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2. Kennedy School IGCC Financing Project. Sponsors: DOE (NETL)EPA (Clean Air Markets)National Commission on Energy PolicyPackard FoundationJune 03\'?began study to develop financing program to stimulate IGCC deploymentFeb. 04\'?draft working paper

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financing igcc for near term deployment

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
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
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
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
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
Natural gas price volatility

Average Delivered Fuel Prices to U.S. Electric Generators

igcc deployment obstacles
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
3-Party Covenant

Federal 80%

Debt Guarantee

IGCC

Deployment

PUC Approved

Revenue Stream

Owner 20%

Equity Investment

federal loan guarantees
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
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%

loan guarantee risk mitigation 3party covenant
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
slide14
Federal budget cost

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

state puc participation
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
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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