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Financing IGCC for Near-Term Deployment. Michael R. Walker Research Director IGCC Financing Project Kennedy School of Government, Harvard University PH: 720.842.5345, FX: 720.851.5784 [email protected] Report available at: www.ksg.harvard.edu/bcsia/enrp. September 2004.

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Financing IGCC for Near-Term Deployment

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Financing IGCC for Near-Term Deployment

Michael R. Walker

Research Director

IGCC Financing Project

Kennedy School of Government, Harvard University

PH: 720.842.5345, FX: 720.851.5784

[email protected]

Report available at:

www.ksg.harvard.edu/bcsia/enrp

September 2004


Kennedy School IGCC Financing Project

  • Sponsors:

    • DOE (NETL)

    • EPA (Clean Air Markets)

    • National Commission on Energy Policy

    • Packard Foundation

  • June 03’—began study to develop financing program to stimulate IGCC deployment

  • Feb. 04’—draft working paper & IGCC financing symposium at Harvard

  • July 04’—final report: Deploying IGCC in this Decade with 3Party Covenant Financing

  • Fall 04’—follow-up IGCC symposium, ongoing dialogue, issue papers, implementing legislation


IGCC financing project objectives

  • Deploy half-dozen IGCC plants in this decade

  • Access to capital

  • Share advanced technology risks

  • Produce competitively priced energy

  • Minimize federal costs


IGCC deployment rationale

Reconcile coal use and environmental protection

  • Abundant domestic coal resource

    • Energy & national security

    • Energy independence

  • Low cost electricity for economic growth

  • Relieve natural gas price pressure

  • Lower air pollutant emissions

  • Less water consumption and waste

  • Technical pathway for carbon control

  • Foundation technology for hydrogen economy


Historic U.S. capacity additions

MW

300,000

Fuel Type

250,000

200,000

150,000

100,000

50,000

1950's

1960's

1970's

1980's

1990's

'00-'02


Natural gas price volatility

Average Delivered Fuel Prices to U.S. Electric Generators


IGCC deployment obstacles

  • Economics

    • Higher capital cost (~20% higher than PC)

    • Higher kWh energy cost

    • Public, not private benefits

  • Perceived Technology Risks

    • Construction overruns (EPC wrap?)

    • Reliable performance (limited track record)

  • Access to Capital

    • Wall Street skepticism

    • S&P utility credit rating from A to BBB (just above junk status)

  • Environmentalist skepticism

    • Renewable & conservation priority

    • “Anti-coal” opposition


3-Party Covenant

Federal 80%

Debt Guarantee

IGCC

Deployment

PUC Approved

Revenue Stream

Owner 20%

Equity Investment


Federal loan guarantees

  • Access to low-cost financing with favorable terms

    • Lower cost debt

    • Higher debt/equity ratio

  • IGCC economic competitiveness

    • 38% lower cost of capital

    • 25% lower cost of energy

  • Foundation for risk sharing

    • Federal government

    • State PUC/ ratepayers

    • EPC contractor/technology vendors

    • Owner


Cost of capital with 80% federal loan guarantee

Traditional

Utility Financing

80% Federal

Loan Guarantee

45%

Equity

(18.6%)

80%

Debt

(5.5%)

55%

Debt

(6.5%)

20%

Equity

(18.6%)

Pre-tax weighted cost of capital:

11.9%

Pre-tax weighted cost of capital:

8.1%


IGCC cost of energy with guarantee


PC vs. IGCC cost of energy with guarantee


Loan guarantee risk mitigation—3Party Covenant

  • Prohibitive risk and cost without protection

    • Budget scoring based on risk of default

    • Without risk mitigation scoring could be as high as 100%

  • Assured revenue stream to reduce federal risk

    • Upfront & ongoing determinations of prudence

    • Approval of timely pass-through

    • Project cost or power purchase agreement

    • IOU, Muni, Coop

  • Alternative credit enhancement

    • Insurance

    • Corporate credit

    • Other


Federal budget cost

Budget Cost of 1 cent/kWh equivalent incentive (3,500 MW of IGCC)


State PUC participation

  • Benefits

    • Low cost base load power

    • Low air emissions

    • Hedge against future CO2

    • Promote long-term sustainable coal use

    • Local coal and jobs

  • Ratepayer protections

    • Transparent PUC process

    • 10% construction and operating reserve fund

    • 15% line of credit

    • EPC performance guarantees

    • Gasifier redundancy


NGCC refueling opportunity

  • Convert to base load plant

    • Establish need for base load power net of new PC

    • Long-term power purchase agreement

    • Inclusion by PUC in rates

  • New valuation

    • Base load vs. cycling

    • 80% vs. 20% operations

    • Potentially par value

  • Financing

    • 80% federally guaranteed debt

    • Existing plant becomes equity contribution

    • Equity that remains in earns regulated 11.5 after tax return

    • Surplus equity withdrawn


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