A National Gasification Strategy


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

Fortnightly Magazine - June 2005

Near-term deployment of gasification technologies can supplement natural-gas supply, reduce demand, and promote long-term U.S. energy security and affordability. But near-term deployment must overcome high capital costs that affect commercial competitiveness and capital availability

A national gasification strategy that provides federal loan guarantees and other incentives for industrial and electricity sector investments in gasification technology can overcome these hurdles and stimulate a robust deployment. By relying on federal loan guarantees as the primary initial incentive approach, federal budget costs can be minimized while jumpstarting construction of significant capacity.

An important policy choice faces the U.S. Congress as it considers where gasification fits into U.S. energy policy. Would the national interest be best served by facilitating a limited number of prototype gasification facilities, or by boldly helping investors finance a substantial fleet of gasification projects to counter the natural gas shortfall and substitute for higher polluting direct coal-combustion facilities?

We propose a robust program leading to 50 commercial, industrial, and integrated gasification combined-cycle (IGCC) power plants that will deploy a variety of gasification technologies using coal, biomass, and petroleum-waste fuels. These plants also will help relieve high natural-gas demand and prices, support a move toward greater energy independence (and away from over-reliance on imports of liquefied natural gas), and create multiple commercial platforms for demonstrating carbon capture, sequestration, and hydrogen-fueled technologies.1

Deployment Challenge

Despite substantial environmental benefits and a growing commercial interest in gasification technologies, commercial IGCC power plants and industrial gasification facilities have not yet materialized in the United States because of concerns over financing, cost, and financial risk. Most estimates suggest that the capital costs associated with the first generation of commercial IGCC power plants will be about 20 percent higher than the cost of a new pulverized coal plant, with IGCC operating and construction costs less certain. A recent filing by American Electric Power, which is seeking to build an IGCC power plant if the right regulatory treatment and incentives are available, indicated capital costs could be as high as $2,000/kW, well above most previous estimates for pulverized coal (PC) or IGCC. Unlike PC power plants, IGCC technology is not perceived to have sufficient commercial experience for developers to be comfortable with its operating performance, which has been demonstrated only at a handful of facilities.

Figure 1 - Cost of Syngas and IGCC Electricity with 80% Federal Loan Guarantees

A 2003 decision by the Wisconsin Public Service Commission approving a WEPCO proposal 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

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 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).

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

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.

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 Congress wants to pursue a national gasification program designed to help address natural gas supply and price concerns and improve energy independence and security.

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

A more affordable and secure energy future is at our fingertips, but it will require Congress to recognize and act on its need for greater energy independence and adopt a National Gasification Strategy that stimulates robust, near-term investment.  [Sidebar, endnotes cont. p.72]

William Rosenberg is a senior fellow at the Kennedy School of Government, Harvard University, and professor in the Deparment of Engineering and Public Policy, Carnegie Mellon. Previously, he served as chairman, Michigan Public Service Commission; assistant administrator for Energy Resource Development, Federal Energy Administration; and assistant administrator for Air and Radiation, EPA. Michael Walker is a consultant who has spent the past 11 years working on environmental and regulatory issues affecting the electric power industry. Dwight Alpern is an attorney advisor at the Clean Air Markets Division, EPA, and previously was an attorney at FERC and the DOE. 


1. More detailed descriptions of the ideas presented in this article are provided in: Rosenberg, William G., Dwight C. Alpern, Michael R. Walker, Deploying IGCC Technology in this Decade with 3Party Covenant Financing, Kennedy School of Government, Harvard University, May 2005 Revision; and Rosenberg, William G., Dwight C. Alpern, Michael R. Walker, National Gasification Strategy: Gasification of Coal & Biomass as a Domestic Gas Supply Option, Kennedy School of Government, Harvard University, May 2005 Revision. Both papers are available at: www.ksg.harvard.edu/bcsia/enrp.

2. Wisconsin Electric Power Co., 228 PUR4th 444, 2003 WL 22663829 (Wisc. P.S.C. Nov. 10, 2003).

Figure 4 - Projected U.S. Natural Gas Supply

3. See S.726, The Natural Gas Price Reduction Act, introduced April 6, 2005; See also S.727, Tax Incentives For The Natural Gas Price Reduction Act Of 2005, introduced April 6, 2005.

4. Rosenberg, William G., Dwight C. Alpern, Michael R. Walker, Deploying IGCC Technology in this Decade with 3Party Covenant Financing, Kennedy School of Government, Harvard University, May 2005 Revision. (available at: www.ksg.harvard.edu/bcsia/enrp).

