obligations, such as a regulated asset base model where costs are passed on to consumers or tradable carbon capture certificates associated with a CO2 storage obligation. In the case of tradable certificates, the government would issue them to project operators based on the amount of CO2 stored, while other parties (emitters) would be obliged to purchase them.
  • Operational subsidies, such as contract for difference mechanisms that can cover the cost differential between the higher generation costs and the market price.  

Depending on the region and electricity mix, power plants equipped for carbon capture, utilisation and storage can be designed to operate in a baseload capacity (e.g. with high utilisation factors) or to be highly flexible with a reduced number of operating hours but providing high-value dispatchable power. Operators may need to transition their plants from baseload generation to more flexible operation over time as the penetration of variable renewable generation increases.

The utilisation rate of CCUS-equipped power facilities will typically have significant cost and policy implications. Early, first-of-a-kind carbon capture projects based on currently available technologies will have high capital and operating costs. Plants running at high capacity factors will be able to generate greater revenues from electricity sales but with higher operating costs relative to plants with lower utilisation rates. Plants operating in a flexible manner will require higher compensation for the power delivered during limited operating hours if they are to be (or remain) commercially viable.

The extent to which the higher costs associated with carbon capture technologies can be passed to electricity consumers will depend on the region and market design. Many markets are “captive,” with limited competition within each region or country, enabling cost pass-through, while, in others, regulated pricing could facilitate the pass-through.

Policies therefore need to be designed to account for a range of characteristics to provide an effective incentive for investment in power plants equipped with carbon capture technologies. These characteristics include: 

  • The high capital cost of retrofits and first-of-a-kind new-build CCUS power stations.
  • The high degree of variation in power markets across regions and countries.
  • The changes in load factors that may occur over time at CCUS power plants.
  • These factors call for policies that provide capital support and/or guaranteed operational revenue, and policies that incorporate sufficient flexibility to accommodate a potential transition from baseload to flexible generation. 

Government leadership will be important to facilitate the development of CO2 transport and storage infrastructure.1 CCUS-equipped power plants have potential to act as “anchor projects” for the construction of shared infrastructure, including for establishing industrial carbon capture hubs, with large quantities of CO2 enabling economies of scale for infrastructure development. In the United Kingdom, the Drax bioenergy power plant – equipped with carbon capture and storage – could support plans for a net-zero industrial cluster in the Humber region, while proposals for a gas-fired power plant with carbon capture technologies would support the development of an industrial cluster for carbon capture and storage in the Tees Valley.2