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Gasification as a Strategic Energy and Environmental Option

Gasification as a Strategic Energy and Environmental Option. William G. Rosenberg 79 John F. Kennedy Street Center for Business & Government Belfer Center for Science & International Affairs Kennedy School of Government, Harvard University W: 617.495.0834 M: 919.601.0563

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Gasification as a Strategic Energy and Environmental Option

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  1. Gasification as a Strategic Energy and Environmental Option William G. Rosenberg 79 John F. Kennedy Street Center for Business & Government Belfer Center for Science & International Affairs Kennedy School of Government, Harvard University W: 617.495.0834 M: 919.601.0563 wrosenberg@e3ventures.com Project Contacts: Michael R. Walker Economic & Technical Issues Phone: (720) 842-5345 Fax: (720) 851-5784 mwalker@e3ventures.com Dwight C. Alpern Legal & Regulatory Issues Phone: (202) 343-9151 Fax: (202) 343-2356 Alpern.Dwight@epa.gov Reports available at: www.ksg.harvard.edu/bcsia/enrp February 2005

  2. Drivers Petroleum Coke Production Biomass Resources U.S. Coal, Pet-Coke, Biomass Resources Coal Deposits Anthracite Bituminous Sub-Bituminous Lignite

  3. Drivers 40 Other Developing 30 India China 20 Fmr USSR /E. Europe Other Industrial W. Europe 10 United States 1990 2000 2010 2015 2020 2025 Source: EIA, International Energy Outlook 2004. Global Climate Change Challenge World CO2 Emissions 2004 U.S. CO2 Emissions By Fuel Source Billion metric Tons CO2 5.8 billion metric tons CO2

  4. Drivers Natural Gas Price Outlook

  5. Drivers 96% of Capacity Built Since 2000 Natural Gas U.S. Net Summer Capacity Additions by On-Line Date MW 300,000 250,000 200,000 Other Renewable Oil 150,000 Hydro Nuclear Natural Gas 100,000 Coal 50,000 1950's 1960's 1970's 1980's 1990's ‘00-’04 Sources: EIA, Form 860 for 2003; EIA, Electric Power Monthly, November 2004, Table ES3.

  6. Drivers TCF Demand from NGCC Fleet

  7. Gasification Opportunities & Challenges Industry Needs Gasification Option to Stay in U.S. Industrial Natural Gas Prices & Consumption • Chemical industry: $50 billion in business lost to foreign competition and 90,000 jobs cut since 2000 • Fertilizer industry: 11 plants, representing 21% of U.S. capacity closed, only 50% of remaining capacity operating, several major fertilizer producers filed for bankruptcy. $/Mcf TCF 7.0 9.0 6.0 8.5 5.0 8.0 4.0 7.5 3.0 Avg. Industrial Price ($/Mcf) Industrial Consumption (TCF) 7.0 2.0 6.5 1.0 0.0 6.0 1997 1998 1999 2000 2001 2002 2003 2004

  8. Drivers Natural Gas Challenge

  9. Drivers U.S. Incremental Natural Gas Supply—LNG Imports

  10. Drivers Energy Policy Implications • Coal is most plentiful U.S. fossil resource • Energy security, independence, and affordability • Significant environmental concerns, including carbon emissions • Continued & expanded coal use is a given—how it is used is not • Global climate change poses serious energy challenge • Need to deploy technologies that can address CO2 • U.S. technology leadership for global progress • Natural gas is not panacea to solve energy/environmental problems • Rapid demand growth • Future supply uncertainty • High prices and volatility • New thinking and approaches are needed--Gasification

  11. Gasification Opportunities & Challenges Shift & CO2 Capture CO2 IGCC Technology Source: NETL

  12. Gasification Opportunities & Challenges Gasification offers clean alternative Estimated New Plant Emissions Performance 2 1.5 lb/MWh 1 0.5 ~80% 95%+ ~0 ~0 ~0 NOx SO2 PM Hg NOx SO2 PM Hg NOx SO2 PM Hg SCPC IGCC NGCC

  13. Gasification Opportunities & Challenges IGCC alone is progress, but must be tied to a commitment for carbon capture and storage We can’t assume all of the technology risk so this must be a regulated asset or We want to be the 5th company to deploy IGCC IGCC technology is commercially ready, but we are not yet able to provide full warranties Too much risk for merchant financing – financing requires strong credit and backup protections IGCC is the technology of the future, but nothing should interfere with current plans to build more PC We are worried about higher costs and technology risks…remember nuclear power? Environmental Groups Generating Companies Technology Vendors State Regulators Coal Companies Bankers Gasification Deployment Challenges • Environmental Groups • State Regulators • Coal Companies • Generating Companies • Technology Vendors • Bankers

  14. Deployment Incentives National Gasification Strategy • 1.5 TCF/yr equivalent—comparable to Alaska Gas Pipeline • Domestic coal & gas resources • Electric power & industrial gasification • Federal loan guarantees • Lower cost of capital • Lower energy costs • Low federal budget scoring • Carbon capture and storage demonstration projects

  15. Deployment Incentives Gasification Gasification—Domestic Supply Option

  16. Deployment Incentives Equity (18.6%) Debt (5.5%) Debt (6.5%) Equity (18.6%) Lower Cost of Capital Traditional Utility Financing • Lower interest rate • 5.5% vs. 6.5% • Higher leverage • 80% vs. 55% debt • Lower cost of capital • Lower cost of energy 11.9% 80% Loan Guarantee Financing 8.1%

  17. Deployment Incentives New Plant Cost of Energy Comparison Traditional Utility Finance 80% Loan Guarantee 7 6.52 0.25 6 5.54 5.02 0.8 5 0.8 4.15 O&M 1.09 4 Fuel 0.8 4.08 1.09 cent/kWh Capital 3 1.09 3.65 2 3.13 2.06 2.26 1 IGCC SCPC NGCC* IGCC * $6.20/mmBtu natural gas, 50% capacity factor.

  18. Deployment Incentives Lower fuel & electricity prices $/mmBtu fuel cost Cent/kWh electricity cost 7 7 6.5 6.2 6 6 5 5 4.3 4.15 4 4 3 3 2 2 1 1 EIA Projected 2005 Delivered Natural Gas Price Est. Manufactured Gas Cost with Federal Loan Guarantees NGCC Electricity Cost at EIA Natural Gas Price IGCC Electricity Cost with Federal Loan Guarantees

  19. Deployment Incentives Federal budget cost NPV federal budget cost of equivalent incentives to support gasification equal to 1.5 TCF $ billions 32.4 35 30 25 20 15 11.8 10 2.2 5 30-Year 80% Loan Guarantees Grants or 30-year Production Tax Credits Investment Tax Credits

  20. Deployment Incentives 80% federal loan guarantee 38% lower cost of capital Funded reserves Credit enhancements Deployment Challenges Met • Access to capital • High capital costs • Higher energy/fuel costs • Operating uncertainty • Federal budget impact • Climate concerns 20-25% cost reduction Commercial CCS demonstration

  21. Deployment Incentives Washington Politics • Senate Energy Committee (Domenici) • Senator Alexander • Administration • Environmental Groups • Industrial Gas Users • Electric Industry • Coal Industry • State Governors

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