Communication from the Commission to the European Parliament and the Council - Demonstrating Carbon Capture and Geological Storage (CCS) in emerging developing countries : financing the EU-China Near Zero Emissions Coal Plant project {SEC(2009) 814} {SEC(2009) 815}
Date: 2009-06-25
Institutions: European Commission
Subjects: EU environmental policy, energy policy, energy storage, environmental impact, environmental protection, greenhouse gas, innovation, new technology, reduction of gas emissions, storage of waste

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 25.6.2009 
COM(2009) 284 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Demonstrating Carbon Capture and Geological Storage (CCS)  
in emerging developing countries:  
financing the EU-China Near Zero Emissions Coal Plant project 

{SEC(2009) 814} 
{SEC(2009) 815} 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

Demonstrating Carbon Capture and Geological Storage (CCS)  
in emerging developing countries:  
financing the EU-China Near Zero Emissions Coal Plant project 

1. 

INTRODUCTION  

Both  developed  and  developing  countries  need  to  act  to  reduce  their  greenhouse  gas 
emissions,  to  achieve  the  objective  of  limiting  average  global  temperature  increase  to  less 
than  2°C  compared  to  pre-industrial  levels.  This  Communication  sets  out  the  plan  of  the 
European Commission to establish an investment scheme to co-finance the construction and 
operation  of  a  power  plant  to  demonstrate  carbon  capture  and  storage  (CCS)  technology  in 
China.  This  investment  scheme  could  serve  as  a  model  for  other  technology  cooperation 
activities between developed countries and emerging/developing countries in the context of a 
post-2012 climate change agreement. 

While energy efficiency is expected to deliver the greatest emissions reductions, for reasons 
of  security  of  supply  and  economy,  coal  will  continue  to  drive  development,  especially  in 
emerging  economies  with  substantial  domestic  reserves,  such  as  China.  It  is  therefore 
necessary  to  make  the  inevitable  combustion  of  coal  more  climate-compatible.  CCS 
technologies,  if  developed  and  deployed  in  an  appropriate  timeframe,  could  make  a 
significant contribution by mitigating the emissions of this key energy source. CCS would be 
a  bridge  technology  while  alternatives  to  fossil  fuels  are  further  developed  and  deployed. 
European  Commission  analysis1  indicates  that  under  an  emissions  scenario  compatible  with 
the 2ºC target around 18% of global fossil fuel power generation would have to be fitted with 
CCS in 2030.  

EU leaders have committed to the establishment of a network of up to 12 CCS demonstration 
plants  in  the  EU  by  20152,  to  maximise  the  range  of  technology  and  storage  options 
demonstrated and knowledge sharing. The European Council and Parliament have agreed to a 
Directive  setting  out  an  enabling  legal  framework  for  CCS  to  enable  the  safe  operation  of 
CCS in Europe and to incentivise CCS demonstration i.e. through the EU Emissions Trading 
Scheme  (CO2  safely  stored  will  not  count  as  emitted)  and  through  EU  ETS  New  Entrants 
Reserve  (providing  funding  which  can  be  used  to  co-finance  CCS  demonstration  plants)  as 
well as revised State Aid rules. The European Economic Recovery Plan has allocated €1050 
million to CCS demonstration projects inside the EU. Several EU companies have announced 
demonstration plants to be completed in the EU over the next 5-10 years. CCS is one of the 
technologies  promoted  under  the  European  Strategic  Energy  Technology  (SET)  Plan3  along 
with renewable energy and other low carbon technologies. 

1 
2 
3 

See Figure 2 of the Impact Assessment which accompanies this Communication.  
European Council Conclusions, March 2007. 
Communication  from  the  Commission  to  the  Council,  the  European  Parliament,  the  European 
Economic and Social Committee and the Committee of the Regions - A Strategic Energy Technology 
Plan (SET Plan) - towards a low-carbon future" 

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Of  particular  concern  are  the  emissions  trajectories  for  the  coal-dependent  emerging 
economies.  The  Intergovernmental  Panel  on  Climate  Change  (IPCC)4  has  projected  that,  in 
the  absence  of  any  additional  policies,  CO2  emissions  from  energy  use  are  expected  to  rise 
between 2000 and 2030 by 45 to 110%. Two thirds to three quarters of that growth will come 
from  developing  regions.  Even  with  strong  action  on  renewables  and  other  low-carbon 
technologies,  fossil  fuels  are  estimated  to  account  for  half  of  the  world's  energy  supply  by 
2050.  

