August 5, 2023
By Adam Cotterill, Energy Analyst
- Capstone recently attended the CCS/Decarbonization Project Development, Finance & Investment Summit in Houston, where we identified several trends that we believe will likely play out in the carbon capture, utilization, and sequestration (CCUS) sector in the next few years.
- The event featured discussions with CCUS project developers, policymakers, tax equity professionals, trade groups, and energy investors from across the US.
- The event underscored the groundswell of interest and activity in the US CCUS sector following the passage of the Inflation Reduction Act (IRA) last summer, given the material upsizing of the value of Section 45Q tax credits, the inclusion of a five-year direct pay provision, and the lowering of minimum capture volume requirements for project eligibility.
- The conference was also a reminder of the persistent challenges the CCUS sector faces in the US today due to its nascency and the evolving regulatory and permitting policies for Class VI wells and the siting of carbon pipelines, among other issues.
Our key takeaways from the event are as follows:
- Section 45Q Tax Credit: The decision to upsize 45Q values to $85 and $60 per ton for sequestration and utilization, respectively, and the inclusion of a direct pay provision for the first five years of a project’s life in the IRA has meant that projects are now much easier to finance than a year ago. Lowering the capture volume thresholds for 45Q eligibility under the IRA also dramatically increased the universe of potential CCUS projects. However, investors and project developers remain acutely interested in the durability and long-term evolution of the 45Q tax credit and the availability of policy support after the initial 12-year credit eligibility window.
- Permitting Bottlenecks: The most significant source of frustration regarding CCUS projects remains the Class VI permitting program. To that end, the regulatory capacity of the Environmental Protection Agency (EPA) to permit sequestration sites remains a bottleneck to broader CCUS deployment. Within the next two to three years, we believe once the EPA grants Class VI primacy to states including Louisiana, Texas, and Colorado, that authority will help to expedite the process of permitting sequestration capacity, though investors should be cognizant of the potential delays to project development timelines. The uncertainty about the permitting process and timeline for carbon pipelines are other issues that we also will continue to monitor closely.
- Recapture Risk: The risk of a sequestration project incurring a recapture event—whereby sequestered carbon leaks and the Internal Revenue Service (IRS) takes back previously granted tax credits—is a key concern for investors and project developers alike. However, there are new insurance solutions emerging to backstop this risk, and one conference participant noted that the highest risk of recapture is at the inception of an injection well’s life.
- DOE Loans: While the IRA’s 45Q amendments made it easier to finance CCUS projects in the US, bank financing for these projects still does not exist. Importantly though, the IRA created a new lending authority under the US Department of Energy’s Loan Programs Office, which has $250 billion of lending capacity that must be committed through September 30, 2026. We believe CCUS infrastructure is eligible for this funding.
- Tax Credit Transferability: Despite the US Department of the Treasury’s recent publication of initial guidance on elective pay and transferability, the evolution of tax equity markets for 45Q credits is still uncertain. There is a tradeoff developers must weigh between claiming direct pay during the initial five-year eligibility window because of the uncertainty about when they will receive cash flows from Treasury, versus the discount a project developer will earn from transferring 45Q credits but receiving certainty around cashflow timing.
Adam Cotterill, Energy Analyst
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