Carbon capture and CO2: How North American companies are entering a low-carbon future.

How North American Companies Are Leaping Into a Low-Carbon Future

How North American Companies Are Leaping Into a Low-Carbon Future

Moneybox
Commentary about business and finance.
Oct. 13 2014 6:30 PM

The Coal Paradox

The current business case for carbon sequestration? Burning coal to make oil.

Photo by Jeff Swensen/Getty Images
SaskPower reasoned that it could help provide a long-term boost to the local coal industry if it could pioneer a way of burning coal without emissions. Above, exhaust extends from the Mitchell Power Station, a coal-fired power plant located 20 miles southwest of Pittsburgh.

Photo by Jeff Swensen/Getty Images

Because coal creates more and nastier emissions than other fuel sources, the black rock has landed on the blacklist of regulators and public health officials. The prospect of higher environmental standards and a carbon tax is posing an existential threat to the industry.

One solution would be to capture and store all the gross byproducts of burning coal. That promise is now a reality: Earlier this month, a Canadian power plant fired up the first large-scale carbon-capture effort at a coal-fired plant. Three more such projects are in various stages of design and construction in the U.S. The irony? The current business case for carbon sequestration relies largely on using the carbon dioxide generated by burning coal to help increase production of another, somewhat cleaner fossil fuel: oil.

At first blush, SaskPower would seem an unlikely low-carbon pioneer. It’s a “crown company”—i.e., government-owned but run on a for-profit basis—and it’s the only major provider of power for Saskatchewan, a province the size of Texas that’s home to 1.1 million people. The company relies on coal to produce about one-half of its electricity, and the leading industries in its service area include heavy, power-intensive sectors as oil, gas, coal, potash, and uranium. Saskatchewan is not a land where Priuses roam the countryside. 

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And yet, several years ago, SaskPower decided to take a leap into the low-carbon future by investing in a carbon-capture effort at its Boundary Dam project, which sits just a few miles north of the U.S.-Canada border. “We had a plant that was getting to 45 years old and it was ready to be retired,” says Mike Monea, president of carbon-capture storage initiatives for SaskPower. “We could either build a natural gas plant, or we could see if we could continue to use coal.” If it could pioneer a way of burning coal without emissions, SaskPower reasoned it could help provide a long-term boost to the local coal industry.

So SaskPower rebuilt a 110-megawatt unit at Boundary Dam and attached equipment that will allow it to capture 90 percent of the carbon dioxide (reducing emissions by one million tons per year), 100 percent of the sulphur dioxide, as well as tons of the fly ash (also known as flue ash) created when the coal is burned. Building this facility was an expensive proposition. The cost—about 1.4 billion Canadian dollars—would be partially defrayed by Canada’s federal government, which kicked in 240 million Canadian dollars, about 17 percent of the total. A portion of the costs will be passed on to customers in the form of higher electricity rates—just as the lower cost of building a new natural gas plant would have. “Whenever you spend a billion dollars it tends to affect the electricity rate,” Monea says.

A portion of the costs will be recouped by selling the waste products that are now being captured. Going in, SaskPower knew it could turn the carbon dioxide into cash by selling it to oil companies. In a process known as enhanced oil recovery, oil drillers for decades have been boosting the yields of aging fields by injecting catalysts like natural gas, steam, or carbon dioxide into them. The carbon dioxide makes the remaining oil flow more easily, and helps push it upward. Once the oil hits the surface, the carbon dioxide is separated, repressurized, and injected back into the ground. Cenovus, a Canadian oil company with operations nearby, has agreed to purchase a large chunk of Boundary Dam’s carbon dioxide, which should bring in “many, many millions over the life of the project,” Monea says. In addition, SaskPower plans to sell the other commodities it will produce: fly ash is used as an additive for concrete, and sulfur dioxide is a widely used industrial chemical.

Even with the government support, the slightly higher rates, and these revenue streams, SaskPower will still likely lose money on the project. “Being the world’s first means it is also the most expensive,” as Monea puts it. But he also expects that similarly scaled projects in coming years would cost some 30 percent less. “We had to design and integrate hundreds of components from scratch at a scale that hadn’t been done before,” he says.