Due to abundant resources, coal is China's predominant energy source contributing 70% to the 
energy mix. It can be expected that coal will remain the primary energy source in the medium 
term – in 2007 alone, China built the equivalent of one 500MW coal-fired power plant every 
two and a half days5. This represents around 4 megatons of CO2 a week increase in Chinese 
emissions from coal-fired power generation alone6.  

China  itself  is  engaging  strongly  in  cleaner  coal  technologies  (CCT).  In  June  2007,  China 
adopted  a  National  Climate  Change  Programme  (CNCCP),  which  specifically  mentions  the 
"development  and  dissemination  of  advance  and  suitable  technologies"  including  "carbon 
dioxide  capture,  utilization,  and  storage  technologies".  China  plans  to  publish  CCS 
technology  guidelines  in  the  course  of  2009.  Furthermore,  a  group  of  seven  state-owned 
energy  sector  enterprises  has  established  Greengen,  which  has  the  objective  to  build  an 
Integrated  Gasification  in  Combined  Cycle  (IGCC)  coal  power  plant,  which  should 
subsequently be complemented by CCS.  

In  March  2005,  the  EU  and  China  signed  an  Action  Plan  on  Clean  Coal,  which  included 
cooperation  on  carbon  capture  and  storage.  The  subsequent  2005  EU-China  Summit7 
established the EU-China Climate Change Partnership, which includes a political commitment 
to develop and demonstrate in China and the EU advanced, near-zero emissions coal (NZEC) 
technology  through  carbon  capture  and  storage  (CCS)  by  2020.  Phase  I  of  this  cooperation 
will be completed in 2009. The motivation for the 2005 agreement between China and the EU 
was  the  desire  to  tackle  emissions  growth  in  the  coal  power  sector.  With  plant  lifetimes  of 
around 30 years or more, the potential for carbon lock-in is enormous. The advanced state of 
the EU's cooperation with China under the EU-China Climate Change Partnership presents an 
opportunity for a first cooperative demonstration project in China.  

The  European  Parliament8  underlines  the  importance  of  cooperation  with  China,  when  it 
"recognises that rapid economic growth in China presents a huge challenge to global efforts to 
tackle  climate  change,  with  CO2  emissions  from  coal-fired  power  stations  set  to  double  by 
2030." CCS represents a potentially credible option for tackling the emissions from coal-fired 
power stations in China as part of a portfolio of technologies.  

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IPCC Forth Assessment Report (2008), Working Group III Technical Summary (Barker, T. et al, 2007: 
Technical Summary. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the 
Fourth  Assessment  Report  of  the  Intergovernmental  Panel  on  Climate  Change  [B.  Metz,  O.  R. 
Davidson, P. R. Bosch, R. Dave, L. A. Meyer (eds)], Cambridge University Press, USA). 
IEA, Cleaner Coal in China, 2009, p. 50. 
N Riley, British Geological Survey, oral evidence to the UK House of Commons, 
(http://www.publications.parliament.uk/pa/cm200506/cmselect/cmsctech/578/57805.htm#note18). 
EU-China Declaration on Climate Change, made at the EU-China Summit, 2 September 2005: 
http://ec.europa.eu/environment/climat/pdf/china/joint_declaration_ch_eu.pdf. 
Resolution 2005/2161 (INI): http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-
//EP//TEXT+TA+P6-TA-2006-0346+0+DOC+XML+V0//EN. 

