CO 2 Capture Rate Sensitivity Versus Purchase of CO 2 Quotas. Optimizing Investment Choice for Electricity Sector

— CO 2 Capture Rate Sensitivity Versus Purchase of CO 2 Quotas. Optimizing Investment Choice for Electricity Sector — Carbon capture technology (and associated storage), applied to power plants, reduces atmospheric CO 2 emissions. This article demonstrates that, in the particular case of the deployment phase of CO 2 capture technology during which CO 2 quota price may be low, capturing less than 90% of total CO 2 emissions from power plants can be economically attractive. Indeed, for an electric power company capture technology is interesting, only if the discounted marginal cost of capture is lower than the discounted marginal cost of purchased quotas. When CO 2 price is low, it is interesting to have ﬂexibility and reduce the overall capture rate of the site, by stopping the capture system of one of the combustion trains if the site has multiple ones, or by adopting less than 90% CO 2 capture rate.


INTRODUCTION
The cost of purchasing quotas (on the EU-ETS (European Union Emission Trading Scheme)) or carbon credits (from CDM projects) is an additional parameter which has to be included in the economic evaluation of CO 2 projects. This environmental cost impacts the economic profitability of any CO 2 mitigation projects as any other economic cost parameter [1]. As soon as CO 2 cost becomes mandatory and not optional, as in an emissions trading scheme, CO 2 post-combustion capture projects become very sensitive to the CO 2 price through the associated capture rate. Under some conditions, developed hereafter and exclusively during the large deployment phase, a low CO 2 price is an advantage to reduce the overall CO 2 cost of power plants equipped with postcombustion technology. CO 2 price is of course on the long term the main condition to stabilize the Capture Carbon Storage (CCS) technology [2].
The aim of this article is to point out that, at the large CCS deployment stage, in the current European carbon markets 1 characterized by high uncertainty [3] and low CO 2 price, post-combustion capture technology with a lower capture rate than technologies capturing at 90% and an associated lower investment cost, can be a winner strategy option.
As long as the CO 2 market is characterized by poor reduction objectives, or is over flooded by free allowances, the CO 2 price signal is weak and does not justify today any capture projects at 90% capture rate [4]. This is what is observed on the EU-ETS market during the phase 2 (2008-2012). In contrast, CO 2 capture rate below 90%, applied on the overall power plant emissions could launch capture technology deployment. Quite all capture studies nowadays are working with 90% capture rate with post-combustion technology [5], but there is no technical justification or economical one. On the contrary for the deployment phase!

SIX MAIN CONDITIONS REQUIRED TO BE IN BENEFICIAL CONTEXT
1. In the EU-ETS market, the choice between utilizing quotas or investing in capture technology arises for an electric power company from the very first ton of CO 2 emitted [6]. After 2013, an operator will decide to invest in CO 2 capture technology only if he anticipates that his discounted total CO 2 capture cost during the lifetime of the project (CAPEX + OPEX + quotas purchase on remaining CO 2 emitted) is lower than his discounted total cost of purchasing quotas. 2. If the discounted total CO 2 capture cost is lower than the discounted total cost of purchasing quotas then the cheapest technology of capture (ranked on marginal costs) is the first technology deployed by operators. Between two capture technologies an operator will choose the technology with the cheapest discounted total CO 2 capture cost. 3. Total CO 2 capture cost of a power plant, equipped with post-combustion technology, has two parts: one part linked to capture investments and another part related to the purchase of quotas for the CO 2 not captured (1-capture rate). The more the capture rate is low and the CO 2 price below capture cost, the more the total CO 2 capture cost (CAPEX + OPEX + purchase quotas) is reduced compared to technology with 90% of capture rate. There is substitution of one part of the capture cost by the purchasing quotas cost. 4. Post-combustion technology with lower capture rate and lower investment cost than those capturing at 90% exists and reduces the cost of the CO 2 avoided. 5. To be in a low CO 2 price economic environment with low expectations to see CO 2 price increasing. European Union Emission Trading Scheme is structurally over allocated and CO 2 price forecasts on the EU-ETS do not exceed 24 1/tCO 2 eq for 2020. On Kyoto market [2008][2009][2010][2011][2012] as surplus AAU (Assigned Amount Unit) observed, stress is also virtually nil. After 2020, all will depend on international negotiations but no expectations to see the CO 2 price rising suddenly. 6. Nowadays, in the context of limited funds available, banks limit their financial risk and prefer investing in higher secure projects. Capturing CO 2 at a capture rate below 90% does not mean operators are not concerned by CO 2 environment goal. In contrary, a low CO 2 price on the carbon market is the signal of a low policy environmental goal which consequently can't justify high mitigation climate change investments [7].

