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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
  • respectively, with no benefits for tax-exempt utilities.
  • Availability insurance. This new concept is meant to address the technology risk component of the COE by having the government provide insurance for shortfalls below a specified availability target. This option also has the advantage of providing roughly equivalent benefits to all three owner classes, with IOUs, IPPs, and public/co-op owners achieving COE savings of $0.90/MWh, $1.02/MWh, and $0.82/MWh, respectively. Although none of these figures comes close to covering the estimated cost of technology risk, availability insurance may make a valuable contribution when combined with other incentives (as discussed below), or could be redefined to provide more value.

The value of the various incentives to each type of plant owner is summarized in Table 2.

Clearly, no single incentive studied comes close to making IGCC competitive with PC for everybody, even with significant changes in base-case assumptions. However, the table does provide a basis for analyzing new individual incentive proposals or packages of incentive that could be tailored to close the COE gap for various classes of plant owners.

Combining Incentives To Close the COE Gap

Table 3 illustrates combinations of incentives that make IGCC essentially competitive with PC for one or more classes of owners. The first two apply only to taxable entities. Doubling the base-case investment tax credit from 10 to 20 percent and combining it with accelerated depreciation, for example, provides a COE savings of $7.72/MWh for IOUs and $7.06/MWh for IPPs, leaving only a small gap. Alternatively, doubling the production tax credit to $18/MWh-equal to that currently available for wind energy facilities-could give IGCC an advantage over PC for the taxable entities, with a value of $8.48/MWh for IOUs and $8.46 for IPPs.

The third package of incentives would triple the federal cost share to 30 percent without repayment and add availability insurance, providing public/co-op owners with enough value-$5.35/MWh-to make IGCC attractive compared with PC. The COE gap would not quite be closed for IOUs and IPPs (with respective savings of $6.75/MWh and $7.27/MWh) but the difference is small enough that other considerations might well determine their choice.

In the end, however, it must be remembered that any incentives such as those just discussed are intended only to get IGCC "over the hump" of initial commercial deployment. After that, the commercial attractiveness of this prototypical clean-coal technology will depend on a variety of other factors. Foremost among these will be resolution of the technical risks involved, specifically by showing that IGCC plants can achieve sufficiently high availability to compete with conventional coal plants. Initial capital costs also should decline as the infrastructure for building, maintaining, and utilizing IGCC facilities develops. Additional factors that may influence the long-term attractiveness of IGCC technology include the potential need to sequester carbon to mitigate global warming or to produce hydrogen for future fleets of fuel-cell vehicles. Because of this potential, the ultimate value of IGCC may be its importance as a hedging strategy-a way to keep using the nation's most abundant energy resource while providing options to deal with long-term environmental demands.