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The  EU  CCS  demonstration  plants  and  the  EU-China  NZEC  cooperation  should  be  seen  in 
the  context  of  the  G8  commitment  to  "20  large  scale  CCS  demonstration  projects…  [to]  be 
launched  globally  by  2010,  taking  into  account  varying  national  circumstances  and  with  a 
view  to  supporting  technology  development  and  cost  reduction  for  the  beginning  of  broad 
deployment of CCS by 2020,"9 as well as the endorsement by the G8 Energy Ministers, the 
European Energy Commissioner and Energy Ministers from several other countries including 
China, of advancing the demonstration of CCS at their meeting in May 200910. 

This Communication sets out the next steps with a focus on financing the CCS demonstration 
plant. Such cooperation can also contribute to the commitment made by developed countries 
under the United Nations Framework Convention on Climate Change (UNFCCC) to promote, 
facilitate  and  finance  the  transfer  of,  or  access  to,  environmentally  sound  technologies  and 
know-how to other Parties.  

With  regard  to  the  on-going  negotiations  for  an  ambitious  global  climate  change  agreement 
for  the  period  post-2012,  the  EU-China  cooperation  on  CCS  could  serve  as  an  example  for 
others.  The  Commission  envisages  the  facilitation  of  information  exchange  between  the 
NZEC  project  and  European  demonstration  projects  through  the  CCS  project  network, 
currently  being  established.11  Furthermore,  many  of  members  of  the  European  Technology 
Platform  for  Zero  Emissions  Fossil  Fuel  Power  Plants  (ZEP)12  are  key  stakeholders  for  the 
EU-China cooperation. 

2. 

CHALLENGES OF CCS 

The individual components of the CCS process are already available and operational in pilot 
schemes13. But the combination of these elements in commercial scale power plants including 
the entire CCS chain from CO2 capture, through transport to storage is yet to be demonstrated.  

The  demonstration  of  CCS  technologies  at  commercial  scale  is  necessary  to  test  and 
subsequently reduce the costs for the technology as a precondition for its wide deployment in 
a  functioning  carbon  market.  Demonstration  will  promote  a  better  understanding  of  the 
technical,  methodological  (including  storage  site  selection  and  monitoring),  environmental, 
public  acceptance  and  financial  issues  and  therefore  facilitate  a  better  estimation  of  the  real 
potential for CCS as a key mitigation technology.  

The development and deployment of CCS in developing and emerging economies, including 
China, can play a vital role in helping achieve global sustainable development but would be 

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Joint Statement by G8 Energy Ministers, Aomori, Japan, 8 June 2008. 
Joint  Statement  by  the  G8  Energy  Ministers  plus  the  European  Energy  Commissioner,  the  Energy 
Ministers of the G5 Countries (Brazil, The People’s Republic of China, India, Mexico, South Africa) 
and  the  Energy  Ministers  of  Egypt,  Republic  of  Korea,  and  The  Kingdom  of  Saudi  Arabia,  at  their 
meeting in Rome on 24 May 2009. 
See: 
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1315&format=HTML&aged=0&langua
ge=EN&guiLanguage=fr 
See: http://www.zero-emissionplatform.eu 
See IPCC, 2005: IPCC Special Report on Carbon Dioxide Capture and Storage. Prepared by Working 
Group III of the Intergovernmental Panel on Climate Change [Metz, B.,O. Davidson, H. C. de Coninck, 
M. Loos, and L. A. Meyer (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New 
York, NY, USA, p. 8. 

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significantly  delayed  without  assistance  from  developed  countries.  The  EU's  commitment, 
coupled  with  technological  and  financial  assistance,  is  a  unique  offer  which  can  help  to 
maximise the potential for CCS in emerging economies.  

The failure of the market in developing/emerging economies to reflect the real cost to society 
(eg  via  CO2  price)  of  the  use  of  fossil  fuels  to  generate  electricity  means  that  CCS  is  not 
economically  viable  in  the  demonstration  phase.  EU  public  financing  can  help  overcome 
some of the barriers outlined above and lever private financing, which would not otherwise be 
available for large scale CCS demonstration projects. 

3. 

