Saturday, April 4, 2009

Insuring the Carbon Storage and Sequestration (CSS) Industry

The Problem.
Numerous issues and hurdles remain in the use of carbon storage and sequestration (CSS). One of these hurdles is the insurance of CSS projects and the need for establishing a robust policy and regulatory frame work that can help resolve the insurance issues faced by CSS projects. Insurance issues can be discussed from the perspective of the life cycle of the CSS project. The life cycle of a CSS starts from site selection and then moves to different phases such as operation and ultimately preventing the stored CO2 from escaping after injection has been stopped.

What investors and Insurers think of CSS.

To meet such demanding requirements the companies need an insurance policy that can share the financial risk of the project with them. However, according to Michael McRaith, a top insurance regulator in Illinois, “the liabilities are just too enormous to insure in case of CSS projects for insurers”. Similarly Granger Morgan, research lead in Carnegie Mellon University’s CSS regulations project says that due to long life spans of CSS projects insurance companies don’t know how to write an insurance policy that goes on for ever. Although, every one understands that the risk of CO2 leaking from underground is really small (less than 1%), Investors and insurers remain hesitant to develop and provide insurance policies for CSS projects.

A Possible Solution!

In 1950 Nuclear power plants were seen as a future solution to meet the growing electricity demands. However, like CSS the main hurdle to the development of nuclear energy was the liability associated with a disastrous event, such as a reactor meltdown and release of nuclear material into the surrounding atmosphere. The electricity industry was not willing to accept the enormous liability related with such a project in case of a catastrophic effect and insurance for such projects would not be easy to find. Moreover, the insurance premium would have been too much and make the project uneconomical. US congress reacted to the issue by passing the Price-Anderson act. The Price-Anderson Act set a maximum liability (about $10 billion). Upon reaching the maximum limit of liability to be met by the operator, such as in the event of a major nuclear event, the government would serve as the second partner responsible for offsetting the liability.

The CSS insurance problem can be solved on a similar basis. However, a consortium of insurers can help insure part of the liability to be met by the operator. The other issue that needs attention is building the trust between the companies and operators of CSS. This can be done by proving the technical soundness of the CSS project and the possibility of any leak being really small.

A more recent example of government collaborating with insurance industries is the Terrorism Risk Insurance Act (TRIA). After 9/11 all big energy utilizes and companies demanded insurance against an act of terrorism. The premium for such insurance was very high and also the demand for such an insurance surged. The government again intervened by providing a cap to the maximum liability to be met by the insurance companies. Once the cap was exceeded the government would step in to help.
An insurance policy similar to the above mentioned might work for CSS projects.

1 comment:

Stuart said...

This is a very important aspect that needs to be addressed and solved to effectively implement a carbon capture and sequestration (CCS) industry. There is inherent liability to CCS especially since it is a new process involving the dynamic processes of the earth. The idea of the government setting a limit of maximum liability could be an effective policy. Whereas, the idea of the government absorbing some of the liability of a CCS project could have strong opposition, expecially from tax payers who are already paying more for their electricty with CCS.
The question that came to mind as I read this blog was how are municipal and hazardous waste landfills insured. Landfills, like CCS projects, have a life well beyond the period of filling with waste/CO2. Both operations are also closely tied to the geologic stability of the project area. If we have been able to insure landfills that store muncipal, hazardous, and radioactive waste then we should be able to set up a similar system for CCS. Looking online at the process of setting liability for a landfill, the same process could easily be applied to CCS projects. These assesments involve a thorough evaluation of landfill design, geologic characteristics, leak detection system, etc. Ideally a CCS project should have a longer expected life without a leak than a landfill given the depth of CO2 injection. It comes down to which is more stable, a leachate liner that could leak or 50ft of shale that could develop a system of fractures. The way I look at it is if we can make if work for landfills then we can do the same for CCS projects.