Financiers say IGCC plants are not yet commercially viable

Financiers say IGCC plants are not yet commercially viable

POWER - 11/18/2005

A variety of financiers, speaking at a recent industry conference, were skeptical about the prospects for financing integrated gasification combined-cycle power projects.

"As a firm, we are generally bullish [on IGCC]. Personally, I'm less optimistic," said John Cogan, senior vice president, global energy investment banking, Credit Suisse First Boston LLC. A company such as American Electric Power or Cinergy will have to build an IGCC plant and put it into service to determine how much it really costs to build, he said.

Cogan was speaking at Platts' Second Annual Coal-fired Generation conference in Chicago.

"That's my view too," said Edward Sondey, director, global energy and power group, at Merrill Lynch & Co., who also spoke at the conference.

AEP is seeking cost recovery from Ohio regulators for a $1.3 billion, 600-MW IGCC plant it has proposed in Meigs County, Ohio. Cinergy is pursuing a 600-MW IGCC project at an undisclosed site in Indiana.

"IGCC makes a lot of sense, but at the end of the day it comes down to costs," said Joseph Esteves, managing director, LS Power Development LLC.

LS Power is developing a 1,600-MW pulverized coal-fired project in Arkansas. The company also has a private equity affiliate, LS Power Equity Partners, that raised $1.2 billion last September for an energy investment fund.

"If we have trouble selling the output of a PC plant," it would be even harder to sell the output from an IGCC, said Esteves. An IGCC plant is more expensive to build than a pulverized coal plant, so the cost of electricity to the customer is likely to be more expensive.

LS Power has lined up significant commitments for its Plum Point plant in Arkansas, but it has been tough going, said Esteves. He added that LS Power is taking a "novel" approach to financing its project. "We are not going to wait to get the final piece of the Arkansas project's capacity sold before closing on the financing.

Esteves said bankers he has polled generally want to see a five-year track record for a particular technology before they commit to financing, and that does not yet exist for IGCC.

The two operating IGCC plants in the United States, Wabash and Tampa, have spotty operating records blemished by multiple problems. Lloyd Webb, senior consulting engineer at Tampa Electric, commented that after a slow start in 1997 the company's 312-MW IGCC unit at its 650-MW Polk station has run at about 80% availability in three of the last five years. But, as Esteves noted, it has taken Polk several years to work out the problems and achieve those results. What banks want to see, said Esteves, is a smoothly functioning plant that was built under a tight construction schedule. "Project finance is not designed for new technology," he said.

"I don't see any independents [successfully] building an IGCC," said Esteves, "it will have to be put into ratebase by a utility" or built with some form of government subsidy, he said.

Glenn Payne, vice president, First Reserve Corp., a private equity firm, said there are still a lot of "substantial issues" regarding the "wrap," or comprehensive construction and performance guarantee that would be provided by the main IGCC equipment vendor. In addition the cost of Powder River Basis coal, which many IGCC projects would likely burn, has doubled in the past several weeks and that could harm the economics of an IGCC plant. "There are a lot of squishy numbers" in the proposals that developers of IGCC projects are shopping around, he said.

Nonetheless, several independents have proposed IGCC plants. In fact, some of them came to IGCC because of the difficulties they had securing permits for pulverized coal plants. They are now seeking permits for IGCC plants and trying to line up financing. It is a difficult process.

To make the higher cost of an IGCC plant more able to be financed, David Schwartz, co-founder of The Erora Group, said he is looking at selling two products, poly-production as it is sometimes called, from a single plant.

Erora's proposed 677-MW IGCC project in Taylorville, Christian County, Ill., would be able to sell either electricity or a natural gas substitute, depending on the prevailing margins and, therefore, would be able to lock in the fattest profit. But, he admitted, Erora's project is "at odds with itself."

He explained that in order to finance the project, it is best to sign long-term baseload power sales agreements. That would satisfy bankers, but it would detract from Erora's business plan because the plant would lose the flexibility that would allow it to switch between producing electricity and producing a natural gas substitute.

And while the cleaner emissions profile of an IGCC plant relative to a PC plant has attracted developers to the technology, it is not always such an easy sell. Erora's Schwartz said his project in Illinois has not met local opposition, only opposition from "national environmental groups." In part, he said that is because his project represents coal-mining jobs for the local economy.

