CCS INSURANCE MARKET LOOKS TO BALANCE EXPECTATIONS WITH REALITIES

Tamar Hallerman
GHG Monitor
10/26/12

There appears to be a disconnect between what North American carbon capture and storage project operators and energy regulators are seeking in terms of long-term liability protections and what is being made available on today’s insurance market, interviews conducted by GHG Monitor have revealed. Long-term liability undoubtedly remains one of the largest barriers to CCS deployment, and uncertainties surrounding stewardship of CO2 once injected into the subsurface have caused some investors to shy away from moving forward on new projects. While energy regulators often require or prefer projects to have some sort of third-party liability protection in place, the federal government and many states have done little to clarify issues surrounding long-term responsibility or transfer of risk. As a result, the insurance market for CCS has remained small and “extremely scattered,” according to Patrick Maguire, vice president at the Birmingham, Ala.-based McGriff, Seibels & Williams, an insurance brokerage firm that drafted one of the first CCS insurance policies.

Also scattered are expectations for what types of coverage should be available. Whereas CCS project operators—which must maintain responsibility for the CO2 in the subsurface for 30 years after injection under the Environmental Protection Agency’s Underground Injection Control program—often look toward longer-term plans, the average length for insurance policies currently being offered on the market is one to three years. “The challenge is that there’s a temporal difference between what some people expect and how the capital markets work,” said Lindene Patton, chief climate product officer for Zurich Insurance Group, one of the field’s leading insurers of CCS projects. “That’s why we need to work together to assure that there’s a common understanding about what’s possible.”

Some CCS project operators, however, said they have experienced problems obtaining insurance for the long-term stewardship phase of their projects. Gary Spitznogle, director of New Technology Development and Policy Support at American Electric Power, said in an interview that while the utility found insurance “very easily” for the operations and immediate post-closure phases of its then-planned Mountaineer commercial demo in West Virginia, few brokers appeared willing to take on the risk of the project for the long term. “Getting insurance for the post-closure stewardship phase was where we really ran into a problem and found nobody willing to do that. Not because it’s such a big risk, but there was just so much uncertainty because it’s such an open-ended thing,” he said. In its annual status report of the CCS industry released earlier this month, the Global CCS Institute said that many other projects worldwide are feeling a similar pinch regarding stewardship. “In most areas, projects still report long-term storage liability as a hindrance to progressing CCS,” according to the report.

Insurers Say Options are Available

But in interviews with GHG Monitor, insurance brokers disagree with that assessment. They say there is a market for CCS project operators looking to obtain affordable insurance for long-term stewardship. “To say that insurance isn’t available isn’t really accurate because it is,” said Ben Harper, climate product officer also at Zurich. “It is available, we just can’t write a policy on day one and guarantee that we will do something for 30 years. We may write a policy for three years and then we’ll review and renew it if it still meets our risk profile, but there is no guarantee of that.” Maguire offered a similar point of view. “It’s a fairly new market that’s largely in its infant phase, but there is a market and there have been policies placed,” he said. “We’re constantly exploring and developing that market for new projects and feel like we can meet many of the objectives of the risk management policies of CCS projects with the current insurance market.”

Patton emphasized that multi-decade policies do not currently exist on most insurance markets and that most plans currently being offered for CCS span one to three years. She added that project operators would not want a long insurance policy due to changes that could occur because CCS is a newer technology. “Most customers don’t want a contract where they’re forced to pay for 30 years under circumstances where everybody knows that you’re learning things along the way with these processes and that you may have to adjust them, which changes their risk profiles along with them,” she said. Over time, she added, the technology could be come cheaper to insure as it matures. Patton said Zurich’s standard insurance plan for CO2 capture and injection operations runs on an annual basis, while a separate long-term stewardship plan creates a fund that pays post-closure necessities such as site monitoring, cleanup and security over a longer period of time. “With that as a backdrop, we certainly are offering coverage for CCS, and we are offering that coverage for the lifecycle of basically geologic storage,” Patton said.

Harper argued that it is an industry misconception that insurers are scared of the uncertainties associated with long-term CO2 storage. “To the contrary, when you start injection is probably the riskiest time. As you continue to inject, that risk will level off to a certain point and then once you stop injecting then that risk is really going to come down,” he said. “However, you’re still talking about a facility where you plan on storing things really in perpetuity.” Overall, some brokers said that the willingness of insurers to be flexible with CCS policies will likely increase as the industry gains more operating experience. “As a new technology develops, it becomes more reliable and less risky because you have a longer period of time behind it to prove its efficacy,” Maguire said. “Presumably as more CCS projects get underway, as long as there are no significant losses that would really harm the industry, the cost for insurance should go down as well.”

Stakeholders Look for Legislative Fix

Despite the availability of insurance products for the long-term stewardship phase of CCS projects, many stakeholders have looked to push through legislative alternatives in recent years. Last year, outgoing Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) reintroduced a bill that would establish a national indemnification program for the long-term liability of the country’s 10 first large-scale CCS projects. Under the legislation, the operators of those projects would pay a small fee per ton of CO2 sequestered into an industry-wide trust fund that would accumulate money over time to pay for any future public claims against a site. It would also allow site operators to transfer liability to the federal government 10 years after their CO2 plume has stabilized and would allow the Department of Energy to incur up to $10 billion in indemnification for any damage that could occur at one of 10 sites. While that measure easily passed the Senate Energy Committee last year, it has appeared all but dead waiting for consideration by the full chamber. Similar legislation by Sen. Kent Conrad (D-N.D.) also creates an indemnification program for 10 early-mover projects, but that proposal has seen even less action in the Senate.

Many industry stakeholders have long advocated for a trust fund idea similar to what was proposed in the Bingaman legislation. American Electric Power pushed for the concept last year. “We like this concept of an industry-funded trust fund because you form this entity and over time you build this sum of money that could be managed and used in the future,” Spitznogle said. “The intent would be that it wouldn’t even be an active fund until after a project’s injection has been completed and all the immediate short-term monitoring is done. It would be well-funded before the first project would even fall under the care of that trust.”

Another proposal from a coalition of CCS stakeholders that included Southern Company, Duke Energy, Zurich and the Environmental Defense Fund in 2010 advocated for the creation of a three-tiered liability program. The first tier would require each CCS project operator to be responsible for a certain amount of liability if there is an incident of damage at a facility. If damages go beyond that level, an industry-wide risk pool similar to that in place in the nuclear industry established under the Price-Anderson Act would contribute a certain amount of liability as well. The responsibility for a third tier of liability would come from the government under the plan. While that option was discussed with the Obama Administration and staff members on Capitol Hill, that proposal did not make it into legislation.