showing CCS to be economically infeasible
must be based on proven methodologies.
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future—typically 300 years—associated with a small increase in GHG emissions; conventionally, 1 metric t in a given year.
Said another way, the SCC estimates the benefit that society will gain, expressed in monetary value, by avoiding the dam-age caused by each additional metric t of CO2 released into the atmosphere. The SCC value, which is determined by computer models, is intended to be a comprehensive estimate of climate change damages. It includes, but is not limited to, changes in net agricultural productivity, effects on human health and property damages from increased flood risk. New types of damages are being added with each model revision.
Note: The models used to develop SCC estimates, known as integrated assessment models (IAMs), do not include all of the important physical, ecological and economic impacts of climate change recognized in the climate change literature because of a lack of precise information on the nature of dam-ages and because the science incorporated into these models naturally lags behind the most recent research. As the models catch up to current science, the calculated values of damage estimates (SCC values) will increase, perhaps significantly.
The SCC is, perhaps, the most important number that own-er/operators may have never heard. It is being used by the EPA to justify a host of new regulatory actions and new government subsidies/taxes/surcharges. When agencies prepare to issue regulations, they must justify proposed regulations by assess-ing the regulation’s costs and benefits. The EPA uses the SCC within the regulatory rulemaking regime to estimate the cli-mate benefits of proposed new regulatory actions. The SCC is used on the “benefits” side of the cost-benefit analysis. Recent justifications using the SCC include renewable fuel and mile-age mandates for our cars; water limits for washing machines and dishwashers; and electrical demand of microwave ovens, among other applications.
Using the SCC typically allows the agency to demonstrate huge benefits due to small changes in efficiency because those benefits are shown to last for 300 years, long after the vehicle or appliance is sent to the landfill or to recycling. The 2017–
2025 Light Vehicle GHG and Corporate Average Fuel Econ-omy (CAFE) regulations indicated a net present value (NPV) of $170 B in savings from CO2 reductions through the year 2050. (Astoundingly, only one commenter indicated that SCC should not be used in the cost-benefit analysis.) The SCC will become a very important policy tool in the coming years and a keystone of future climate policy.
The use of the SCC by the EPA has largely gone unchal-lenged by industry. As a result, the EPA is using it in increasingly bolder ways and, in fact, recently proposed newer and much higher SCC values—values that are 60% to 100% higher than those proposed just three years ago. The future use of the SCC will likely be aimed much more directly at emitters of fossil fuels.
The EPA SCC value for 2015 is $39/t, assuming a 3% dis-count rate, and increases rapidly every year thereafter. TABLE 1 presents the various SCC estimates published by the EPA for the years 2015–2050, assuming various discount rates. Permit applicants should assume that the $39/t SCC value represents the GHG BACT cost threshold when submitting a permit. If the EPA is using the SCC costs to justify new regulations, it will not be long before it requests that state agencies with del-egated permitting authority use the SCC as the cost threshold
for BACT GHG cost analyses. After all, if the federal agency believes that the release of 1 metric t of carbon will cause $39 worth of damage in the future, then that cost estimate repre-sents the rational and logical GHG BACT cost threshold.
[Note: The author does not adhere to this view, but presents it as a likely scenario for the future.]
Thus, permit applicants are advised to always submit GHG BACT cost analyses of CCS that significantly exceed the cur-rent value of the SCC. While that should be easy to do, there have been a number of permit applications submitted that have shown costs below this threshold.
Development of a solid GHG BACT cost analysis. In Step 4 of the EPA’s five-step BACT cost analysis process, ap-plicants are asked to rank all of the remaining feasible tech-nologies. In Step 5 of the process, the highest-ranking option with reasonable cost, energy and environmental impacts is selected. For all of the reasons and justifications mentioned in the preceding paragraphs, it is important that the GHG BACT cost analysis be prepared in such a way as to clearly show that CCS is not economically feasible.
A review of more than a hundred recent GHG BACT sub-mittals revealed many common errors. As the EPA continues to strengthen its GHG review process, as it has during the last three years of GHG permitting, and as it gains further insights into the range of solutions offering CCS, the agency will even-tually ask one unlucky applicant to apply CCS to its facility.
