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Financing Clean Coal

No single type of financial incentive closes the cost gap between clean coal and modern conventional coal technologies.

Fortnightly Magazine - June 2005

After two decades of demonstration projects aimed at establishing the technical and economic viability of clean-coal technologies, a variety of power producers now are considering seriously their use for new commercial generating plants. The major remaining obstacle is how to obtain financing for the next few plants, with an expected cost of electricity about 15 to 20 percent higher than that produced by conventional coal facilities.

Since the use of clean-coal technologies remains a high priority for the federal government, various financial incentives have been proposed to help overcome this problem. After examining a wide range of formally and informally proposed options, however, the authors have identified a critical dilemma facing policymakers: No single type of financial incentive studied will close the cost gap between clean coal and modern, conventional-coal technologies for all three major groups of generator owners-investor-owned utilities, independent power producers, and publicly owned utilities and cooperatives.

This dilemma comes at an awkward time for owners of generation, many of whom invested heavily during the last decade (when gas prices were relatively low) in power plants fueled by natural gas.

Table 1 - COE Gap Without Incentives ($/MWh)

Since 1990, more than 200 GW of new natural gas generating capacity has been placed in service, compared with only 15 GW of new coal-fired capacity. Since 2000, however, the average price of natural gas has more than doubled, and two major price spikes have occurred that set records for months at a time. As a result, many of the new gas-fired plants are not competitive: For 2004, the average capacity factor of U.S. natural-gas, combined-cycle plants was only 32 percent. And, looking toward the future, gas prices appear likely to remain high as domestic production increasingly falls behind consumption.

In addition to rising gas prices, which once again have made conventional coal-fired plants highly competitive, other considerations are driving renewed interest in coal. Foremost among these are concerns over energy security and balance-of-payment deficits related to rising imports of oil and liquefied natural gas (LNG)-imports that have been key to fueling economic growth over the past half-century. These imports likely will continue to play a key role in the future, but their benefits will be weighed against the transfer of funds to other countries, often in unstable parts of the world.

Coal remains the nation's most abundant domestic energy resource, still economically attractive even after paying to retrofit expensive, emission-control systems. Rising environmental pressures, however, have created deep uncertainty over which future coal technologies will be most economical in the long run.

Advanced Coal Technologies

Against this background, the attractiveness of advanced coal technologies is easy to understand: Plant emissions can be reduced more efficiently by eliminating pollutants before or during combustion, rather than through post-combustion treatment. Eventually, a portfolio of such "clean-coal" technologies will be needed to handle different grades of fuel