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Understanding Gasification Incentives: Risks, Benefits,

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Title: Understanding Gasification Incentives: Risks, Benefits,


1
Understanding Gasification Incentives Risks,
Benefits, CostContext The Energy
Investment Challenge
www.ClimateVISION.gov
Western Regional Air Partnership April 5, 2006
Salt Lake City, Utah David Berg U.S.
Department of Energy, Office of Policy
International Affairs and Loan Guarantee Program
2
Overview
  • Context Drivers of Energy Policy
  • The Energy Investment Challenge
  • Climate challenge
  • Enhancing energy security
  • Business Cases for Commercial Deployment of...
  • Business Case Team DOE, DOD, EPA, plus Climate
    VISION partners, other industry groups, and EPRI
  • Financial Advisors Scully Capital Services,
    Inc.
  • BASE CASE Commercial prospects, sensitivities
  • RISK Findings from key risks questionnaire
  • LIFT Results from financial analysis of
    incentives
  • SCORING Results of budget scoring analysis

3
The Energy Investment Challenge
IGCC in Wabash, IN
IGCC at Tampa PECO
4
The Energy Investment Challenge (IEA)
  • We dont have an energy crisis, we have an
    energy investment crisis. We will need billions
    invested.
  • Admiral Skip Bowman, Nuclear Energy Institute,
    2005

Roughly 1,000 billion needs to be invested in
North America each decade to meet energy demands,
half of it in the electric sector. World Energy
Investment Outlook, 2003 IEA
For U.S. Canada
For U.S. Canada
Billions
5
Energy Insecurity Driver for Energy Initiative
C
A
B
D
  • Global oil consumption hit record high in 2004
    80 mm bbl/day.
  • Declining on-shore oil production for two decades
    B.
  • Moratoriums intensified for off-shore drilling
    (e.g., Florida) D.
  • U.S. imports gt60 of oil consumption, most of it
    from unstable, or even hostile, regimes.
  • Increasing terrorist threats at supply sources or
    choke points C.
  • Steady erosion of global surplus of oil
    production and refining.
  • No new U.S. refineries built since 1976 several
    closed A.
  • Local resistance to more LNG capacity potential
    supply limits.

6
Oil, Gas Supply Constraints Price Volatility
Market volatility hampers investment
70.00
Natural Gas Natural gas price volatility, gt100
variation in a year, is damaging key industries
that depend on gas (e.g., chemicals, fertilizers,
metals, cement). Stakeholders resist LNG
terminals.
45.00
Crude Oil Ascent of crude oil prices in 2004-2005
threatens economic growth and provides a painful
reminder of U.S. commercial vulnerability arising
from the Nations dependency on oil imports.
7
Situation Briefing Vulnerable Oil Sources
State-owned energy companies control world oil
reserves.
Unstable Sources
U.S. imports 60 of oil.
Vulnerable Transit
Tanker Prestige off coast of Spain, Nov. 2002
Source Economist
8
Situation Briefing Oil Transit Chokepoints
Chokepoints in global oil transit pose a major
threat to supplies.
C
A
B
D
On a clear day you can see the Strait of Hormuz
Hurricane zone
Major chokepoints
U.S.S. Cole 10-12-2000
Over 40 million barrels per day of oil moves by
tanker. A significant volume of oil is traded
internationally by oil tankers and oil pipelines.
About 2/3 of the worlds oil trade (both crude
oils and refined products) moves by tanker. About
43 million barrels per day more than half of
daily consumption is crude oil. Tankers have
made global transport of oil possible, as they
are low cost, efficient, and extremely flexible.
What would an attack on a tanker yield?
9
Situation Briefing Damage from Hurricanes
  • 20-25 of national oil gas rigs shutdown
  • Nearly 60 rigs damaged in Gulf
  • Several pipelines damaged, crimping supplies to
    other regions
  • 8-10 refineries down, some more damaged than
    others could take weeks or months

