Insurance issues for carbon capture and storage

07 April 2017

In the current debate around clean energy finance and the role of coal-fired power stations in maintaining energy security, the process of carbon capture and storage (CCS) is one option under consideration for facilitating ‘clean coal’.  As a relatively new technology, the installation and operation of CCS projects creates novel risks and, as the perennial ‘canaries in the coalmine’, insurers are at the forefront of assessing those risks.

The world’s climate is affected by the emission of greenhouse gases, and the most prolific of those is carbon dioxide. The CCS process, also known as geosequestration, involves capturing carbon dioxide at the source of its emission, compressing it into a liquid and pumping it underground into geological strata where it is trapped. Suitable sites for geosequestration, also known as environmentally sustainable sites for carbon dioxide injection (ESSCIs), consist of an open or permeable space for storing the gas that is capped with a layer of salt, clay or impermeable rock. Typical ESSCIs include sandstone basins, depleted oil reservoirs, uneconomic coal seams, salt caves and deep saline aquifers.

CCS projects around the world are still relatively embryonic although in 2009 there were 60 projects devoted to investigating geologic sequestration in deep saline formations. In Australia there are 4 demonstration projects with several more in planning. And though the geosequestration of carbon dioxide as a means of curbing GHG emissions is a relatively new concept, the technology has, in fact, been around for a while. For example, in 2005, 70 firms worldwide were injecting carbon dioxide into oil wells to enhance oil recovery and in fact the C02CRC Otway geosequestration project was first considered in 1998.

Current hurdles for geosequestration include the expense of removing most of the carbon dioxide from a power station’s exhaust. Retrofitting carbon capture equipment to existing coal-fired power stations is energy intensive – adding it to the most efficient kind of coal burning stations reduces their generating efficiency and requires them to burn 27% more coal to produce the same amount of electricity than those without CCS equipment.

There are also questions about the long term security of this type of storage. Common concerns include whether the gas will slowly leak out over time, whether seismic activity will cause breaks in the non-permeable strata that trap the liquefied gas and whether CCS is just hiding the problem away and leaving it for another generation to deal with. On the other hand, the CSIRO has stated that the risk of catastrophic release of carbon dioxide from CCS projects is ‘not real’ and that there are many natural leaks of carbon dioxide from the earth in countries like Italy and New Zealand that exceed potential leaks from a CCS site with a failure. The CSIRO concedes, however, that proper regulation is essential.

There are actual examples that demonstrate the size of the risks of geosequestration and the dangerous potential of legal liability exposure. A well known example involved sequestered carbon dioxide leaking from its storage in August 1986 at Lake Nyos in Cameroon, although the sequestration in that instance was natural and not man-made. In that incident a volcanic crater lake released a large quantity of carbon dioxide that had accumulated underwater. Due to topographical issues it failed to disperse and resulted in more than 1,700 fatalities.

Insurance products do exist to cover the risks of these products. Insurers offer products covering the construction phase of CCS projects, damage to or loss of machinery during the operating phase and, in limited circumstances, damage to third parties resulting from a failure of the facility, including the release of carbon dioxide. There are, however, many uncertainties to deal with in assessing indemnity, such as who owns the carbon dioxide and who is responsible for it after compression and deep injection into the earth. There are design feasibility issues – for example, it is difficult to retrofit sequestration plants onto power generation sites because of the space needed – and other technical risks, such as the efficiency of sequestration and the general risk of leaks. There are risks during transport (for example, carbon dioxide leaking from pipes when it is transported from geographically remote power plants, sometimes lying up to several hundred kilometres away, to underground reservoirs) and non-proven storage technology. For example, carbon dioxide is injected into deep saline formations or exhausted oil and gas reservoirs either in gaseous form or as a cryogenic liquid and the long term stability of such reservoirs has not been fully proved.

The number of risks and the potential damage from an accident involving those risks will limit the number of insurance products on the market that provide cover for geosequestration projects after installation. One insurance executive suggested in a speech that an accident involving carbon capture could be so large it could bankrupt the industry. Where the risk of catastrophically large losses cannot be necessarily restricted, the insurability of the risk is called into question. Nevertheless, CCS projects in Australia are showing good results, and, in the opinion of the CSIRO at least, the risks are manageable. With the necessary regulation, insurance may provide the safety net that CCS requires to become a viable option for reducing carbon dioxide emissions.

This article was written by David Guthrie, Partner and Ailbhe Kirrane, Partner.

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