Japan CCS Forum 2023

Financing CCS/CCUS
Projects
15 November 2023

Mizuho Bank, Ltd.
Kentaro Sakaguchi
Project Finance Department

CCS– High Level Bankability Considerations
2. Transportation

1. Carbon Capture

Transportation by vessels

2 + 3 = Transportation and Storage (T&S) business model
Project Finance (PF) is a suitable way to finance large-scale
projects with long loan tenor
Bankability consideration (for PF)

Transportation by pipeline

3. Storage

Risks and mitigations
typically found ininfrastructure PF
transactions (based onprecedents).

＋CCS specific risksand mitigations(highlighted in blue)Key risks to be addressed to ensure bankability
Risk Categories

Key Considerations

Revenue risks

Need to ensure stable project cash flow for long term (for more than [10-15] years)
 T&S Co should be insulated from CO2 volume and price risks and “project-on-project” risks on
the emitter side (as they are out of control of T&S Co)  ideally it should receive revenue based on
the availability of the T&S service, from creditworthy counterparties

 Different revenue models can be considered  see the next page
 Contract structure enabling the borrower to receive enough termination payment from counterparties
 Need to give economic incentives to the parties involved, such as subsidies or carbon pricing. However,for the T&S Co, relying solely on such forms of support with high volatility may pose difficulties
Construction / operation/technology risks

 Construction delay / under-performance / operation shut-down / CAPEX & OPEX overrun

Other risks

 Regulatory / Environmental & Social risks

 Reservoir risk (lower annual / total volume of CO2 injected, CO2 leakage) Force Majeure etc.

(Source) illustration from Global CCS Institute website| 2

CCS– High Level Bankability Considerations (Revenue risks)
Potential CCS revenue models
 Stable (rather than high but volatile) revenue is important to ensure bankability and maximize leverage There could be several ways but each has pros & cons and the best approach would depend on project-specificsituations
Case 1Long-term T&S service contracts with emitters

Case 2Tolling contracts with T&S Co sponsors

 Long-term contracts with emitters (fee payers) which
covers the loan tenor (e.g. construction + [10-15] years)

 Similar to Case 1, but the fee payer (toller) is T&S Cosponsor

 Creditworthy fee payers (e.g. Investment Grade) The toller will enter into T&S service agreements withemitters to recover fees

 Availability based fee structure

Case 3
PPP scheme
 Similar to Case 1, but the fee payer is a public entity
 Cost to be recovered by carbon tax or other measures incentive mechanism for emitters can be flexibly
designed
 Technical challenges to apply it to cross-border T&S
transactions

Case 4
Regulated Asset Base (RAB) model Similar to Case 3, but suitable for the specificenvironment with some pre-conditions, including thewell designed regulation
 T&S Co charges fees to the emitters based on CO2volume
 The adjusted fee level for the T&S Co to recover a certain
level of return on asset investment, depreciation and othercosts| 3

CCS– High Level Bankability Considerations (Other risks)
Risks

Possible mitigations

Construction risks Technical DD and conservative budgeting (contingency) and scheduling Sponsor support, Lump-sum turnkey EPC contract, warranty/LD mechanism- e.g. construction delay,underperformance, CAPEX overrun

Operation risks- e.g. shutdown, underperformance,OPEX overrun

Reservoir risk
- e.g. insufficient capacity, CO2leakage

 Technical DD and conservative budgeting Risk sharing with the O&M service provider, ongoing performance warranty by the EPC
contractor / licensor
 Risk sharing under the revenue contract
 Technical DD
 Sufficient allowance of reservoir capacity / securing alternative reservoir
 Limiting T&S Co’s liability on leakage (risk sharing with the Insurance company and thegovernment by contract or regulation)

Regulatory / sovereign risks

 Legal DD, establishing clear regulatory framework, agreement with the host country
government (London Protocol, CCS Business Act, JCM) ECA cover

Environmental & Social risks

 E&S DD and covenants in loan agreements
 Community engagement

Force Majeure Insurance

Additional point – Shipping technology risk
 For long-distance transportation (e.g. cross-border T&S), CO2 would need to be transferred by ships in liquid form
 Mid-temperature, mid-pressure (-25°C, 15-18 bar) technology has been used for commercial shipping, but not suitable forlarger scale. Low-temperature, low-pressure (-50°C, 6-8 bar) and high-temperature and high-pressure (20°C, 40-60 bar)technologies are being developed(Source) Mizuho bank| 4Disclaimer
This material is prepared for discussion purpose only. The conditions described in this material are indicated based onassumption, and Mizuho Bank does not guarantee the certainty and completeness of the information. The analysis in this material
is made based on assumption and Mizuho Bank does not guarantee the certainty of the results.
According to the information to be provided by your company in the future, rating agency’s opinions, changes to the rules and thefinancial environment, etc., Mizuho Bank may significantly change the process and scheme of the product. In such cases, please
understand that your company may not get the effect as analyzed in this material. Moreover, this material does not explain yourcompany’s risks exhaustively.
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Please undertake sufficient consultation with a lawyer with respect to the legal treatment, with an accountant with respect to theaccounting treatment and with a tax accountant with respect to tax treatment.
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