CCS Investment incentives: Loan Guarantees and Tax Credit
Together with supporting RD&D initiatives, the US government's strategy to accelerate CCS deployment is focused upon supporting private investment through loan guarantees and tax credits. Such incentives have been authorised in legislation, as explained below.
Loan Guarantees for CCS under the Energy Policy Act of 2005
The Energy Policy Act of 2005 (EPACT) contains a series of incentives and initiatives to stimulate RD&D activities and investments.
Under Title XVII, the Act authorises the US DOE, in consultation with the Secretary of the Treasury, to issue loan guarantees for projects that:
'avoid, reduce or sequester air pollutants or anthropogenic emissions';
'employ new or significantly improved technologies as compared to technologies in service in the United States at the time the guarantee is issued'; and
have reasonable prospects for repayment of the principal and interest on the obligation of the borrower. The loan has to be repaid within 30 years or, alternatively, by the time that 90 percent of the projected life of the physical asset financed by the loan has expired (which one is shorter).
The Act lists eligible project categories, which expressly include CCS projects. According to the EPACT the guarantees cannot cover more than 80 percent of the project cost.
In August 2006, the DOE published its guidelines for proposals in response to the first solicitation. In October 2007, DOE issued a regulation which was amended by a final regulation in December 2009.
The 2009 regulation governs the competitive solicitation process for selection and award of loan guarantees under the EPACT. It also provides that:
DOE loan guarantees can cover 100 percent of a loan, subject to the EPACT limitation that the DOE may not guarantee debt instruments amounting to more than 80 percent of the total project costs. However, if the guarantee is issued for 100 percent of an individual loan, the loan must be issued and funded by the Treasury Department's Federal Financing Bank;
A project receiving other governmental assistance can still apply for a loan under EPACT, but this fact will be taken into account in the evaluation process;
The borrower must make a 'significant equity investment' in the project. Preference will be given to projects which require loan guarantee for a smaller percentage of project costs compared to competitors.
The 2007 regulation established that, in the case of non-repayment, the DOE would have enjoyed a superior lien on all project assets financed with the loan. This rule was changed by the 2009 regulation which provides that 'DOE is subrogated to the rights of the holders of the debt, including all related liens, security and collateral'. Although this change caused many criticisms, DOE believes it is consistent with the EPACT and would provide more flexibility. (See detailed discussion of this aspect in the Final regulation December 2009.)
16 projects were eventually invited to submit final application for loan guarantees under EPACT and, as of July 2010, three awards have been made.
Tax credit for carbon capture and sequestration under the Internal Revenue Code
The Emergency Economic Stabilization Act (EESA) of 2008 adds a new section to the Internal Revenue Act introducing a 'Tax Credit for Carbon Sequestration', which was then slightly amended by ARRA in 2009 (Section 45Q in its current form).
This tax credit is available to a taxpayer who captures CO2 at a 'qualified facility' and stores it in a secure geological formation. The credit corresponds to:
US$20 per metric tonne of CO2, if it is captured and injected in a geological storage, or
US$10 per metric tonne of CO2, if the stream is captured and used for EOR operations.
A 'qualified facility' is an industrial facility operating in the US, which is owned by the taxpayer claiming the credit and equipped with CCS technologies that capture at least 500,000 metric tons of CO2 a year.
The Secretary to the Treasury, in consultation with the EPA and the Secretaries of Energy and the Interior, has to determine the conditions of security of the storage site.
The credit is attributable to the person that captures and physically or contractually ensures the CO2 disposal. Credit is available to cover a maximum of 75 million tonnes of CO2 per year, after which the credit ceases to be available.
The Act also expands and modifies Article 48 A and B of the Internal Revenue Act concerning advanced coal and gasification projects, so as to include CCS requirements.
Key legal issues concerning CCS
Loan Guarantees
The original 2005 loan guarantee programme authorises appropriation of US$90 million between 2007 and 2009 for a 10-year research and development programme on CCS intended to be used in new and existing installations. There has been no indication that additional funds will be provided for subsequent years.
In 2009, ARRA amended the EPACT by establishing a new loan guarantee program called 'Temporary Program for Rapid Development of Renewable Energy and Electric Power Transmission Projects' (Title IV - Division A) to stimulate investment in these sectors. This new programme provides additional funds for the loan guarantee programme under the EPACT, but only covers: renewable energy systems; electric power transmission systems and biofuel projects, which commence construction by September 2011. Although it does not apply to CCS projects, this new programme expands the scope of the DOE's loan guarantee programme.
The 2009 regulation for the Loan Guarantee Programme defines 'eligible project' as a project located in the US that 'employs a new and significantly improved technology that is not a commercial technology' and meets all requirements of section 1703 of the EPACT and of the regulation. After a consultation with stakeholders, the DOE defined 'new and significant improved technology' as
'a technology concerned with the production, consumption, or transportation of energy, and that has either only recently been discovered or learned or that involves or constitutes one or more meaningful and important improvements in the productivity of value of the technology'.
The DOE also clarified that 'commercial technology' means 'a technology in general use in the commercial marketplace in the US at the time the term sheet is issued by DOE'. However, the regulation provides that 'projects for demonstration, research or development' are not eligible (s. 609.7(a) (4)). This exclusion is not explained in the regulation or in its supplementary information. This raises a question with respect to CCS technologies. CCS belongs to the general category of 'projects that avoid, reduce or sequester air pollutants or anthropogenic emissions' (EPACT s.1703 (a) (1)) and is also explicitly listed among eligible technologies (EPACT s. 1703 (b) (5)). However, due to the initial state of development of the technology, CCS projects requiring access to the loan guarantee programme would be "demonstration, research or development" projects. This is consistent with the requirement under the EPACT that eligible project cannot be commercial technology. Therefore, by expressly excluding projects for demonstration, research or development from the category of eligible projects, the regulation seems to make the treatment of CCS unclear.
CCS tax credit
The CCS tax credit can be a positive mechanism to stimulate private investments in CCS projects in the US. However, the value of the credit may be too low compared to the capture cost, which is nearly US$70 per tonnes of CO2 captured. As it currently stands, it is only a weak incentive.
The only eligible person for claiming the tax credit for CCS is the owner of the qualified facility. However, there may be instances where the owner sells the captured CO2 to a third person for sequestration (whether in an EOR or non-EOR operation). The third party would be unable to claim the credit, therefore limiting the incentive effect of such a measure.
The cap of US$75 million might be considered an obstacle to achieving an effective incentive. At the end of the fiscal year, when the taxpayer claims the credit, they run the risk that the cap may have already been exceeded and no credit is available. To overcome this it has been suggested that, the cap should only become effective after a certain date. All CCS plants operational before this date would benefit from the tax credit on an equal basis, thus providing an effective incentive for early deployment.