PLATTS 8 TH EUROPEAN CARBON CAPTURE & STORAGE CONFERENCE

Transcription

1 2/20/ February 2014 PLATTS 8 TH EUROPEAN CARBON CAPTURE & STORAGE CONFERENCE HOW TO BAG A BANKER CONVERTING APATHY TO ACTIVITY Allan Baker Managing Director - Global Head of Power Advisory & PF Tel.: 44 (0) Mob: 44 (0) allan.baker@sgcib.com

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3 CCS SHOULD BE AN ATTRACTIVE TARGET FOR BANKS... CCS should be an essential part of the strategy to decarbonise power: It allows for the continued use of coal, one of the most abundant fuel sources It does not suffer from the intermittency issues associated with wind /solar It is applicable to existing and new fossil fuel generating plant gas and coal CCS - a key contributor to cost effective CO 2 reduction Attractive in terms of scale for lenders: Global application - investment requirement measured in US$ trillions ( IEA) Globally several hundred CCS projects could be implemented by 2030 Significant part of the future energy landscape- as technology proven and costs reduce 3

4 THE VIEW OF FINANCIAL INSTITUTIONS... EVOLVING SINCE 2011? CCS - Mobilising Private Sector Finance (Climate Group & Ecofin ): Debt... not yet conclusion was that finance community wanted: Performance Guarantees across the whole chain Major sponsor involvement deep pockets and significant equity commitment Confidence in future economics of the technology SG-CSLF CCS Financing Taskforce Round Table (2012): Meeting of leading financiers, industry and institutions: Why are you wasting time on CCS, financing is years away? It was useful to find out more about it (CCS) but I m still not convinced Demonstration project bank soundings (2013) The DECC CCS Competition in the UK included finance in the deliverability assessment A number of the shortlisted projects engaged in the most detailed bank market sounding exercise yet Letters of support/interest solicited from a number of banks, multilaterals and ECAs The finance community is becoming interested in CCS? 4

5 KEY MESSAGES FROM THE SG-CSLF ROUND TABLE... STILL RELEVANT? Confusion about the opportunity: Focus on proving technology and not the long term roll out Patchwork of technology, policy, timing, incentives and commitment Concern about technology: Demonstration Projects imply prototype & unproven What if it doesn t work WHITE ELEPHANT? Concern on risk: Project-on-project risk complex risk matrix and allocation process CO2 is a liability with limited revenue unless you have EOR Uncertain economics: Cost uncertainty (capex and opex) from early projects Heavy subsidy - policy / regulatory risk Credibility gap: Many projects but few projects getting to FID yet alone operation Perceived as an experiment that may or may not lead to more projects Still a concern of the finance sector Focus on fewer projects and tangible progress is helping to clarify Remains possibly the key concern Recognised by and likely to be addressed in risk allocation of early projects Starting to be addressed Detailed risk allocation discussions underway and T&S solutions being fleshed out More differentiated CRT and various policy measures starting to address this issue UK CfD perceived as being a positive for CCS Process of natural selection Project development failure has been a negative for CCS perception but focus is narrowing on more deliverable projects What was in the too difficult box has moved to challenging 5

6 UPDATE - BANK PERSPECTIVE 2014 SG have recently completed a comprehensive market sounding Approached 15+ International banks ECAs Multilaterals Engagement exercise scrutinised by the UK Government Feedback based on real engagement Financial institutions provided with details of risk allocation, technology etc Significant interaction with SG and Sponsors on project detail Strong letters of support for the project Strong desire to be involved in DD and structuring of the debt What s changed? We are talking about real projects. 6

7 BAGGING A BANKER FOR CCS DEMONSTRATION PROJECTS Feedback from White Rose Engagement: Strong Sponsors: Key bank relationships important in gathering support Supportive execution environment: Grant funding: Capital grant improves the capital structure of the deal and underpins bank economics (downsides) Ongoing Support Mechanism: Contract for Difference structure provides a flexible mechanism for dealing with specific risk profile of the project Image credit: <a href=' / 123RF Stock Photo</a> Full-Chain Project: Strong transport and storage story with strong service provider strategic business proposition Risk mitigation: Initial discussions indicate that a pragmatic risk sharing solution will be possible and will involve all stake holders in the project 7