CCS IN KEY PARTNER COUNTRIES 

In  countries  with  abundant  coal  reserves,  security  of  supply  concerns  dictate  that  coal  will 
continue  to  be  used  to  generate  electricity,  particularly  in  fast  developing  countries  such  as 
China. Therefore, it is important to develop a means of supporting the demonstration of CCS 
in  such  countries  in  order  to  exploit  the  economies  of  scale  and  ensure  that,  once 
demonstration  is  completed,  deployment  could  happen  at  scale,  if  all  challenges  of 
deployment are adequately addressed (see Box 1). 

Box 1: Challenges to deployment and diffusion of CCS in developing countries 

•  The increased cost of electricity generation due to the additional capital and operating costs 
of  the  capture,  transportation  and  storage  installations  compared  to  conventional  power 
plants,  including  the  energy  penalty,  ie  the  additional  energy  requirements  of  the  CCS 
process  itself.  This  is  due  to  the  failure  of  the  market  to  reflect  the  real  cost  to  society 
including externalities caused by the use of fossil fuels to generate electricity. 

•  A  lack  of  enabling  environment:  insufficient  legislative  framework  for  planning  and 
permitting  of  CO2  capture  installations  as  well  as  transport  and  storage;  furthermore, 
investment protection guarantees should be in place, and protection of intellectual property 
rights should be guaranteed. 

•  Even  if  the  policy  frameworks  become  increasingly  conducive,  the  financing  of  CCS 
investments  is  not  automatically  ensured  by  the  private  sector.  This  financing  gap  is 
common  for  technologies  that  move  into  the  pre-commercialization  stage  which  is 
characterized  by  the  “weaning-off”  of  grant  support  and  by  high-cost  activities  such  as 
initial  and  secondary  prototype  development  and  testing,  site  development,  supply  chain 
formulation, construction, etc.  

•  A lack of public awareness/acceptance needs to be actively addressed. 

In addition to the well-established cooperation with China, it is necessary to step up efforts to 
demonstrate and deploy CCT and CCS in other emerging economies in order to maximise the 
potential  for  global  deployment  and  diffusion.  The  EC  has  committed  itself  to  stepping  up 
existing cooperation on carbon capture and geological storage with China and to extending it 
to  other  key  partners,  such  as  India  and  South  Africa14.  According  to  recent  bilateral 

14 

See COM(2006) 843. 

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exchanges, other countries which might also have an interest in capacity building for CCT and 
CCS are Russia and Ukraine.  

The Commission intends to support cooperation with emerging and developing countries on 
CCS  and  other  cleaner  coal  technologies  through  its  Environment  and  Natural  Resources 
Thematic  Programme.  Under  a  new  activity  called  "Cooperation  on  clean  coal  technology 
(CCT) and carbon capture and storage (CCS) with coal-dependent developing and emerging 
country  partners",  the  European  Commission  proposes  to  build  capacity  and  conduct 
preparatory  studies  for  CCT  and  CCS  technologies  in  coal-dependent  emerging  economies 
and  developing  countries,  taking  a  partner-driven,  differentiated  approach.  In  addition,  it  is 
envisaged  to  disseminate  worldwide  the  experience  gained  in  the  demonstration  project  in 
China. 

4. 

SUPPORTING CCS DEMONSTRATION IN CHINA 

Given  the  extent  of  greenhouse  gas  emissions  generated  by  China's  coal-intensive  power 
generation  sector,  the  political  commitment  between  the  EU  and  China  and  the  advanced 
stage of existing cooperation on CCS, China would be the most suitable country for a CCS 
demonstration plant supported financially by the EU.  

The  EU-China  Near  Zero  Emissions  Coal  (NZEC)  project  is  envisaged  as  having  3  phases. 
Phase  I  comprises  several  projects  conducting  initial  research  to  explore  options  for 
demonstrating  carbon  capture  and  storage  (CCS)  for  coal-fired  power  generation  in  China, 
namely the UK funded NZEC Assessment Project and the European Commission co-funded 
research projects COACH and STRACO2 (see Box 2). Phase I is due to conclude in autumn 
2009. 

