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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

dioxide, allowing the latter to be captured and sequestered in geologic formations, rather than being released into the atmosphere as a greenhouse gas.

Despite these significant technological advantages, IGCC power plants have not yet been built without government financial assistance. The two primary factors are higher initial capital costs compared with conventional coal plants, and costs associated with technological risks that might impact the reliability and availability of IGCC plants. According to EPRI data, the capital cost of an IGCC unit, in terms of dollars per kilowatt of generating capacity, is about 14 percent higher than a comparable pulverized coal unit. This accounts for about half of the cost-of-electricity (COE) gap between the two technologies, measured in dollars per megawatt-hour of electrical energy produced.

The other half is the risk premium imposed by the financial community to finance an IGCC power plant, based on concern that the plant's capacity factor-i.e., the proportion of time it is running at full power-would be less than a conventional plant. Such concern is based in part on problems encountered at IGCC demonstration facilities, but also because experience at commercial-scale plants is still very limited. Vendors are working hard today to address those issues related to technology costs and risks, but the risk premium likely will remain until there is more commercial-scale experience. For purposes of analysis, we assume the risk premium reflects a 78 percent capacity factor for an IGCC plant over a 30-year period, compared with 88 percent if, after initial ramp up, the plant operated as designed.

Table 1 shows the resulting COE gap for three classes of owners. For all classes of owners, assured market recovery, either regulatory or through long-term power purchase agreement, is necessary to gain financing. Our cost calculations assume that these market risks have been addressed.

As indicated by the table, the COE gap differs considerably by ownership for a number of reasons. First is the debt structure and cost of capital. Based on typical industry practices, an investor-owned utility (IOU) is assumed to use corporate financing with 55 percent debt at 6.5 percent interest, compared with an independent power producer (IPP) that has 70 percent debt financing at 8 percent interest, because of the need to provide higher return on capital. Public power entities and cooperatives are assumed to use 100 percent debt financing at 4.5 percent interest, because interest on their debt is not taxable. In addition, the IOU and IPP are assumed to pay both federal and state taxes at a combined rate of 39.2 percent, while the public/co-op owners are assumed to be tax exempt. Despite their differences, all three types of potential plant owners likely would estimate a PC plant to cost significantly less than an IGCC plant.

Incentive Options

We considered eight types of federally provided financial incentives in our analysis to help close this cost gap. Not surprisingly, based on the financing and tax differences described above, the impact of specific incentives varies considerably among owner classes. Indeed, we conclude that no single incentive examined will suffice to close the COE gap