C
A
B
D
U.S. oil firms examine Katrina damage The U.S.
Coast Guard reported at least 20 oil rigs or
platforms missing in the Gulf of Mexico, while
officials estimated 95 percent of regional oil
and natural gas production and eight refineries
along the coast remained shut down. Several
crude pipelines on the Gulf Coast remained out of
service due to power outages, damage and
flooding, creating more strains for the sector.
What's more, DOE said Port Fourchon in Louisiana,
which handles a large share of U.S. crude oil and
natural gas imports, was severely damaged by
Hurricane Katrina and cut off by flood waters.
In all, about 1.4 million bpd of crude production
-- about 7 percent of domestic demand -- was
down, and concerns about the lack of feedstock
for refineries prompted the United States to
offer to loan crude from its Strategic Petroleum
Reserve to companies to replace lost output. The
offer helped ease oil prices from record highs
above 70 per barrel. But U.S. crude still
remained at a red-hot 68.94 a barrel, down 87
cents from Tuesday when crude, gasoline and
heating oil futures set record peaks.
10
U.S. Power Plant Sector, 1950 2004
Wave of NGCCs built since 1998 faces bankruptcy,
mothballs, or low use due to high gas prices.
Many new plants (not gas) are under study.
Gas turbines were the easiest for air permits,
so thats what got built.
11
Business Case Coals Lead Role in Power
EIA forecast for U.S. electricity generation,
2002 2020 (AEO 2004)
  • By 2020, EIA forecasts that U.S. will still use
    coal for 45 50 of U.S. electricity
  • Climate VISION
  • How do we best shift to coal gasification to
    reduce emissions and build carbon capture
    potential, or move to coal refining capacity?

12
Reduce GHG Intensity, Enhance Security
Climate Challenge
  • On February 14, 2002, President Bush set a
    near-term goal to reduce U.S. GHG emissions
    intensity i.e., GHG per unit of GDP 18 by
    2012.
  • In January 2006 State of the Union address, the
    President called for action to end U.S.
    addiction to imported oil.

My administration is committed to cutting our
nations greenhouse gas intensity . . . by 18
percent over the next 10 years
13
Challenge CO2 Emissions by Sector, 2002
Total CO2 from electricity shown, then allocated
to residential, commercial, and industrial.
CO2 emissions are concentrated in electricity,
industry, transportation sectors. Expanding
nuclear reduces powers GHG intensity. Programs
in hydrogen, fuel cells, biofuels, and Freedom
Car are aimed at the transport sector. IGCC
can play a role in alleviating gas shortages and
building carbon management options.
Electricity
Transport
Fuel Source
End-use Sector
14
Climate VISION Contributes to Energy Security
Energy Security goals (adapted from Energy
Challenges in NEP, May 2001)
Climate VISION approaches contribute to overall
energy security goals.
15
Climate VISION Contributes to Energy Security
16
Commercial Applications Plug-in Hybrids
Briefings on the Hill
Flexible-Fuel Plug-in Hybrids Taking Charge to
Reduce U.S. Oil ConsumptionTuesday, April 4,
2006 1000 - 1130 a.m. , 2318 Rayburn House
Bldg.
Ford promises hybrid engines in half its lineup
by 2010 By Sharon Silke Carty, USA
TODAY DEARBORN, Mich. 9/21/2005 Ford Motor
(F) CEO Bill Ford pledged Wednesday to make
fuel-saving gas-electric hybrid power available
in half the automaker's Ford, Mercury and Lincoln
models by 2010, a big jump from just two hybrids
now.
States Take Lead in Alternative Energy Source
Denver Post Apr 03, 2006 SYNOPSIS Some 20
states now have "portfolio standards" that
require utilities to increase their use of
renewable sources.
DOE Battery Consortium
17
DODs Clean Fuel Initiative
  • To gain secure fuel supplies, DOD seeks domestic
    commercial sources of synthetic clean fuels from,
    initially, coal gasification Fischer-Tropsch.
  • DOD will develop fuel specs procure supplies of
    fuels for testing and evaluate, demonstrate,
    certify, and, if successful, implement widespread
    use.
  • DOE RDD government incentives offer catalytic
    production.
  • Testing use require commercial producers.
  • Industrial gasification and fuels co-production
    face similar roadblocks as IGCC high cost of
    production, plant reliability concerns,
    environmental uncertainties, financing
    difficulties.
  • Collaborative analysis of risks and incentives
    can create synergies for DOD, DOE, EPA, states,
    and industry.

18
Energy Policy Act 2005
  • 14.5 billion in tax benefits other financial
    assistance
  • Provides incentives for power and fuels from coal
    gasification, nuclear power, grid upgrades,
    energy efficiency, and renewable power and fuels
  • Clarifies rules for siting power infrastructure
    and investment, and grid reliability
  • Addresses climate challenge through sound
    voluntary actions and acceleration of technology

August 8, 2005
May 2001
President George W. Bush signing H.R. 6, The
Energy Policy Act of 2005, at Sandia National
Laboratory in Albuquerque, NM, on Monday, August
8, 2005. Congressmen Ralph Hall (R, TX) and Joe
Barton (R, TX), and Senators Pete Domenici (R,
NM) and Jeff Bingaman (D, NM) also are on the
stage.
19
Specific EPAct 2005 Provisions
EPAct provides DOE with a toolkit to promote
energy investment.
  • Sec. 105 Expansion of Energy Savings
    Performance
  • Sec. 106 Voluntary agreements on industrial
    efficiency
  • Sec. 140 Energy efficiency pilots with 3 to 7
    states
  • Sec. 202 Renewable energy production
    incentives
  • Sec. 638 Nuclear power plant risk insurance
  • Sec. 1222 Third-party agreements (Electricity)
    SWPA, WAPA
  • Title XIII Tax incentives (various)
  • Sec. 1510 Ethanol and motor fuel incentive
  • Sec. 1611 National Deployment Strategy on
    Climate
  • Sec. 1700 Incentives for Innovative
    Technologies
  • Loan Guarantees, plus S-1 authorities

