As DAC scales, profit margins will depend on high utilization rates

Last month, Climeworks announced that its newest direct air capture (DAC) facility, Mammoth, has begun removing CO2 from the atmosphere. Scheduled to reach its full rated capacity of 36,000 mt per year by the end of this year, Mammoth will be nine times the size of the largest operational facility to date, Climeworks Orca. Still, today’s largest DAC facilities pale in comparison to the megaton (million tonnes) scale that DAC developers hope to achieve this decade, and the gigaton (billion tonnes) of annual global processing capacity that the IEA models as necessary to achieve net zero by 2050. Achieving these goals will depend on the performance of larger-scale DAC technologies as well as the development of voluntary carbon direct removal (CDR) credit markets. But the rapid expansion of these new technologies exposes nascent DAC projects and their developers to significant technology risks.

Most DAC technologies have so far only been tested in small pilot plants. For example, Occidental Petroleums' half-megaton facility under construction in West Texas will be more than 1,300 times larger than its current pilot plant, which serves as the largest demonstration facility for its proprietary technology. Occidental and project partner BlackRock are investing $1.3 billion in scaling the technology, paving the way for future projects. Presumably contingent on the outcome of this first project, Occidental expects a second project to be worth the investment with a competitive IRR.

The technical risks faced by such projects can be illustrated by recent data from Orca, Climeworks' first commercial DAC plant mentioned above. A variety of technical issues, including faster-than-expected equipment wear, inconsistent quality of process chemicals, and impurities in the CO2 stream, have prevented the plant from operating at full capacity. As a result of these and other factors, the plant's average operating rate in its first two years of operation was only 21% of its rated capacity. Lifecycle emissions calculations reveal that the actual production of marketable CDR credits was even lower, at only 18% of its rated capacity.

Despite these results, performance has improved over time. Climeworks claims that future plants will incorporate lessons learned at Orca to further improve performance. That said, CDR credit production at this plant is not currently expected to exceed 63% of rated capacity. If other early projects operate at similar capacity rates, the developer could face significant losses and struggle to gain investor support for follow-on projects.

DAC plants are capital intensive and therefore must maintain moderate to high utilization rates to be profitable. BTU Analytics combined published techno-economic data and assumptions from major DAC technology suppliers to create a proprietary financial model of a generic reference plant in the first generation of DAC deployment. The chart above shows the modeling of the levelized cost of net payback for two potential projects: a 0.5 megaton facility with modeled capital costs of $1.3 billion and a megaton facility with modeled costs of $2.1 billion. Potential revenues per ton are overlaid in yellow, with the low case reflecting a $400 CDR price with a 45Q US federal tax rebate and the high case reflecting a $630 CDR price with a 45Q rebate. For the 0.5 megaton capacity plant, BTU Analytics models that the breakeven utilization rate will be between 50% and 75%, depending on the CDR price. Larger megaton plants could break even at a 40-60% utilization rate, as economies of scale would reduce costs. In either case, lower utilization rates would result in significantly higher unit costs, potentially leading to significant losses if the facility does not meet the breakeven threshold. For example, if the modeled utilization rate of the 0.5 megaton plant mimicked the ramp-up of the Climeworks Orca plant, the project would incur negative cash flows of $157 million and a net loss of $287 million in the first two years of operation.

Of course, it must be taken into account that first-time projects are often not profitable in themselves, but developers hope for a positive precedent that demonstrates the viability of future projects. Even if improvements in scale or technology can reduce unit costs, DAC developers need to demonstrate that second-generation projects are viable with high occupancy rates in order to generate high profits.

As shown above, future megaton-scale plants may be able to clear the 15% pre-tax IRR hurdle at 75% capacity utilization even in low-price environments. However, because DACs are exposed to both technology and market risks, initial investments may be evaluated at a higher target IRR (perhaps 20% or higher). To achieve an IRR above 20%, they would need to operate at capacity utilization above 90% in low-price environments and 65% in more favorable environments.

Future DAC plants are expected to improve on the performance of these first-of-its-kind plants. However, the first few generations will continue to face a variety of technical challenges as they scale and approach new regions while continuing to experiment with their core technologies. Even when technically mature, DAC facility utilization may be at risk from other factors such as adverse weather and fluctuations in energy costs. While the results of a single initial project may not be predictive of future projects, Orcas' performance to date suggests that techno-economic models that assume 90% utilization may underestimate the challenges ahead.

BTU Analytics' Global Carbon Capture Database currently tracks over 50 direct air capture and direct ocean capture projects. To learn more about this project and other energy transition data offerings, be sure to check out our Energy Transition Coverage Suite, available on our Premium Energy Workstation.

This blog post is for informational purposes only. The information contained in this blog post does not constitute legal, tax or investment advice. FactSet does not endorse or recommend any investments and is not responsible for any consequences related directly or indirectly to any action or inaction taken based on the information contained in this article.

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