8 BAGGING A BANKER FOR CCS MEDIUM TO LONG TERM Successful demonstration of technology: Key for risk reduction and confidence Crucial for widespread application Consistent policy support: Positioning CCS clearly as part of the low carbon mix Enabling Environment: Ensuring the barriers to entry are reduced / eliminated Providing at least a level playing field Risk mitigation and cost evolution: Evolution of template risk allocation Delivery of cost reduction to demonstrate cost competitiveness Strong sponsors involvement 8

9 UK CCS COMMERCIALISATION AND THE COST REDUCTION TASK FORCE (CRTF) UK Government initiative: CRTF established in March 2012 by DECC as an industry-led joint task force established by Government to assist with the challenge of making CCS commercially available for operation by the early 2020s. Broadly representative of the stakeholders in CCS and international - 23 members drawn from industry, trade associations, developers, finance and academia SG led the commercial and financial work stream The objective of the Task Force is to publish a report to advise Government and industry on reducing the cost of CCS so that projects are financeable and competitive with other low carbon technologies in the early 2020s. 9

10 KEY CONCLUSIONS REFLECT REQUIREMENTS FOR SUCCESSFUL FINANCE... Need for a supportive regulatory landscape: Commercialisation program provides an opportunity to resolve many of these issues and create a template for future industry development Within this environment tangible cost savings can come from: Planning & infrastructure developments Generation & capture technology development Evolution of commercial and financing arrangements Deliverability will require the constructive and full engagement of all stakeholders 10

11 PLANNING AND INFRASTRUCTURE DEVELOPMENT... Achieving optimal scale in CO 2 storage scale has cost and risk benefits Storage reservoir development represents a significant part of CO 2 storage cost Expensive process so benefit on focussing on high volume opportunities Substantial risk (cost) reduction from storage clusters Essentially a volume business: higher volume = lower per unit cost Optimisation of transport infrastructure Pipe cost is not proportional to the volume transported significant cost benefit in over sizing Trunk lines and local feeder pipes from a hub provide volume benefits over early point to point Distance matters shorter less complex routes have obvious cost benefits Planning and investing for future projects in the first projects could lead to significant reductions in per unit of CO2 stored in follow on-projects 11

12 ACHIEVING AFFORDABLE FINANCING... Appropriate risk allocation across the full chain never easy in a new industry! Complex mix of disciplines and cross border risks and liabilities Appropriate allocation on FOAK is unlikely to be the allocation for the N th -of-a-kind : improvement with experience Role of Government, developers, insurance industry and finance being defined Real time risk allocation discussion under way Commercialisation Competition We don t know what we don t know pragmatic approach from all stakeholders Continued engagement with finance and insurance industry crucial Genuine interest now momentum needs to be retained High cost of capital in early projects offers scope for material cost reductions if a replicable template emerges from the Commercialisation competition 12

13 POTENTIAL DELIVERABLE COST REDUCTIONS... 13

14 CONCLUSIONS The finance community is waking up to CCS but there is a need to demonstrate real and tangible progress to: Gain credibility Stimulate the interest of the financing community Attract debt financing Early stage projects are key to delivery of the industry potential: Proving of technology & development of risk allocation Development of template commercial structures for the full chain Optimisation of early experience to create a commercial and financeable industry The finance community now appear ready to play their part 14

15 SOCIETE GENERALE AND CCS... Leading Financial institution in the CCS sector: Financial Advisor to White Rose CCS Project, UK (ongoing) Financial Advisor for Hydrogen Energy California (ongoing) Financial Advisor to Abu Dhabi full chain CCS (Masdar) project ( ) EEPR guarantee facility arranger for the 2Co Don Valley CCS project (2012) Financial Advisor to Powerfuel IGCC, UK ( ) Member of the UK Government CCS Forum (ongoing) CCS Cost Reduction Task Force Member (Ongoing) 15