Erora Group, however, is also developing a 677-MW IGCC plant in Henderson County, Ky., that has run into opposition from officials in neighboring Indiana. And Tondu Corp. is running into permitting problems. In September the St. Joseph County (Indiana) Council rejected Tondu's proposed 550-MW IGCC project. The company is now looking at possible sites in Indiana, Illinois, Michigan and Ohio.

The permitting process is one of the problems that remain to be worked out to make IGCC successful, admitted Hank Courtright, vice president, generation, at the Electric Power Research Institute. One basic problem is how to evaluate the plants. "Are they coal plants, gas plants, or chemical plants?" he asked.

Despite the fact that IGCC plant proponents champion the technology for its environmental benefits, those benefits are not compelling enough to win over some developers and utility executives.

"Peabody is one of the biggest proponents of IGCC out there, said Jacob Williams, vice president, generation development, Peabody Energy. "It uses coal" and Peabody, as one of the largest coal companies in the country, backs any technology that uses coal. Nonetheless, Peabody is pursuing pulverized coal projects, not IGCC projects. As justification, Williams cited a quote from Jeff Immelt, chairman and CEO of General Electric, during CERAWeek in February 2005: "Coal gasification we think is an interesting new technology - one that hasn't been proven yet from a cost standpoint - but one that we're going to lead into in terms of really trying to validate it for the future." "When we look at coal gasification, it's 20% too costly today, but we know how to get the costs out of it, we think. We know how to get it commercially viable."

In 2003, GE Energy acquired ChevronTexaco's gasification technology and last year the company formed an alliance with Bechtel to offer an integrated equipment and construction package for IGCC projects.

Southern Company is also a big backer of coal-fired generation. Plants fired by pulverized coal will be the "backbone of generation for years to come," said Charles Goodman, senior vice president, research and environmental policy, at Southern, speaking at Platts' Coal-Generation conference.

Southern is developing a 285-MW IGCC plant in Orange County, Fla., with the Orlando Utilities Commission and the Dept. of Energy, and is a member of the DOE's FutureGen that has a long-term goal of developing a zero-emissions coal-fired plant. Both efforts involve some level of government funding or subsidy. On a stand-alone basis, IGCC is not commercially viable, said Goodman. An IGCC plant is not "justifiable," he said, because it does not reduce emissions enough to justify the 20% cost premium over PC plants.

"I have to concede that point to him," said Thomas Sarkus, director, advanced energy systems division of the Dept. of Energy's National Energy Technology Laboratory.

According to Steve Derenne, project manager, IGCC, WE Energies, IGCC technology is only a clear winner over super-critical PC technology in the emission of SO2. An IGCC plant's SO2 emission profile is 0.03 lb/MMBtu compared with 0.15 lb/MMBtu for a super-critical PC plant. Both are even in the production of NOx, at 0.07 lb/MMBtu each.

Erora's Schwartz showed similar comparisons for a PC plant compared with an IGCC plant. A PC plant produces more than twice as much SO2 as an IGCC plant at 0.120 lbs/mmBtu and 0.045 lbs/mmBtu, respectively.

The IGCC plant also produces less particulate matter at 0.015 lbs/mmBtu, compared with 0.007 lbs/mmBtu for a PC plant. But in terms of NOx, there is very little difference with the PC plant producing 0.058 lbs/mmBtu and the IGCC plant producing 0.050 lbs/mmBtu.

IGCC plants have an advantage when it comes to mercury and carbon dioxide emissions, but those pollutants are not currently restricted by law.

Nonetheless, the DOE is working to make IGCC commercially viable. In addition, the recently passed Energy Policy Act of 2005 has various provisions to promote IGCC technology via grants and tax incentives. But financiers at the conference generally said that those measures alone would not make IGCC projects able to be financed.

"I don't know if there is anything in EPAct that would change my view about the ability of a private party to get an IGCC project done," said Sondey at Merrill Lynch. And, as Esteves at LS Power pointed out, most independents do not have a use for the tax credits offered by the new energy law.

EPRI has also been backing IGCC, but starting next year is going to shift its focus to super-critical, advanced super-critical and ultra-critical technologies. Those technologies achieve high efficiency rates by raising boiler temperatures and pressures.

Over the past two years, 90% of EPRI's coal fleet focus has been on IGCC, said Courtright. In 2006 funding for PC and IGCC projects will likely be more evenly balanced, he said, adding that the final split will decided by EPRI's members.

Please visit: www.platts.com

Their coverage of energy matters is extensive!!.