The IRS’s 45Q program has been a boon for the carbon capture and storage (CCS) industry. The program, which was established as part of the 2016 Consolidated Appropriations Act, was set in motion to incentivize investment in CCS by providing tax credits to companies that capture and store carbon dioxide emissions from industrial sources. Since its inception, the program has awarded $0.6 billion in tax credits to CCS site owners. The program is growing in popularity, as there is a $2.3 billion award expectancy from 2020-2029.
One of the key provisions of the program allows site developers to store CO2 in return for the issuance of tax credits which can offset income. These credits are computed based on the metric tonne value of qualified CO2 that is captured and sequestered. For CO2 to be distinguished as “qualified,” the emissions are measured when captured and disposed of or injected. If there is an amount that escapes into the atmosphere during this transition, then tax credits must be repaid to the Treasury, a process called credit recapture. However, if the CO2 is stored in its entirety, developers benefit fully.
To better ensure full value of the market, developers have implemented complex tax equity structures to take advantage of the credits. They have partnered with investors who have taxable income to realize the full benefits. The most recent draft of the Build Back Better plan contemplates an improvement to the 45Q tax credit scheme, which converts the credits to “direct pay.” This removes the need for tax equity partnerships. Importantly, it also significantly raises the credit prices to $60/metric tonne for EOR and $85/metric tonne for secure geological storage, which includes “storage at deep saline formations, oil and gas reservoirs, and un-mineable coal seams.”
Geological storage can be accomplished through the use of EPA Class VI injectors to transmit the CO2 into subsurface formations. The Class VI wells are designed to protect drinking water sources and must be permitted by the EPA (or relevant states with primary permitting authority – only North Dakota, Wyoming as of this writing). The EPA has only approved two wells of this Class previously. Another solution is EOR-based associated carbon dioxide storage, which can be accomplished more readily through existing Class II wells. Class II wells are used for underground fluid disposal, enhanced recovery operations or hydrocarbon storage – with the majority (~80 percent) being used for enhanced recovery. Twenty percent of these wells are used for disposal, and only 100 wells are currently in service for hydrocarbon storage purposes (e.g. the Strategic Petroleum Reserve). With 180,000 Class II wells operating in the United States alone, repurposing of this well stock to accommodate carbon dioxide injection seems to be a likely avenue pursued by CCS developers.
In order to design a viable project, major elements of cost like CO2 capture and transportation must be carefully considered. The cost can vary based on onshore/offshore saline aquifers, well type, and number of wells. The overall transport and storage cost is often estimated at $10 per metric tonne (typically for pipeline builds). Using the notional $60/metric tonne credit price proposed in the BBB fill for EOR, successful projects are likely to require an industrial source of high-purity CO2 that is co-located or near the CCS site to yield an acceptable economic return. This would mean that the sum of capture costs, field operations and amortized well costs does not exceed $50/metric tonne.
A December 2020 meta study of 39 U.S.-based projects pointed to two key factors driving relative project success: 1) credibility of revenues and incentives and 2) capital cost and technological readiness. Large capture facilities at power plants were criticized in a recent GAO study which found that many DOE-funded projects connected to coal-fired power generation either failed to materialize or were shut down for economic reasons after being constructed. For this reason, we anticipate there will be skepticism in the investment community for projects requiring significant capital earmarked for capture of carbon dioxide.
With the proper pairing of a co-located or nearby site and high purity CO2 source, the capture and storage of CO2 may soon be a viable endeavor for site developers. With the tailwind of a global effort to reduce emissions, CCS project traction should increase throughout 2022 and beyond.
Andrew Schaper is a professional engineer and principal of Schaper Energy Consulting. His practice focuses on advisory in oil and gas, sustainable energy and carbon strategies.
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