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A similar pattern—expensive, money-losing pioneers preceding second-movers who may break even—is likely to unfold in the U.S., where several coal carbon-capture projects are underway. The first is the highly ambitious Kemper plant in Mississippi. More than five times the size of the SaskPower unit, the Kemper plant aims to capture 65 percent of the carbon dioxide emissions associated with burning coal, and plans to sell the captured carbon dioxide to oil firms. Despite receiving hundreds of millions of dollars of government aid, the project is running behind schedule and is significantly over budget; it’s in danger of becoming a poster child for failed grande traveaux, and it’s difficult to see how it will work as a stand-alone business.

However, second- and third-movers are already applying slightly different business models and technology to carbon-capture projects, and their prospects look significantly better. In West Texas, design work is proceeding on the Texas Clean Energy Project. Built by Summit Power and backed in part by $450 million in government funding, the plan calls for a 400-megawatt coal-fueled plant that will capture 90 percent of carbon dioxide emissions, with the carbon dioxide to be sold to oil producers in the nearby Permian Basin. Last week, the project struck a deal with CPS, a utility based in San Antonio, in which CPS will purchase about one-half the electricity produced by the plant at a market rate.

More intriguing is a project that has already broken ground in East Texas. The power company NRG, an investor-owned utility that operates largely in unregulated power markets, has entered a joint venture with a Japanese firm JX Nippon Oil & Gas Exploration to capture the carbon dioxide generated by 240 megawatts of coal-fired electricity production at NRG’s WA Parish power plant, near Houston. The $1 billion-plus investment is being supported in part by the Department of Energy, which will supply up to $167 million in funds. But NRG, which has to sell its electricity at market rates in Texas, can’t recoup its costs by raising rates unilaterally—as a regulated utility like SaskPower can.

So rather than sell the carbon dioxide to oil companies, it is using the carbon dioxide as a way of getting further into the oil business. NRG and its partners will construct an 82-mile pipeline that will send the carbon dioxide to Hilcorp’s West Ranch Oil Field, an aging field in which NRG and JX Nippon are now co-owners. After the plant comes on line in late 2016, they plan to inject the captured carbon dioxide into the oil field, thus increasing production 30-fold, from today’s trickle of about 500 barrels per day to about 15,000 barrels per day. While still preliminary, “the models shows that this will produce a return on investment that will pay for the carbon capture system and provide shareholders with a return,” says NRG spokesman David Knox.*

This may seem like something of a pyrrhic victory, in that it only makes sense to eliminate the carbon dioxide emissions associated with the coal to the extent they can help pump another emissions-producing fossil fuel more efficiently. But oil burns cleaner than coal. And as Knox notes, these projects won’t increase global demand for oil. They won’t simply result in more oil being pumped and burned; they’ll result in more American oil being pumped and burned, which helps reduce the trade deficit. If marginally boosting U.S. oil production is the price for substantially reducing the environmental impact of coal, it may be worth it. When it comes to making progress toward a lower-carbon future, we shouldn’t let the perfect be the enemy of the better.

What’s more, should these projects work, they will point the way to a future in which companies will produce carbon-reducing technology without the need for government support and loan guarantees. From solar panels to electric vehicles, from LED light bulbs to carbon capture, environmentally useful technologies have a far greater impact when they can be the basis of real, profit-seeking businesses rather than demonstration projects. SaskPower has made great strides by building a demonstration project for carbon sequestration. The next challenge—for SaskPower and for its American counterparts—is to turn it into a business.

Correction, Oct. 14, 2014: This article originally misstated that a joint plan by power company NRG and the Japanese firm JX Nippon Oil & Gas Exploration planned to inject captured carbon dioxide into Hilcorp’s West Ranch Oil Field increasing production 30-fold from 50 barrels to 15,000 per day. The increase would be from 500 barrels. (Return.)