20
Business Case for Commercial Deployment of
Gasification with Co-Production
I. Define a base case gasification with
co-production facility (Sponsor DOE) II. Develop
and populate DOE's financial model for this base
case co-production facility (Sponsor
DOD) III. Analyze sensitivities for alternative
plant configurations and product mixes (Sponsor
EPRI) IV. Assess business risks and financing
challenges of gasification with co-production
facility development (Sponsor ACC
GTC) V. Analyze the business case for financial
incentives for gasification with co-production
projects (Sponsor EPRI) VI. Integrate findings
in a summary report and presentation (Sponsor
DOE)
21
Risk Analysis of Transaction Chain Views
Severity
RISK EVALUATION
Probability
22
Overview and Approach to Risk Assessment
This diagram depicts the studys logic flow and
approach to the analysis.
Evaluation, Application of Risk Mitigation
Mechanisms
Energy Project Development Timeline
Risk Analysis of Project Development Stages
Rating and Ranking of Risks by Stages
Cash Timeline
23
Incentives Can Best Be Tailored to Risks
1. Not enough coverage of early operating
risks. No coverage of poor technical
performance. 2. Too much risk coverage after
successful operations Buydown reduces end-use
costs, but government lift is expensive.
Early Units
  • High capital costs
  • Regulatory uncertainty
  • Electricity competition

Risk Profile ?
Selection for DOE support
Impact of DOE buydown extends over life of
systems.

Plant Project Timeline ?
Development Engineering
Construction Manufacturing
Operations Maintenance ?
24
Risk Ratings Broad Set of Interviewees
  • Examples
  • GE, ConocoPhillips, Praxair, GTC
  • Bechtel, Fluor, Parsons, BW
  • AEP, Cinergy, Duke, TVA
  • Excelsior, Baard, Tondu, TriGen
  • APPA coal group, NRECA
  • DOE, EPA, NETL
  • NARUC OH, IL, IN, PA
  • NASEO Coal boards, RDAs
  • Eastman, Peabody, Kennecott
  • CSFB, JP Morgan, SwissRe
  • SP, Fitch, Moodys
  • PJM, MISO
  • NRDC, CATF, WRI, EDF
  • UND-CEED, SIU, UK
  • Interviewee Categories
  • Vendors Tech firms
  • Engineering contractors (EPCs)
  • Utilities (regulated, merchants, hybrids)
  • Independent power cos (IPPs)
  • Public Power Co-ops
  • Government agencies
  • Public Utility Commissions
  • State / Local Agencies (Comm Devel)
  • Fuel / Coal / Chemical companies
  • Financial (Banks, Funds, Insurance)
  • Rating agencies
  • Transmission entities (TransCos)
  • Pragmatic NGOs (vs. ideologues)
  • Universities / Research centers

25
IGCC Risk Ratings 2005 1 Technical
High capital cost and excessive downtime remain
key risks, though lower than in 2004. Technical
risk also ranks high.
Average
26
IGCC Risk Ratings 2005 2 Regulatory
Concerns about state national regulation of
coal grew. Unclear advantages on emissions for
IGCC pose an investment risk.
Average
27
IGCC Risk Ratings 2005 3 Market
IGCC units will be baseload, so PUC support would
help with market risks. Financing difficulties
are derivative from other risks.
Average
28
Recap Highest Risk Ratings (2004 v. 2005)
High capital cost and excessive downtime remain
high risks for all owner types. Critical
regulatory issues (e.g., where IGCC carries
advantages) are also a focus. Environmental
(state, national) utility commission policies
are not well defined.
29
Risks Responses Observations
  • Top concerns remain constant High capital cost
    and excessive downtime. Will performance wraps
    be adequate? No signed deals yet leaving some
    uncertainty about price, terms.
  • If federal government accepts significant
    technology (downtime) risk, then adequate EPC
    wrap probably could be negotiated with lower
    total cost.
  • Concern about lack of clarity of state regulatory
    policies on conventional coal is rising, which
    adds risk for competitiveness of IGCC plants.
    This risk jumped the most since last year.
  • Risk of natural gas prices dropping was rated
    lower than 2004, but carries big impact. Even
    with Eastern coal prices rising, IGCC can
    compete.
  • Owners remain skeptical that carbon capture
    advantages will materialize by 2010. IGCCs have
    edge on mercury but, CAMR is in litigation.
  • Concerns about coal transport constraints
    doubled, but are not high yet.
  • Lack of clarity that PUCs will accept high
    capital costs to gain long-term emissions and
    rate stability remains of concern.
  • Workforce issues (for construction and operation)
    rate low.

