Utility executives face volatile energy markets, skyrocketing fuel prices, and changing federal energy policies. How are utilities benefiting from the turnaround in energy trading?
Coal Gasification Gets Real
see a clear path to retrofitting a system to remove carbon from syngas produced at an IGCC plant," Mudd says. "We don't see that for a PC plant, so if we build a PC plant, will it become a stranded asset if we have carbon reductions mandated in the future? It's hard to put that into a , but a long-term strategy must address these uncertainties."
Although existing plants might qualify for grandfathering provisions in future environmental laws, as they did under the Clean Air Act, a cleaner plant nevertheless would help manage the owner's exposure to legal and regulatory changes.
"IGCC is a hedge against change-of-law risk," says Ed Feo, a partner with Milbank, Tweed, Hadley & McCloy in Los Angeles. "If you look at the lawsuits being brought against the owners of existing coal plants in the Northeast and Midwest, you can understand the kind of after-the-fact legal risk that owners face. With clean-coal technology, presumably you'd be ahead of the regulatory curve."
Another factor that plays in IGCC's favor is the potential for a plant to produce other fuels and chemicals to sell. Most of the gasifiers in operation today, in fact, are being used by chemical companies to get hydrocarbon products from petroleum and waste feedstock. "Having synthesis gas as an intermediary opens up all kinds of potential markets," says Dale Simbeck, vice president of technology for SFA Pacific, a consulting firm in Mountain View, Calif. "If you have clean syngas, you can convert it to hydrogen, methane, methanol, diesel. … It's all commercial technology, but the question is cost and market price."
While the cost analysis is uncertain, the ability to manufacture other products gives IGCC a potential hedge against falling electricity prices. "You will see different transactions structured to account for revenue from different product streams," Feo says. "Clearly IGCC will benefit from being able to sell these products, in addition to burning fuel and selling electricity."
With environmental and market factors included in the calculus, IGCC is beginning to look like a winning technology for the future. DOE demonstration projects have shown that IGCC works, and the petroleum and chemical industries have been operating petroleum coke gasifiers commercially for decades. Nevertheless, most generation companies are reluctant to become first-movers in the IGCC game.
"Right now there is mixed interest in making that type of procurement for the long term," says Michael Zimmer, a partner with Thompson Hine in Washington, D.C. "Development times are too long, the market timing is uncertain, and the regulatory environment is unclear."
Additionally, an integrated coal gasifier and power plant has never operated on a commercial basis in this country. Consequently, IGCC presents technology risks for stakeholders, whether those stakeholders are commercial banks, equity investors, or utility ratepayers.
"The real test will be whether vendors will provide sufficient warranties to support investment decisions, and whether they will stand behind claims of efficiency and availability," Feo says. "Over the next year we will see standards and benchmarks develop that will make it possible to look at these projects and determine