Financiers, Credit Analysts Await Carbon Price Signals

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Outside of enhanced oil recovery (EOR) projects, financing carbon capture and storage (CCS) projects will not be possible until the market assigns a price for carbon dioxide, panelists agreed at Infocast's third annual carbon sequestration development and finance summit in Houston last week.

"Outside of an EOR setting, you can't finance CCS," Rob Toker, Business Development Director (Americas) for Sindicatum Carbon Capital (London, England), a privately held project developer specializing in greenhouse gas reduction projects. "Risks can be mitigated and managed, and projects will be bankable once the market assigns a price for carbon," said Toker.

"We can't rate the risks, and thus we are unable to assign a credit rating to CCS projects where the carbon dioxide will be injected in a saline aquifer," adds Swami Venkataraman, a Director of Standard & Poor's (S&P) Utilities, Power & Project Finance group. Loan guarantees from the U.S. government will enable several CCS projects at coal-fired power plants to move forward, he says, adding that loan guarantees would enable these projects to obtain financing at interest rates of around 3%.

"Federal loan guarantees will allow three to four CCS projects to get off the ground, and once the technology is proven, there will be a price for carbon dioxide," he continues. Financiers, project developers, and institutional investors on the panel echoed the S&P analyst's view that federal loan guarantees were necessary to help commercialize the technology at coal-fired power plants.

The inability of credit-rating firms like S&P to assess the risk and credit-worthiness of CCS projects for coal-fired power plants has been one of several factors delaying commercialization of those technologies, panelists agreed.

"We are interested in investing in low-carbon power projects, but we'd be hard-pressed to see viable [investment] opportunities right now," says Nikhil Garg, an analyst with Climate Change Capital (London), an investment management firm with more than $2 billion in investments in low-carbon projects. "We don't have much appetite" for risks that can't be assessed and managed, he says. CCS manages investments totaling about $2 billion in low-carbon projects around the world, but the firm "is not yet ready to put a stake in the ground" for CCS projects at coal plants.

"CCS is a totally different animal compared to other environmental remediation projects like sulfur dioxide and nitrogen oxide," comments Clay Jones, a Project Finance Director at Societe Generale SA (OTC:SCGLY) (Paris, France), a global investment and commercial bank. "The value of an asset that you hold--carbon dioxide emissions--can be politically altered in a moment if Congress changes its mind about climate change. What I'm calling 'congressional risk' has to be reflected in a project's discount factor," which determines its cost of capital and ultimately its financial viability.

At a minimum, carbon prices need to exceed $40-$60 per ton for CCS projects where the carbon dioxide is used in an EOR project, Sindicatum's Toker told about 50 attendees at the Infocast conference. CCS projects that will store the gas underground in aquifers need a higher floor and wider range for carbon dioxide prices--between $50 and $150 per ton, he estimates--to be financially viable.

The Waxman-Markey "cap & trade" system to reduce carbon-dioxide emissions is a good first step towards commercialization of CCS technology, said several panelists, noting in particular the establishment of a "bonus allowance" program that would provide CCS "early adopters" with subsidies of between $50 and $90 per ton of carbon dioxide removed for up to 10 years. Waxman-Markey is under consideration by the U.S. Senate, where a vote is expected after senators return from their August recess.

The bonus allowance program in Waxman-Markey, plus the existing secondary markets where carbon-dioxide emissions are currently bought and sold, are still not enough to give financiers, investment companies or project managers enough assurance to invest in CCS projects that lack an EOR component, conference participants said.

Several panelists warned that any attempt by a government agency to place a cap on carbon prices would further delay the development of a market for carbon-dioxide emissions. There was also broad agreement that the carbon-dioxide bonus allowance program in Waxman-Markey and federal loan guarantees were steps in the right direction toward commercialization of the technology at coal-fired power plants.

"Right now, aside from EOR projects, what we see missing is a compelling reason for people to buy this stuff," meaning carbon-dioxide emissions, says Andrew Jackura, Senior Vice President at Camco International Limited (LSE:CAO) (Jersey, United Kingdom), a global project management firm specializing in low-carbon projects. "The sooner we know specific emissions caps and what carbon emitters need to do when, the sooner the market will develop."

Websites:

Sindicatum Carbon Capital: http://www.carbon-capital.com/index.aspx

Standard & Poor's: www.standardandpoors.com

Climate Change Capital: http://www.climatechangecapital.com/home.aspx

Societe Generale: http://www.sgcib.com/about-us

Camco International: http://www.camcoglobal.com/en/globalhome.html

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.