Box 2: Phase I of EU-China cooperation on CCS  

The  EC-China  MoU  (Feb  2006)  is  being  supported  by  the  COACH  Project  (Cooperation 
Action with CCS China-EU, with €1.5m of EC 6 th Research Framework Programme funding). 
The  COACH  project  has  20  European  and  Chinese  partners  from  academia,  research  and 
industry and has the following objectives: 

Enhance Knowledge sharing and capacity building 
Prepare the ground for a demonstration of CCS in China using coal-based IGCC/ 

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2. 
polygeneration schemes including CCS 
3. 
(EOR/EGR), deep saline aquifers, and the Bohai basin coal seams 
4. 
and economic aspects. 

Assessment of CO2 geological storage potential in hydrocarbon reservoirs 

Address cross-cutting issues such as public acceptance, and legal, regulatory, funding 

The China-UK MoU (Dec 2005) is supported by the UK-NZEC Assessment Project (£3.5M), 
which began in November 2007. The UK-funded UK-NZEC project is a collaborative project 
between Chinese and UK experts to: 
– build capacity in China to determine the best options for carbon dioxide capture, transport 
and geological storage; and 
– examine the potential for the development and demonstration of CCS technology in China 
and its deployment in the future. 

There are four more EC co-funded projects on CCS which also involve Chinese partners: 

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-  Support  to  Regulatory  Activities  for  Carbon  Capture  and  Storage  (STRACO2,  €0.86m  EC 
funding); 
-  Assessing  European  Capacity  of  Geological  Storage  of  Carbon  dioxide 
GEOCAPACITY, €1.9m EC funding); 
- CO2 storage on enhanced coal bed methane (MoveCBM, with €1.25m EC funding), and 
- Carbon Dioxide Capture and Hydrogen Production from Gaseous Fuels (Cachet, €7.5m EC 
funding) 

(EU 

Phase  II  of  NZEC  will  run  from  2010-2012.  It  will  build  on  the  results  described  above  of 
these  projects  and  examine  the  site-specific  requirements  for  and  define  in  detail  a 
demonstration  plant  and  accompanying  measures.  It  will  include  the  technical  and  cost 
analysis of different options. Based on this analysis, the site of the power plant as well as the 
combustion  technology  (pulverised  coal  or  IGCC),  the  capture  technology  and  the  transport 
and storage concepts will be determined. Phase II shall also include a detailed roadmap for the 
construction  and  operation  of  the  demonstration  plant  as  well  as  an  Environmental  Impact 
Assessment of the demonstration power plant and the carbon storage site.  

Several  issues  remain  for  negotiation  with  Chinese  partners  in  relation  to  Phase  II.  These 
include the timeline for the decisions on the project and the cost sharing arrangements. The 
European Commission intends to tender for a consortium to carry out Phase II later in 2009. 

Phase  III  should  commence  thereafter  and  will  see  the  construction  and  operation  of  a 
commercial-scale demonstration plant in China. The Commission is currently discussing with 
Chinese counterparts to start operation of the demonstration plant well before 2020 (the date 
agreed in 2005). 

The final investment decision will be made on the basis of the Phase II feasibility studies and 
is subject to agreement by the relevant partners and the existence of a solid financing scheme. 
In order to speed up the process, technical preparatory work and fund raising will be done in 
parallel. Thus, the main purpose of this Communication is to trigger a financing scheme for 
phase  III  of  the  NZEC  project  in  cooperation with  the  Government  of  China,  EU  and  EEA 
Member States.  

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Figure 1: Flow chart of phases I to III of the NZEC project 

5. 

CO-FINANCING A CCS DEMONSTRATION PLANT IN CHINA 

The  rationale  for  co-financing  this  CCS  demonstration  plant  in  China  is  to  win  time  by 
accelerating the development of the technology. Experience in China shows that costs will go 
down  once  the  technology  is  deployed  at  broad  scale.  However,  a  carbon  price  will  be  a 
precondition for large scale deployment of CCS in China. 

