Power Engineering - Harvard Study Supports Federal Loan Guarantees for Gasification Projects

August 5, 2004 - According to a revised report from the Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University, the federal government should provide loan guarantees for retrofitting existing natural gas-fired power plants with advanced coal gasification technology � a cost-effective way to encourage commercial development of IGCC. The Belfer Center proposal, one of many on the table as the federal government decides how to encourage cleaner coal-fired power generation, is an updated version of an earlier draft released in February and proposes financing six clean-coal projects that would use IGCC technology over the next 10 years. The six plants would represent about 3,500 MW of IGCC capacity and require about $5 billion in federal loan guarantees.

The plan envisions a "3Party Covenant" under which the federal government would provide a loan guarantee covering 80% of project costs, while state utility commissions would guarantee revenue from the projects. The paper suggests that the plan could reduce energy costs of a new IGCC plant to 17% below that of a conventional coal-fired facility. The 3Party Covenant is distinguished from other federal financing programs because a principal party is a state utility commission, which effectively assures the revenue stream needed to service the debt. Ratepayer risks are mitigated through a combination of contractor guarantees, reserve funds, a 15% line of credit, and state oversight.

The report points to several factors that are creating a window of opportunity for IGCC: high natural gas prices, broad political interest, and a growing need for baseload power. Many entities, from coal producers and utilities, to state and federal government officials, to environmental organizations, have expressed support for the technology. On the other hand, the primary impediments to commercial development are high capital costs, excessive downtime, and difficulty with financing. The financing hurdle is exacerbated by the fact that the utility industry is weaker financially today than it has been in the past.

The revised paper includes a new suggestion that the financing plan be used to convert existing gas plants as well as building new facilities or replacing older coal-fired generation. At issue is the potential to add equipment that would turn coal into a combustible gas for use by existing combined-cycle gas facilities, many of which are being run at below capacity because of recent high natural gas prices.

Implementation of the 3Party Covenant program depends on Congressional action to enact loan guarantee legislation. Implementation will also require state action to institute regulatory mechanisms for review, approval and recovery of IGCC project costs.

IGCC projects would have to meet stringent performance requirements. Coal would have to account for 75% of heat input, and the plant's design heat rate would have to be 8,700 Btu/kWh or lower. With respect to emissions, requirements include:
1. 99% sulfur reduction with SO2 emissions not to exceed 0.04 lb/MMBtu
2. NOx emissions not to exceed 0.025 lb/MMBtu (5 ppm)
3. Particulate emissions not to exceed 0.01 lb/MMBtu
4. 95% mercury emissions control

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