Tax credit reignites interest in the fossil-fuel industry’s preferred weapon against global warming

By Will Wade and Brian Eckhouse for Bloomberg
 Updated on 
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Carbon capture, the fossil-fuel industry’s favorite weapon against climate change, has never really caught on because of the cost.
That may be about to change. The Internal Revenue Service recently issued crucial guidance to help developers take advantage of tax credits for the systems, and supporters say it could usher in a new era for the controversial technology.

“It’s the make-or-break financial element,” said Peter Mandelstam, chief operating officer for Enchant Energy Corp., which is preparing to install a carbon-capture system at a coal-fired power plant near Farmington, New Mexico. “The Enchant project only works if the tax credit is in place.”

Thirteen commercial systems are operating in the U.S., with 30 more in development, according to the Carbon Capture Coalition. Nine have been announced since October. The growing list boasts projects proposed by deep-pocketed developers including Occidental Petroleum Corp. and Starwood Energy Group Global. A similar tax credit jump-started the U.S. wind-power industry more than a decade ago, and supporters say the new IRS guidance may prove to be the missing piece of the financial puzzle that will make capturing carbon economical.

San Juan Generating Station

The San Juan Generating Station near Farmington, New Mexico, Photographer: Susan Montoya Bryan/AP

Carbon capture systems put the “clean” in clean coal and can cut emissions at industrial sites like ethanol plants or cement factories. They trap carbon dioxide, which can then be stored underground or sold to drillers to help them pump oil and natural gas. Either way, carbon is kept out of the atmosphere where it causes global warming. Green groups say the technology extends America’s reliance on fossil fuels and steers financing away from wind and solar, but many of them support the credits because it helps reach the ultimate goal — slowing climate change.

Enthusiasm appears to be growing. Norton Rose Fulbright, a law firm that specializes in project funding, held an online seminar last week about tax-equity for carbon capture, a financing arrangement that’s common in renewable-energy projects. Organizers said they would’ve been happy with 150 registrants. Nearly 1,000 signed up, and 540 joined.

“The numbers say to me that the tax-equity market is looking for ways to diversify out of wind, solar and low-income housing,” said Keith Martin, the firm’s co-head of projects in the U.S.

Congress more than doubled the existing tax credit in 2018. The incentive provides $50 for every metric ton of CO2 that’s sequestered, or $35 a ton for producing oil with the captured carbon. That was enough for developers to start hatching plans, but tax questions held up financing deals. The IRS issued proposed regulations for the so-called Section 45Q credit last month.

“This gets us a lot closer to getting deals done,” said Himanshu Saxena, CEO of Starwood Energy, which  is working with OGCI Climate Investments to retool a natural-gas power plant. “Without this, we would’ve been very far from the goal-posts.”

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A coal plant in Centertown, Kentucky, Photographer: Bloomberg/Bloomberg

There are still plenty of reasons to be skeptical. Oil companies, coal miners and utilities have talked for years about the promise of carbon capture without backing up the hype with action, and a potential revenue stream — selling the carbon dioxide to oil drillers — is less attractive due to the collapse in crude.

But one advantage of the systems are their ability to remove emissions from existing facilities, a possible selling point with so many Americans out of work. Enchant Energy’s plan to install a carbon-capture system in New Mexico may help save 450 jobs at the 847-megawatt San Juan power plant and the nearby mine that feeds it. The facility is slated to close in 2022 because its majority owner, the local utility, says it’s no longer economical to operate and can’t meet an emission cap established last year.

With the tax credit, Enchant Energy says it can solve both problems. The company has a deal to take over the generator for $1. Its planned $1.3 billion carbon-capture system will reduce emissions by as much as 90% and introduce a new revenue source by selling the CO2, according to Enchant’s Mandelstam. The company is looking to complete financing this year and start construction in the second quarter of 2021, he said.

Big Picture

But extending the life of fossil-fuel plants may not be the best long-term strategy, according to Mike Eisenfeld at the San Juan Citizens Alliance. He said he has doubts about whether the San Juan project will be able to trap all the emissions that Enchant claims it can and if the company will find a buyer for the electricity.

Eisenfeld said he’s opposed to spending money to prop up coal plants when the funds could be directed to renewable energy.

“These subsidies are really misguided,” he said. They don’t “look at the big picture.”

Carbon capture at U.S. power plants has a mixed record. The highest-profile project, Southern Co.’s Kemper plant in Mississippi, was once heralded as the future of clean coal. It was designed to turn the fuel into a gas, then burn the gas to produce power. But Southern pulled the plug in 2017 after construction issues and equipment problems helped drive up costs to $7.5 billion. Southern decided to run the plant on regular natural gas.

High costs have impeded projects in Europe, too, though there are signs of a possible breakthrough. Last month, oil giants Royal Dutch Shell Plc, Total SA and Equinor ASA said they were ready to go ahead with the transport and storage portion of Norway’s plan for a full-scale carbon-capture chain. That would cost 6.9 billion kroner ($744 million) in the first phase alone, but the government would shoulder most of the investment if Parliament gives its green light later this year.

U.S. supporters tout Petra Nova, a $1 billion joint venture of NRG Energy Inc. and JX Nippon Oil & Gas Exploration Corp. The facility outside Houston went into service in late 2016, and captures CO2 from burning coal and delivers the gas for oil production.

Oil companies like Occidental view the technology as a way to make operations more environmentally friendly. Occidental is co-developing a system at a White Energy Co. ethanol plant in Texas.

“We know there’s a growing C02-emissions problem,” said Richard Jackson, president and general manager of the company’s Oxy Low Carbon Ventures unit. “There’s got to be a solution.”

— With assistance by Ewa Krukowska, Jeremy Hodges, and Kevin Crowley