More than likely, the applicant will then bolster the BACT cost analysis and resubmit it, and the EPA will then waive the CCS requirement. However, the applicant’s permit will have been delayed four to six months and the project may have lost the economic window of opportunity. A solid and detailed GHG BACT cost analysis can prevent this delay and the pos-sible imposition of CCS.
The prime mistake that virtually all applicants make is not including all appropriate costs in their CCS cost analysis, and the costs that are omitted are not esoteric costs related to GHG emissions. The omitted costs are costs that should be used in every cost analysis, whether for criteria pollutants or GHGs. That is, the issues discussed below are not specific to GHG permit applications: they apply equally to criteria pol-lutant permit applications.
TABLE 1. The EPA’s SCC issued in 2013 for the period 2015–2050 for various assumed discount rates
Discount rate and statistic
Year 5% average 3% average 2.5% average 3% 95th percentile
2015 $12 $39 $61 $116
SCC values are $/yr and emissions/yr specific.
Costs typically omitted by GHG permit applicants. How does the EPA want to see a cost analysis presented? To address hundreds of requests for such a document, the EPA developed the EPA Air Pollution Control Cost Manual, EPA/452/B-02-001.4 This manual provides information on point source and station-ary area source air pollution controls for volatile organic com-pounds (VOCs), particulate matter (PM), NOx and some acid gases, primarily SO2 and hydrogen chloride (HCl). Unfortu-nately, the manual has not been updated to reflect GHG costing examples, but it is insightful nevertheless.
The objectives of this manual are two-fold:
1. To provide guidance to industry and regulatory authorities for the development of accurate and consistent costs (capital costs, operating and maintenance expenses, and other costs) for air pollution control devices
2. To establish a standardized and peer-reviewed costing methodology by which all air pollution control costing analyses can be performed.
To meet these objectives, this manual—for the last 25 years—has compiled up-to-date information for “add-on”
(downstream of an air pollution source) air pollution control systems, and provided a comprehensive, concise, consistent and easy-to-use procedure for estimating and (where appro-priate) escalating these costs.
From a regulatory standpoint, the manual estimating pro-cedure rests on the use of a study-level—or rough order of magnitude (ROM)—cost estimate, which is nominally ac-curate to within ±30%. This type of estimate is well suited to estimating control system costs intended for use in regulatory development because it does not require detailed site-specific information. While more detailed data is available to the regu-lator, that data is generally proprietary in nature (which limits its publication), costly to gather and too time consuming to quantify. Therefore, for regulatory analysis purposes, study-level estimates offer sufficient detail for an assessment while minimizing its costs.
While this document does not specifically address GHGs, it is certainly a solid guide to use when building a cost analysis, since a cost analysis for controlling a criteria pollutant will have many of the same types of costs needed for GHG emissions.
The EPA wants applicants to use certain equations as the basis for their approach to costing, and the first and most im-portant is used to calculate the total annual cost. Once the to-tal annual cost is derived, it can be divided by the annual emis-sions reduction to derive the annualized cost effectiveness, as shown in TABLE 2.
The components of a comprehensive cost analysis.
As the EPA explains in the aforementioned manual, total an-nualized cost (TAC) comprises three elements: direct costs (DCs), indirect costs (ICs) and recovery credits (RCs), which are related by the following equation:
Total annualized cost = DC + IC − RC
To develop a comprehensive cost analysis (FIG. 1), the com-ponents that make up the above three sub-costs—DC, IC and RC—must be understood. First, the equation for DC helps to illustrate those costs that might typically be omitted by ap-plicants in a hurry:
Direct costs = Labor
+ Raw materials, feedstock + Replacement parts + Utilities
+ Impacts to heat rate, efficiency losses due to the new control system + Outages
+ Waste disposal.
Typically, about half of all GHG BACT submittals use noth-ing more than a “vendor quote” when preparnoth-ing their GHG BACT permit applications. The applicants probably ask the
en-gineering firm of their larger project, “By the way, when you get a few minutes, can you prepare a cost quote for a CCS system for the project?” The client would include the resulting estimate within the GHG BACT analysis section of the application.