5. Id. at Vol. I, p. 14.

Gasification Technology

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

Gasification is the partial oxidation of a solid or liquid fuel feedstock to manufacture a gaseous product (synthesis gas or "syngas") made up of predominantly hydrogen (H2) and carbon monoxide (CO).1 Impurities, such as particulates, sulfur, nitrogen, and volatile mercury are cost-effectively removed from the syngas prior to combustion, using commercially proven systems to produce syngas that is almost as clean as natural gas. Synthesis gas has a lower heating value than natural gas,2 but can be substituted readily in many industrial processes and in the generation of electricity with modern gas turbines. Synthesis gas also can be converted to synthetic natural gas (methane) using commercially available methanation catalysts.3 By producing gas on site, gasification eliminates the need for additional pipeline capacity for fuel delivery.

According to a recent survey by the Gasification Technologies Council (GTC), there are 385 gasifiers in operation at 117 projects worldwide.4 These gasifiers are used to produce liquid fuels in South Africa (Sasol facility); chemicals in the United States (Kingsport facility); electricity in the United States, Europe, and Japan (Polk, Wabash River, Puertollano, Buggenum, and Negishi facilities);5 methane in the United States (Great Plains facility); and ammonia fertilizer in China and India. There are several different commercial gasifier designs available, including systems from GE Energy,6 Conoco Phillips,7 Shell,8 Lurgi, and Noell. Each of these systems has been proven in commercial use around the world.

Gasification can be used to produce feedstocks, heat, steam, and electricity for a variety of industrial processes that currently use natural gas. For example, Eastman Chemical successfully has operated a GE Energy gasifier at its Kingsport, Tenn., facility since 1983 as the only source of gas for its chemical processes to produce film and other acetyl-based products. Similarly, Sasol operates one of the oldest and largest gasification operations in the world in South Africa, where high-ash coal is gasified with Lurgi gasifiers to produce a variety of liquid fuels and chemical products. Several players in the chemical industry are looking at new production technology to utilize syngas for the production of large-volume commodity chemicals based on natural gas liquids. In addition, China is constructing nine gasification systems for ammonia fertilizer production based on the Shell technology.- WGR, MRW, and DCA


  1. Syngas also contains some carbon dioxide (CO2), moisture (H2O), hydrogen sulfide (H2S), and carbonyl sulfide (COS) as well as small amounts of methane (CH4), ammonia (NH3), hydrogen chloride (HCI), and various trace components from the feedstock. See SFA Pacific, Inc., "Evaluation of IGCC to Supplement BACT Analysis of Planned Prairie State Generating Station," May 11, 2003, p. 7.
  2. The heat content of syngas can vary depending on the gasifier type and fuel feedstock. Typical heat content of syngas produced from large gasification systems is around 250 Btu/cf, which is 24 percent of the 1,028 Btu/cf heating value of dry natural gas.
  3. Methanation is a process for removing carbon monoxide from gas streams or for producing methane by the reaction CO + 3H2 CH4 + H2O.
  4. Presentation by James Childress, "2004 World Gasification Survey: A Preliminary Evaluation," Gasification Technologies Conference, Washington, D.C., Oct. 4-6, 2004.
  5. In addition to the two integrated gasification combined cycle facilities operating in the United States, American Electric Power and Cinergy Corp. both have announced intentions to develop new IGCC power plants in the United States, and Excelsior Energy and Southern Co. received funding grants in 2004 from the Department of Energy to develop IGCC facilities.
  6. GE Energy Gasification Technologies acquired the ChevronTexaco process on July 1, 2004.
  7. ConocoPhillips acquired the patents and intellectual property rights to Global Energy's proprietary E-GAS gasification process in 2003. This technology was originally developed by Dow Chemical Co. and later transferred to Destec, a partially held subsidiary of Dow Chemical. In 1997, Destec was purchased by Houston-based NGC Corp., which became Dynegy Inc. in 1998. In December 1999, Global Energy Inc. purchased the gasification technology from Dynegy, and in 2003 ConocoPhillips purchased the technology from Global Energy (see DOE, Clean Coal Technology Topical Report Number 20, "The Wabash River Repowering Project-an Update," Sept. 2000, p. 4).
  8. The performance and economics of the Shell gasification system are described in a paper presented by Shell at the 2004 Gasification Technology Conference in Washington, D.C. See H.V. van der Ploeg, T. Chhoa, P.L. Zuideveld, The Shell Coal Gasification Process for the U.S. Industry, Oct. 2004.
Figure 6 - Natural Gas Consumption by Sector (1997-2025)


Coal: America's Great Resource

For two decades (1980-1999), annual average wellhead natural gas prices in the United States remained between $1.5/MMBtu to $2.6/MMBtu.1 However, natural gas prices spiked in late 2000 above $9/MMBtu and began a steady climb again in 2002 that has resulted in average delivered prices in the $6-$7/MMBtu range (see Figure 3).2

