Ongoing litigation over EPA rules raises compliance risks and costs. North Carolina utilities, however, benefited from the state’s forward thinking.
Financing Clean Coal
No single type of financial incentive closes the cost gap between clean coal and modern conventional coal technologies.
for any of the three types of owners.
- Loan guarantees. This is often identified as an attractive option from the government's point of view because the impact on the federal budget is minimized, since no funds actually are spent unless the borrower defaults or incurs specific types of extraordinary expenses. While some prominent studies suggest that federal loan guarantees, combined with state regulations aimed at assuring cost recovery, would be sufficient to give IGCC power plants a significant cost advantage over PC plants, our estimated benefits to the three types of owners are much less. Assuming that such guarantees lower the interest rate for IOUs by 0.5 percent and for IPPs by 0.8 percent, we estimate the COE savings would be only $1.08/MWh and $1.80/MWh, respectively-far below the amount required to close the COE gap. In addition, loan guarantees would not help public/co-op owners at all.
- Direct loans. This case assumes the federal government loans plant owners 80 percent of the IGCC project cost at the same interest rate as a 30-year Treasury bond, effectively reducing the rate for an IOU by 1.5 percent and for an IPP by 3 percent. Of the financing options examined, direct loans provide by far the most value to IPPs, reducing the COE gap by $6.76/MWh. Such loans could give IOUs a COE savings of $3.24/MWh and have no effect on public/co-op owners.
- Federal cost sharing. Our base case assumes that the federal government would share 10 percent of the cost of a new IGCC plant, with funding made available during construction and not requiring payback. This is the best option for the public/co-op sector, reducing its COE gap by $1.54/MWh. IOUs save $2.08/MWh and IPPs save $2.17/MWh.
- Investment-tax credit. This credit also is assumed to cover 10 percent of the plant cost, but would become available only at plant startup. Public/co-op owners would not benefit, while IOUs and IPPs would receive only marginally higher savings than in the case of cost sharing-$2.29/MWh and $2.37/MWh, respectively.
- Production-tax credit. Assuming a $9/MWh tax credit for the first 10 years of plant operation, this option is the most attractive for IOUs, with a COE savings of $4.24/MWh, compared with $4.23/MWh for IPPs. (Since IOUs have access to lower interest rates already, they do not benefit as much as IPPs from incentives that affect capital costs; but since they pay comparable taxes as IPPs, once plant operations begin, they receive almost exactly the same benefit from a production tax credit.) Public/co-op owners receive no benefit.
- Tax-exempt financing. Such financing reduces the interest rate demanded by lenders and is applied to outstanding bonds during both construction and operation. Tax-exempt financing benefits IPPs somewhat more than a production-tax credit, with COE savings of $4.85, but provides sharply lower benefits, $2.97/MWh, for IOUs and none for the already tax-exempt utilities.
- Accelerated depreciation. By reducing the recovery period for depreciation, this option enables a plant owner to realize the tax deduction earlier-over a 5-year period instead of 20 years-in the case analyzed. IOUs and IPPs receive approximately the same benefits, $3.14/MWh and $3.33/MWh,