CO LEVERAGE EFFECT OR SWITCH PRICE
Total CO 2 capture cost of an operator is the sum of two parts: the capture cost (CAPEX + OPEX) and the cost of CO 2 quotas purchased (which depends on the percentage of CO 2 not captured and the CO 2 price). Actually, all depend on the structure of this total CO 2 capture cost i.e. on the share of the capture cost compared to the share of quotas cost.
An operator can identify for a given technology, what is his "CO 2 switch price". This CO 2 switch price is function of two parameters: the capture cost and the CO 2 capture rate. This CO 2 switch price is equal to the CO 2 price under which an operator is more interested to buy quotas than to invest in carbon capture technology. This CO 2 switch price is the CO 2 price for which exchanging CO 2 captured cost by purchasing allowances is cost equivalent.

Example 1
In Figure 1, we have four decreasing capture rate technologies (A = 90% carbon capture rate, B = 70%, C = 50%, and D without any CO 2 capture).
We assume capture cost technologies below 90% of CO 2 captured is less expensive than technologies capturing at 90%. Total CO 2 capture cost per technology, is the sum of the cost of capture (dark part) and the cost of purchasing quotas (clear part).
What happens on the total CO 2 capture cost when the quota price increases from 20 to 120 1/tCO 2 for technologies with different capture rate? Figure 1 shows, when capture rate decreases, how capture cost is substituted by the cost of purchased quotas. The more we substitute capture cost (at 70% or 50% capture rate), with the cost of allowances at 20 1/tCO 2 , which is below the capture cost, the more the total CO 2 capture cost decreases. At 20 1/tCO 2 it is more interesting to capture at 70% (B) and buy the remaining 30% of allowances in the CO 2 market. In this example, 20 1/tCO 2 , it is worth paying quotas than capturing (case D). With a relatively low CO 2 price it is more interesting to have low capture rate technologies.

Example 2
What happens with a high CO 2 price?
The same capture rate technologies associated to a CO 2 price equals to 120 1/t, the conclusion is completely reversed. Figure 2 shows with a quota price of 120 1/tCO 2 : technologies with reduced capture rate are not interesting compared to technology at 90% (A). Depending on the CO 2 price, CO 2 cost share becomes majority in the total CO 2 capture cost. Technologies with low capture rate are not worth with high CO 2 price. Now, it's clear that for each capture technologies (A, B and C), there is a CO 2 price level that balances the CO 2 capture cost and the cost of purchased quotas. For this CO 2 price level, it is equal to capture or purchase quotas: we call this CO 2 price the "CO 2 switch price".
With technology A (90% capture rate) the CO 2 switch price making the cost of capture equal to the cost of purchased quotas is 45.5 1/tCO 2 . In contrast with technology C (50% capture rate) competition with purchased quotas is at 35 1/tCO 2 , a much lower CO 2 switch price (Fig. 3).

THE GENERAL RULE
Considering two different technologies: A and B. Capture rate of A equals to 90%, and capture rate of B is 70%. Breakdown capture and quotas costs and CO 2 switch price per capture rate technologies. When varying the CO 2 price (Fig. 4), what happens with the total CO 2 capture cost (CAPEX + OPEX + quotas purchase) for technology A (90%) and compared to technology B (70%)?
Rule No. 1: an electric power company should invest in capture technology only if the discounted total CO 2 capture cost of this technology is cheapest than the discounted cost of purchasing quotas (at the right of the blue line of equivalence between investing in the capture or paying the quotas - Fig. 4). This is the case for technology A from 45 1/tCO 2 and B from 40 1/tCO 2 : -at 15 1/tCO 2 : total CO 2 capture cost of B is 31.1 1 while that of A is 42.5 1. For both technologies it is better to buy quota at 15 1/tCO 2 than investing in capture. Left part of the equal cost frontier; -above 40 1/tCO 2 : it's better to capture CO 2 with the technology B rather than buy CO 2 quotas; -similarly for technology A (90% capture rate) as the CO 2 price is less than 45 1/tCO 2 it is worth to buy quota rather than capturing CO 2 .
Rule No. 2: it is important to compare the total CO 2 capture cost between technologies -here between technology A and B: -from 72 1/t CO 2 total CO 2 capture cost curves of A and B intersect and it is more interesting to have the technology A (90%) than technology B (70%). In contrast, between 45.5 and 72 1/tCO 2 the technology B is more interesting than technology A; -looking only at the technology B (70%) around 40 1/tCO 2 capturing or buying allowances at time is equivalent. Above 40 1/tCO 2 the opposite is true.

