PLATTS 8TH EUROPEAN CARBON CAPTURE & STORAGE CONFERENCE

HOW TO BAG A BANKER – CONVERTING APATHY TO ACTIVITY

18-19 February 2014

Allan Baker

Managing Director - Global Head of Power Advisory & PF

Tel.: 44 (0) 20 7762 4821

Mob: 44 (0) 7870258164

allan.baker@sgcib.com

2/20/2014

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CCS SHOULD BE AN ATTRACTIVE TARGET FOR BANKS.....

CCS should be an essential part of the strategy to decarbonise power:

● It allows for the continued use of coal, one of the most abundant fuel sources

● It does not suffer from the “intermittency” issues associated with wind /solar

● It is applicable to existing and new fossil fuel generating plant – gas and coal

Attractive in terms of scale for lenders:

● Global application - investment requirement measured in US$ trillions (2010-2050 - IEA)

● Globally several hundred CCS projects could be implemented by 2030

● Significant part of the future energy landscape- as technology proven and costs reduce

CCS - a key contributor to cost effective CO2 reduction

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THE VIEW OF FINANCIAL INSTITUTIONS..... EVOLVING SINCE 2011?

CCS - Mobilising Private Sector Finance (Climate Group & Ecofin - 2011):

● “Debt... not yet” – conclusion was that finance community wanted:

Performance Guarantees across the whole chain

Major sponsor involvement – deep pockets and significant equity commitment

Confidence in future economics of the technology

SG-CSLF CCS Financing Taskforce Round Table (2012):

● Meeting of leading financiers, industry and institutions:

“Why are you wasting time on CCS, financing is years away?”

“It was useful to find out more about it (CCS) but I’m still not convinced”

Demonstration project bank soundings (2013)

● The DECC CCS Competition in the UK included finance in the deliverability assessment

A number of the shortlisted projects engaged in the most detailed bank market sounding exercise yet

Letters of support/interest solicited from a number of banks, multilaterals and ECAs

The finance community is becoming interested in CCS ?

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KEY MESSAGES FROM THE SG-CSLF ROUND TABLE........ STILL RELEVANT?

Confusion about the opportunity:

● Focus on proving technology and not the long term roll out

● Patchwork of technology, policy, timing, incentives and commitment

Concern about technology:

● “Demonstration Projects” imply prototype & unproven

● What if it doesn’t work – WHITE ELEPHANT?

Concern on risk:

● Project-on-project risk – complex risk matrix and allocation process

● CO2 is a liability with limited revenue unless you have EOR

Uncertain economics:

● Cost uncertainty (capex and opex) from early projects

● Heavy subsidy - policy / regulatory risk

Credibility gap:

● Many projects but few projects getting to FID yet alone operation

● Perceived as an experiment that may or may not lead to more projects

What was in the “too difficult” box has moved to challenging

Still a concern of the finance sector

Focus on fewer projects and tangible progress

is helping to clarify

Remains possibly the key concern

Recognised by and likely to be addressed in

risk allocation of early projects

Starting to be addressed

Detailed risk allocation discussions underway

and T&S solutions being fleshed out

More differentiated

CRT and various policy measures starting to

address this issue UK CfD perceived as being

a positive for CCS

Process of “natural selection”

Project development failure has been a

negative for CCS perception but focus is

narrowing on more deliverable projects

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UPDATE - BANK PERSPECTIVE 2014

SG have recently completed a comprehensive market sounding

● Approached 15+ International banks

● ECAs

● Multilaterals

Engagement exercise scrutinised by the UK Government

Feedback based on real engagement

● Financial institutions provided with details of risk allocation, technology etc

● Significant interaction with SG and Sponsors on project detail

● Strong letters of support for the project

● Strong desire to be involved in DD and structuring of the debt

What’s changed?

We are talking about real projects….