Historically, using a vendor quote may have been sufficient. Even a ROM vendor quote would likely exceed the $10/t cost threshold used by most agencies. How-ever, many vendor quotes will not exceed the EPA’s estimates for the SCC, and ven-dor quotes are insufficient to protect ap-plicants from the imposition of CCS.
Within the DC equation, there are sev-eral sub-components that the engineering contractor, without seeing the EPA’s cost-ing procedure, might omit, includcost-ing:
1. Raw materials—Many CCS units will require various types of raw material feeds, such as catalysts or amine solutions.
Higher reductions at lower cost/ton
Lower reductions at higher cost/ton
Increasing total annualized costs, $/yr
Increasing emission reduction, CO2e tons/yr O2 Trim control
FIG. 1. Graphical illustration of average cost effectiveness of the various control options under consideration.
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2. Replacement parts—Replacement parts can incur a substantial cost and should always be included.
3. Utilities—The annual cost of utilities can be a substantial portion of the total cost of a CCS system and should not be omitted from the GHG BACT cost analysis.
4. Outages related to installation and startup of the new system—The system installation can result in an outage of a month or perhaps much longer.
These outages will cost the applicant money, and those costs should appear in the BACT cost analysis.
5. Impacts to heat rate/efficiency—The installation of a CCS system will have an enormous impact upon the overall operation of the new facility. CCS systems will typically have a parasitic energy burden of 25%
to 40% of the total energy consumed by the main facility. It is vital to capture those costs in the analysis.
6. Waste disposal—Many CCS units will generate various forms of waste products, such as spent catalysts or spent amine solutions, which need to be sent out for disposal. Capture those costs.
A typical engineering quote, as described above, will omit six of the seven DC components needed for an iron-clad BACT cost analysis.
The equation for IC includes:
Indirect costs = Overhead: typically a % of labor costs + Property tax: typically, a % of total capital cost (TCC)
+ Insurance: typically, a % of TCC + General and administrative: typically, a % of TCC
+ Capital recovery: capital recovery factor (CRF) x TCC.
Very few engineering quotes will include any of the above line items. While the applicants might include line items relat-ed to electrical, piping, insulation, instrumentation, and even taxes and freight, applicants will seldom, if ever, see items like property tax, insurance, and general and administrative costs within the bounds of a vendor quote. These are all perfectly legitimate costs, and all applicants for GHG permits should include these line items when an iron-clad BACT cost analysis is required.
Capital recovery (CR) is the last sub-component cost fac-tor in the list of indirect costs. It is a critically important cost factor, and great care should be used in establishing it. Two components are used to establish the CR: CRF and TCC.
The CRF is a little more involved and will be discussed later in this article.
The equation for TCC is as follows:
Total capital cost = delivered cost of the control equipment + Auxiliary equipment
+ Instrumentation
+ Working capital costs + Startup costs + Performance tests + Initial catalyst loads
+ Any additional costs that are legitimate upfront costs associated with the planned equipment.
Again, there are many sub-components to the TCC equa-tion that are often omitted when a simple “vendor or engineer-ing quote” is requested. Permit applicants need to be sure to add appropriate costs for startup, performance tests, initial catalyst loads and working capital costs. These are all allowed by the EPA and should be included in the GHG BACT cost analysis. Without these costs, the permit application may be at a disadvantage to those that may include these costs, as the annual cost effectiveness (cost/t removed) may be so low as to prompt the EPA into asking the applicant to consider imple-mentation of CCS.
When addressing the capital cost recovery factor, the equa-tion is: the capital cost recovery factor is 0.136. In this example, a com-pany can “recover” 13.6% of the capital cost every year.
As is apparent from the equation, a high interest rate and a short equipment life will lead to much higher annualized costs. Using a high interest rate and/or a short equipment life-time results in a high annual cost recovery of the equipment and, ultimately, a high cost/t removed, which will indicate that CCS is economically infeasible. Higher annualized costs resulting from a high interest rate and/or a short equipment lifetime will result in a greater probability that the equipment will be excluded from further consideration in the BACT anal-ysis, as it will exceed the BACT cost threshold.