IN SITE APPLICATION
In that context of high capture investment costs [8], an operator could decide to invest in capture technology in two step times: one part of the investment during the deployment phase (Phase 1) when the CO 2 price is low (for example at 10 1/tCO 2 ) and another part during the deployed phase (Phase 2) supposing the CO 2 price increases then (at 100 1/tCO 2 ). In real life, a low CO 2 price always preclude any high investment cost. At the end of the large deployment phase (Phase 2): 100% of power plant's flue gas is treated at 90% capture rate, but in the deployment phase (Phase 1) two options of investment are possible a priori: -Option 1: the operator varies the capture rate applied to all the flue gas of the power plant between the deployment and the deployed phase (Fig. 5). The operator treats 100% of the flue gas of the power plant at a reduced capture rate of 70% in Phase 1, then in Phase 2 when the CO 2 price is higher, he switches to 90% of capture rate. Investing in Phase 2 on a second capture to improve the capture rate of the plant (to 90%) is interesting if the capture cost dependents on the capture rate -which is the case of hydrates capture technology; -Option 2: only 50% of the power plant flue gas are treated at 90% capture rate in Phase 1 (Fig. 6). For example one train of two is equipped with capture technology. In Phase 2, additional investment on the second train of the power plan could treat 100% of the flue gas with 90% capture rate. Total CO 2 capture cost with 90% (A) and 70% (B) capture rate.
We can calculate the total CO 2 capture cost for the reference case (100% of the flue gas treated with 90% capture rate in Phase 1 and Phase 2), for the Option 1 and for the Option 2 (options described above). CO 2 price in Phase 1 is supposed to equals to 10 1/tCO 2 when in Phase 2 the CO 2 price equals to 100 1/tCO 2 .
Total CO 2 capture costs are calculated in Table 1 and illustrated Figure 7 for these three main options of capture deployment. We suppose first, the length time period of Phase 1 is equal to the length time period of Phase 2, i.e. in the example 15 years.
The average total CO 2 capture cost of the reference case (100% of the flue gas treated at 90% capture rate during Phase 1 and 2) is higher (46 1/tCO 2 ) than the two other options (40 1/tCO 2 for Option 1, and 38 1/tCO 2 for Option 2), taking into account a reduce capture rate (Option 1) or a reduced treatment of the flue gas (Option 2).
It's noteworthy that an actualisation rate will reduce in the same amplitude the actual total capture cost of these three options without modifying the ranking between them (Fig. 8-10). However, the relative lengths of the Phases 1 and 2 have an impact on the total capture costs discounted per phases. With a short Phase 1 (for example 5 years) and a much longer Phase 2 (of 25 years), the total discounted capture cost in Phase 2 is lower (Fig. 10) than the one calculated with equal length phases of 15 years (Fig. 8).
The calculated global discounted capture cost (Phases 1 and 2) shows the same ranking of the technologies as the one calculated (a) without discount rate and (b) with a discount rate (8%) and equal lengths Phases (Fig. 8). 50% 50% Phase 1: 50% flue gas treat at 90% capture rate Phase 2: 100% flue gas treated at 90% capture rate 50% 50% Figure 6 Variation of the flue gas treated.    Total CO 2 capture cost per deployment options (without discounted costs).  Actual total CO 2 capture cost per deployment options (12% discounted factor, Phase 1 = Phase 2 = 15 years).

CONCLUSION
Capture technologies are deployed on large scale according to their discounted purchased quotas cost and their discounted total CO 2 capture cost (CAPEX + OPEX + purchased quotas). As long as the total CO 2 capture cost is still higher than the purchased quotas cost without capture, no technology will be selected by investors. The first selected (and ranked) technologies on the market will be those below the purchased quotas cost and with the lowest total CO 2 capture cost. However, this total CO 2 capture cost depends on both the capture rate and the CO 2 price on the market.
For a given technology, reducing its capture rate is only profitable if the increase in purchasing quotas cost does not invalidate the decrease in CAPEX/tCO 2 . With a lower total CO 2 capture cost at 70% these technologies are the first to compete with the CO 2 price on the market (e.g. technology B in Fig. 4). However these technologies are penalized when CO 2 price ascend and they become not profitable beyond the CO 2 switch price. If you have a way to increase the capture rate or consider a second capture unit to complete the first, this scenario has the merit of spreading investment.
In other words, in the early phase of large CCS deployment, technologies with less than 90% capture rate, as their total CO 2 capture cost remains below the cost of purchasing quotas, may be a less risky in terms of investment. It is highly possible that the CO 2 price remains relatively low until at least 2020, all will depend on international negotiations on climate. Accordingly technologies with lower total CO 2 capture cost would be strategic to enter at the earliest the capture market which is strongly linked to the price of CO 2 .