California has significant ambitions for carbon capture and storage (CCS), with a goal for this technology to make-up 25% of the state’s net-zero portfolio. However, there are currently no operating CCS projects in California. In a previous post, we highlighted how an immature regulatory framework is a key reason for this and identified opportunities to address this barrier. Here we examine a second key barrier, which is the lack of a commercial framework to attract the substantial and diverse CCS investments required to help fully decarbonize California’s economy in only 22-years. We summarize the CCS commercial frameworks (or business models) being rolled-out in the UK, the result of a five-year stakeholder effort and now endowed with £20 billion in funding, before considering their applicability to California. Overall, a business model that provides regulated returns for CO2 transport and storage similar to the power sector could help expedite this core infrastructure deployment to meet state climate goals.

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California has established a significant ambition to technologically capture, transport and store underground 100 million tons of CO2 per year by 2045. Per the California Air Resources Board (CARB), this CO2 would be captured from a combination of industrial and bioenergy point-sources as well as directly from the air. Such carbon capture and storage (CCS) is important for delivering the state's net-zero target as in many cases it is the only option to address hard-to-electrify sources (e.g. cement plants) as well as any residual emissions that may remain in the economy at 2045, such as from agriculture, industry and transportation. Natural and Working Lands can also provide carbon sequestration, but have limited potential in California. Similarly CO2 utilization (as opposed to storage) can contribute carbon benefits, but as the captured CO2 is often released back into the atmosphere these are reduced.

Despite its major ambition, there are currently no operating CCS projects in California. Recent legislation which established requirements for CCS project development as well as existing state Low Carbon Fuel Standard (LCFS) and federal 45Q tax incentives are important, but alone are unlikely to spur the size and diversity of investment needed to deliver 100 Mt of CO2 underground each year in the state. 

The main reason is because of a coordination challenge that exists across the CCS value chain. That is, a single ‘CCS project’ is typically three separate projects developed by separate entities that must then be integrated. This creates cross-chain risk and a key investment barrier. For example, even with favorable $/ton incentives an industrial facility is unlikely to invest in CO2 capture without a third-party agreement to offtake the CO2 for transport and storage. At the same time, a storage developer is unlikely to invest in establishing commercial capacity without first securing sufficient supplies of CO2. The result is a chicken-or-egg problem that stifles deployment. This is especially relevant to California, where it is anticipated that 75% of all CCS projects will be carbon dioxide removal (CDR) projects in the form of either bioenergy with carbon capture and storage or direct air capture with carbon storage. Both of these projects will commonly require integration with separate transport and storage operations.

CCS business models

Addressing the CCS coordination challenge is at the heart of the UK’s approach to incentivizing CCS deployment. The UK offers an interesting case study, as it has a similar economy ($3 trillion in GDP), emissions inventory (over 400 MtCO2e per year) and CCS goal (20-30 Mt/year by 2030) as California. The UK also currently has no operating CCS projects and so is starting from scratch, like California.

In California (and the United States), we have focused on $/ton incentives for CO2 captured and stored underground. The UK took a broader view, examining what institutional arrangements would be necessary to kickstart its CCS industry. An initial analysis identified thirteen alternate models ranging from public ownership of a majority of assets, various public-private owner/operator structures to a more substantive role for the private sector alone. This 'business model' approach was viewed as optimal to create the commercial conditions for rapid and large-scale CO2 infrastructure investments necessary to deliver the UK’s ambitious CCS deployment goals. $/ton incentives such as the LCFS and 45Q are more effective when CO2 infrastructure is already available to integrate projects. Without this shared CO2 infrastructure, it is likely that only oil companies will be able to benefit from the existing incentives because in many cases they own and operate their entire value chain.

A Base Case business model was developed (Fig. 1) and used as the starter for the thirteen variations. This core model separates capture from transport and storage (T&S) with a view that this can facilitate more natural investments in discrete projects (e.g., a CO2 pipeline, or an industrial capture project).

The Base Case assumes that T&S would be privately owned and receive only moderate returns on an asset base similar to a power utility. Examples of variations include whether there should be a single statewide T&S entity, or multiple T&S entities, or whether the state should first own the T&S assets, as well as alternate financing approaches related to the use of capex grants and how to charge capture operators a T&S fee. For CO2 capture, the Base Case assumes private ownership with unregulated returns. Examples of variations include whether to regulate returns similar to T&S. Alternate financing approaches related to the use of capex grants and Contracts for Difference were also considered.

