Carbon Capture, Storage Projects Seen as Boon for Ethanol Producers

Source: By Michael Schneider, OPIS • Posted: Wednesday, July 1, 2020

When the IRS issued guidance this spring that detailed the tax-credit regime for carbon capture and storage (CCS) projects, it boosted interest in a practice that was already drawing increased attention across a range of industries, including ethanol producers.

“The CCS industry is abuzz about the tax credits and the additional capture opportunities that the incentive provides,” said Keith Tracy, president of Cornerpost CO2 LLC, which provides consulting services for the industry. He predicted the CCS industry will soon “take off,” noting that the credit incentivizes capturing CO2 emissions from different types of facilities and industries and either storing them underground or using them in other products to be sold.

The IRS’ April guidance was designed to help businesses understand how legislation passed in 2018 impacts those claiming credits under Section 45Q of the Internal Revenue Code.

Tracy and others said the fact that the much-anticipated guidance was released is as important as the information it contained. It provided details on a need for construction of a facility that includes CCS equipment to begin before 2024 to qualify for the credits. Tracy called that “pretty well anticipated because IRS had done something very similar with wind and solar tax credits.”

It also provided specifics on how tax-equity investors and project developers could partner to own and operate projects.

“Tax equity investors like as much certainty as possible in order to make their significant investments, and the [guidance] provides us those guardrails,” Tracy said. “It is sufficiently flexible for project developers to put together CCS projects. Many times, these 45Q credits need to be monetized somehow, because a project does not typically make enough revenue to have taxable income to be offset by tax credits.”

Those views are shared by Daniel Sanchez, a member of the Department of Environmental Science, Policy and Management at the University of California-Berkeley and lead author of a 2018 study that highlighted CCS’s financial potential for the U.S. ethanol industry. “People weren’t willing to put up the capital to start building until they were sure that they were going to get this tax credit,” he said.

Observers had been waiting for word from the IRS for some time. “While 45Q was revised in February 2018, it took the IRS until summer 2019 even to ask industry for comments, and then took another eight months or so to issue the guidance,” Tracy said.

He added that industrial manufacturers that capture carbon from their operations can earn tax credits this year of at least $20 per metric ton of CO2 stored underground in enhanced oil recovery or in products, or $31 if the CO2 is otherwise stored underground. And those values rise each year, reaching $35 and $50, respectively, by 2026, and then adjust for inflation thereafter.

Ethanol plants, Sanchez said, are particularly good candidates for CCS projects. Combining biofuels production with CCS, he said, “makes a lot of sense” because the processes generate “fairly concentrated” CO2 streams that are not emitted into the atmosphere.

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“Ethanol plants are unique because they produce a relatively pure stream of CO2 off of the fermentation tanks,” Tracy said. “It is 95%-plus pure CO2 coming off of an ethanol plant compared with maybe 12% CO2 from a power plant that has to purify their CO2 — and it costs a lot more money to do so.”

Sarah Saltzer, managing director for Stanford University’s Center for Carbon Storage, agreed.

“The thing about ethanol plants is that they appear to be the cheapest from a capture point of view,” she said, adding that because of the “very concentrated stream off ethanol plants, you don’t need to do a separation phase.”

“So you may as well go after the easiest and cheapest first with ethanol,” she said.

Geoff Cooper, president of the Renewable Fuels Association, said that CCS “has enormous potential to dramatically lower the carbon intensity (CI) of corn ethanol and create new economic opportunities for ethanol producers.”

Where the right geology exists, Cooper said that a typical ethanol plant with an annual capacity of 100 million gal could likely capture and store around 250,000 to 300,000 mt of CO2 per year.

“That would reduce the plant’s CI score by something like 30 to 40 grams of CO2e/megajoule (g/MJ),” he said, meaning that CCS could reduce a plant’s CI score under California’s Low Carbon Fuel Standard (LCFS) by 50% or more and increase its value in California and Oregon, which operates its own LCFS program.

Cooper used as an example the CCS project being developed by Red Trail Energy in North Dakota that is projected to cut the CI score of the plant’s ethanol to 37 g/MJ from 76 g/MJ now. “That’s considerably lower than the CI scores for Brazilian sugarcane ethanol and is in the same ballpark as CI scores for electric vehicles powered by California grid electricity,” he said. “And, at least in theory, a 40 g/MJ CI reduction ought to fetch about 50 to 60 cents per gallon of ethanol in premiums when carbon is priced at $200/ton.”

A Red Trail official declined to comment for this story, but last year the company said that its project was awaiting the results of a seismic survey.

Cooper called CCS “a big step toward zero-carbon corn ethanol,” adding that if it is combined “with other cutting-edge technologies at the ethanol plant and if the corn feedstock is produced with carbon- efficient farming practices, it is conceivable that the net CI score for the ethanol could be close to zero.”