5.1. 

Blending public and private financing in a public-private partnership  

In order to bring together sufficient public and private funds and deploy them effectively the 
Commission  plans  to  develop  a  public-private  partnership  (PPP),  possibly  in  the  form  of  a 
Special  Purpose  Vehicle  (SPV).  SPVs  are  highly  flexible  investment  vehicles  which  can  be 
designed for a one-off project and have a relatively light legal and managerial structure, which 
means that they can be established quickly and with minimal overheads. The rules governing 
the SPV are set down in advance and carefully circumscribe their activities. This mechanism 
allows the limitation of financial risk for the investor. SPV are suited for the transfer of assets 
to  finance  a  large  project  achieving  a  narrow  set  of  goals  while  limiting  the  risk  to  the 
investing entity. Hence the SPV model offers several advantages and can be tailored to suit 
the needs of the CCS demonstration project.  

An  advantage  of  this  structure  would  be  that  the  public  donors  can  set  out  the  investment 
policies  to  ensure  full  coherence  with  public  policy  objectives.  Through  a  specified 

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investment  policy  this  structure  would  offer  an  investment  platform  which  can  combine 
public and private funding.  

The  initiative  has  to  be  designed  to  inform  and  garner  support  from  China,  EU  and  EEA 
Member States, International Financial Institutions and private companies to contribute to this 
activity.  Private  investment  in  CCS  is  only  attractive  if  there  are  prospects  for  a  revenue 
stream, eg from the carbon market and/or enhanced oil recovery.  

Chinese investment in the incremental costs of CCS will be essential to increase China's buy-
in  to  the  project.  It  will  also  ensure  a  greater  Chinese  ownership,  familiarity  with  the 
technology and an increased likelihood of further deployment.  

Box 3: Potential sources of financing for the NZEC plant 

Private sector 

Private  sector  involvement  falls  into  two  categories:  active  equity  investors  (operators, 
contractors, equipment suppliers) and passive equity investors (investment funds, institutional 
investors). The base plant may be funded through private sector investment (eg on a project 
finance  or  corporate  finance  basis).  Private  sector  investors  may  also  take  on  some  of  the 
additional CCS costs or provide in-kind support if they can see potential incentives.  

Several European companies are already present in China's clean technology markets. Many 
of  these  are  members  of  the  ZEP  and  are  key  stakeholders  for  the  EU-China  cooperation. 
Cooperation between European and Chinese industry stakeholders will also be supported by 
the  EU-China  Clean  Energy  Centre,  agreed  at  the  2007  EU-China  Summit  and  due  to  be 
established in Beijing15. 

Carbon finance 

Currently,  CCS  is  not  eligible  for  carbon  finance  (eg  through  the  Clean  Development 
Mechanism, CDM, which is a project-based approach offsetting developed country emissions 
through clean development projects in developing countries), although it might be eligible for 
post-2012  carbon  financing,  eg  through  a  sectoral  crediting  mechanism  (ie  a  mechanism  to 
credit  emissions  reductions  at  the  sector  level)  or  through  a  specific  CDM  scheme  for  CCS 
demonstration plants in emerging/developing countries.  

Enhanced Fossil Fuel Recovery  

Depending  on  the  nature  of  the  plant,  it  is  possible  that  a  revenue  stream  could  come  from 
enhanced oil recovery (EOR). 

Public financing 

Contributions from the public budget would be required to co-finance for the additional CCS 
cost. There are a number of potential sources that it might be possible to leverage: 

•  EC budget 

15 

See: http://www.eu-in-china.com/download/EC2.pdf 

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•  EU or EEA Member States national budgets16 

•  concessional loans from public investment banks 

The public finance could be used in the following ways: 

–  subsidy  

–  loan guarantees 

–  guarantee for private sector return (to guarantee price or regulatory risk) 

–  investment (with limited expected return) 

5.2. 