30
IGCC Range of LCOE Benefits for IOUs (/MWh)
  • Tax incentives provide the most lift for IOUs,
    tracking well with EPRI findings.
  • IOU results are less sensitive due to
    normalization process embodied in rate making.
  • The juice in the 3Party Covenant is tied to its
    leveraged return assumption.

31
Range of LCOE Benefits for Merchant Power (/MWh)
  • Both types of incentives benefit MP
  • MP producers are more cash-flow driven than IOUs
  • Ratepayer / owner benefit tradeoff (IRR vs. LCOE)
  • MPPs and IPPs exhibit more LCOE sensitivity than
    IOUs.
  • Reflects price taker status and dynamic tax
    effects.

32
IGCC Range of LCOE Benefits for IPPs (/MWh)
  • Structural tools benefit leveraged IPPs due to
    lower interest rates, higher leverageand better
    access to debt.
  • Tax incentives provide less lift.
  • MPPs and IPPs exhibit more LCOE sensitivity than
    IOUs.
  • Reflects price taker status and dynamic tax
    effects.

33
Incentive Benefit/Cost Ratio and Rank
  • Despite modest benefits for IOUs, credit
    incentives tend to be cost efficient relative to
    tax incentives.
  • Accelerated Depreciation stands out among
    tax-based incentives.
  • 3 P Covenant efficiency is tied to leverage and
    initial credit rating assumption.

34
Sample Output Graph
35
Budget Scoring Factors (per FCRA)
  • Reduces Scoring
  • Robust independent credit rating (SP, Moodys,
    Fitch)
  • Short term of guarantee
  • More equity financing
  • Very strong off-takers or PUC support / mandate
  • Confined terms for trigger
  • Additional collateral or recovery
  • Superior rights in liquidation
  • Tighter payment terms
  • Higher interest rate or fees
  • Solid environmental permits
  • Increases Scoring
  • Weak credit rating, or below investment grade
  • Longer term of guarantee
  • Less equity from owners
  • Weak off-take agreements and/or tepid PUC support
  • Broader terms for trigger
  • No collateral beyond project assets
  • Inferior liquidation position
  • Liberal payment terms
  • Lower interest rate or fees
  • Questionable permit status

36
Cooperation Is Important
  • DOE-supported and industry-supported RDD.
  • Testing and commercial use to produce changes in
    energy economy.
  • Early adopters face extra risks e.g., high cost
    of production, plant reliability concerns,
    environmental uncertainties, financing
    difficulties.
  • Government incentives offer catalytic value.
  • Federal incentives (EPAct tax credits loan
    guarantees, EPA, DOD fuel purchase contracts)
  • State PUC, economic development, environmental
    actions
  • Collaborative analysis of risks and use of
    incentives can create synergies for Federal
    government, states, and industry.

37
Wrap-up Discussion Thoughts
  • There are many drivers for energy policy
    emissions are a key driver but not the only one
    (energy security, economy).
  • Climate VISION aims at addressing GHG emissions
    and energy security via partnerships with entire
    sectors.
  • Federal incentives within EPAct can play a
    critical role in addressing energy, economic and
    environmental goals.
  • The Energy Investment Challenge means that
    Federal incentives must be targeted and used
    artfully.
  • Expanding our domestic base in coal gasification
    provides a strategic capacity for carbon capture
    over several decades.
  • Western states have vast, affordable coal
    resources and are experiencing the greatest
    demographic demand for power and transportation
    fuels. The future is now.

38
Backup slides
39
Plant Cost and Configuration Assumptions
839 1400 600 per KWe
980 1885 520 per KWe
40
Financing Assumptions
41
Federal Deficit Poses Fiscal Challenges
Fallout from 9/11, recession, stock market slump
amplified deficit.
http//www.cob.gov
42
Range of Benefits in LCOE (/MWh)
Levelized Cost of Electricity
  • IOU results track well with EPRI findings.
  • MPPs and IPPs exhibit more LCOE sensitivity than
    IOUs.
  • Reflects price taker status and dynamic tax
    effects.
  • IOUs less sensitive due to normalization process
    embodied in rate making.
  • The juice in the 3 Party Covenant is tied to a
    leverage return assumption.
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