Carbon Reduction
carbon-reduction
Climate Strategy
climate-strategy
7 min. read
Last updated Feb 26, 2026
Key takeaways
The opportunity: Clean, firm power is a strategic priority for large electricity buyers. Natural gas-fired generation equipped with carbon capture and storage (CCS) is emerging as a key tool in meeting this demand. The existing gas-fired power fleet in the US should be assessed to identify plants well-positioned for carbon capture retrofits that would benefit grid decarbonization.
The challenge: The climate benefits of CCS-equipped natural gas plants depend entirely on how often they actually run. Adding carbon capture technology increases the cost to operate the equipment. These higher running costs can make the plant less competitive in auctions where the grid operator picks the cheapest power first. Without mechanisms to keep these plants running continuously, they may be outbid by cheaper, higher-polluting plants, causing grid-wide emissions to stay the same or even increase.
The solution: Hyperscalers and other large energy buyers are creating a robust market for clean, firm power. By paying a "clean, firm premium" through long-term offtake agreements, these buyers can offset the higher operational costs of CCS, ensuring these plants are continuously utilized. This corporate leadership not only maximizes the grid-wide climate impact of each retrofit but also provides an important hedge against policy volatility, securing the investment case for clean innovation even when the future of subsidies like the 45Q tax credit is uncertain.
We need clean, firm power now
The market signals for clean, firm power are clear. Meta’s nuclear energy projects and Microsoft’s Crane Clean Energy Center demonstrate growing interest in reliable, low-carbon electricity to support the rapid expansion of AI. Similar commitments by Google and Meta to advanced geothermal power also illustrate this trend.
One of the near-term options to meet this demand is natural gas with carbon capture and storage (CCS). As explored by Carbon Direct, retrofitting existing gas facilities offers a path to reliable baseload power with low direct emissions, leveraging existing infrastructure to bypass the years-long delays typical of new grid interconnections.
Recent initiatives from Google and Calpine are already working to prove this concept at scale. This type of corporate leadership is driving the market; over the last decade, voluntary corporate procurement led to more than 40% of new clean energy capacity in the US. Further, recent procurement decisions illustrate that these players are willing to pay a “clean, firm premium” to secure round-the-clock, low-emissions sources of power.
Why systems-level analysis matters for CCS
While news of corporate procurements often makes headlines, recent analysis finds the number of supply contracts for natural gas power with CCS may outpace the number of secured offtake agreements. Without a power purchase agreement (PPA) to ensure competitive operation, or strong policy support, a generator may need to operate as a “merchant plant” in power markets, competing solely on cost.
A power plant’s ultimate climate impact is determined primarily by how it is positioned in the market, not just its facility-level technology.
How power markets determine which plants run
Understanding the potential of CCS to deliver clean, firm power and grid-wide decarbonization requires looking beyond the technology performance at a single facility. A retrofitted plant does not operate in isolation; its impact depends on how it interacts with the broader power market’s merit order.
The merit order is the ranking system in competitive power markets where the grid operator dispatches the cheapest offers first. Since carbon capture units are energy-intensive, the retrofitted natural gas plant incurs higher operating costs. This cost increase can inadvertently price the lower-emitting plant out of the market. Without mechanisms to ensure continuous utilization, the CCS plant is potentially outbid by cheaper, more carbon-intensive resources. This creates a risk of increased overall grid emissions.
To illustrate this dynamic, we’re sharing the results of our detailed grid modeling analyses of the Electric Reliability Council of Texas (ERCOT), which serves most of Texas, and the Southwest Power Pool (SPP), which covers parts of 14 states across the central US. Our analysis highlights the value of corporate “clean, firm premiums” in achieving maximum climate benefit and mitigating policy risk present in government subsidy support.
This type of systems-level grid modeling is necessary in understanding how facility-level reductions translate into real climate benefits. Support to incentivize continuous operation, such as corporate offtake agreements or the 45Q tax credit, is key to ensuring that retrofitting a gas power plant with CCS reduces overall grid emissions.
Offtake agreements and policy support as solutions
Power offtake from CCS retrofitted gas plants can meaningfully reduce system-level emissions. By directly matching electricity demand with the supply of power, large energy buyers – the offtakers – ensure the power plant is effectively utilized. This type of arrangement helps ensure any changes to reduce emissions intensity at the facility level translate into broader emissions reductions on the grid.