Determining the scale of public financing 

In order to attract private investment for the demonstration plant, it is necessary to create the 
possibility  of  return  on  investment.  Possible  sources  of  revenue  are  the  carbon  market  or 
EOR. Different types of investors may require different level of return for their investment in 
clean technologies.  

The future eligibility of CCS for carbon financing (as opposed to the imposition of a carbon 
tax)  would  generate  a  revenue  stream  that  could  attract  private  investment  in  the 
demonstration plant. Particularly interesting in this regard is the sectoral crediting mechanism 
currently  being  discussed  in  the  context  of  the  negotiations  on  a  post-2012  global  climate 
change agreement. In the Chinese power sector, for example, such an approach could enable 
the  crediting  of  emissions  reductions  beyond  a  certain  baseline.  In  this  manner,  only  the 
action  which  is  additional  to  business  as  usual  is  credited  and  companies  would  have  an 
incentive  to  take  more  costly  mitigation  actions  in  return  for  financing  through  the  carbon 
market.  This  could  facilitate  the  uptake  of  more  expensive  technologies  such  as  CCS,  over 
and  above  other  cleaner  coal  and  efficiency  technologies  which  are  cost  neutral  or  even 
negative over time. It is uncertain whether and at what time CCS in emerging and developing 
countries will be eligible for carbon market revenues. Therefore, public investment – with no 
or very low expectations for a return – will be required to reduce the risk for private investors 
and to allow for a sufficiently high internal rate of return (IRR). A financial analysis has been 
undertaken  to  determine  the  scale  of  public  finance  required17.  The  precise  costs  will  be 
determined during Phase II of the NZEC project and the share of public contributions to the 
SPV  (or  other  appropriate  investment  vehicle)  is  an  issue  which  will  be  negotiated  with 
government partners (European and Chinese).  

The size, location, technology and storage site for the NZEC plant will be determined on the 
basis of studies conducted in NZEC Phases I and II, and with a view to replication potential in 
China. The cost estimates in this communication are preliminary – even though based on a set 
of reasonable assumptions, they may vary in the range of +/- 40% according to the specific 
technology and construction/storage sites chosen. The additional capital and operational cost 

16 

17 

If  these  public  contributions  qualify  as  State  aid,  they  might  need  to  be  notified  to  the  Commission 
under the State aid rules. 
See the Impact Assessment which accompanies this Communication, Annex VII. 

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over a lifetime of 25 years for this first-of-a- kind 400 MW demonstration plant18 is estimated 
at  around  €730  million  for  an  IGCC  plant  (€12 5m  for  capital  cost,  €340m  for  operational 
costs, and €265m for tran sport and storage costs19, approximately) and around €980 million 
for a pulverised coal plant (€235m for capital  cost, €445m for operational costs, and €300 for 
transport and storage costs20, approximately).  

Within the project lifetime a strengthening of the global carbon market and the emergence of 
a  domestic  carbon  price  in  all  major  economies  can  be  expected.  Therefore,  a  price  of 
€10/tCO 2 avoided is assumed in 2015, which gradually increases to €20 21. Taking account of 
such  a  carbon  price,  and  without  pre-judging  the  technology  choice,  the  financing  gap  is 
estimated at roughly €300 million for an IGCC pl ant and at €550 for a pulverised coal plant 22. 
Should  the  carbon  price  reach  higher  levels,  this  financing  gap  would  decrease  and  public 
support could be downsized. 

Depending  on  the  storage  site  chosen,  it  may  be  possible  to  source  an  additional  revenue 
stream  from  EOR,  which  is  already  commercially  viable,  in  addition  to  revenues  from  the 
carbon  market.  EOR  refers  to  a  variety  of  processes  to  increase  the  amount  of  oil  removed 
from a reservoir, typically by injecting a liquid or gas (eg nitrogen, carbon dioxide).  

