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A National Gasification Strategy

Presenting a program to stimulate robust coal-gasification technology deployment at low federal cost.

Fortnightly Magazine - June 2005
Figure 2 - Budget Cost of IGCC incentives for a $1 Billion, 600 MW Plant

to build two PC power plants, but rejecting the company’s proposed IGCC facility, illustrates the chicken and egg problem facing IGCC technology. In Wisconsin, the commission determined that “IGCC technology, while promising, is still expensive and requires more maturation. For these reasons, the application to construct the IGCC unit is denied.” 2 For IGCC technology to become commercially mature and economic it must be deployed, but to be deployed it needs to be perceived as mature and economic. The National Gasification Strategy described below is designed to overcome this dilemma.

Federal Incentives

Our National Gasification Strategy to stimulate investment in commercially available technology could improve natural gas affordability and security, help domestic industry, and reconcile coal use and environmental protection. A 5- to 10-year federal incentive program designed to stimulate commercial investments in 50 gasification plants across the country could provide the energy equivalent of the 1.5 Tcf of natural gas—equal to the projected Alaskan Gas Pipeline delivery—and deploy a technology capable of addressing the environmental concerns associated with expanded coal use, including climate change. Adding domestic supplies equivalent to 1.5 Tcf could reduce the projected need for LNG imports by 35 percent in 2015.

The federal government has a number of policy levers that could be incorporated into a National Gasification Strategy to stimulate investment in gasification technologies, including credit financing support ( i.e., loans, loan guarantees, performance guarantees, or lines of credit), tax incentives ( i.e., investment tax credits, production tax credits, or accelerated depreciation treatment), or direct grants. In April, 2005, Sen. Lamar Alexander, R-Tenn., introduced legislation that calls for a national strategy to deploy gasification technologies in the face of surging natural gas prices. Alexander’s bill authorizes DOE to make direct grants to six IGCC projects, providing a 40 percent federal cost share for the first three plants and a 30 percent federal cost share for the next three, plus up to 20 percent investment tax credits for all of the plants. 3 The bill also provides $2 billion of authorization for industrial gasification incentives, which could be in the form of direct loans, loan guarantees, price supports, or federal purchase agreements, plus up to 20 percent investment tax credits. For electric generators, 50 to 60 percent of total incentives would amount to $400 million to $600 million per project.

Benefit of Loan-Guarantee Incentives

Figure 3 - Natural Gas Price Trends (1990-2004)

Loan guarantees provide a particularly attractive policy option for stimulating robust gasification deployment as part of a National Gasification Strategy, because they serve to provide access to capital markets, improve project economics, and, most important, minimize federal budget impacts. Reports by Rosenberg, et al .4 describes how IGCC plants could be made commercially viable if utilities, state public utility commissions, and the federal government join together (an arrangement referred to as the “3Party Covenant”) to finance a fleet of plants. Federal loan guarantees allow higher leverage and provide for lower cost debt, thereby reducing the cost of capital by 30 percent and the cost of energy by 17 percent. 5 These savings are sufficient to incorporate redundant components, while still enabling