Improving the Business Case for CCS in the Electric Power Generation Industry

Abstract

Supporting new, high impact energy and environmentally friendly initiatives has been a regular and important component of US tax policy. A production tax credit (PTC) of up to 2.3 cents per kWh (now reduced) was available for electricity generated by wind. Solar photovoltaic projects receive a 30% investment tax credit (ITC). These tax credits, along with state-level renewable performance standards, have significantly increased investments in renewables and supported their growth in the electricity generation sector. A similar opportunity now exists for supporting accelerated installation of large-scale Carbon Capture and Storage (CCS) in the US electric power generation industry. Section 45Q of the US tax code represents a first, but still insufficient, step for covering the costs of using CCS with electric power generation. It provides a $50 per metric ton (mt) tax credit for captured CO2 stored in geological formations and a $35 per mt tax credit for captured CO2 used and stored with enhanced oil recovery. However, the 45Q tax credits contain limitations, including-- a rapidly approaching “commence construction” deadline, limited years for claiming the tax credit, a tax credit level insufficient for economically viable installation of CCS by natural gas-fueled power plants, and little support for first-of-a-kind (FOAK), higher CO2 capture rate facilities. In a previous paper (Esposito, et al., 2019), the authors illustrated the basic arithmetic for assessing the economic viability of CCS in the electric power generation industry with availability of the Section 45Q tax credits, including an extensive look at the business case for installing CCS by coal-fueled power plants. This paper discusses a series of modifications to the Section 45Q tax credit, as well as additional steps, that would improve the business case for installing CCS on natural gas-fueled power plants. The paper addresses the following topics: • Extending the Commence Construction Date for the Section 45Q Tax Credit. Given a fast-approaching deadline, the paper provides a series of arguments for extending the “commence construction” date for eligibility for the Section 45Q tax credit. • Increasing the Time Period for Eligibility for the Section 45Q Tax Credit. The paper examines how the business case for CCS would be improved by increasing the time of eligibility for the Section 45Q tax credit to 20 years from the current 12 years. • Increasing the Value of the Tax Credit for Natural Gas-Fueled Power Generation. The overall CO2 capture costs at a natural gas-fueled plant are about 60% as much as at an equivalent generation capacity coal-fueled power plant. However, the volume of CO2 produced from a natural gas-fueled power plant is about 40% as much as from a coal-fueled plant. As such, the per-ton costs of capturing CO2 at a natural gas power plant are 1.5 times higher than the per-ton costs of capturing CO2 at a coal-fueled power plant. Since the Section 45Q tax credit rate was designed to approximately cover the cost of CO2 capture at a coal-fueled power plant, it needs to be increased by about 50% to cover the cost of CO2 capture at a natural gas-fueled power plant. • Providing Incentives for Higher Capture Rate, FOAK Plants. The paper also examines how a more robust set of incentives, including modified Section 45Q tax credits and other options, could help overcome the barriers facing first-of-a-kind (FOAK), high (95%+) CO2 capture rate plants. • Providing Section 48A Investment Tax Credits for Natural Gas-Fueled Power Plants. The paper examines how expansion of the eligibility for the Section 48A investment tax credit could support installation of CCS at natural gas-fueled power plants.