The combination of a $200/mt price on carbon in California and Oregon and the 45Q tax credit “means CCS projects that might not have made economic sense a few years ago now pencil out quite well,” he said.

Sanchez agreed that the return on investment could be lucrative.

“All it really takes is pumps and compressors,” he said, putting the cost for a single ethanol facility at $20 million to $50 million. “Assuming that these plants are operating for 20 years, most of them can do the CCS for $20 to $30 per ton, so you should make the initial investment back in less than 20 years.

“There is going to need to be an ICM or Archer Daniels Midland (ADM) or POET or some kind of savvy company that will want to make this investment and learn everything associated with doing it,” he added.

Cooper acknowledged that the potential benefits of the projects will vary from plant to plant based on geology and other factors, and CCS won’t be an option for every producer, a viewpoint Tracy shared.

“Certain ethanol plants will be more likely candidates for CCS than others,” he said. “Some plants may not be in areas where they have what I call ‘good geology’ under them to store the CO2. Many ethanol plants are not located near oilfields, so there is a geographic and logistical issue that has prevented this from happening in lots of other places.”

Sanchez downplayed any environmental concerns over the practice.

“Through the permitting through EPA and the additional hurdles that California has placed on top of it, they are well understood, relatively low risk and explicitly monitored,” he said. “This is several thousand feet underground, below where we get our drinking water.”

Saltzer said that CCS “is absolutely required if we want to reduce emissions, and we need to reduce emissions if we have any hope of meeting the temperature hold that some of us” committed to under the Paris Agreement that aims to limit global warming in this century to 1.5 to 2 degrees C above pre- industrial levels.

To do that, more than 2,000 CCS facilities will be needed by 2040, Saltzer said.

“Right now, we have 25 in the world,” she said. “Hopefully, other countries will see the 45Q and realize that they need incentives if they want to spur any activity. And only time will tell if the 45Q is enough to spur activity — it might not be quite enough.”

While the IRS guidance was helpful, Cooper said CCS programs are weighed down by regulatory complexity.

“The biggest obstacles standing in the way of broader adoption of CCS in the ethanol industry are not economic or technological in nature — they are regulatory,” he claimed. “The permitting process for these projects is a total nightmare in many states. Some companies who were interested in CCS threw in the towel after learning that the permitting process would be almost impossible to navigate.”

Regulatory requirements related to monitoring and recordkeeping are “often unrealistic and serve as an obstacle or deterrent to adoption of CCS,” he added. “So for many ethanol producers looking at doing this, the technology is there, the value proposition is there and the return on investment is there.
But the regulatory red tape gets in the way.”

Sanchez said he believes that “within a couple of years, a half-dozen to a dozen corn ethanol plants will be doing this,” but his study had envisioned another scenario: continental-scale pipelines connecting several plants that would combine their CO2 and send it hundreds of miles to where geologic storage resources might exist in areas around the corn belt such as South Dakota or Indiana or western Nebraska.

The right of way to build such a line would represent one-third of the cost or more, he said, adding, “We would need an economy of scale, like 10 ethanol plants for a common-carrier CO2 pipeline and getting a lower transport cost as a result.”

Several companies have expressed interest in CCS in recent years.

In 2018, Occidental Petroleum and White Energy agreed to study the feasibility of a project that would capture CO2 from White’s ethanol production plants in Texas and transport it to the Permian basin, where Occidental would use it to enhance oil recovery operations.

“White Energy and Oxy Low Carbon Ventures have completed the front-end engineering and design and selection of contractors for the capture facility and pipeline at the White Energy Hereford and Plainview ethanol plant facilities,” an Occidental spokesperson told OPIS for this story. “With final 45Q guidance, we will be ready to move to a final investment decision and construction.”

In May 2019, Wabash Valley Resources, an affiliate of Phibro, said that it would develop a CCS project outside of West Terre Haute, Ind., that it expected to become the largest such project in the U.S. to date.

Last June, Midwest AgEnergy Group told OPIS that its Blue Flint plant near Underwood, N.D., was being studied to confirm that CO2 from the facility could be permanently put in geological storage below the facility.

In October, U.K.-based producer Velocys announced plans to capture and store underground CO2 produced at its planned advanced biofuels plant in Mississippi.

Last month, ethanol producer REX American Resources CEO Zafar Rizvi told analysts that the company is in the early stages of reviewing a CCS project at one of its plants and is considering bringing in outside investors.

And ADM has launched a project to sequester carbon at its Decatur, Ill., ethanol plant. –Reporting by Michael Schneider, mschneider@opisnet.com; Editing by Jeff Barber,

jbarber@opisnet.com

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