« Previous | Contents | Next »
Listen
9| Business models
With costs and risks identified, business models have been constructed and compared in order to identify the best contractual structure for enabling CCS projects. Business models need to address the manner in which market, technical and operational risks are distributed between the various parties involved (Figure 22). The challenge is to find a business model which shares risks and rewards in such a way that acceptable returns are earned by each individual party as well as for the project as a whole.
Figure 22
Mitigation of risks in a CCS scheme.
In addition to appropriate action at company level, the CCS industry as a whole should work to reduce these risks, for example through technology testing and information sharing. Finally, the government has an important role to play in mitigating risks, both by introducing a policy framework favourable to CCS and in establishing the appropriate funding mechanism for CCS to allow the industry to overcome the effects of high marginal costs in the short term.
Different business models share risk and reward between the participants in different ways. Figure 23 shows the three principal business models examined.
Figure 23
Summary of the three business models examined in this study.
'Fully Integrated Project' - a single company in which all partners invest and receive an equal return on their investment. In this model, all parties are exposed to all the risks over the whole chain but the exposure of the parties to individual operational risks is reduced. In the other models the partners do not form a single company but are governed by contractual agreements.
'Take or Pay contract' - comprises a set of contracts each specifying a fixed payment to each partner. Each partner bears full responsibility for its own operational risk with only limited risk passed on to other parties.
'Full Variable Contract' - consists of contracts between power plant, pipeline and storage site operators specifying a price per unit of CO 2. In this model, operational risk can, to some degree, be passed on to parties down the chain.
Of the business models analysed, a 'Fully Integrated' model appears to be the most attractive in terms of risk sharing. However, companies that are accustomed to operating in different sectors expect different returns and this may prevent this model from working satisfactorily. Typically, utilities expect their projects to return a pre-tax real rate of return around 10%, a regulated pipeline network expects a rate closer to 6%, whereas hydrocarbons Exploration & Production companies expect returns in excess of 15%. This model may not function well if applied to a CO 2 system with several sources and storage sites linked by a common network.
Under the 'Take-or-Pay' business model, while the pipeline and storage operators are fully exposed to their own risks, they are insulated from operational problems further up the chain. This model provides the greatest incentive for parties to manage their own operational risks but exposes the power station entity to significant revenue uncertainty.
Under the business model with variable contracts, the pipeline and storage operators are exposed to the operational risks of the power station, but cannot in turn pass on their own risks in the same way as the power station. While a mixture of Take-or-Pay and Variable contracts can be used to share operational risks it is less appropriate to use contracts to share risks such as those associated with capital overrun.
Identifying why a commercial organisation may or may not want to undertake CCS projects is a complex question. The question can be addressed at three levels; corporate strategic reasons, tactical business reasons or business implementation reasons. The viewpoint of any organisation also depends on its position in the future CCS value chain as power/CO 2 source, capture provider, transport operator, or storage provider.
« Previous | Contents | Next »