On the surface, it certainly appears to be beneficial to select a high interest rate and a short lifetime for the equipment. How-ever, permit applicants are cautioned that the EPA scrutinizes these two items very closely. Applicants are advised to choose
TABLE 2. Illustration of annualized cost-effectiveness calculation Option
Annual tune-up 3,000 2,010 1.49
Boiler O2 trim control 5,308 3,350 1.58
Economizer 124,315 10,049 12.37
Boiler blowdown
heat recovery 25,061 1,340 18.7
Condensate recovery 11,018 13,399 0.82
Air preheater 130,735 10,049 13.01
their interest rate and equipment lifetime carefully. ExxonMo-bil’s Baytown, Texas olefins cracker project was recently chal-lenged by the Sierra Club on its choice of interest rates (14%).
The Sierra Club was suggesting that an interest rate of 0.8%
was more appropriate, using the US Office of Management and Budget’s (OMB’s) Circular A-94 “social interest rate” discussed in the EPA Air Pollution Control Cost Manual. In a second ex-ample, US Nitrogen submitted a PSD permit and assumed a 13% cost of capital (interest rate) and a 10-year life of the equipment (depreciation). By doing so, it was able to eliminate several technically feasible control solutions from further con-sideration. The EPA objected to the US Nitrogen interest rate and asked why the standard rate of 7% and the normal 20-yr life span had not been used for its equipment.
Common interest rates used by industry and accepted by the EPA for applications include the business’ current borrow-ing rate, the current prime rate and other acceptable industrial rates of return. Typically, in the absence of other rates, the rec-ommended interest rate is determined as follows:
1. Average the 10-yr US Treasury bond interest rates for the last six months
2. Add 2% to that interest rate
3 Round up to the next higher integer.
For example, if the 10-year bond averaged 2.9% for the last six months, the interest rate to use would be 5%. Applicants can certainly use an interest rate higher than 5%, but the ap-plication should clearly explain why the higher interest rate was selected in the permit application. Applicants may be able to quote loan documents, internal costs of capital or other sources of information, but any interest rate selection must be supported by solid documentation.
Clearly, some equipment, like that in acid service, does not last 20 years, which is the EPA’s “suggested” lifetime estimate for most equipment types. If the application uses a lifetime shorter than 20 years, detailed arguments as to why the equip-ment cannot be expected to last 20 years should be presented.
Lessons learned. Developing a comprehensive GHG BACT cost analysis is critically important. The activist community and the EPA are no longer accepting brief one- to three-page
“cost analyses” that blithely conclude that CCS is not econom-ically feasible. Numerous permits have been challenged and held up unnecessarily for months while agencies and courts work through the issues.
While CCS is almost always prohibitively expensive, dem-onstrating that it is too costly is not always easy. Building a strong case to show CCS to be economically infeasible must be done in such a way as to be understandable to all concerned parties, using proven methodologies. Fortunately, the EPA has provided fairly detailed guidance on what it expects and how the analysis is to be approached.
A BACT cost analysis developed using this document as a guide will be difficult to challenge and should withstand EPA scrutiny.
Permit applicants are advised to properly account for all costs in a BACT cost analysis. Using a simple “vendor quote”
will no longer suffice for GHG BACT cost analyses. Vendors leave too many major costs out of their quotes, and the ac-tivist community may be able to challenge the costs and gain
a hearing with the state or federal agency. Failing to include key costs in your BACT cost analysis will result in poorer than necessary economics and also possibly result in unwanted and unnecessary permit challenges.
Key direct costs that are often left out of permit applica-tions include raw materials (amine soluapplica-tions, catalysts, etc.);
replacement parts; utilities to operate the new unit in the first year; outages related to installation and startup of the new system; impacts to heat rate/efficiency caused by energy and power losses from the CCS unit; and waste disposal of amine or spent catalyst.
Key indirect costs that are often omitted from the calcu-lation include company overhead, property taxes on the site
Key indirect costs that are often omitted from the calcu-lation include company overhead, property taxes on the site