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Taking Green Private

How merchant funding is remaking the rules for renewables.

Fortnightly Magazine - March 2010

in Illinois, a coming together of merchant money and clever legislative lobbying has put that state’s lawmakers and regulators in the catbird seat, leaving Illinois now able to dictate to FERC regarding rates of return earned in the wholesale power sector.

This curious turn of events involves the Taylorville Energy Center (TEC), the $3.5 billion commercial-purpose, clean-coal IGCC (integrated gasification combined-cycle) project proposed by a startup joint-venture formed by Tenaska, the international power development and energy marketing firm.

Alternative Retail Electric Suppliers (ARES) in Illinois call the situation discriminatory, “and perhaps even unconstitutional.” But if Congress continues to drag its feet on carbon control, Illinois stands ready to step into the vacuum, showing what merchant money can achieve when aligned with a state’s economic interests.

The Taylorville plant would convert high-sulfur Illinois coal to pipeline-quality synthetic natural gas (methane), remove the sulfur and mercury, and then capture some 3 million tons of carbon dioxide per year, sequestering the CO 2 in local sandstone formations, or selling it for enhanced oil recovery operations. CO 2 emissions from the coal wouldn’t be eliminated, but merely reduced to the level emitted by comparable power generation operations if fueled by natural gas.

Armed with nearly $2.6 billion in DOE loan guarantees, TEC will be able to play power and gas markets against each other. With twin gas combustion turbines and single steam turbine (730-MW gross output; 500-MW net after SNG manufacture and CO 2 compression operations), the plant could choose perhaps to toll one gas turbine and sell off the surplus methane, or even purchase pipeline gas for all its power generation, selling all its coal-gas production in natural gas markets. As the nominal developer of the project, the merchant startup Christian County Generation LLC (CCG) has sought a guarantee from FERC that the wholesale return on equity (ROE) equal at least 11.5 percent. ( See FERC Docket No. EL10-27, filed Dec. 23, 2009. )

But here’s the twist. Without federal legislation enacting a carbon tax or cap-and-trade program to put clean-coal power output on an equal footing with cheap and traditional fossil-fired power, no utility or retail supplier ever would buy it.

So Tenaska went to the state legislature to win a preferential deal for itself, as explained by attorney Karen Hill, writing for Exelon, which has intervened in the FERC case:

“If CCG succeeds in getting TEC built, it intends to price the output of the plant at cost-based rates … [which] … will almost certainly be above market. For that reason, Tenaska approached the Illinois general assembly and persuaded it to enact a law that will require Illinois utilities and [ARES] to purchase the entire output of TEC … under long-term purchased power agreements known as ‘sourcing agreements.’” ( Protest of Exelon, Docket EL10-27, filed Jan. 22, 2010. )

In fact, the state legislature has authority not just to OK these mandated purchased power agreements, but also to incorporate a maximum allowable ROE into those agreements, and to weigh in on the overall cost impacts on Illinois ratepayers over the projected 30-year life of the