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 mwalker@e3ventures.com 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

Financing IGCC for Near-Term Deployment