Since the initial analysis was released in 2019, the UK Department of Business, Energy and Industrial Strategy has led a comprehensive consultation process weighing the pros and cons of model variations as well as progressively refining the promising options. In 2022, the latest draft models for each of T&S, electricity with carbon capture and industrial production with carbon capture were proposed.

For more information, see the stakeholder-led analysis of thirteen business model variants (2019). In addition, the initial UK government consultation paper (2019) and follow-up analysis (2020). After this time, specific analyses were prepared for capture and T&S. See below for more information.

UK model selection

Tables 1-3 summarize the latest UK CCS business models, which recently received a major boost with the UK government committing to invest £20 billion ($25 billion) to implement the models. This funding will be allocated to capital investments in four CCS clusters, two of which are targeted to be operational in the mid-2020s. The funding would be dispensed through a newly created CCS Infrastructure Fund.

For more information, see the T&S Model, DPA Model, and ICC Model summaries. See also Contract for Difference mechanism background as well as the DPA CfD formulas. See also the bottom of this blog post for a summary of the UK's Hydrogen Production business model.

Application to California

There may be benefits for California in adopting aspects of the CCS business model approach into its broader CCS deployment strategy. The state currently has either developed or is in the process of developing important elements, including incentives via the LCFS as well as a regulatory framework via SB 905. SB 308 (Becker) is also proposing a world-leading market development mechanism for CDR. However, a strategy to facilitate a near-term ‘infrastructure push’ in pipelines and storage sites is missing. Without this infrastructure, it is highly unlikely California can achieve its CCS ambitions.

A transport and storage (T&S) business model similar to the UK could enable this development while also expediting CO2 capture projects that will otherwise be slow to develop, as operators cannot see a clear path to reliably offtake their CO2. T&S companies (T&SCos) could be established in key regions such as the Bay Area and LA (industrial clusters) as well as Kern County, which could be supported by a T&SCo focused on carbon dioxide removal via biomass and direct air capture with storage. The equivalent of a CCS Infrastructure Fund would also be needed to support capital costs. Despite having similar ambitions, California has at this stage only committed small amounts (e.g., $200 million in the 2022-23 budget for CDR and industrial decarbonization grants) compared to the UK’s £20 billion.

New legislation that empowers an existing agency or otherwise develops a new approach to T&SCo governance is also likely needed. This could be a major undertaking – although it would arguably parallel the state’s commitment to deliver an enormous 100 Mt per year of CCS by 2045, requiring hundreds of billions of dollars in new project development costs to establish a new carbon economy. It would also not be dissimilar to the power sector, where formal processes at the CPUC and CAISO enable significant amounts of new renewables and transmission. If CCS is going to provide 25% of California’s net-zero solution, a similarly robust process that facilitates this key infrastructure seems warranted.

Conclusion

California has taken important strides in establishing the incentive and regulatory structures to enable CCS development in the state. However, the CCS coordination challenge (or chicken-or-egg problem) makes front-loading infrastructure deployment in the form of CO2 pipelines and storage sites of paramount importance. A utility business model approach similar to the UK, where T&SCos receive regulated returns on their asset base, can create the investment conditions for an ‘infrastructure push’ that then also crowds-in priority capture projects in the forms of direct air capture, bioenergy with carbon capture as well as industrial production with carbon capture, such as at cement facilities. Potential synergies with clean fuels such as hydrogen can also drive investment in these technologies.** Overall, California is unlikely to meet its CCS goals without these new policy elements in its CCS framework.

For more information on CCS business models, please contact Sam Uden (sam@csgcalifornia.com). 

** Hydrogen Production Model

There are multiple potential deployment synergies when CCS is coupled with clean fuels deployment, such as hydrogen. Below, we summarize the key elements of the UK's proposed hydrogen production model. For more information, see the UK's hydrogen consultation.

• A contractual, producer-focused business model, applicable to a range of hydrogen production pathways and able to facilitate hydrogen use in a broad range of sectors;

• A variable premium price support model where the subsidy is the difference between a ‘strike price’ reflecting the cost of producing hydrogen and a ‘reference price’ reflecting the market value of hydrogen;

• Setting a reference price based on the producer’s achieved sales price, with a floor at the natural gas price, and a contractual mechanism to incentivize the producer to increase the sales price and thereby reduce the subsidy;

• Providing volume support via a sliding scale in which the strike price (and therefore subsidy) is higher on a per unit basis if hydrogen offtake falls;

• Allowing small-scale hydrogen transport and storage costs to be supported through the business model where necessary, taking into account affordability and value for money;

• Introducing a levy to fund the business model from 2025 at the latest, subject to consultation and legislation, with the first electrolytic projects being funded through general taxation if they are operational before the levy is in force.