(Bloomberg) -- The processes for making steel, cement and hydrogen have a few things in common. They are emissions-intensive; their production is concentrated in large industrial sites; and they are “hard to abate” — that is, their carbon dioxide emissions are hard to remove for reasons of basic chemistry.
These sectors have something else in common, too. Together they are the most important source of demand for the carbon capture and storage (CCS) market, which aims to create an industry of removing CO2 from significant industrial processes and storing it stably for decades or centuries.
New research from BloombergNEF has key findings for this business. It may be promising, but it also has a long way to go in multiple dimensions.
The first is scale. BNEF projects 123 million metric tons of capacity for industrial CCS by the end of the decade. Its models, however, point to 3.5 billion tons of CCS capacity being needed by 2050 in order to meet net zero greenhouse gas emissions.
The second is capital cost. Even the relatively modest carbon-capture capacity tracked to date implies $57 billion of investment in just CCS physical assets through 2030. Scaling that capital outlay up by a factor of 30 implies not billions, but trillions of dollars of capital expenditure.
Capital costs for BNEF’s modeled benchmark plants are about half of the total unit cost of capturing carbon from steel, hydrogen or cement production in the US. Add in fixed operating costs (which do not vary much over the long run) and interest payments, and project developers can estimate with some certainty 60% or so of their costs over the lifetime of a plant.
But that leaves them to contend with operating costs. This is where matters become more complicated.
Capital equipment — the cost to build a plant — should be largely fixed when a project enters its construction phase. Yet there are significant variable costs to layer on top of that in today’s economic environment, like fuel and electricity.
Fuel costs are quite outside the control of any point-source carbon capture project. There are not, and almost certainly will not be, any projects with the pricing power to control their fossil fuel costs over the course of decades. This means that regardless of what companies plan for, they could find themselves in a windfall situation, paying much less for fuel than their spreadsheets expected — or in a crunch with much higher costs, which they have limited ability to manage.
Electricity costs are a different matter. They make up a lower share of operating costs than fossil fuels, and prices for renewable power will decline in coming decades. Large emitters who choose to capture CO2 from their operations can contract for renewable power for years if not decades at a time, locking in one variable in their cost structure.
BNEF notes two other factors that carbon capture facilities will be highly sensitive to: plant utilization rates and the percentage of carbon that is captured. BNEF expects plants to operate 85% of the time, and any departure from that changes the economics of removing carbon.
For both factors, the downside is more significant than the upside. Reduce a plant’s annual running hours by 10%, and its cost to capture carbon goes up by more than 10%; raise its annual running hours by 10%, and its capture cost declines by only 7%. Reduce its capture rate by 10%, and its levelized cost of capture increases by 8%; boost that rate by 10%, and its costs only decline 6.5%.
There is a final variable to consider, which may be more complex than any other: the cost of money itself. In one market — say the US, where President Joe Biden’s Inflation Reduction Act provides ample incentives for carbon capture that bankers can get behind — the cost of capital for CCS could be lower than it is for heavy-emitting projects that do not capture carbon.
Read More: How Carbon Capture Is Getting New Life With US Help
In other markets, though, CCS could be seen as risky, and investors would demand a premium, not allow a discount, to finance it. And while the IRA offers substantial support for operating expenditures, it does not support capital ones. In some markets, direct support for capital investment may be needed to get the industry moving.
Add in the fact that benchmark interest rates are at their highest levels in more than a decade, and commercial financing is a significant wild card in the ultimate cost of capturing carbon from steel, cement and hydrogen facilities.
As Bloomberg Green readers probably well know, every major decarbonization challenge requires trillions of dollars of investment to reach global scale. But along with money, they need finesse: in managing upfront costs, utilization rates and, where it’s possible, the cost of capital too.
©2023 Bloomberg L.P.