In practice, CO2-EOR use will be limited to power plants close to oil fields in order to limit 
transport  costs.  Even  though  the  potential  for  EOR  in  China  is  limited  to  the  relatively  low 
number of oil fields, the development of CO2-EOR could, however, jump-start the transport 
infrastructure  required  for  full  CCS  deployment  in  some  regions.  The  Phase  I  projects  are 
examining options for EOR in China. If EOR is an option at the site selected by the Chinese 
government,  this  would  considerably  ease  the  financing  of  a  CCS  commercial  scale 
demonstration plant. 

A likely scenario is that the participation beyond government funding is of two types: Lenders 
(International  Financial  Institutions  or  public  banks,  such  as  the  EIB)  essentially  providing 
debt  financing  requiring  interest  rates  of  around  5%,  and  investors  providing  equity,  who 
require  a  gross  return  on  investment  of  around  10-20%.  One  way  to  reduce  the  size  of  the 
initial investment required is through the competitive bidding process for the construction and 
operation of the plant, where partner companies in the consortium may bid at cost or reduced 
rates in order to gain first-mover and learning advantages from being in the first commercial 
scale CCS demonstration plant in China. 

In order to make the proposition attractive for private investors, the public investors need to 
be  willing  to  underwrite  some  of  the  risk.  This  could  maximise  the  leverage  of  the  public 
input by making the proposition more attractive to private investors. 

The European Commission has earmarked €60m  for cooperation on cleaner coal technologies 
and carbon capture and storage with emerging economies. The first tranche of €10m will be 

18 

19 
20 
21 

22 

Expressed as net present value in 2010 over the 4 years of construction and 25 years of operation using 
a social discount rate of 2.5% (net of inflation).  
This includes capital and operational costs over 25 years of 7€/t CO 2 stored. 
This includes capital and operational costs over 25 years of 7€/t CO 2 stored. 
Hypothetical  assumption of 10€/tCO 2  in 2015,  gradually  rising  to 20€/tCO 2  in 2040 and  without pre-
judging the policy instrument used to achieve this value. 
Amounts vary depending on number of years of operation for which a CCS plant would receive public 
financing. 

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used  to  build  capacity  for  CCS  and  other  cleaner  coal  technologies  in  emerging  economies 
and for the second phase of the EU-China NZEC project. Provided there is continued political 
support from China and satisfactory progress with the NZEC project, a second tranche of up 
to €50m could be made available for the cons truction and operation of a CCS demonstration 
plant  in  China.  A  viable  financing  scheme  should  be  in  place  by  2013  at  the  latest,  as  a 
precondition for the construction of the demonstration plant. 

6. 

CONCLUSIONS AND NEXT STEPS  

Working  closely  with  European  and  Chinese  stakeholders,  the  Commission  proposes  the 
following: 

i) 

ii) 

iii) 

iv) 

to determine with international financial institutions such as the European Investment 
Bank,  World  Bank  and  Asian  Development  Bank  the  setting  up  of  an  appropriate 
financial  structure,  including  possibly  an  SPV,  to  support  Phase  III  of  the  NZEC 
project  in  close  cooperation  with  interested  Member  States,  States  of  the  European 
Economic Area and Chinese partners; 

to  invite  EU  Member  States  to  pledge  financial  and  political  support.  The  target 
amount  for  public  financing  an  IGCC  plant  would  be  around  €300  million  for  an 
IGCC plant or €550 million for  a pulverised coal plant; 

to  further  secure  political  support  from  China  and  ensure  maximum  value  for 
European public money in the negotiation of the cost-sharing arrangements; 

to  engage  in  the  international  negotiations  on  a  post-2012  global  climate  change 
agreement  in  support  of  carbon  financing  for  CCS  technologies  both  in  the  first 
commitment  period  of  the  Kyoto  Protocol  (up  to  2012)  and  in  the  new  regime 
thereafter;. 

The  Commission  also  invites  interested  EEA  States  and  China  to  pledge  financial  and 
political  support  to  this  novel  initiative,  and  invites  the  European  Parliament  to  provide  its 
political  support.  Considering  that  this  is  a  novel  approach,  the  European  Commission 
Services  will  continue  to  develop  the  detailed  implementing  arrangement  together  with 
entities that express a formal interest in co-financing this initiative.  

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