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Battle Royal: Pulverized - Coal vs IGCC

The battle for the future of coal-fired power is heating up. Recent developments give IGCC a fighting chance.

Fortnightly Magazine - December 2005

pulverized-coal project in St. Lucie County.

At the state level, too, the choice between pulverized coal and IGCC is headed for a fight. The California Public Utilities Commission (CPUC) issued orders late last year requiring California utilities to impose a “carbon adder” on fossil-fuel resource options. Although California has not officially defined IGCC as BACT, the state’s climate-change policies effectively have eliminated pulverized-coal plants as an option. “We’ve determined there is a role for coal in California’s future, but it must be as clean as natural gas,” CPUC Chairman Michael Peevey told Public Utilities Fortnightly . “The only way is IGCC with sequestration.”

These policies could lead to a conflict over states’ rights if a California utility seeks to import power from a coal-burning facility outside California’s borders—as Sempra Energy hopes to do with a 1,450-MW pulverized coal project it is developing in Gerlach, Nev. Other companies similarly are planning coal-fired plants that could supply power to California, and how the state will apply its policies to those projects remains unclear.

“The state’s standards are tougher than what is legally required by federal law or neighboring states,” says Ed Feo, a partner with Milbank Tweed Hadley & McCloy in Los Angeles. “If the CPUC tells utilities that in order to recover the cost of acquiring power from a coal-fired plant the facility must meet state requirements, the state effectively would be exporting California air emissions standards to other states. That issue has yet to be tested, but it would seem contrary to the commerce clause.”

The commerce clause of the U.S. Constitution prohibits states from taxing or restricting interstate trade, and depending on how it approaches carbon constraints, California’s climate-change policy might violate this prohibition. Exceptions to the commerce clause exist in cases of legitimate needs involving health and welfare, but using such an exception to regulate out-of-state CO 2 emissions might prove difficult. “The state cites immediate and direct health benefits, but it would be tough to argue that case against a plant that is located several hundred miles away in someone else’s jurisdiction,” Feo says.

Other battles will take place in states where companies are proposing IGCC plants and seeking special rate treatment to recover the additional costs. Securing cost recovery is a vital piece of the IGCC puzzle, because commercial banks will not finance an IGCC plant without unequivocal support from a creditworthy entity.

“Big dollars are at stake,” says Byrd of Morgan Stanley. “In principle IGCC can be commercially financed, but we need a utility behind it, with a lease or power-purchase agreement that has been blessed by regulators and perhaps even state legislators. It’s hard to see how we’ll get much closer until we have a clear rate path to protect against cost overruns and ensure the project is commercially viable.”

This dilemma keeps IGCC perpetually knocking at the door of commercial viability. Even a utility dream team like AEP, GE, and Bechtel cannot unlock that door by itself. State regulators hold the keys. But while several states are looking favorably on IGCC—and indeed, Minnesota’s legislature passed