For these offtakers, the decision to pay a premium for clean power is driven by the goal of additionality – ensuring their procurement has a measurable, additional emissions reduction impact. Beyond physical energy, buyers secure Energy Attribute Certificates (EACs) for CCS, which serve as the verified proof of low-carbon generation required to satisfy corporate zero-emissions targets. As seen in the recent Google and Calpine agreement, these certificates allow buyers to claim the specific climate benefit of the CCS retrofit, justifying a premium over standard wholesale market rates to secure firm, clean delivery.
In the absence of offtake agreements, policy frameworks like the 45Q tax credit (up to $85 per ton of CO2 sequestered) serve a similar function by offsetting production costs. However, access to this credit is not a guarantee and carries operational hurdles. To unlock the full credit value, facilities must meet stringent prevailing wage and apprenticeship requirements. Furthermore, the credit is limited to a 12-year window once the facility is placed in service, and requires construction to commence by 2033.
Beyond these eligibility requirements, the long-term outlook for 45Q involves inherent uncertainty. Recent regulatory shifts, including potential changes to the Greenhouse Gas Reporting Program (GHGRP), pose risks to the verification mechanisms required to substantiate captured tons.
Corporate offtake agreements offer a crucial private-sector complement to this landscape; they provide a stable revenue model independent of policy cycles, ensuring the investment case remains robust over the full life of the asset.
Understanding the merit order in power markets
Most US power plants operate in competitive deregulated markets, where grid operators dispatch generators based on their marginal cost of production – the cost of generating one additional unit of electricity. The operator ranks these offers from lowest to highest price, creating the "merit order.”
In these auctions, the cheapest resources (typically renewables and base load) are dispatched first. Progressively more expensive units (gas and peaking plants) are called upon until demand is met. The price of the final, most expensive unit required sets the market-clearing price received by all generators in that period.
The Figure below shows an example generation merit order in the ERCOT energy market.
Figure 1. Example generation merit order in the ERCOT energy market.
Case study: How support structures influence dispatch
The merit order figure illustrates a hypothetical scenario for a natural gas generator, showing how its market position changes based on technical and policy variables:
Pre-Retrofit (Stage A): The plant operates with standard marginal costs, sitting competitively in the middle of the supply stack.
Post-Retrofit (Stage B): Retrofitting with CCS introduces higher operating costs due to the energy-intensive nature of carbon capture. Without external support, the plant’s marginal cost increases (A to B), making it less competitive. The retrofitted plant may be utilized less while cheaper units are dispatched to meet demand.
Post-Retrofit + policy or offtake support (Stage C): Financial support, whether through the 45Q tax credit (approx. $33/MWh¹ ) or a corporate offtake agreement, can effectively offset the plant’s higher operational costs (B to C). This effect restores the plant’s competitiveness, ensuring it dispatches consistently.
Testing this with grid modeling
At Carbon Direct, we apply state-of-the-art grid analysis tools to answer these and more complex analytical questions related to the future energy system. Our custom modeling framework has been used to simulate clean power strategies, assess data center demand response programs, and understand how procurement decisions today impact the future energy system.
While the theoretical impact of a CCS retrofit, a PPA agreement, and the 45Q tax credit on a plant’s dispatch is clear, it’s important to put the theory to the test by modeling their effects on system-wide emissions.
Figure 2. Network diagram of the simulated SPP energy system.
Our modeling approach
Because each grid region has distinct power plants and load requirements, they must be modeled separately. For this analysis, we chose to model the ERCOT and SPP power markets to determine the region-specific, grid-wide emissions impact of hypothetical CCS retrofits of natural gas power plants.
As part of this modeling, we:
Deployed detailed hourly simulation: We used our custom PyPSA-USA grid model to produce a set of hourly simulations of the ERCOT and SPP electricity markets.²
Identified suitable retrofits: We identified suitable combined cycle gas power plants for a CCS retrofit in each of the markets, based on key commercial and operational criteria, including size, age, generation profile, and proximity to CO2 transport/storage.