Over the next 20 years, U.S. natural gas demand is expected to grow by almost 40 percent, but production from on- and off-shore wells in the lower 48 states is expected to increase only 5 percent. Net imports from Canada and Mexico are expected to decline slightly as those countries consume more for their own use.3 Consequently, the average delivered price of natural gas is predicted to remain above $5.50/MMBtu through 2025, and 96 percent of the incremental supply needed to meet growing U.S. demand is forecast to come from overseas LNG imports (72 percent) and Alaska (24 percent) (see Figure 4). The continuation of historically high natural gas prices and the potential for U.S. dependence on overseas imports for needed supply also are cause for concern.

The pressure to increase natural gas supplies is being driven largely by growth in demand for natural gas from the electric power sector. More than 200,000 MW of new natural-gas generating capacity came on line between 1990 and 2004 (85 percent of all new capacity), and 180,000 MW came on line between 2000 and 2004 (96 percent of all new capacity)4 (see Figure 5). Natural-gas demand in the electric power sector is projected to far outpace demand growth in other sectors, becoming the largest natural gas consuming sector by 2015 (see Figure 6).

Figure 7 - U.S. Coal Deposits, Biomass Resources, and Petroleum Coke Production

Price trends driven by the combination of production constraints and demand growth are adversely affecting investors and consumers looking to natural gas as the clean, affordable answer to U.S. energy needs. Skyrocketing prices have undermined the economic viability of natural-gas generating stations built in competitive markets, hurt consumers dependent on natural gas to heat their homes, and are adversely affecting the U.S. economy and economic competitiveness.5 The chemical industry, which is the largest industrial consumer of natural gas in the United States, estimates it has lost $50 billion in business to foreign competition and more than 90,000 jobs since 2000 due to high natural gas prices.6 Similarly, the fertilizer industry, where 70 to 90 percent of the cost of producing ammonia for fertilizer is the cost of natural gas, reported in 2003 that 11 ammonia plants representing 21 percent of U.S. capacity already had been closed, that only 50 percent of the remaining U.S. capacity was operating, and that two major U.S. fertilizer producers had already filed for bankruptcy.7

In contrast to natural gas, delivered coal prices have declined over the past decade, increasing the spread between coal and natural gas prices to more than $4.00/MMBtu and sparking a renewed interest in coal power-plant development. According to the Department of Energy (DOE), as of September 2004, 100 new coal plants had been proposed in the United States, representing 63,000 MW of new coal capacity and $73 billion of potential investment.8 Although the United States holds less than 2 and 3 percent of world oil and natural gas reserves, it has more coal than any other country in the world-approximately 25 percent of world supplies and more than a 250-year supply at current consumption rates.9 The United States also has abundant biomass resources and produces large quantities of petroleum coke residue from refinery operations (see Figure 7).

Effectively using these domestic resources to fuel gasification technology is critical for supporting U.S. energy security and fulfilling the national need for secure, clean, and affordable electricity.- WGR, MRW, and DCA


1. See Energy Information Administration at: http://tonto.eia.doe.gov/dnav/ng/hist/n9190us3a.htm

2. See Energy Information Administration at: http://tonto.eia.doe.gov/dnav/ng/hist/n3050us3M.htm; see also National Petroleum Council, Balancing Natural Gas Policy—Fueling Demands of a Growing Economy, Washington, D.C., Sept. 2003, p. 22.

3. See Energy Information Administration, Annual Energy Outlook 2005, Table A14.

4. Energy Information Administration, Form EIA 860, Annual Electric Generator Report, 2002.

5. The economic consequences of high prices are described in the House Speaker’s Task Force for Affordable Natural Gas report, which states: “Because domestically produced natural gas is so vital to our nation’s energy balance, rising prices make our nation less competitive. When prices rise, factories close. Good, high-paying jobs are imported overseas. Today’s high natural gas prices are doing just that. We are losing manufacturing jobs in the chemicals, plastics, steel, automotive, glass, fertilizer, fabrication, textile, pharmaceutical, agribusiness and high tech industries.” House Energy and Commerce, The Task Force for Affordable Natural Gas, Natural Gas: Our Current Situation, Sept. 30, 2003.

6. American Chemistry Council, “Energy Costs Destroying Chemical Manufacturing Competitiveness,” (Nov. 3, 2004 news release).

7. The Fertilizer Institute, “Fertilizer Industry Weights in on Energy Crisis at Natural Gas Summit,”(June 26, 2003 news release).


9. National Mining Association, “Fast Facts About Coal,” http://www.nma.org/statistics, Sept. 9, 2003.