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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 5 - U.S. Capacity Additions by On-line Date

IGCC plants to produce energy at prices competitive with conventionally financed PC and for industrial gasifiers to produce syngas on site at prices well below delivered natural gas prices ( see Figure 1 ).

The federal budget impact of different federal incentive approaches is a vital consideration given the current deficit and the focus in Washington on less government spending. Loan guarantees can minimize the federal budget cost of providing federal incentives, thereby enabling a given level of federal spending to achieve more gasification deployment and energy policy benefit.

The budget cost of federal loan guarantees is governed by the Federal Credit Reform Act of 1990 (FCRA), which makes commitments of federal loan guarantees contingent upon prior budget appropriations (budget scoring) of enough agency appropriations to cover the estimated present value cost of the guarantees. The present-value cost is estimated based on the dollar amount guaranteed and the risk of loan default, which typically is evaluated by rating agencies and the Office of Management and Budget. Without high creditworthiness to protect the guarantee, the scoring cost will be based strictly on project risks, making the program more risky and expensive for the federal government. The alternative is to secure strong credit enhancements to substantially mitigate default risks and protect the federal guarantee, which reduces the federal budget scoring and program cost.

Figure 6 - Natural Gas Consumption by Sector (1997-2025)

A powerful way to mitigate loan-default risk is to establish an assured revenue stream to service debt obligations. In the electric power sector, this type of revenue stream can be created through a state public utility commission or other ratemaking body ( e.g., a municipality or rural electric cooperative) providing up-front and ongoing determinations of prudence of project costs and approvals of timely pass-through of project (or power purchase agreement) costs to ratepayers. This is the mechanism incorporated into the 3Party Covenant to provide revenue certainty to reduce the risk and budget scoring cost of the federal loan guarantee program. Similar risk-sharing arrangements are being proposed by major utilities considering IGCC projects when they require “full cost recovery,” which assures debt and equity authorized returns will be covered in all events. Comparable credit (and budget scoring) could be created for industrial gasification projects through long-term off-take agreements (agreements to purchase syngas or electricity) with creditworthy purchasers, insurance arrangements, or other credit enhancements. The key factor is ensuring that the federal risk is mitigated sufficiently to reduce the budget scoring to an acceptable level, recommended as 10 percent or less of the loan principal. At this level, a loan guarantee program will be significantly less costly for the federal government than alternative policy options, such as tax credits or direct federal grants ( see Figure 2 ).

The decision to focus on a loan-guarantee program is largely a decision as to whether to promote a robust near-term deployment program, or a limited program for a few prototype projects. The primary advantage of loan guarantees is that they cost the federal government significantly less than grants or tax incentives to achieve the same level of project support. The savings are critical if