Modeled plant and energy assumptions: To reflect the retrofit, we adjusted generator cost and energy use for the identified plants (up to 1.4 GW capacity), fitting all combustion turbines with capture and requiring each plant to consume 20% more fuel per unit of electricity produced to power CCS.³
Carried out comparative scenario analysis: We simulated several scenarios, including (1) pre-retrofit, business-as-usual, (2) post-retrofit, with and without a PPA, and (3) post-retrofit, with and without the 45Q tax credit, to isolate the impact of different procurement agreements and policy landscapes on grid-wide emissions.
What our analysis reveals
Results of this analysis reveal how CCS deployment in the power grid interacts with market economics and the role mechanisms that drive high utilization of CCS retrofit plants can have in ensuring system-wide emissions reductions:
CCS with a firm offtake agreement can significantly reduce grid-wide emissions
Pairing a retrofitted plant with a dedicated offtaker can drive meaningful emissions reductions in both ERCOT and SPP compared to business-as-usual (-0.8% to -1.7% CO2 in ERCOT; -5.2% to -7.3% CO2 in SPP). Under these arrangements, system-wide emissions fall because the PPA acts as an operational anchor, ensuring the retrofitted plant maintains high utilization rates despite its higher running costs. Ensuring the plant stays utilized prevents the grid from reverting to more carbon-intensive generation to fill the gap.
Our analysis finds the value of the operational “clean, firm premium” for natural gas with CCS power is up to $60 per MWh. This value varies by hour, region and scenario but results generally align with our previous estimate of a $30 per MWh value associated with this type of generation. Other estimates put this value between $19 and $72 per MWh.
CCS without an offtake agreement can reduce emissions, but is more reliant on policy support
Without a dedicated offtake agreement or policy support, retrofitting natural gas plants with CCS runs the risk of a small increase in grid emissions (+0.7% CO2 in ERCOT; -0.0% CO2 in SPP). System-wide emissions are higher because other power plants displace the plants with carbon capture. The higher operational costs of CCS mean the CCS plants have a less competitive place in the merit order and run for fewer hours in the year.
The story changes with the application of 45Q, and grid-wide emissions are lower for both ERCOT and SPP (-1.7% CO2 in ERCOT; -3.4% CO2 in SPP). Access to the 45Q tax credit improves each CCS plant’s position in the merit order, meaning that it runs for more hours and successfully displaces higher-emitting generation with clean, firm power.
Figure 3. Impact of natural gas with CCS retrofit on grid CO2 emissions – merchant vs. offtake models in ERCOT and SPP
The path forward for clean, firm power
Our analysis illustrates that in competitive power markets, the overall carbon emissions impact of natural gas generation with CCS cannot be measured solely at the power plant level. While clean, firm power remains a strategic priority for large electricity buyers, and CCS is a key tool to meet this demand, the overall climate value of a successful retrofit is linked to the availability of offtake agreements and the plant’s position in the merit order.
A systems-level perspective captures what facility-level analysis misses: how market dynamics determine the true climate impact of decarbonization investments. Support mechanisms for the continuous operation of low-carbon power plants, like PPAs and the 45Q tax credit, are important tools that ensure clean, firm power reaches the grid, effectively bridging the competitiveness gap.
How Carbon Direct can help
At Carbon Direct, we deploy our advanced energy modeling suite to address the complex market and policy questions that define the future of the energy system. Our approach combines technical due diligence with grid-wide system modeling to reveal how decarbonization strategies perform in real-world market conditions.
Stay tuned for future modeling studies on power procurement for large energy buyers, data center load management, and revisions to the GHG Protocol.
¹ Calculated by multiplying the 45Q subsidy ($85 per metric ton) by the plant’s emissions intensity (e.g., 410kg CO2 per MWh) and the effective carbon capture rate (e.g., 95% capture rate).
² The model used in this analysis did not represent transmission constraints; stay tuned for a more detailed follow-up analysis with explicit transmission representation.
³ For simplicity, this analysis only considers the direct operational impacts of CCS-retrofit plants. We do not account for CO2 transportation and storage, upfront capital costs, or associated downtime of the retrofit, capital cost amortization or depreciation, or the finite duration (and associated monetization costs) of the 45Q tax credit.