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BAGGING A BANKER FOR CCS – DEMONSTRATION PROJECTS

Feedback from White Rose Engagement:

● Strong Sponsors: Key bank relationships important in

gathering support

● Supportive execution environment:

Grant funding: Capital grant improves the capital

structure of the deal and underpins bank economics

(downsides)

Ongoing Support Mechanism: Contract for

Difference structure provides a flexible mechanism

for dealing with specific risk profile of the project

Image credit: <a href='http://www.123rf.com/photo_6057943_young-man-

trapped-in-a-butterfly-net-isolated-on-white-background.html'>ljupco /

123RF Stock Photo</a>

● Full-Chain Project: Strong transport and storage story with strong service provider – strategic

business proposition

● Risk mitigation: Initial discussions indicate that a pragmatic risk sharing solution will be

possible and will involve all stake holders in the project

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BAGGING A BANKER FOR CCS – MEDIUM TO LONG TERM

● Successful demonstration of technology:

Key for risk reduction and confidence

Crucial for widespread application

● Consistent policy support:

Positioning CCS clearly as part of the low carbon mix

● Enabling Environment:

Ensuring the barriers to entry are reduced / eliminated

Providing at least a level playing field

● Risk mitigation and cost evolution:

Evolution of “template” risk allocation

Delivery of cost reduction to demonstrate cost competitiveness

● Strong sponsors involvement

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UK CCS COMMERCIALISATION AND THE COST REDUCTION TASK FORCE (CRTF)

UK Government initiative:

● CRTF established in March 2012 by DECC as “an industry-led joint task

force established by Government to assist with the challenge of making

CCS commercially available for operation by the early 2020s.”

● Broadly representative of the stakeholders in CCS and international - 23

members drawn from industry, trade associations, developers, finance and

academia

● SG led the commercial and financial work stream

“The objective of the Task Force is to publish a report to advise

Government and industry on reducing the cost of CCS so that

projects are financeable and competitive with other low carbon

technologies in the early 2020s.”

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KEY CONCLUSIONS REFLECT REQUIREMENTS FOR SUCCESSFUL FINANCE......

Need for a supportive regulatory landscape:

Commercialisation program provides an

opportunity to resolve many of these

issues and create a template for future

industry development

Within this environment tangible cost savings can come from:

● Planning & infrastructure developments

● Generation & capture technology development

● Evolution of commercial and financing arrangements

Deliverability will require the constructive and full engagement of all stakeholders

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PLANNING AND INFRASTRUCTURE DEVELOPMENT ......

Achieving optimal scale in CO2 storage – scale has cost and risk benefits

● Storage reservoir development represents a significant part of CO2 storage cost

● Expensive process so benefit on focussing on “high volume” opportunities

● Substantial risk (cost) reduction from storage clusters

Essentially a volume business: higher volume = lower per unit cost

Optimisation of transport infrastructure

● Pipe cost is not proportional to the volume transported – significant cost benefit in over sizing

● Trunk lines and local feeder pipes from a hub provide volume benefits over early point to point

● Distance matters – shorter less complex routes have obvious cost benefits

Planning and investing for future projects in the first projects could lead to

significant reductions in per unit of CO2 stored in follow on-projects

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ACHIEVING AFFORDABLE FINANCING ......

Appropriate risk allocation across the full chain – never easy in a new industry !

● Complex mix of disciplines and “cross border” risks and liabilities

● Appropriate allocation on FOAK is unlikely to be the allocation for the Nth-of-a-kind : improvement

with experience

Role of Government, developers, insurance industry and finance being defined

● Real time risk allocation discussion under way – Commercialisation Competition

● We don’t know what we don’t know – pragmatic approach from all stakeholders

Continued engagement with finance and insurance industry crucial

● Genuine interest now – momentum needs to be retained

High cost of capital in early projects offers scope for material cost reductions if a

replicable template emerges from the Commercialisation competition

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POTENTIAL DELIVERABLE COST REDUCTIONS ......

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CONCLUSIONS

The finance community is waking up to CCS but there is a need to

demonstrate real and tangible progress to:

● Gain credibility

● Stimulate the interest of the financing community

● Attract debt financing

Early stage projects are key to delivery of the industry potential:

Proving of technology & development of risk allocation

Development of “template” commercial structures for the full chain

Optimisation of early experience to create a commercial and financeable industry

The finance community now appear ready to play their part

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SOCIETE GENERALE AND CCS .......

Leading Financial institution in the CCS sector:

Financial Advisor to White Rose CCS Project, UK (ongoing)

Financial Advisor for Hydrogen Energy California (ongoing)

Financial Advisor to Abu Dhabi “full chain” CCS (Masdar) project (2010-11)

EEPR guarantee facility arranger for the 2Co Don Valley CCS project (2012)

Financial Advisor to Powerfuel IGCC, UK (2010-2011)

Member of the UK Government CCS Forum (ongoing)

CCS Cost Reduction Task Force Member (Ongoing)